rediff.com: Prelude to Budget 2000


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February 25, 2000

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What will Yashwant Sinha do?

Presenting the first of the rediff.com-Dun & Bradstreet India special pre-Budget analysis series. This article examines the finance minister's options for Budget 2000.

It has always been a difficult task to predict what India's Union Budget will look like. No matter how many bases one covers, the finance minister succeeds in pulling out some very unexpected rabbits from his hat on Budget Day.

However, each Budget is distinguished by the priorities that drive it. The 1999-2000 Budget was drafted with the objective of spurring economic growth through measures aimed at key sectors such as housing. It also aimed at providing succour to a dormant stock market. Looking back, both those objectives seem to have been achieved to a great extent - the economy is expected to grow by 6 to 6.5 per cent in 1999-2000 and the BSE Sensex has touched a new high of over 6,000 points in the recent past.

What will drive the Union Budget for 2000-01?

In Dun & Bradstreet's opinion, the finance minister has a two-fold task in the Union Budget for 2000-01:

1. Tackling the burgeoning fiscal deficit.

2. Sustaining industrial recovery to fuel higher GDP growth.

Deficit control measures

Given that the finance minister has explicitly stated that the Budget could contain harsh measures, it is largely expected that the government will seek to increase its tax revenues significantly. Dun & Bradstreet believes that the government may examine the following options (in order of priority) to achieve this objective:

1. Taxation of export earnings of the software sector.

Support for this measure stems from the fact that the software sector is presently in an upward trajectory and is therefore well placed to support the government's revenue mobilisation efforts without impeding their growth. It is being advocated that this very profitable sector should be made to share its current prosperity. Another justification is that the software sector is being provided with several incentives/tax breaks by the government -- if software companies cannot be taxed in such heady times, when else can they?

An alternative to taxing the export earnings of software companies could be the imposition of a software service tax on revenues generated by such companies.

2. A Minimum Alternate Tax on export profits of companies

With exports averaging double-digit growth on a year-on-year basis, the finance minister may actively consider an across-the-board taxation of export profits of companies.

3. Rationalisation of excise duties to move to two ad valorem rates

This would be a welcome continuation of the rationalisation process begun by the finance minister in the previous Budget. Its impact could, however, get diluted if the government continues with its plethora of exemption notifications.

4. Reduction of customs duty on crude oil

The rapid increase in the international price of crude oil has had an adverse impact on the domestic refining industry. In order to protect Indian refineries, the government is likely to reduce customs duties on crude oil by 5 per cent without any compensating reductions on import duties of refined petroleum products.

5. Introduction of Fiscal Responsibility Act

The election manifesto of both the BJP and Congress did contain references to this. If at all the government wishes to usher in the Act, there could be no better time than now.

6. Partial reduction of subsidy on LPG and kerosene

The government looks set to do away with at least part of the subsidies on domestic liquefied petroleum gas and kerosene. The subsidy bill on these two items accounted for Rs 88 billion in 1998-99 and is expected to touch Rs 130 billion in 1999-2000 if the increase in crude oil prices and the standard growth rate in consumption (10 per cent) are factored in.

7. Taxation of Agricultural Income

There has been some talk of taxing agricultural income. However, this appears remote because of the following:

a. Rural demand has been largely responsible for GDP growth in 1999-2000.

b. The agriculture sector has not witnessed the healthy growth in 1999-00 that was seen in the previous year.

c. Negative political fallout.

Need to revive the core sector

While the economy has witnessed a turnaround in 1999-2000, it is important to note that several important sectors such as infrastructure and capital goods have recorded poor growth. The measures that the finance minister announces to give a fillip to these sectors will be watched with keen interest.

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How will personal taxes change?

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