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Union Finance Minister Palaniappan Chidambaram's second budget has been hailed in euphoric terms by the business community in India. The stock markets have taken off and the Bombay Stock Exchange has risen sharply. The opposition has found little to criticise in a budget which has reduced personal income and corporate taxes and import duties, abolished taxes, on dividends, and yet holds the budget deficit at 5 percent of GDP.
The budget has won the plaudits of those who are more articulate and are more visible in or control, the media. It has exceeded the expectations of industrialists and the middle classes. But critics maintain that there are nagging doubts, and that it is not a budget for the poor. After all, only 12 million Indians pay income tax about 1.2 percent of the population.
The budget gives several concessions to those who are relatively well-off. The salaried class has received a tax break; all income-tax rates have been cut across the board by ten percentage points with the top-rate at 30%. Corporate tax has been cut by five points, to 35%. Taxes on dividends have been abolished. The top import duty has been reduced from 50% to 40%. But these selective concessions give. much to those who have the most and produce the most.
The budget is not very specific on how with all these concessions, the expenditure will be funded. The finance minister argues that with less taxes to pay, more people will rush to pay taxes and so extra tax income will vastly increase government revenues.
The finance minister has advocated a Voluntary Disclosure Scheme to curb tax evasion. He proposes an amnesty on disclosures of "black money" to boost government revenues. But how effective this is likely to be remains to be seen. Critics say that amnesty schemes for unearthing black money have never yielded results. Little, if anything, has been done to encourage expatriate inflows of money. Tax evaders will benefit more than NRIs (Non Resident Indians) under the new proposals.
Chidambaram claims that over the past three years India has been one of the ten fastest growing economies: GDP has grown by an average of 7% a year. But in recent times industrial growth has slumped and Indian businesses find it difficult to compete with multinationals entering India. Hence the finance minister's intention is to get things moving again.
Foreign investors will find conditions attractive for investment. The budget increases the investment for foreign portfolio investors in Indian companies from 24% to 30%. Foreign investment in oil has been liberalised and additional tax breaks have been given to telecoms investors.
In view of criticism from his communist colleagues, the finance minister has decided to go slow on privatisation of insurance. This is limited to a few Indian companies on medical insurance alone.
Opinion is divided on whether the budget promotes the objectives of the Common Minimum Programme (CMP) presented by the United Front government after the election. Critics say that Chidambaram has not learned any lessons from the fate that befell the Narasimha Rao government, which initiated the liberalisation policies in 1991. They say that the new government perceives that if the interests of the rich farmers, businessmen, industrialists and the middle classes are taken care of everything else will fall into place. Moreover, they see "trickle down" economics as being against the spirit of the UF's Common Economic Programme. For example, V. Kurien, the widely known Director of the National Dairy Development Board, says, "This is a popular budget - popular with whom is the big question. They say that you can tell the quality of a man by his enemies possibly you can tell the quality of a budget by those who applaud it. Overall (the budget) is a disappointment".
On the other hand, M.R. Marya, a former executive director of the Bombay Stock Exchange is of the view that the Finance Minister has "duly reflected the philosophy embodied in the Common Minimum Programme... The Minister has indeed done a marvellous job by ensuring that growth is ensured with equity and that fiscal discipline is not discarded".
The main theme of the Common Minimum Programme is social justice. But rural development and social services have received small sums thinly spread out over a number of items. The agriculture sector has not been provided enough allocation although there has been a slowdown in agriculture. Allocations for education and health will not enable a significant improvement in the infrastructure for the social service sector. Except in the case of telecommunications, there is little assistance for other aspects of infrastructure like power, roads, railways and ports.
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