Finance Minister P Chidambaram’s fourth consecutive budget failed to generate the magic that his “Dream Budget” did in 1997. While it drew a limp response from the stock markets, most analysts believed that the political setbacks and the inflationary surge had put the brakes on big ticket economic reforms. The minister explained the underlying objectives, even while he defended his budget in an interview to Mint’s Monica Gupta. Excerpts:
What is the broad direction of the Budget?
The broad direction is that the growth story is unfolding and there is no reason to interfere with that. But there is every reason to ensure that the growth is distributed among a larger section of the people. That’s the message of the budget.
What are the growth assumptions underlying the Budget?
The investment rate is 33.8% in 2005-06. Intuitively I think the same investment rate of 33.8% will endure in 2006-07, so there is no reason to assume that the growth will go down.
How much will the measures announced by you on agriculture actually help to address the supply side constraints which are contributing to the increase in prices?
It is the really the supply side of essential commodities which is exerting pressure on prices, apart from of course the monetary aggregates, money supply, credit growth, global commodity prices - all of which are very high. Those can be addressed by reducing customs duties by tighter monetary stance. But supply side can only be addressed by augmenting supplies, therefore, the budget attempts to give a push to the supply side by dealing with irrigation, watershed management, ground water recharge, doubling the production of certified seed, more subsidy to fertilisers. These are measures which the budget takes to help the agriculture sector increase production and increase productivity.
What is the direction on exemptions. In the run-up to the Budget, you had emphasised on the need to withdraw exemptions. While dropping a few exemptions you have actually introduced some new exemptions in service tax?
We have just raised the threshold limit (for exemption from payment of service tax) from Rs 4 lakh to Rs 8 lakh. Small scale industry is exempt from excise duty up to Rs 1.5 crore similarly small service provider should also be exempt up to a threshold limit. In order to make India a preferred destination for clinical trials, lot of people are doing animal testing in India, there is a growing industry in clinical trial.
How much has the electoral reversal impacted the budget announcements?
Well the election results came on February 27, by the time the results came, the budget speech had already been printed. So how can election results influence the budget speech?
But given the electoral reversal, how much political support would you be able to garner to push through some crucial economic reforms like labour, pension, insurance and even disinvestment?
I am directly concerned with the Pension Bill, the Banking Bill and the proposed Insurance Bill. I hope there is enough political support for these Bills. It is important that these bills are passed. It is only when these bills are passed that you can mobilise resources that are required to sustain high growth.
Overall sense in the market particularly the stock market is that the Budget did not have your usual punch of reforms?
I am glad you mentioned stock markets. It is only one among many markets in India. There are other markets in India. There is a market where students have aspirations, where the physically challenged have aspirations, where farmers have aspirations, where unorganised workers have aspirations, these are also important markets.
On the Goods and Service tax, you have said that the states have agreed to work with you?
The empowered committee of state finance ministers on Value Added Tax will now work with the officials on a roadmap. We have said that we will work out the whole roadmap for the GST in 2007-08 and then begin phased implementation of the roadmap for introducing GST by April 1, 2010. We have made a success of VAT, I believe we have made a success out of phasing out of the Central Sales Tax, why assume that we will not succeed with the proposed GST.
Why was the SSI dereservation announced on the eve of the Budget?
They are autonomous, they can do it and if they have done it there is no reason to announce it in the budget. Last year, they also announced one tranche after the budget.
There were expectations of duty rationalisation in the auto sector?
We cut the excise duty on small cars last year from 24% to 16% so what is the expectation? The sector is growing, they are selling more cars, selling more two-wheelers than ever before, they are profitable. What do they expect?
What about the Direct Tax Code? Will some exemptions be withdrawn in the Code?
Several chapters have been written. We will now return to the process of writing the Code. I am hopeful of introducing the Code in Parliament in this calender year. Some of the exemptions will be withdrawn. It is easier to keep out redundant exemptions from a new code than remove it from an old Code.
What is the average tariff now after the Budget?
In case of customs the average tariff is 9.4% and in case of income tax it is 19.2%.
How will NSSF funds be used by the IIFCL for infrastructure?
We have said that states can’t borrow more than 80%. They had sought 100%. The remaining 20% will accrue to the Central government. Besides, the repayment has started to accrue in 2005-06, so there are a lot of funds with the NSSF which can be lent for the long term. So these funds can be accessed by the IIFCL if they have fundable projects.
How will you use the forex reserves?
Well a decision has been taken. We have the Deepak Parekh Committee report. Now the legal and regulatory aspects have to be examined. So the RBI and the government will examine them and when we are able to work these out, then the overseas subsidiaries will be set up to use a small part of the reserves and start lending for infrastructure. That is an idea that was mooted almost two years ago. It is now taking shape.
You have said that the Tarapore committee will be implemented as and when the parametres laid out in it have been achieved. Would you expand on this?
The rupee is convertible for a foreign investor. He can bring in capital, take out capital, bring in dividend, take out profit. He can take out royalties. The rupee is not convertible for the resident Indians and that will happen as we come closer and closer to the parameters indicated by Tarapore II. It is always fuller convertibility and not full convertibility. Today the rupee is convertible for practically every transaction - which an average person wants. It is only on the capital account on which there are restrictions.
Are you withdrawing the exemption to STPI (software technology parks of India)?
We have only brought Section 10A and Section 10B under Minimum Alternative tax. We will examine the Section 10A and 10B separately. When the STPI expires, we’ll see. Since the exemption expires in 2009, there is time to take that decision, it need not be taken in the budget.