The Hindu : Jaswant Singh's challenging task

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Monday, Dec 09, 2002

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Jaswant Singh's challenging task

THE FORMULATION of the Central Budget proposals for 2003-04 may well pose serious challenges to Jaswant Singh who has taken over the Finance Portfolio from Yashwant Sinha. This is due to the fact that the former has to finalise the budget proposals in such a way that the legitimate grievances of taxpayers in particular income groups are redressed and the badly needed stimulus to the economy imparted.

The fallout of the severe drought in northern, northwestern and central India during the kharif season and vigorous representations by the States to the Centre for liberal assistance for carrying out relief operations are resulting in a big increase in non-plan expenditure.

The financial assistance to the States concerned and allocation of large quantities of foodgrains under the food-for-work programme are likely to increase non-plan expenditure by even Rs. 10,000 crores to Rs. 15,000 crores.

Besides, a liberal relief package to the farmers will be announced shortly by the Prime Minister in Parliament.

Large assistance for drought relief

Political considerations and a helpful approach to the problems arising out of the loss of incomes to farmers have obviously been responsible for the Centre's decision to meet the needs of the affected States. But the impact of the drought on the economy has not been as severe as apprehended in some quarters, as the decline in the yield of foodgrains in the whole season may not be more than ten million tonnes to around 200 million tonnes.

This impression is borne out by the satisfactory progress of procurement operations in rice and no anxiety on the part of farmers to withhold earlier stocks. The decline in the yields of cash crops too has not been disturbing.

As indicated earlier, there has been no speculative activity in the commodity markets and the inflation rate may tend downward with softening world prices for crude and petroleum products.

The inflation rate was, thus, lower at 3.14 per cent during the week ended November 16 against 3.27 per cent a week ago.

Welcome rise in industrial output

While the extent of decline in agricultural production in the current season can be determined precisely only by February-March, the performance of other sectors of the economy has been quite encouraging. Industrial output has been rising consistently with the index for April-October being much higher at 5.6 per cent against 2 per cent comparably last year.

All the major industries, excepting the plantation group, have been increasing their production and sales and the automobile and ancillary industries particularly are having a boom time.

Comfortable BoP position

With creditable software exports and greater activity in other services sectors, the balance of payments (BoP) position has been quite comfortable. Even with a higher oil import bill, the trade deficit for April-October has risen only marginally to $5.54 billion from $5.23 billion.

It is worth mentioning that until September, the trade deficit was lower than the year ago figure. The performance in October should be considered exceptional.

With quicker repatriation of export earnings due to the rupee becoming dearer and sizable inflows on current and capital accounts, forex reserves have risen to a record high of $66.93 billion with foreign exchange assets also at a new peak of $63.64 billion during the week ended November 29. As a result of the creditable performance of all sectors other than the agricultural sector, the growth in the gross domestic product (GDP) may be higher than the revised figure of 5.5 per cent, though lower than the previous estimate of 6-6.5 per cent.

It is also indicated in the mid-year review presented to Parliament by the Finance Minister that the outlook for the economy can be viewed with cautious optimism, though the rise in non-plan expenditure in October-March may be more pronounced than in April-September 2002. No definite clues are available about the thinking of the Government in regard to the Budget proposals for 2003-04.

Only in respect of excise duties and sales taxes, there may be simplification with minimum exemptions. But there is no reference at all to the changes that may be attempted in respect of direct taxes. However, the Finance Minister is keen on providing relief for the lower and middle income groups and also senior citizens. A helpful approach may be adopted, as it may be considered that a significant enlargement of the fiscal deficit, even if it takes place, will be exceptional.

While there may be an overrun in non-plan expenditure, tax collections in April-October can be stated to be fairly satisfactory. Any shortfall in gross tax receipts is unlikely to be sizable having regard to the fact that industrial production has not shown signs of deceleration in growth and the services sectors are performing creditably.

Fiscal deficit enlargement exceptional

If the serious bid being made to reach the target of Rs.12,000 crores under the disinvestment programme proves successful and non-debt receipts on capital account also are maximised, the fiscal deficit may not rise by more than Rs. 10,000 crores. Besides, the economy will revive significantly in the next financial year, if the setback experienced by the agricultural sector is overcome and the yields of food and cash crops rise above the record level of 2001-02.

The Finance Minister can, thus, adopt a cautiously optimistic approach. However, the main difficulty will relate to the manner in which the structure of direct and indirect taxes has to be simplified.

The proposals of the Task Force headed by Vijay Kelkar on direct and indirect taxes have been controversial and not in conformity with the thinking of the Finance Minister. The changes in direct taxes will, thus, have to be on lines somewhat different from those recommended by the Task Force.

FM keen on reviving capital market

Since it is recognised that there is double taxation of profits of companies and the stock markets have to be enabled to become buoyant, the tax on distributed profits may be revived along with the exemption of dividend incomes at the hands of the recipients.

However, the Kelkar Committee has stated that the distributed profits tax too should not be levied after the tax on corporate incomes gets reduced to 30 per cent from 36.75 per cent in three years.

The suggestion that capital gain on equities should be exempted from capital gains tax will also be helpful, if implemented, to improve the investment climate.

As the Central and State governments are also in need of additional resources for increasing plan outlays, there will have to be special incentives for channeling savings in particular directions.

A conventional approach, even while endeavouring to simplify procedures, should be useful in finalising the Budget estimates, which will be outstanding in many respects.

Better appreciation of India's creditworthiness

With Moody's and other agencies inclined to improve the creditworthiness of the Indian economy and the general impression that Mr. Jaswant Singh would present a popular budget to Parliament, the sentiment in stock markets has been more cheerful.

Mr. Arun Shourie, Minister for Disinvestment, has also indicated that unanimous decisions have been taken by the Cabinet Committee about the manner in which the disinvestment programme should be implemented in respect of two companies in the petroleum sector.

As the Tenth Plan will not be having a good start in the first year and it is still emphasized that an average growth of 8 per cent in GDP should be achieved, it is needless to say that the forthcoming Budget should have the necessary triggering effect.

P. A. Seshan

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