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Budget rollbacks? We have a history

July 02, 2004

'One step forward and one step back, and sometimes half-a-step back.' This 'modified' adage applies perfectly to the Indian Budget. We say this because this is the relevant time to do so especially when everyone is looking forward to the budget for a 'sense of direction.'

The purpose is to highlight the fact that though budget may outline some 'hard' measures, whether the government will stick to its decisions remains to be seen. This is because we have a history of rollbacks!

There have been numerous instances of rollbacks in the past (check table below), which were of course, favourable for the masses but equally detrimental to government finances. Initiatives taken by various governments with respect to widening of tax base, better tax administration, rationalisation of subsidies, labour reforms, divestments, second-generation reform measures and last but not the least, setting its own house in order, have been either diluted or reversed. Thus, some policy measures have failed to serve its purpose.

In few of the budgets over the last few years, distinct signs of progress were made on various fronts, including tax reforms, with good intentions.

Just to put things in perspective, here's a quote from former finance minister Yashwant Sinha, while he was moving the Finance Bill 2002 for consideration in the Lok Sabha in April 2002: "I wish to reiterate that a moderate tax regime and a large number of exemptions go ill together. I do recognise that those who are accustomed to enjoying the benefit of exemptions would like to resist the withdrawal of exemptions."

And the latter was precisely what happened. However, one does not need to delve deep to find out the obvious reasons for the rollbacks.

Take the case of the Fiscal Responsibility Bill, which was aimed at setting the government's own house in order. We have this history of trying to 'maximize' revenues.

There have very few instances where the government said 'I would like to tighten my expenses also'. The Fiscal Responsibility Bill was a step in that direction. But it has been diluted to such an extent that it is now namesake.

We would like to re-iterate what we had written earlier. The larger idea here is not to question the validity of the measures adopted during the budget.

While we all understand the kind of pressure on our finance minister and prime minister, it is the office of India's finance minister that seems to be undermined. If one had to rollback, one need not have mooted the same in the budget in the first place.

These consistent rollbacks have reduced the annual budget proceedings to something of a 'snakes & ladders' game. It would be better in future if the finance minister consults (read convinces) the ruling coalition members first and then present the budget. This could be the only way to avoid rollbacks in future.

Having said that, the strategy could be to include several stringent measures and then roll back on low priority items. In such case, the Finance Minister is better off, as high priority measures do not lose momentum at the same time satisfying the roll back lobby.

So, is there something to be learnt from this history? How is the retail investor affected in this tug-of-war between economics and politics, the balancing of which is a Herculean task for the finance minister?

While it is natural for investors to act on the basis of budget proposals, it is the changes and/or rollbacks that we have to watch out for.

For e.g. there are already noises about considering a rollback of the recent petro-products price hikes. If this happens, investors, who had invested in oil companies stocks on the basis of the announcement, would be left in a lurch.

The bottomline is that what is 'proposed' in the Budget 2005 may not be 'disposed' after all. At least, history fails to inspire confidence on this front. So, watch out!

A page from history!
Finance MinisterBudgetBudget ProposalRevised Proposal
Jaswant Singh2003-04

Effective 5% hike in fertiliser prices proposed

Proposal rolled back owing to opposition from various political factions.

Yashwant Sinha2002-03

Dividend to be taxed at the hands of the shareholder or the mutual fund owner at the applicable tax bracket.

Dividend earnings brought under Section 80L. That means dividends earned from companies and mutual funds upto a maximum of Rs 9,000 are tax exempt. Also, dividends earned below Rs 1,000 will not be subject to TDS, giving relief to small investors.

Yashwant Sinha2002-03

Sec-88 benefits reduced from 20% to 10%

Sec-88 benefit for individuals earning between Rs 1.5 lakhs to 5 lakhs revised to 15%. Individuals earning above Rs 5 lakhs get no Sec 88 benefits.

Yashwant Sinha2002-03

5% service tax

5% service tax rolled back for the savings portion of the premium.

Yashwant Sinha2002-03

LPG price hiked by Rs 40 per cylinder

Rs 20 rolled back

Yashwant Sinha2002-03

The Finance Bill 2002 had proposed to restrict the tax deduction to 90% of profits or gains derived from export of articles or computer software for one year - i.e. assessment year 2003-04.

Restoration of the 100% income tax deduction on export profits to units in special economic zones (SEZs), software technology parks (STPs) and 100% EOUs.

P. Chidambaram1997-98

Levy of income-tax on gifts received

Proposal totally withdrawn

P. Chidambaram1997-98

Registrar's value in property transactions be taken as sale consideration instead of the actual consideration for capital gains purpose

The proposal was withdrawn and the status quo restored. As such for capital gains purposes, the actual sale value will be relevant and not the Registrar's value is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.

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Number of User Comments: 1

Sub: Rollbacks have a useful purpose!

Dear author of this article, I wonder what you've been smoking. In the real world, decisions are never reached by consensus - they are reached ...

Posted by Ritesh


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