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The trick Chidambaram played

July 10, 2004

Instant reactions to complicated documents are a hazardous business. Thursday's Union Budget provides a good example. On Day 2, the picture looks different from what it did on Day 1.

The long list of programmes on health, education, water, jobs, etc -- on which Mr Chidambaram dwelt for more than half his Budget speech -- turns out to have been a huge smoke and mirrors exercise. There is plenty of promise, but almost no extra money.

It may have been a packaging masterpiece, to create the illusion of a re-orientation of government activity, but a careful reading shows that much of it is a re-hash of existing programmes -- down to the funding of specific public sector entities.

As for the social infrastructure areas, there is talk of banks lending more for some things, the LIC chipping in elsewhere, Nabard contributing its bit, the states being advised to do various things (set up horticulture cooperative societies so that horticulture production can double in eight years, for instance, or adopt model laws on agricultural marketing in order to create a unified national market for agro-produce), and when all else fails, the setting up of committees and pilot projects (as for revamping the public distribution system).

The government could easily have argued that it is new in office, that its priorities will be properly reflected in next February's Budget, and that it is treading water now. Instead, by choosing to create the impression of change, it has played the old magician's game. Beyond a point, no one will be fooled.

There is re-assessment on other fronts as well. The announcements on zero taxation for computers and tractors, the steep tax on leased aircraft and the revamping of the duty structure on textiles, could end up matching the turnover tax as serious mistakes.

Because there is the problem of upstream taxes paid by suppliers on parts, components and raw materials -- on which there cannot now be a set-off downstream, since there is no tax on the end product.

The result is that it becomes cheaper to import computers than to manufacture them locally -- because the importer does not have to pay the (say) 20 per cent duty on plastics that the local manufacturer is faced with. Ditto with tractors: the producer who buys more components through outsourcing suddenly becomes at a disadvantage in comparison with the competitor with a more integrated manufacturing process.

In the case of leased aircraft, the heavy duty that has been slapped on them seems a particularly unkind cut to both Air-India and Indian Airlines, which for years have been denied permission to buy aircraft on account of government indecision.

If the two airlines have managed to build capacity and protect at least some of their marketshare, it has been by leasing in aircraft -- and since aircraft orders take years to be fulfilled, the leased aircraft can't just be sent back.

The steep duty therefore means they have to suddenly bear a cost that their private sector rivals are spared, since these latter mostly own the aircraft that they fly.

And of course all the new guys who hope to start cheap airline services, by using leased aircraft because that's the quickest way to get off the ground, suddenly find that their plans go belly up because costs have changed. Why all this should be done to help one or two established private airlines is the obvious question.

The other fact to hit home hard on Day 2 is that the whole of the cotton textile industry now can become tax-free, and the government could end up losing revenue to the extent of thousands of crores -- or so the mills say.

The mills are naturally not complaining, though the step was taken in the name of the handlooms and powerlooms, but how does the government propose that one of the country's largest industries should in effect pay no taxes?

The chaps who are complaining, meanwhile, are the mills that make synthetic cloth -- they complain that their duty structure does not allow them to fully pass on input costs, and that they are at a cost disadvantage with their cotton-based rivals.

All of which is an argument for ending the secrecy associated with Budget-making, and for instituting a more open process of discussion with those who will be affected by tax proposals, before these get formulated into a Budget that is presented to Parliament.

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Number of User Comments: 3

Sub: Supporting Mr.T.N. Ninan's View.

1. 2% Cess for education will be misused. Is it for poor students as such or will be distributed in the name of caste and ...

Posted by Dr.Rajendra Nayak


I agree with Ninan. PC seem to be still in election mode. A few hundred crores here and there hardly makes a difference, for a ...

Posted by J.N. Kini

Sub: constraints

Chidambaram has been asked to present a budget before he could even settle down. Therefore, we have to wait and watch the developments. There are ...

Posted by A.H. Venkatachalam


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