Reforms come with I-T bonus for middle class

'Jai Kisan, Jai Jawan' Budget.

Finance Minister P Chidambaram has manfully tried to deliver a Budget with a new kind of dream: make good on election promises, appease the middle class, reduce the deficit, collect more taxes, push ahead with reforms, and make government spending deliver a 'caring' face.

The Budget for 2004-05 has no single thrust, it has half a dozen of them "" and the broad message is that the 'original reformers' have developed a social conscience.

The sub-text is that while the social conscience is hung out for all to see and admire, the business of reform continues.

So there is a cut in the deficit (the 'over-arching objective' of the Budget); a bigger role for foreign investment in the politically sensitive sectors of civil aviation, telecommunications and insurance; opening up of 85 more areas reserved so far for small-scale industry; extension of the tax network to more service sectors like transport and opinion polls (a nice post-election touch); and mention of the P word in the Budget speech, so that privatisation is back on the agenda.

One set of constituents is addressed through the headline-hitting revenue measure: half the 27 million income-tax payers now have to pay no tax on their income as the tax exemption limit has been doubled to Rs 1 lakh.

This is designed to ensure the maximum political bang for minimum bucks, since the tax given up is no more than Rs 1,750 crore (barely half of 1 per cent of the total tax revenue).

About three times as much is to be collected through the 2 per cent cess for funding increased spending on education. But over-all, there is very little additional taxation in the Budget: about Rs 2,000 crore.

Another set of constituents is addressed through the spending priorities. The finance minister spent a good part of his 100-minute speech to the Lok Sabha on a long laundry list of programmes aimed at improving food security for the poor, increasing access to education, offering mid-day meals to school students, expanding the food-for-work programme, improving access to medicare, making drinking water available to more people, and so on.

Farmers have been promised quick completion of irrigation schemes that have reached the 'last mile'; a tax holiday for agro-processing industries; and improved credit delivery.

The biggest increase in spending was a doubling of the capital outlay on defence, which the finance minister said was a one-off affair to clear pending bills.

The capital market, unfortunately, got the short end of the bargain. The finance minister abolished the tax on long-term capital gains in stocks, and reduced that on short-term gains to 10 per cent, but introduced a 0.15 per cent turnover tax on listed securities.

The proposals sent the Sensex tumbling by nearly 200 points from the intra-day peak of just over 5,000, and the market experts forecast a sharp fall in trading turnover, so the expected tax revenue may not materialise.

In interviews later in the day, Mr Chidambaram offered to discuss the issue, especially in the treatment of speculative gains on the futures market (which continue to be taxed at up to 33 per cent).

There was more bad news for the capital market, in terms of a closing of tax-free windows for debt-oriented mutual funds and for dividend-stripping by companies.

The corporate sector got a better deal. The investment incentive is now available for increasing capacity by as little as 10 per cent (25 per cent till now), and the power transmission/distribution, tractor, computer, shipping and other industries have got varying degrees of tax giveaways.

The textile industry (especially powerlooms) got what they wanted "" a rollback of the cenvat system introduced last year, to be replaced by a new restructured tax regime. Many chief executives, meanwhile, welcomed the spending priority on agriculture, and the finance minister said in an interview that no major demand made by industry had been ignored.

If the initial reactions to the Budget are anything to go by, the Budget has got a cautious welcome, though there is doubt about whether the Left parties will allow the increase of foreign investment in insurance and civil aviation.

Economists questioned the assumption that tax revenue would grow 25 per cent over the revised estimates for 2003-04. But there is also relief that the UPA government's first Budget is not veering off in crazy directions, and that the 'original reformers' are back in action.

Chief executives of companies said they understood the new government's spending priorities, and many argued that this was in the larger interest of both companies and the economy as a whole.