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The Rediff Budget Special Chat

Reddy: The previous finance minister promised milk and honey for the nation in the course of three years. The present finance minister is more coy. But his strategy remains the same as the previous finance minister -- that is invite those who have money to spend in the country. To spend on luxuries and wait for foreign money to do the miracle of lifting the economy on a higher growth plateau. There was also an obsession for reforming the so-called financial sectors. In practice, most of these reforms have concentrated on arranging a concession and facilities for merchant bankers, institutional investors from western countries, foreign banks and mutual funds; all these in the hope that the stock exchanges will become buoyant by enticing further flow of funds from overseas. What has actually taken place is in fact a prolonged crisis in the share markets instigated by these foreign institutional investors who want to lower share prices in order that they might buy up equity of cheap established Indian industries.

The experts believed the decline in the export growth was attributable to the minimum alternative tax which inter alia brought to tax export profits. The finance minister has now minimised the rigours of MAT by providing that under section 80 hhcof the the Income Tax Act 1961 the entire export profit would be exempt from taxation.

The Budget is quite some distance from the compulsions of the common minimum programme. The finance minister's first commitments are evidently to the IMF and WTO. For the constituents of the United Front, he did read out a couple of sentences from the CMP. But if I am permitted to be a little risque, this was nearly a version of oral eroticism. On the major issues of food subsidy and holding back any increase in petroleum prices, his Budget speech is noncommital. Therefore, the intramural tension within the United Front is bound to continue.

I feel that the finance minister has not given enough attention on the macro side of his Budget proposals This is what the BJP would have stressed had it been in power. For the last two years the main problem has been the fact that inflation has not been under control. I find from my calculations that given the figures in the Budget documents. The inflation rate would be around 10%. This means that by the end of the next financial year, i e by March 1998, the inflation rate will be something like 12%. This is a very high rate for an economy like ours and will ultimately affect economic growth as well as industrial growth The BJP would have focussed on agriculture and small industry which between them account for the bulk of employment in India, almost 90% of total employment. In the previous Budgets agriculture was totally ignored and investment in that sector actually came down in real terms. That is the reason for the excessive rise in foodgrains and other farm commodities. Mr Chidambaram's Budget also ignores agriculture and apart from some small sops to small industry is not particularly supportive of small industry.

Dundee: What I would have appreciated a clear cut position on the government's intention in the area of industry and infrastructure. The Budget offers certain indirect incentives but the finance minister is in no position to provide any assurance that the consequence will be a concrete addition to productive capacity in sector A or sector B.

The overall impact of the Budget in my opinion should create an atmosphere of optimism in investors. In fact, I understand that the stockmarket and the capital market has already started moving upwards. This is very important from the view point of establishing a welfare nation in which the fruits of prosperity reaches everyone. The average growth of the last three years has been about 7 per cent in real terms. If we can continue with this kind of growth and in fact improve upon it marginally we would have achieved a miracle of growth and poverty and unemployment would become a thing of the past. Look at the ASEAN countries. Fifteen years ago they were all way behind India. They decided to open their market and economy, raised large funds from foreign investors bringing about a growth in real terms between 8 to 10 percent and today they are no longer developing countries. In about ten years time their economy has come on par with developed countries. There is no reason why India with its men and material resources cannot achieve a state of affluence higher than ASEAN countries and in fact higher than China.

Dundee: China has a long history of social transformation throughout the 50s the 60s and the early 70s. The difference in the economic classes within the country had to undergo long bouts of sacrifice and had to be made amenable to a rigid social discipline under the leadership of the Communist party. I certainly would agree that those conditions did not obtain in India. And the social classes within the country wanted to have painless growth. This is where China's path deviates from our own.

Vijay: I think once I mentioned to the finance minister that enough has been done to placate these cateogries who constitute the so- called financial sector. He should now adopt a policy of benign neglect towards them and transfer his attention to the nitty-gritty of the problems which afflict the millions and millions of our poor country.

Customs duties have been brought down from the peak rate of 50% to 40%, the reduction in customs duties on capital goods has come down even more, this is likely to effect Indian industries adversely. Because they will have to compete with foreign imports for which they may not be adequately organised. This may also effect employment in companies manged by Indians. Something that is already happening. So although the long term the reduction in customs duties may help the consumer in India its adverse effect on Indian- managed companies as well as employment in these companies should not be minimised.

EVERYONE: Thank you, for the intersting set of questions you had posted and I hope I have not emulated our finance minister in tackling them. Or is that a less than graceful note on which to part?

I will take a pause to answer Mr Dinesh Chandra's question: We have never threatened the United Front govt. There are some areas of political differences and on that we have taken a decision to give issue-based support. It was never the Congress party's contention that a good Budget is the only point on which our support rests. However, a good Budget by Mr Chidambaram is undoubtedly a feather in the cap of a govt which unfortunately has doubtful legitimacy in the eyes of the common man in the country. If the UF govt wants that at least on matter of economic policies they should continue to get the support of the Congress apart from bringing in dynamic, bold and courageous economic policies which are growth oriented and takes care of the weaker sections of society, the govt must function with a certain degree of discipline and cohesion. The different ministers must not speak in different voices. The prime minister is not the senior-most amongst equals but is a leader of the Cabinet and therefore he must effectively hold the line of command. Any minister not in agreement with the the PM has no place in the Cabinet.

No, Mr Vijay by investment in agriculture I do not mean free power to Punjab or any other farmers By investment in agriculture, in the rural infrastructure, which helps farmers, meaning roads, warehouses, irrigation canals, schools in rural areas, technology centres in villages, telephone facilities etc. This inftastructure is totally absent in our villages which is why our production and marketing of farm products is suffering. A country of India's size should produce at least 50% more food grains more vegetables, etc. in the next 5 years. Unfortunately the agriculture sector has been ignored all these years.

Henry, Dr Manmohan Singh was a pioneer and gave the "guru mantra" of economic reforms taking the economy from the clutches of quota license and permit raj towards a market economy. Chidambaram's Budget in a very substantial measure undoubtedly carries forward the reform friendly polices of Dr Manmohan Singh.

Who do you think presented a better Budget, Dr Singh or Mr Chidambaram? My response: I would not be tricked into comparing Dr Manmohan Singh's Budget with that of Mr Chidambaram. All that I can say is that Chidambaram has very creditably and boldly carried forward the economic reforms initiated by Dr Manmohan Singh.

Dr. Dubashi's answer to Vikram: The answer is yes and no; Yes, if we allow too many foreign companies and foreign products to enter India at this stage of our development. On the other hand, I feel very strongly that Indian businessmen are second to none in meeting the challenge of competition from abroad and will be able to strengthen their operations, provided they are given adequate time and resources. Swadeshi means making use of all resources including resources from abroad to keep a grip on the national economy.

On the opening of the insurance sector: The insurance sector has been opened up to private sector for the first time, this is good for the industry as well as for the consumer. Because now the insurance monopoly will disappear and the consumer will have some options It is also good that foreign insurance companies will not be allowed, atleast for the time being

Dundee, there was considerable controversy on opening the general insurance to the private sector. In fact the common minimum programme also contemplated a more competitive set-up in general insurance business. The finance minister has very skillfully got out of the controversy by opening the insurance sector to private companies in the field of health care. It is obvious that the finance minister was under pressure not to go the whole hog towards privatising general insurance. He opened the health sector insurance for the first time in the last Budget and he got a very good response. Obviously, he thought this was one area in which the private sector could be allowed entry without cutting into the business of govt-owned general insurance companies.

Good evening! The statement of the finance minister on the Indian Budget is very important. The Finance Minister Mr P Chidambaram has covered the sectors which are crucial for the development of the country. He has also taken care of investments from abroad, whether are FDIs or NRIs. He has slashed custom duties across the board, overall 40 per cent from 50 per cent and, on specific areas, reduced the custom duties sharply in the import of items like picture tubes, computer parts and many of the products relating to textile industry, etc. In the case of import of capital goods the custom duty has been reduced from 25 per cent to 20 per cent. For machinery required for infrastructure, refinery equipment, no custom duty will be charged. A tax holiday for 7 years has been provided for investments from outside the country. The tax on profits for NRIs and FDIs has been brought down to 50 per cent of the original rate. All drawings and sketches required for modernisation or setting up of industry will be duty free. On the industrial front, companies have been permitted tax concessions, surcharge has been abolished in their case, shareholders will not have to pay the tax on their dividend. The benefits have gone equally to the domestic sector. Certain items reserved for the SSI sector has been deleted. Now they are freely available to large scale industries. According to the Budget, we are on the way to free convertibility on capital account. He has permitted investment upto US $ 15 million on joint ventures or setting of the offices outside the country without any prior approval of the RBI.

Vijay, as regards rozgar yojanas, my view is that they can be only temporary measures. For a real and concentrated attack on unemployment and poverty we have to invest in rural education and infrastructure including health services. Ultimately you cannot really make a dent in poverty unless we have sustained development over time. and growth rates of the order of 8 % to 10 % a year. This is what the Asian Tigers have done, which has enabled them to bring down their poverty rates to 15 % As you know the poverty rate in India is around 37 % and has actually increased in the last 5 years.

As the erstwhile power minister I have a serious grievance against the Budget of Shri Chidambaram. He has provided several bold measures for expansion of the petroleum sector which measures are indeed very significant and essential. His budget proposals mentions nothing about the power sector. If we do not bring about rapid growth in power generation and streamline transmission the whole nation will be in the dark in the next few years. And the entire dream of bringing about accelerated growth in industry and agriculture would remain an illusion. Therefore, expansion of the power sector and rapid expansion is very essential. Further, the state goverment and central government for that matter cannot bring about such rapid growth because power is a very highly capital intensive industry. The conditions must be created where private investment can come in the power sector with a certain degree of trust and confidence in the system by which they would not be put to losses and be able to set up power plants expeditiously. The most serious problem before the investors is that their only buyer -- the state electricity boards -- rarely pay promptly for the power they buy. The state governments who guarantee the payments on behalf of the boards in case of defaults do not have any credit ratings. Therefore, it is imperative that if the govt of India does not want to give a counter guarantee then acceptable and credible alternative to counter guarantee must be found. The pending counter guarantee for fast track projects were promised to be completed by September 1996. The same has not been executed even to date. They must be expedited so that at least the fast track projects o

On Black Money: The finance minister does not seem to be very concerned about black money as also about huge transfers of money from India to banking centres abroad The only measure he has taken in his budget is to announce a voluntary disclosure scheme which is actually old hat. Such schemes have been announced from time to time in the past without any impact on black money , it is estimated that tax evasion in India is 3 to 4 times tax revenues, which means that it is of the order of Rs 750 billion to Rs one trillion every year. In addition, overseas hoardings by Indian amount to between 100 billion and 150 billion dollars Although Mr. Chidambaram makes references to money laundering and to black money, he has not, I regret to say, attempted any effort to tackle this issue.

They must be expedited so that at least the fast track projects are able to complete financial closures and commence the erection of the power plants.

So far as the exporters in the industry in India are concerned, the provisions of 80 HHC has been restored, which means that the Indian exporters will get full income tax exemption on their profits on exports. Units set up in EPZ and EOU zones will now be in a position to sell their products relating to electronic hardware up to 50 per cent in their domestic market. The project set-up or supplies made to oil gas and power projects will get the benefit of the deemed exports. Capital goods imported for science and technology will get duty concessions. FERA is going to be abolished and in turn the finance minister is going to introduce a money laundering bill in Parliament. He is also going to introduce capital index bonds in the market. The companies can now buy back their shares. He has come out with a novel scheme of voluntary disclosure scheme whereby anyone disclosing unaccounted income will only be charged the highest slab of the income tax and there will not be any penalties or interest on this account. Some new incentives have been provided to senior citizens. Surcharge has been abolished for corporate sector. Income tax has been reduced in their case as well as in the case of foreign companies. Royalty to foreign companies will now be at a reduced rate. Construction of new hotels in specified areas in India will get tax resumption. Custom duties have been drastically reduced on watch parts. It has even been reduced on baggage (more...)

I must compliment the finance minister in presenting a Budget which is indeed bold and courageous and his efforts are deserving of special commendation because he is carrying on his shoulders the burden implicit in a coalition government of 13 parties who have diseparate political and economic philosophy and ideology.

Agriculture, horticulture, milling machinery and jute industry has been given the excise benefit. Of course, there's an increase in tax on smoke. In the case of small case industry, the excise exemption is up to Rs 3 million of the sale. Thereafter, there is a flat rate of 3 per cent on their sale between Rs 3 million and Rs 5 million and 5 per cent on their sale from Rs 5 million to Rs 10 million. There is some increase in the rates of postal stamps.

Reshmi: But the finance minister has reduced the rate of tax on incomes of NRIs to 10 per cent.

facilities extended to residents cannot be extended to NRIs also.

Rav: No! India is a democratic country. The changes can be made only in a democratic manner. We cannot enforce order by way of the military. In our own humble way, we are bringing about reforms. Before 1991, the custom duties peak rate was 400 per cent. In today's budget it has come down to 40 per cent. Today, all types of raw material components and capital goods are freely importable. There is a small list of consumer goods which needs to be liberalised. Though the custom duties have been reduced even in those cases, they will be freed very soon. I don't think India needs to be compared with Russia. After 5 years, we can compare ourselves to the US.

Vijay: It is true that a different basis has been used for estimating poverty but, in my view this is a much more realistic basis than the previous one. The old basis gave a very distorted idea about poverty , in fact Dr Manmohan Singh had claimed in one of his Budgets that the poverty level have come down to 19 % Anybody visiting Indian villages or small towns can see for himself that it is much more than that and poverty still continues to be our main problem.

Rav: Actually, significant reforms are happening .. If you see the reductions in personal and corporate taxes as well as the reductions in import duties, India is coming close to global economies. The move to capital account convertibility is also a significant historical announcement. The situation is therefore not really as bad as Russia!

Sandeep: Yes, the budget reform is friendly both to NRIs, foreign investors and Indians. If you want to set up a business in India, you will have a tax holiday. Your manufacturing activities in certain areas will permit you to import even restricted list items. Of course, your profits after 5 years or 7 years will be taxed at 10 per cent.

Photographs: Atul Chowdhary