Budget, 2003: Growth will be the test

On the negative side, the fiscal deficit remains at a high 5.7 per cent, but one would argue that the country could live with this deficit if the minister manages to deliver on his promise of economic growth. Jaswant Singh said that infrastructure development, fiscal consolidation through tax reforms, agricultural reforms and a restructuring of the duty structure for the industry would form the core of his budget exercise. And he has come up with significant proposals in all these sectors. The budget provides over Rs 60,000 crore for big-ticket infrastructure projects in road building, port and airport modernisation and railway projects. This, along with the incentives for the housing sector to individuals and builders will lend buoyancy to core industries such as steel, cement and finance.

There are several proposals to move agriculture and the plantation industry up the value chain and improve price realisation. In addition, there is a serious attempt to make the tax machinery more transparent and accountable, by adopting the recommendations of the Kelkar committee report. These measures will go a long way in reducing harassment of taxpayers and in automating the tax collection and investigation procedures. The minister deftly ignored the two controversial Kelkar Committee reports on direct and indirect taxation almost in their entirety by brushing them off with big dose of empty praise for generating a pitched debate on taxation policies.

In addition, the budget has a slew of populist measures, with some goodies for various segments of society. There are tax breaks on education for two children, a move to fund sports infrastructure, several incentives for the health sector, including tax and duty cuts on specified medical equipment, and tax incentives for setting up private hospitals. The minister also made the long overdue announcement to set up a Pension Fund Regulatory and Development Authority, with specific schemes to reorganise the opaque pension and provident fund sector that had caused some panic in the wake of the Home Trade scam.

However, announcements such as the health insurance policy to be offered by General Insurance Corporation (GIC) and a pension facility to be offered by Life Insurance Corporation (LIC) need careful consideration. It is a matter of great discomfort that the FM continues to announce policies on behalf of GIC and LIC, when both institutions are operating in a highly competitive market, and ought to make their decisions purely on business considerations. The LIC pension scheme for senior citizens (Varishtha Pension Bima Yojana) is more reprehensible. First, it shows that the government has learnt nothing from the ‘‘assured return’’ fiasco of Unit Trust of India (UTI) even after it has paid or earmarked nearly Rs 18,000 crore of taxpayers fund to bail out the institution in the last three years. Yet, the finance minister has thought nothing of assuring a high 9 per cent return under the pension scheme, and even promised to make good any shortfall in earnings by LIC from the exchequer. This would make it an assured return scheme with an explicit government guarantee.

Interestingly, while Jaswant Singh has earned kudos from industry, the capital market’s reaction to Jaswant Singh’s budget has been unusually muted. That is probably because the market’s expectations were far too high, and although the minister seems to have delivered on many of their expectations, most of his announcements come with an interesting twist. For instance, the reduction in capital gains tax becomes applicable only next year and has a curious one-year validity. While dividend has been exempt in the hands of individual investors, the liability has been passed on to companies. Similarly, investors have yet to work out the implications of the increase in the service tax incidence. Although the Foreign Direct Investment (FDI) ceiling for private banks and the removal of the 10 per cent cap on voting rights has been welcomed, investors were disappointed that FII investment limits in government banks have not been increased.

The attitude to public sector disinvestment is another disappointment. While the disinvestment target has been missed by a huge margin, the government hopes to raise Rs 15,000 crore. However, it must be said that the capital market too realises that Jaswant Singh has succeeded in laying a solid foundation for growth and if his government is able to implement his various proposals and deliver on all his promises, the economy and corporate earnings are bound to recover and stock indices would eventually take wing.