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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