A stitch in time
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A stitch in time

This year's Budget must consolidate on increasing FDI inflow and on raising both tax and non-tax revenues, writes Nitin S Kasliwal, Vice-Chairman & Managing Director, S Kumar's Nationwide Ltd.

india Updated: Feb 22, 2006 13:11 IST

The budget this year is of special interest. Because India today stands at the cusp of transformation to a truly global economy. It has performed well in the last fiscal and today we look at the Budget with a great degree of hope and expectation.

Buoyancy of the Indian economy has now been sustained into the third year, with growth rates exceeding projections. Investment demand has pushed up the production of machinery and equipment. Growth in the manufacturing sector is geared to gain momentum. The high savings rate has boosted consumption. It is against this backdrop that India is looking at a dynamic, growth-oriented Budget.

The government has to address two main issues. Fiscal consolidation by raising both tax and non-tax revenues to fund the development of infrastructure, social sector spending, education and rural development is one. Raising FDI flows is the other critical issue. These need to be immediately addressed.

The gross tax revenue of the central government is targeted at 10.5 per cent of the GDP. The only way to further increase tax collection is to widen the base for both direct as well as indirect taxes. Reduction of tax rates is, perhaps, the most recommended route in boosting collections. It is thus advisable that the government takes a re-look at the existing tax rates to reduce them. Corporate tax should be scaled down to around 25 per cent. Personal tax needs to be reviewed. The maximum rate of 30 per cent should be levied on incomes beyond Rs 5 lakh with a target to push this tax bracket to incomes above Rs 10 lakh in the near future. This would enhance the purchasing power of the people, stimulating demand in the economy.

The Fringe Benefit Tax (FBT), introduced last year, caused tremendous confusion and increased the tax burden on corporates. In a competitive economy, the corporates, out of necessity, have to be cost-conscious to retain a competitive edge. They cannot afford to spend more than what is warranted for legitimate business purposes. It is therefore important that business expenses (advertising, publicity and sales promotion activities) that have no employee benefit are not subjected to the FBT. In fact, this tax should be withdrawn altogether.

The government must step up FDI inflows. The Common Minimum Programme (CMP) talks about the possibilities of doubling FDI flow. However, the steps for increasing this have been restrained. There is an immediate need to push up FDI limits in the key sectors of insurance and retail. In retail, the government has partly relaxed the FDI regulation for a single brand but India awaits a total liberalisation. Retail growth is not only critical to the growth of the economy but also helps generate direct and indirect employment. India is among the most backward countries in organised retailing. The CII-Mckinsey report puts organised retail at around 2 per cent, while countries like Thailand, Brazil and China have organised retailing to the tune of 40 per cent, 36 per cent and 20 per cent respectively. The sector offers tremendous opportunity to increase FDI inflows as the world waits for India to fully open it up in this Budget.

The textile and apparel industry should also get consideration. It is one of India's oldest and most impor tant economic sectors, second only to agriculture in terms of employment. The industry accounts for 4 per cent of the country's GDP, about 14 per cent of industrial production and about 20 per cent of export earnings. It provides 35 million jobs and has the potential to influence growth at the grassroots.

After a long time, the scenario is looking good for the Indian textile industry. Both domestic and international demand is fuelling a boom. It is rediscovering its potential in the post-quota regime. Although China has taken a lead currently, the scope for Indian growth is phenomenal. The important aspect for India's textile industry is that the developed world is now looking to it as an alternative Clothier of the World to China.

The key is to increase manufacturing capacities. Massive investments are the need of the hour. This needs policies that encourage investment, continued low interest rate regimes as well as the creation of an equity fund, which will facilitate project funding. It must be ensured that the sector is able to compete in the world market and boost domestic consumption.

This can be done by focusing on labour productivity. Bold changes are required in labour policy if we are to be competitive in the international market. This is one area where China currently holds an edge over us. We need to create a level-playing field.

Reduction of excise duty of inputs and capital goods for spun yarn to 8.16 per cent will prevent losses to spinning mills by virtue of accumulated Cenvat credit, increasing viability. A further help would be reduction of excise duty on synthetic fibre to reasonable levels, thus reducing its cost. Reforms in the cotton industry will go a long way in ensuring availability of cost-competitive technology and quality inputs (raw materials, dyes and chemicals) and an assured supply of en ergy. Policies must be tweaked to help the industry function smoothly enhancing productivity with improved cash flows. Taxes, like the DFRC and in DEPB, that reduce the quantum of export incentives making the final product unviable in the international market must be removed.

These are not just corporate observations but the perspective for an overall growth paradigm. I have focused on the textile and apparel industry because it is one of the largest employers and a potentially high forex earner. The sector's growth augurs well for the economy as a whole.

The government has already made a start with its textile-friendly policies of de-reservation of a substantial portion of the industry. This has created a level-playing field between the organised and unorganised sector. Fiscal reforms have boosted production. The extension of the Technology Upgradation Fund scheme with enhanced funds allocation and Special Economic Zones are others. These initiatives have already placed India on the world map. We now await the next set of reforms that will not only encourage growth but also ensure that the Indian textile industry becomes a major global force. Given the government's commitment to liberalisation and growth objectives, we can expect a favourable Budget this year.

(The writer is Vice-Chairman & Managing Director, S Kumar's Nationwide Ltd)

First Published: Feb 21, 2006 15:02 IST