By Invitation: India’s compromise budget

Missing the big picture

Sameer Wagle

I am a bit disappointed by this budget. I had expected more from Finance Minister P Chidambaram (PC). This seems to be more of a compromise budget rather than one with a “big picture” strategy that one would have expected from him. I was expecting him to bat like Tendulkar. He turned out to be a Chopra !

Positives

  • Thrust on infrastructure specifically airports, ports & tourism.
  • Thrust on agro-processing industry. Now Sharad Pawar needs to follow up
  • Removal of long term capital gains tax and reduction in short term capital gains tax to 10%. Movement towards turnover tax
  • Increase in sectoral caps for FDI in telecom, insurance & civil aviation. Promise to increase FII caps too
  • Bank securitization act to be improved (at least that it is the impression I got from PC’s words)
  • VAT to be implemented by 2005
  • Boost to the domestic IT industry – Computers exempt from excise
  • Tractors population to grow and automotive R&D to be given a 150% tax exemption
  • Shipping industry to move to tonnage tax
  • Investment commission set up. Hopefully a change in mindset from “approving investment” to attracting investment. It will be best if the bureaucracy is kept away from running this outfit.
  • Some widening of the tax net specifically in the services sector
  • Increased spending on agriculture, rural infrastructure, water management etc. Instead of doling out freebies, the focus is rightly on building infrastructure.
  • However the big question however is whether this well intentioned measure will actually lead to benefits at the grass roots – remember the famous 85 paise loss example. The same thing applies for the education cess. Increasing education spending is definitely a noble thing but the problem is will this percolate down into helping the expected beneficiaries
  • No populist measures on the small savings front maintained at 8%

Negatives

  • No measure to widen tax base for individuals eg agriculture
  • Increase in defence expenditure by 17 % – I feel that defence though important should come down the priority list.
  • Sops like the Bihar package (even as Laloo Lalu was dozing off while the Finance Minister was delivering his budget speech), ITI institutes upgradation could have been avoided
  • No concrete steps to cut subsidies. He has postponed the hard decisions to a later day by asking NIPF to come up with a recommendation paper
  • 2% cess on all taxes plus increase in service tax from 8 to 10%
  • Too much micro-management at the indirect tax (excise duty) level. Too many exemptions/special cases.
  • No implementation of the famous Kelkar report on taxation
  • Increase in steel excise duties from 8% to 12%
  • Pressure on banks to continue rural lending – danger of NPA’s building up

Disclaimer: Sameer is both a venture capitalist and an eternal optimist. These views are his own.

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2 thoughts on “By Invitation: India’s compromise budget”

  1. Sameer,

    India spends less on defence than its neighbours and peers, from a per capita GDP point of view. Moreover a rupee spent on defence is a rupee that could have been spent on health or education.

    I think the spend on defence is justified for three broad reasons: a) To prevent infiltration and insurgency in Kashmir – Pakistan’s tenor has changed, but it has retained both capability and intent. b) To bring the armed forces to the 21st century; c) To enable India to project its power beyond its shores

  2. In an interview to CNBC, PC said that the increased defence expenditure was because the previous government had left several bills unpaid and he needed extra money to meet those contractual obligations, not for fresh investment.

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