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Budget 2006:Cashing on Booming Economy, by Dr. Vinod Mehta, 2 March 2006 Print E-mail

ECONOMIC HIGHLIGHTS

New Delhi, 2 March 2006

Budget 2006

Cashing on Booming Economy

By Dr. Vinod Mehta

The first budget of the UPA Government in 2004 had provided a big push to the rural sector.  This push continues into its third budget; large allocation has been made to the rural sector under the Bharat Nirman Yojna.  Some of its critics have questioned the ability to raise the resources required for Bharat Nirman Yojna, but the Finance Minister is banking on the booming economy, which will help generate resources it needs for the rural sector.  Apart from the rural sector it provides impetus to the infrastructure and social sectors.

In the Economic Survey he has already indicated that the growth rate will be around 8.1 per cent and hopes that he will be able not only to maintain it but will be able to raise it further.  The manufacturing sector is already booming for the last three years.  The Finance Minister feels that the time is appropriate to strengthen the manufacturing sector also.  Therefore, he has concentrated on growth rather than indulge in populist measures like giving the tax sops.  The ultimate aim is to take the growth rate to around 10 per cent  in the next two to three years as it will ensure more jobs as well as relatively higher living standards.

The Finance Minister has not touched personal and corporate tax rates and has also not tinkered with income slabs.  Last time when he had tinkered with the income slabs was during the last year’s budget.  The middle class was also not looking for any change this time in the tax structure and income slabs.  The Finance Minister has also not touched the savings parts of the individuals.  In the last year’s budget he had simplified the tax concessions on savings by allowing individuals to save up to Rs. one lakh in many of the approved savings instruments;  he also allowed an additional deduction of Rs.10,000 on medical insurance. 

The Finance Minister also kept the limit of Rs.10,000 on pension funds, which was included in the overall Rs.one lakh savings.  Also he has made two minor changes : i) the limit of investment in pension funds has been removed;  a person can now  invest all his savings in pension funds upto Rs. 1 lakh, ii) he has also allowed deduction of Rs.1 lakh if that money is kept in a bank fixed deposit for a period of five years or more. 

For the last one year media had been carrying stories that the savings under section 80C could be taxed at the time of withdrawal that is to say, for instance, the contribution made to Provident Fund will not be taxed but at the time of maturity it would be taxed.  This has been called EET that is to say Exempt Exempt Tax norm.   All this media hype, which had created a scare in the mind of average citizen, has been found to be damp squib.  There is no mention in the budgetary proposals of taxing the savings at the time of withdrawal.

The social sector funding which includes education and health care has been increased.  The old age pension to destitutes has been increased from Rs.75 to Rs.200 p.m.  Safe drinking water programme will get Rs.4,680 crore as against Rs.3,645 crore during this fiscal year.  Similarly, the National Health Mission allocation which includes eradication of polio by December 2007, has also been raised substantially.  The total budgetary support to the Bharat Nirman Programme is Rs.18,696 crores which represents a hike of 54 per cent over the 2006-06 allocation.  Budget allocation for the north eastern region has also been increased to over Rs.10000 crore.

As for farmers, they will be able to get loans at the rate of seven per cent interest, as against the present rate of nine per cent.   He has allocated Rs.1700 crore for this purpose. This amount will be credited to the bank accounts of farmers by March 31, 2006. The credited amount will be equal to two percentage points of the farmers interest liability on the principle amount up to Rs.1 lakh.  This is likely to provide a great relief to the farmers.   This, however, falls short of the four per cent interest rate recommended by a high level committee, headed by M. S. Swaminathan

The other emphasis of the Finance Minister has been to make India a manufacturing hub for small cars, garments, computer chips, chemicals and petro- chemicals, processed food, leather products and so on. The concession in excise duty and other sops will provide big boost to these sectors as well as generate more employment.  What this really means is that like China, India will make these products not only for the domestic market but also for export purposes and will be able to reap the benefits of large-scale manufacturing.  With these concessions in these industries more FDI may flow into these sectors.   It may be mentioned that India was able to attract FDI worth four billion US dollars this fiscal and with these sops more FDI is likely to flow into these sectors.

 

Apart from rationalizing the excise duties and reducing the customs duties across the board, the Finance Minister has made changes in the service tax.  Services now contribute about 54 per cent of the GDP.  He would like to tap this source for increasing its revenues in the coming years.  In his first budget in 2004 he increased the service tax from eight per cent to ten per cent.   In his budgetary proposal for the next fiscal, he has not only raised the service tax from 10 per cent to 12 per cent but brought more services in the ambit of service tax. 

 

The new services that will now come under the service tax are internet telephony, travel by cruise ship and journey in business and club class of airlines, cable TV, advertisement in all media other than newspaper and magazine, commissions shared by merchants with acquiring bank and settling bank for credit cards, debit cards, consultancy in different areas, on banking transactions like issuing of bank drafts etc.  The service tax on services provided by public toilets like ‘Sulabh Shauchalyas’ could provide large amount of revenues considering India’s population, but it is hoped that in his eagerness to raise more resources, the Minister will never bring it under service tax net!

 

Taxes on certain processed foods like condensed milk, pasta etc. have also been exempted or reduced. Excise duty has been reduced on processed meat, fish and poultry, as well as ice-cream and pasta.  It is however difficult to appreciate that while duty has been reduced on instant food mixes like idlis and dosas but totally removed on pasta, an Italian dish.  It should have been the other way round.  Hopefully, however, it will lead to lower prices of processed food products and will provide boost to the processed food industry.  It would, however, have been much better if there was a packaged deal for the processed food industry where they could obtain latest machinery and technology to make products of international standards.

 

On the whole, the budgetary proposals for the next financial year per cent are good and will provide a further boost to the economy.  If the economy can sustain the 8.1 per cent growth rate and increase it in the next two years to nine per cent or so it will be a boon to the economy.  But the realization of this growth rate would be dependent upon the performance of the agricultural sector which in turn is dependent upon monsoon.  Does the Finance Minister have any control over the monsoon?---INFA

(Copyright, India News and Feature Alliance)

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