Budget 2003: Up, up and away
By inviting more investments, inducing consumption and, at the same time, containing fiscal deficit, the Indian economy will definitely be able to continue to rise up the growth curve. The Budget should set the pace for achieving 8% growth, says DSP Merrill Lynch chairman, Hemendra Kothari.india Updated: Feb 24, 2003 20:12 IST
Budget 2003 should set the pace for achieving the ambitious growth targets that have been chalked out for the Tenth Plan. This would mean ensuring that some of the fast growing sectors are not taxed too heavily to disturb their growth while providing concessions to the sectors not doing well. Second, the Budget should be a consumer-friendly one, with measures that seek to raise disposable income at the hands of the consumers.
A sustainable GDP growth of around eight per cent can be achieved only by empowering the consumer as well as by raising investment demand. However, the leeway for giving tax concessions is limited as the fiscal deficit must be kept on a tight rein. While there was an improvement in the mid-Nineties, the fiscal deficit has moved up again to 10 per cent levels.
In an effort to keep the fiscal deficit in check, Jaswant Singh will have to follow a mix of additional revenue-raising exercises as well as taking steps to prune expenditure.
Measures to enhance revenue:
Bringing more services under the tax net: Currently services contribute only a miniscule amount to the government's revenue kitty despite accounting for around 55 per cent of the GDP. Bringing more services under the tax net will hopefully broaden the tax base.
Simplification of excise duties without compromising on revenue potential: The existing excise duty structure is complex and leads to extensive tax evasion. The number of duty slabs should be reduced further. In addition, a value added tax (VAT) regime will be introduced from April 2003. This will not only simplify the existing tax structure, but also ensure greater tax compliance. Revenue collections could surge if the scope of VAT is enhanced to cover services too.
Revival of disinvestment: This will be revenue-generative. But, more importantly, it will demonstrate the government's commitment to the reform process. The government should set a target of at least Rs 120-150 billion for divestment proceeds -- though even this would be lower than the annual average target of Rs 160 billion that it has set for itself for the Tenth Plan (2002-07).
Tax on agricultural income for the richer farmers is required due to its tremendous revenue-enhancing potential as well as a step to plug tax evasion, despite such a proposal facing opposition from several fronts.
Measures to prune expenditure:
Roll-back/reduction of subsidies: In order to keep a tight rein on the fiscal deficit, the government should reduce subsidies on fertilisers, kerosene and other non-merit goods.
Reduction in non-plan government expenditure: This should be done by tight cost control.
Reduction of interest rates on contractual savings: Interest rates (post-tax) on small savings are still at around nine-9.5 per cent -- the main cause of rigidity in the interest rate structure in India. A reduction in small savings rate will not only bring down the government's interest liability, but also reduce real interest rates in the economy.
Factors to ensure that the present 'feel-good' factor continues:
The government should increase Plan expenditure (on infrastructure projects) significantly in light of its potential to generate high multiplier effect for economic growth. Last year, Yashwant Sinha had announced an increase in infrastructure spend by 24 per cent. A similar increase should be announced this year also, particularly as the government needs to counter the lag-effect of last year's weak agricultural growth. Over the last few years, sustained spend on programmes like road development has quickly put incomes into the hands of relatively low-income people dispersed across the country.
The surcharge of five per cent levied on personal income tax and corporate tax should be removed.
While the FM is likely to remove a lot of the deductions under income tax (to simplify the act), deductions towards interest on housing loans and funding of pension schemes should be retained/introduced.
Steps to indicate that the reform process continues:
Reduction in peak customs tariffs by five per cent: This will be in line with the long-term goal to bringing them down to 10-15 per cent levels.
Further steps towards capital account convertibility (CAC): Given the comfortable level of forex reserves (over $75 billion) and current account surplus in the last three successive quarters, the government recently announced several steps towards CAC. We feel that in the 2003-04 Budget, it should announce further easing of forex norms for individuals, institutions and companies.
Relaxation of FII, FDI limits: The government should raise foreign ownership limit for several key sectors including telecom, insurance, banking and civil aviation. Last year, the government had announced that foreign ownership limit for some sectors would be raised. But no progress has been made on this issue so far.
From a corporate perspective, we believe that tax incentives available to exporters under section 10A and 10B should continue. Software exports have emerged as a key driver of economic growth and forex earnings and dilution of tax incentives could impede the growth spurt in this sector.
However, for corporates as a whole, we would welcome implementation of several Kelkar Committee suggestions aimed at simplifying the tax laws.
The FM should also announce measures that would indicate the government's willingness to move ahead with banking sector reforms. Steps to bring in parity in foreign investment limits between public sector and private sector banks should be initiated. This will enable strong public sector banks to access the ADR/GDR market.
We would also welcome the removal of cap on voting rights in banks. The 10 per cent cap on the voting rights creates inequality among majority and minority shareholders. This restricts foreign banks from setting banking subsidiaries thus impeding capital flow. Its removal would also facilitate consolidation in the banking sector. There should also be tax concessions for the tourism and textiles sectors.
The government should focus on the equity markets. In terms of tax concessions, dividend tax and long term capital gains tax should be removed. There should be more progress in the derivatives segment with option writing other than on exchange and forward contracts being permitted. This will facilitate structuring of divestments as well as M&A transactions. OTC derivative products should also be introduced. The existing provisions allow only exchange-traded derivatives. The OTC derivative product will add depth to the capital market.
However, the proposal to tax unlisted companies capital gains and other assets like real estate at three per cent will hinder development of the private equity funds. It may also lead to a spurt again in unaccounted money.
The Indian economy today is faced with the challenge of growing at a growth rate of eight per cent. It is my belief that by inviting more investments and inducing consumption and, at the same time, containing fiscal deficit, we will definitely be able to continue to rise up the growth curve.
(The writer is Chairman, DSP Merrill Lynch)
First Published: Feb 24, 2003 23:00 IST