Union Budget 2002-03: Double-whammy
for the common man
The Union Budget 2002-03
states that it is aimed at consolidating, widening and deepening the reforms
process, besides being devoted to development. While it contains many welcome
measures, its potency to stimulate economic growth is suspect. Read on for the
full story.
Lack of export thrust
The
Budget does not have an export-thrust. The Commerce Ministry had announced an
ambitious target of achieving a 1% share in world exports by 2006-07 - a target
that can be achieved only if exports grow at a CAGR of 11.9% in the next five
years. Against this backdrop, one would have expected the Finance Minister to
announce major incentives to export-oriented units and industries. No doubt,
reduction in the peak rate of customs duty from 35% to 30% will help Indian
industry move towards international competitiveness and industry will also benefit
from reduced fuel costs on account of dismantling of the Administered Pricing
Mechanism. However, 100% export oriented units, especially software companies
in Export Promotion Zones, will find themselves losing yet another piece of
their competitive advantage on account of removal of benefits under Section
10A / 10B of the Income Tax Act. It must be remembered that the Information
Technology industry has played a major role in bolstering the country's foreign
exchange reserves to US$ 50 bn during the current fiscal, at a time when merchandise
exports have faltered badly. The imposition of new surcharge of 5% across all
categories of tax-payers has diluted the advantage conferred by the removal
of dividend distribution tax.
Double-whammy for the common
man
No
effort appears to have been made to widen the tax base to augment resources.
On the contrary, the Finance Minister has chosen to dip into the pockets of
existing taxpayers to achieve this end. The Finance Minister has delivered a
double-whammy to the common man, especially the salaried individual - by reducing
his investible surplus as well as reducing the rate of return on his investments.
Firstly, measures such as
- Surcharge on income tax on all categories of
tax-payers
- Reduction/elimination of benefits available
under Section 88 of the Income Tax Act,
- Capping investments in RBI Relief Bonds to Rs
200,000 per annum
- Taxation of dividends at the hands of the individual
rather than the corporate or the mutual fund; will mean a higher tax outgo
and reduced rate of return for individuals.
Secondly, increased prices of LPG and kerosene
will result in higher household expenditure. Why, even a visit to the friendly
neighbourhood barber or beautician will be postponed as they have been brought
under the service tax net! Or for, that matter, even life insurance will be
more expensive, thanks to service tax.
In two strokes, the Finance Minister has reduced
the ability of the common man to save. So what does this mean for the economy?
Where will the demand required to kick-start the economy come from? Will this
budget actually deliver on its promise of development and growth? Or is the
Finance Minister strangling the golden goose?
The manufacturing, mutual fund and insurance sectors
will see reduced demand for their products. As for the economy - well if you
take away savings from the common man in order to finance Government expenditure,
where will the funds for investment in the real sector come from?
But everything does not look bleak. There are a
few pluses too.
Agriculture
Union Budget 2002-03 contains many announcements
beneficial to the agricultural sector such as additional allocation of Rs 700
mn to Credit Linked Subsidy Scheme for construction of cold storages and rural
godown schemes in 2002-03, allowing farmers to sell directly to food processors,
lifting barriers to inter-state trade, de-canalization of the export of agricultural
commodities and phasing out of remaining export controls.
These moves should result in reduction of intermediaries
in the agricultural sector and pave the way for farmers to get better prices
for their produce, thereby increasing their purchasing power. This can translate
into higher rural demand for industrial products.
Infrastructure
The Government's focus on infrastructure development continued with total plan
outlay in power, roads and railways increased by 22%, 39% and 23% respectively,
to a total of Rs 379.19 bn. Moreover, an Infrastructure Equity Fund of Rs. 10
bn will be set up to help in providing equity investment for infrastructure
projects. Implementation of these projects should lead to increased demand for
steel and cement, and a number of ancillary industries which are dependent on
the aforementioned sectors.
Interest Rates
The Finance Minister has cut the interest rate on small savings by 50 basis
points, signalling his intent towards a lower interest rate regime. This will
have a salutary effect on not only the Government's interest outgo and the fiscal
deficit, but also on industry's cost of borrowing. Moreover, administered interest
rates will be benchmarked to the average annual yields of government securities
of equivalent maturities in the secondary market, making them more responsive
to changes in interest rates.
Globalisation
Indian companies may now invest abroad up to US$ 100 mn (earlier US$ 50 mn)
on an annual basis through the automatic route.
FII portfolio investments will not be subject to the sectoral limits for foreign
direct investment, except in specified sectors.
Income tax rate applicable to foreign companies reduced from 48 per cent to
40 per cent.
Other Measures
A new Bill on Banking Sector Reforms will be introduced in Parliament to strengthen
creditor rights through foreclosure and enforcement of securities by banks and
financial institutions.
Plan outlay for tourism, a major source of foreign exchange for the country,
raised to Rs 2,250 mn .
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