29 Feb 2008

Budget 2008-09, what do we have ...

Well, politics does play a part (and a huge one) as far as the shaping of the economy is concerned. The presentation of the Budget for 2008-09 goes on to tell this in a long way. Eying for the general elections for the Union Government due next year (therefore the last budget before that), the Finance Minister Mr. P. Chidambaram presented a win-win budget, seeking to appease all cross-sections of the economic sectors in an attempt to secure a majority for another five years. This looks just a continuation of the Rail Budget which almost came out in full force to appease the bulk of voters of the country; by offering reduction in prices not only for the lower and economically backwards rungs of the country but also by reducing the fares in the AC-II tier and AC-III tier segments, thus offering an attachment and understanding with the growing middle clas of the country. With this background, let us analyze the budget as presented today by the FM.

(1) The Finance Minister came out in full swing to give the farmers a long due relief (hope there would not be any more suicides now with this proposal made) by proposing (it is still a proposal until approved by the Parliament) to waive the debt owed by the farmers (estimated to be Rs. 60,000 crores) and also by proposing to provide a credit facility to them. In my view this is a immediate response to a long term issue; the full relieving of which would require nothing short of another Green Revolution in the country. While India, no doubt, is moving towards development on the behest of industrial growth, the low turn out from the agricultural segment can be really gruesome for this food hungry and 1.2bn strong populated country. Agricultural independence is a very critical requirement for the growth of any country and with the poor state in which the country's farmers languish is really an issue which needs to be addressed with full might. This proposal by the Finance Minister really (I hope the money will be spent as promised and not diverted elsewhere) comes a long way to support the almost crumbling belief of the farmers in the political ideologists of the country.

(2) As we had predicted in one of our earlier posts, the Finance Minister has indeed come out with the raising of tax slabs, a move which we think is a logical and much needed move towards simplification of the tax system. The hitherto tax exempt limits of Rs. 1,10,000/- and Rs. 1,45,000/- for man and women respectively, have been increased to Rs. 1,50,000/- and Rs. 1,80,000/- respectively. The limits for senior citizens have also been increased from Rs. 1,95,000/- to Rs. 2,25,000/-. More than this increase of limits, what we admire is the reformation of tax slams. Under the new proposal,

  • the income between Rs. 1,50,000/- to Rs. 3,00,000/- would be liable to be taxed at the rate of 10%,
  • anything between Rs. 3,00,000/- and Rs. 5,00,000/- would be taxed at the rate of 20%, and
  • the income above Rs. 5,00,000/- would be taxable at Rs. 30%.

Coupled with the fact that the corporate tax rates remain the same, this continuation of the highest tax rate of 30% is indeed a good sign as it is neither too high to risk the migration of investment from the country nor too low to sustain the requirements of a developing nation.

(3) What has surprised us, however, is the fact that the no change has been made on the corporate front. No new rules have been brought in as regards 'thin-capitalization' or even 'controlled foreign corporations' or even the fact of 'loan relationships', as we had expected the Finance Minister to come out with. But then we can reconcile with the fact that the FM is delivering an all-appeasing budget and therefore does not want the corporate sector to come hard against the existing government in the elections due next year.

(4) In a number of moves, which we think are directed to counter the growing inflation (as the FM has also acknowledged in his speech as being a key consideration in the formation of the budget), the FM has proposed the following;

  • Increasing the rate of tax on short term capital gains from 10% to 15% (which we think are introduced to bring a small thud, if not complete overhaul, in the speculative tendencies going on especially in the corporate and real estate markets).
  • Scrapping the 'Banking Transaction Tax', which has led to wasteful expenditure on the part of the public engaged in banking transactions without any matching benefits. (but only w.e.f. April 1, 2009)
  • In a move to bring to par the Commodity Markets (which has begun to function officially only recently), the FM has introduced a 'Commodity Transaction Tax' which would be at the same rate of Securities Transaction Tax.

(5) The stress has been on education this year, especially primary education. With Article 21A being in the Constitution for quiet some time now, it is high time that the government delivers the promise of free education to all up to the age of 14. Further, the increase in the number of seats in premier institutions of the country, given the fact of heightened reservation in them (the fate of which is still being debate before a Constitutional Bench of the Supreme C
ourt), also has required the Union Government to spend an extra bit on these lines. Not surprisingly, therefore, the Finance Minister has raised the budget allocation on education by upto twenty percent from the last year's allocation, which now currently stands at Rs. 34,400 crores. Adding on these lines, and seeking to rebuild India as a 'Knowledge Society', the FM has also allocated an additional Rs. 600 crores for establishment of 6,000 high quality 'model schools'. A number of other proposals have also been made to strengthen the educational infrastructure. Let us all hope and stand united in this vision of a developed country.

(6) On other lines of development, which he and the UPA government popularly calls as the 'Bharat Nirman' goal, now the budget allocation stands at Rs. 31,280 crores; a whopping figure but no one would mind such expenditure provided the goals established are achieved.

(7) Then in a much appreciable move acting against hawala and money laundering, the FM has made the use of PAN (Permanent Account Number) for all market transactions subject only to a minimum threshold.

(8) In a not so surprising move, the budget allocation for defense has also been increased. Given the heightened tensions in the neighbouring countries and also the consistent internal tensions with the ULFA, the FM thought wise to equip the Defence Ministry with an additional 10 percent budget allocation as compared to last year.

(9) And what we had been expecting on the custom duty front has not come up this year and the peak rates of custom duty have remained the same. However there is relief to specific sectors like power projects, life-saving drugs, etc. and also on 'small and hybrid cars'.

(10) Excise Duty has also been reduced generally from 16% to 14%, a move which FM sees as one directed towards boosting manufacturing segment.

(11) Then as we thought would happen, more services have been brought within the Service Tax net, prominent ones being 'Asset Management Services' (as delivered by Mutual Funds) and services rendered by stock exchanges. Also, the Central Sales Tax has been reduced from 3% to 2%, given the urgency to come up with a 'Goods and Service Tax' (GST) by 2010.

(12) Proposals also have been made to improve the health care industry, Public distribution system, employment under the 'National Rural Employment Guarantee Scheme', etc., all popular moves to entice the vote bank.

And then what might sound amusing, while drinkers have been told to continue (by leaving the tax rate on liquor unchanged), smokers have been sought to be diminished (by increasing the rate of tax on cigarettes and also by imposing similar level of tax on hitherto relieved non-filter cigarettes)

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