Pleasing everyone

INTERIM BUDGET & THE GOVERNMENT/COMMENT

Hemendra Kothari,
Chairman, DSP Merrill Lynch

The finance minister confirmed the strong growth in the economy and the pleasant surprise is the low fiscal deficit at only 4.8 per cent of GDP.

High fiscal deficit has been a big concern for India. Should the long- term trend in fiscal deficit reduction continue, rating agencies are likely to look at India's ratings favourably.

We believe equity markets will be enthused by Jaswant Singh's commitment to exempt long-term capital gains in equities from tax for three years.

The finance minister has kept his commitment to the infrastructure sector by extending fiscal benefits to new projects in the sector from 2006 to 2012. We expect investments in the power sector to see a growth of over 50 per cent in the next few years.

The finance minister has also promised to undertake measures to make domestic industry more competitive.

However, the issue of tax on dividend from equity mutual funds is unclear and requires further clarification.

This is critical since the mutual fund industry is key to the development of capital markets in India.

Overall, while the finance minister did not have much leeway to make substantial changes in tax laws, he has used the vote-on-account to highlight his commitment to social sector reforms, ensure benefits for the poor as well as keep industry and the stock market in good cheer.

The surprising thing is that he has managed to keep everyone happy while keeping the overall objective of fiscal consolidation in mind.

Govinda Rao,
Director, NIPFP

Polishing the shine

Unlike in the past, the Budget making this year has not been a one-off event; the mini-Budget announcements which started in January 8, have continued to culminate in the interim Budget.

Indeed, the finance minister has further polished the India shining story with the assurance of a reduced revenue and fiscal deficits, not merely as a ratio of GDP but even in absolute terms.

Whatever be the quality of adjustment, if the final deficit figures are closer to the revised estimates, the government must be commended.

During the last few years, there has been considerable difference between revised estimates and accounts and in present environment; we should wait and hope before ensuring that the administered polish results in further shining.

The problem is more with the sops that has been given and promised. The single most disturbing act that may destabilise the entire process of fiscal consolidation at the Centre and even more at the state level is the proposed merger of dearness allowance with basic salary.

Besides putting the adjustment clock backwards, this seeks to destabilise the already strained finances of the states. A number of states are to hold elections soon and they will not be able to resist treading in the golden political path irrespective of their financial position.

We are in for another round of cost escalation in public service delivery. Equally disturbing is the promise of raising the exemption limit and standard reduction.

Thus the long-term effect of the interim budget is to erode the tax base on the one hand and expend the salary outlay on the other. My only wish is that I should be proved wrong.

Arvind Virmani,
Chief Executive, ICRIER

Mixed emotions

The Budget disappointed many. Nevertheless many people, particularly stock market investors and salary earners, hoped that they would be favoured by an election eve through reduction in their income tax liability.

The finance minister decided not to stir the hornet's nest in the Lok Sabha by announcing income tax changes that could not be implemented as parliament could not pass such a finance bill under the vote-on account.

From a reform perspective, there are two significant plus points and to minus points. First, the announcement of halving of the stamp duty. The reduction in rates may not even reduce revenues as evasion is likely to decline as more people follow regular registration procedure.

The second positive signal is the setting up of the non-lapseable defence fund. As major defence purchases have to forward looking because the fast pace of technological development and consequent obsolescence, and the procurement procedures are unduly drawn out dilatory, defence planning suffers.

This fund will make it possible to plan and procure major weapons systems more efficiently. The two negative factors are to continue the license subsidy raj in the sugar industry, and to merge 50 per cent DA with salary for central government servants.

The latter will not only increase the revenue and fiscal deficit of the central government on a continuing basis but also have a negative effect on State governments.