Budget Proposals 2005-06


Submitted to the UPA-Left Coordination Committee
On February 1, 2005
1. The first (interim) Budget of the UPA government had made an additional allocation of Rs. 10,000 crore as a special budgetary support for the 10th Plan in order to implement the commitments made in the Common Minimum Programme. This amount was clearly inadequate to meet the commitments related to employment generation, agriculture, education and health. The forthcoming Budget should therefore make substantially increased allocations in the direction of fulfilling the commitments made in the CMP.
2. The important commitments made in the CMP include the Employment Guarantee Act, stepping up of public investment in agriculture in terms of rural infrastructure and irrigation and phased increase in public spending on education and health in order to meet the targeted 6% and 2-3% of GDP respectively in five years. The Budget should make an additional allocation of Rs. 20,000 crore to support the employment generation programme under the National Rural Employment Guarantee (which is soon expected to become an Act). There should be additional allocations of Rs. 8000 crore each for education and health. Total allocation for agriculture, irrigation and rural infrastructure should be increased by Rs. 14,000 crore. In sum there should be an increase of Rs. 50,000 crore in the Central Plan outlay in the Budget in order to meet the commitments made in the CMP.
3.  The resources required for the increased expenditure can be mobilized through deficit financing, in view of the significant unutilised capacity existent in various sectors of the economy. But the government has tied its hands as far as running a budget deficit is concerned, by committing itself steadfastly to the FRBM Act, which has institutionalized conservatism in fiscal policymaking in India by imposing unwarranted constraints on the capacity of the Central government to run a budget deficit even when idle resources exist in the economy. The Act should not be allowed to come in the way. Further, it is noteworthy that the Gross Tax Revenue collection stood at only around 9.21% of the GDP in 2003-04 as suggested by the Budget figures, which is quite low even if compared to other developing countries. Enough scope for resource mobilization through taxation exists. There is a strong case therefore to increase the tax-GDP ratio by around 1.5%, which should be sufficient to meet the additional development expenditure that is being suggested, given the current level of India’s GDP.
4. Expenditure on Defence, which had witnessed a whopping Rs. 12,000 crore hike in the interim Budget, can be brought down. However, the decision taken by the government on the eve of the Budget, to set up a fund from disinvestment proceeds in order to make investments in the social sector, lacks economic rationale. Public spending in the social sector, or any other sector for that matter, should be financed by raising resources through taxation or by running a budget deficit. Selling off stakes in a profit making PSU is in effect equivalent to running a budget deficit. While in the latter case interest payments have to be made by the government in the future against a one-time borrowing, in the former future streams of income from dividends are forgone against a one-time receipt from the sale of stakes. In fact the latter is worse since it involves transferring state-owned assets to private hands, which is not the case when the government borrows from the market.
5. It is therefore important for the government to make a serious effort to mobilize tax revenue. Additional tax revenue can be mobilized both by levying new corporation taxes and customs duties as well as widening the tax net, focusing upon the upper classes. The rate of wealth tax, which is currently very low and yields annual resources to the tune of around Rs150 crore only, should be increased. Corporate tax exemptions need to be done away with. Specific targets for realization of tax arrears and recovery of the NPA of banks/FIS should be fixed. A review of the whole gamut of export incentives/duty drawback should be undertaken given the comfortable foreign exchange position with a view to phasing out those which are no longer necessary. The salaried class should not be subjected to any additional income tax burden.
6. Tribulations arising out of speculative activities in the Indian stock market once again came to the fore in the recent past. In this context the capital gains tax need to be reintroduced, given the fact that the turnover tax introduced in the last Budget was eventually diluted. Besides, an ad valorem tax on all foreign exchange outflows should be introduced, which would not only generate revenue but also help to stabilize ‘hot’ money flows into our economy and provide some protection against capital flight. Moreover, no foreign entity should be allowed to hold rupee denominated sovereign debt, directly or indirectly.
7. Rural credit continues to be an area of grave concern. It needs to be underscored that the primary focus of expansion of rural credit should be on agriculture and crop related activities in the rural areas. The RBI directive on providing loans of up to Rs. 1 lakh without collateral to small and marginal farmers has not been implemented in most places. The Budget should make special allocations to recapitalize the cooperative banks in keeping with the recommendations of the Task Force on Revival of Cooperative Credit Institutions. The aggregate liability to be borne by the Central government in order to undertake the revival package has been estimated by the Task Force to be Rs. 10,839 crore (and another Rs. 4000 crore for contingency). To begin with an amount of Rs. 5000 crore (from the Rs. 14000 crore suggested for Agriculture) can be allocated for this purpose. Moreover, the Advisory Committee on Flow of Credit to Agriculture and Related Activities from the Banking System which was set up by the RBI had recommended the setting up of an Agri-Risk Fund which would mitigate the risk of the banks lending to the agriculture sector, as they can have recourse to the fund in the event of genuine default. Such a fund should be created with allocations from the Central Budget.
8. Farmers in different parts of the country have suffered immensely due to the crash in prices of their crops. A system of variable tariffs needs to be introduced in order to protect the producers of such crops, which experience wide price fluctuations, like cotton, groundnuts, soya bean, sugar etc. In case there is a sharp fall in prices of any of these crops in the world market, the domestic producers should be protected by raising the import tariffs, which can be lowered once the prices stabilize.
9. The structure of customs duties on finished and intermediate goods and excise duties in certain sectors result in discrimination against domestic industries. For instance colour picture tubes (a finished product) can be imported from Thailand, under the Free Trade Agreement, at 12.5% customs duty while the customs duty on colour glass (intermediate good) is 20%. The domestic Electronics and TV manufacturers are adversely affected since the cost of the input is higher than the cost of importing the finished product from Thailand. The customs duties levied in accordance with the Free Trade Agreement with Thailand and the existing excise duties for the manufacturers who are affected by the Trade Agreement should be thoroughly reviewed. Customs and excise duties should be revised wherever such imbalances exist which put domestic manufacturers in a disadvantageous position.
10. The recommendations of the Standing Committee on Petroleum, which has suggested several measures to restructure the customs and excise duties of Petroleum products, should be implemented. This would help in bringing down the prices of petroleum products and provide some relief to the people. The government should not stall this duty restructuring on revenue considerations.
11. The existent structure of customs duties for Power projects, especially Mega Power projects of 1000 MW and above which does not attract any customs duty, discriminates against domestic industries like BHEL. There are further moves to make the entire Power sector a virtually zero import duty segment by bringing down the eligibility limit for Mega Power projects to 250 MW. This should not be done.
12. The government should honour the commitment made in the CMP that profit-making PSUs will not be privatised. Keeping this in view there should be no disinvestments of shares in such PSUs like BHEL. The government should not unilaterally proceed with mergers in the nationalized banks and should discuss such issues with the trade unions as stated in the CMP. The proposal for increasing the FDI to 74% in the Indian private banks should not be proceeded with as it would mean handing over control of funds to foreign banks. The public distribution system should be strengthened without resort to food coupons.