rediff.com Budget 2000: The Rediff Budget Jury/Birendra Kumar


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March 2, 2000

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The Rediff Budget Jury/Birendra Kumar

Positives outweigh negatives in this mixed bag

BUDGET
2000

This is a Budget with many positive strokes, notwithstanding the market reaction on February 29. The Budget aims to strengthen and modernise traditional industries, reduce infrastructure bottlenecks, acccord high priority to human resources development, increase exports and foreign direct investment and signal towards lower interest rate.

In addition, a significant step taken towards capital account convertibility is the enhancement of acquisition norms for automatic acquisition abroad by Indian corporates (other than those from the infotech industry) from $ 15 million to $ 50 million. In addition, crucial announcements have been made on the divestment front.

Government has shown its intent by declaring the bringing down of its stake in PSU banks to 33 per cent. Besides, the move towards corporatisation of utilities will give boost to infrastructure development.

The positive aspects of the Budget are as under:

Macroeconomic policy direction:

Significant policy announcement on privatisation and disinvestment.
Focus on knowledge-based industries with particular emphasis on ICE (infotech, communication and entertainment). This industry is expected to launch India on exponential economic growth.
Government has taken a very bold and courageous step of cutting down the fertiliser and food subsidy.
Anomaly in depreciation resolved. Both unabsorbed depreciation and unabsorbed business loss can now be carried forward and set off even if the business to which the depreciation/loss relates to is no longer carried on. This will give significant boost to mergers and acquisition activities as also to corporate restructuring.

Taxation

Higher revenue targeted.
Dividend tax increase from 10 per cent to 20 per cent.
Rationalisation and simplification of indirect taxes.
Increase in income-tax surcharge.

Capital market

Increase in foreign investment through foreign direct investment. FDI limit raised from 30 per cent to to 40 per cent. This is expected to help companies, where FII limit has hit 30 per cent upper limit.
For the IT, communication and entertainment sectors, import duties on various consumables and capital goods has been reduced.
A tilt towards equity funds of mutual funds is evident from the move to increase tax on debt mutual funds to 20 per cent.
Venture capital fund will also bring about growth in the knowledge-based sector.

Demand revival

Budget focus has been on housing and rural thrust.
Increased outlay for defense and rural development.

Interest rate scenario

Reduction in GPF rate from 12 per cent to 11 per cent reaffirms the resolve of government to bring down interest rate.
Two per cent interest tax has been abolished, which will bring down interest cost borne by corporate on credit facilities offered by the banks.

Fiscal discipline

Indication that divestment proceeds shall be used for meeting the cost of VRS and debt retirement is another positive step.
A move towards zero-based budgeting for control of costs.

External sector

Budget focus has been on complying with the World Trade Organisation's requirements and key measures were:

Peak custom duty reduced to 35 per cent.
Custom duty on crude oil/petro product reduced.
Items going out of quantitative restrictions placed in the top rate slab of custom duty.

Infrastructure

Deletion of Section 54EA and 54EB and their replacement by the bonds of NHAI will result in resource-starved hydel sector and other infrastructure sectors getting fund.
The budget proposal to securitise over Rs 100 billion of state electricity boards' dues to public sector companies through SEB reforms may lead to states subscribing to government guaranteed bonds under the direction of proposed State Electricity Regulation Commission or SERC.

Financial sector

A significant step has been taken in setting up the Financial Restructuring Authority for restructuring weak banks.
Measures for curbing non performing assets have been taken.
Government has assured that it will not close down any public sector bank but will recapitalise them.
For development of government debt markets, the Government Securities Act is proposed to replace the archaic Public Debt Act 1944.
Credit guarantees scheme for small scale industries has been announced.
The scheme will be formulated through SIDBI and will cover loans upto Rs1 million. The guaranteed loan will be securitised and will be tradable in secondary debt market. This indeed is a giant step forward.
Narsimham Committee recommendations have been accepted. Government to reduce shareholding in nationalised banks to 33 per cent.

However, the negative aspects of Budget 2000 were:

Fiscal deficit estimate for 2000-2001 at 5.1 per cent of GDP, but given the compulsion on defence expenditure, this appears to be unavoidable.
Tax rates on individuals have been increased. Dividend tax rate has been doubled to 20 per cent. Minimum Alternate Tax exemptions have been withdrawn. This implies that low tax paying entities would now face a significantly higher tax outflow.
Tax exemptions on export earnings will be phased out in five years at 20 per cent every year. By providing a time-table for elimination of export tax benefit, the finance minister has not let expectations develop. Although the measure is positive, market was not prepared for it.
Capital gains exemptions extended to purchase of second house. This makes real estate more attractive than equity investments.

On balance, the positives far outweigh the negatives.

The budget for a change is devoid of rhetoric and is a blueprint for development. I would rate the budget at 8 out of 10.

Birendra Kumar is managing director and chief executive, SBI Capital Markets

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