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A growth-oriented pre-emptive 'Budget'

January 09, 2004

It is not uncommon that some sweeping changes are made before the regular Budget, the idea being to get a few things done quickly to keep away the criticism that is inevitable during the Budget.

This time, however, this has been done to effect some real changes in the economy since it is fairly clear from the move that the regular Budget will not take place on schedule.

Interim Budget 2004-2005: Complete Coverage

All the changes are in the nature of duty reductions. It is inevitable that the government would have to do so because without a regular Budget, which is passed by Parliament, tariff rates cannot be increased.

However, tariff rates can be increased only in those cases where there are exemptions and the exempted rate can be increased to make it equal to the tariff rate. The peak rate on non-agricultural goods has been reduced by 5 per cent, from 25 to 20 per cent in the expected lines. The government had already announced that the peak rate would be reduced by 5 per cent each year.

The abolition of Special Additional Duty of Customs is a very bold and welcome measure. This was introduced about seven years ago, after some industries insisted on protection against imports to countervail the sales tax being paid on domestic products.

But after its introduction, the industries were divided sharply on its usefulness. The domestic manufacturers who depend more on imported goods did not support it. But the domestic manufacturers who competed with imported goods wanted it.

Therefore, there were a number of exemptions given, with all its complications. Now the abolition of SAD underlines the finance minister's commitment to side more with the manufacturing industry to cut the cost of production.

That part of the industry that needs more protection has been left to fend for itself against the competition with imported goods. This is economically a correct policy in the present context since the Indian industry as a whole has shown the resilience to withstand the so-called onslaught of cheaper imports.

The reduction of customs duty from 25 to 10 per cent for project imports where the investment is more than Rs 5 crore (Rs 50 million) in plant and machinery is obviously designed to give a boost to greenfield projects in India.

This should facilitate the flow of foreign investment in the country to a very large extent. The reduction of customs duty on coal from 25 to 15 per cent has also been done with the same design. All the reductions will definitely make the manufacturing sector more viable and competitive.

The growth rate of the manufacturing sector has been 6.8 per cent in the first half of 2003-04 compared to the first half 2002-03. For industry as a whole, the same rate was 6.1 and for services it was 8.8.

The growth for the power sector was 3.8 only. The finance minister has, therefore, given some boost to the power sector by reducing the customs duty on power transmission and distribution projects and also by reducing the customs duty on electricity meters. The information technology and electronic industry has also received some concessions in customs duty.

Customs duty on specified raw materials and inputs for manufacture of electronic components and optical fibre cables has been reduced to 15 to 5 per cent and from 5 per cent to nil. Customs duty on specified capital goods used for manufacture of electronic goods has been reduced from 15 per cent/10 per cent to nil. Customs duty on cellphones has also been reduced from 10 to 5 per cent, which will benefit consumers and increase the mobile invasion on landlines.

All the above concessions are to the manufacturing industry as distinguished from the capital goods industry. The finance minister has left the capital goods industry in the cold.

Import of capital goods has been made cheaper in general because of the reduction of peak rate duty, abolition of SAD, reduction of duty on power projects and on the capital goods for the manufacture of electronic goods.

The capital goods industry, which has a very substantial presence in terms of investment and spread, had not been opposing a reduction in the peak tariff of 25 per cent or reducing the high rate of 20 per cent to, say, 15 per cent.

What they have been asking for is the abolition of so many exemptions at the nil and 5 per cent rates so that the general rate becomes 15 per cent or higher.

By increasing the number of exemptions at 5 per cent or zero per cent, the government has given a boost to the manufacturing industry by making imported machinery available cheaper to them but at the same time making indigenous machinery uncompetitive with the imported ones. The existing tariff was disparate. Now it has become even more so.

As far as the health sector is concerned, the reduction in customs duty to 5 per cent for life-saving drugs and formulations is a welcome measure for the common man. At the same time we must appreciate that the countervailing duty has been exempted for such goods not by giving a straight exemption but by giving an exemption on the excise side also. This will put the indigenous and foreign goods at parity.

Reduction of excise duty on aviation turbine fuel from 16 per cent to 8 per cent, abolition of inland air travel tax and foreign air travel tax will make travel cheaper and airlines more viable. Abolition of these two taxes, which were irritants and did not yield commensurate revenue has been a bold measure and reminds us of the abolition of excise duty on unmanufactured tobacco by Charan Singh in the 1970s.

There are some indications of procedural simplifications such as electronic filing of customs documents in more customs stations and also introducing self-assessment and selective examination in respect of customs clearances. However, considering that almost every year the Budget claims that procedural simplifications have been made and ultimately not really much is done, we cannot afford to be optimistic this time also.

The baggage rules have definitely been more liberalised and even the procedural requirements in respect of service tax been made more relaxed. There have been very nominal reductions in the excise duty. They are only in respect of computers, medical furniture and ATF. Almost the entire exercise is by way of reducing customs duty. Procedural improvements are also nominal.

The biggest gainer will be the laptop computer. It will enjoy reductions in customs duty from 25 to 20 per cent, abolition of SAD of 4 per cent, and reduction of countervailing duty from 16 per cent to 8 per cent. To cap it all, when it comes as part of passenger baggage it is completely free of customs duty. So the laptop is the man of the match.

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