A need to step back

INTERIM BUDGET & ANALYSIS

The biggest positive from the presentation of the interim Budget or vote-on-account was the drop in the fiscal deficit target to 4.8 per cent in 2003-04 from the original targeted 5.6 per cent.

On top of this, Finance Minister Jaswant Singh has indicated a fiscal deficit target of 4.4 per cent for 2004-05, an eight-year low.

While I am sure there may be some optics involved in achieving this deficit reduction, at least the direction is positive.

The reduction in the government's targeted borrowing programme for 2004-05 is also a big plus. One of the big concerns of investors has been a rise in interest rates due to a crowding out as companies crank up their capital expansion plans and the government is unable to rein in the fiscal side.

The reduction in the central government's borrowing programme for 2004-05 will mitigate these concerns to a certain degree. Keeping interest rates low is critical to sustaining growth in retail lending and avoiding any possible shocks to the financial system.

The extension of the capital gains waiver is also positive, as well as the decision to exempt multinational captive business process outsourcing (BPO) operations from taxes. The decision on the BPO front puts to rest a lingering uncertainty dogging this important sector.

The ability to self-assess customs as well as file e-returns for excise, combined with the prior simplifications announced for direct taxes are helpful measures in streamlining the tax administration.

Clearly the finance minister seems to want to deliver on his promise of making the tax administration as hassle-free as possible.

The extension of concessions for the power sector is another long-term positive, lowering the capital costs of new projects and hence the delivered cost of power.

The sops handed out for shipping are also important and should improve the financial position of the industry and increase its ability to acquire ships. This is important as this sector has began experiencing severe shortages globally.

The reduction in stamp duties on central stamp papers by 50 per cent as part of an eventual overhaul of the total stamp paper regime is another structural positive that will help lower the frictional costs of doing business in India.

The finance minister's decision to make no changes to the direct tax regime will also help ensure continuity and stability in economic decision-making.

On the flip side, the merging of 50 per cent of dearness allowance with the basic salary for central government employees is a clear negative.

It will invariably be demanded and implemented at the state government and public-sector undertaking levels as well, driving weaker states further into bankruptcy. This seems to be a election gimmick for which government finances will have to pay a heavy price.

The tinkering with the banking system and effectively forcing them to lend at below market rates for agricultural purposes is another worrying trend.

The government and the Reserve Bank of India seem to be getting too involved in the day-to-day micro-management of banks.

The decision to lend, at what interest rate and against what collateral are commercial decisions and should be left to the bank managements. The government has no business getting involved in these issues.

The increase in defence spending by nearly 10 per cent is surprising as is the desire to set up a Rs 25,000-crore corpus for defence modernisation.

What happened to the idea of a peace dividend from improving relations with Pakistan? The target of $ 3.5 billion in asset sales looks ambitious and once again calls into question the government's credibility on this issue. Has the government of India ever met its disinvestment target?

On the whole, not a great deal should have been expected by investors from an interim Budget-cum-vote-on-account.

The finance minister has made positive noises about re-examining the standard deduction and income tax exemption limits were the BJP to come back to power and extending the capital gains benefit for three years.

I don't think investors realistically could have expected anything more on the direct taxes front. If the markets are disappointed, they have only themselves to blame.

As for longer term issues, I think investors have got to see more movement on revenue generation by the government.

The vast services sector has to bear its fair share of the tax burden and the fact that less than 30 million people pay taxes is absurd. The fiscal problems of the country can only be solved by raising more revenue, not cutting spending.

VAT and its introduction post-elections will be a clear demonstration of the government's resolve in tackling these issues head-on and will be closely watched by investors.

Investors will also want to see continued progress on the disinvestment front; the government is still involved in far too many industries and companies.

Further simplification of the tax regime is also required, but beyond this the baton of reform has already passed on to the states.

It is at the state level really where the next generation of reforms must take place, not at the Centre. Central Budgets will become increasingly irrelevant for investment decision-making, which is the way it should be.