The Hindu Business Line : Budget 2004-05: A new deal for Bharat

There is now a discernible shift in focus towards the farm sector and Rural India as is evident from the package of measures outlined for agriculture and allied activities by the Finance Minister, Mr P. Chidambaram. Besides outlining a roadmap for accelerating the growth rate of the sector and the rural industries over the next five years, the Minister has promised to double the flow of institutional credit to agriculture, says S. D. Naik.

IN KEEPING with the promises made in the National Common Minimum Programme (NCMP), the Finance Minister, Mr P. Chidambaram, has made a laudable effort to give a better deal to Rural India. The accent of the Budget is clearly on farm growth, rural development and poverty alleviation, even while ensuring that there is a healthy environment and adequate policy support for robust industrial growth.

Agriculture, rural development

Critics have rightly pointed out that the increase in budgetary allocations to agriculture and social sectors is not significant. For instance, the Plan outlay for agriculture and allied activities in 2004-05 is Rs 4,543 crore against Rs 3,866 crore budgeted in the previous year, an increase of just Rs 677 crore. While the Budget has increased allocations for various social and rural development schemes by Rs 6,000 crore, including extra Rs 2,225 crore for the Rashtriya Sam Vikas Yojana, it has cut the outlay on Sampoorna Gramin Rozgar Yojana by Rs 5,050 crore. Thus, the effective increase on all the schemes works out to just Rs 950 crore.

However, the Finance Minister has set aside Rs 10,000 crore for the poor in addition to his other Budget initiatives, but the actual money flows from this amount will have to wait till the Planning Commission works out the details. The Minister also announced the decision to reverse the previous Government's proposal to close the Rural Infrastructure Development Fund (RIDF) set up in 1994-95 and create a similar Fund in its place. The guidelines of the RIDF have been revised and a corpus of Rs 8,000 crore would be provided to it through contributions from banks that do not comply with their agricultural lending targets.

Since the Finance Minister is obligedto bring the revenue deficit to zero by 2007-08 (he proposes to do so latest by 2008-09) under the Fiscal Responsibility and Budget Management Act (FRBM) 2003, it was not possible for him to increase budgetary allocations significantly. Despite this constraint, there is now a discernible shift in focus towards farm sector and rural India as is evident from the package of measures outlined by the Finance Minister for agriculture and allied activities. He has outlined a roadmap for accelerating the growth rate of the sector and the rural industries over the next five years.

The Minister has promised to double the flow of institutional credit to agriculture over the next three years. The policy accent will be on accelerating irrigation schemes, rebuilding traditional water conservation and water harvesting schemes, enhanced farm and cattle insurance, improving agricultural product markets and promoting agri businesses. The agro processing industry has been given full exemption from excise duty. Besides, tractors, dairy machinery and agricultural hand tools have also been fully exempted from excise duty.

Greater attention is also proposed for agricultural research and development. There will be a special focus on farming in drylands and unirrigated areas. The allocation for R&D in agriculture in 2004-05 is increased to Rs 1,000 crore from Rs 775 crore in 2003-04 (BE). The Budget has also mooted a National Mission on Horticulture on the lines of the successful Anand model of co-operative sector dairy development. The Mission will aim at doubling the horticulture output from the present 150 million tonnes to 300 million tonnes by 2011-12.

Assistance to States

In the past, agriculture and social sector projects suffered because of the deterioration of State finances owing to a number of reasons. On acount of their inability to provide matching contributions for a number of Central sector projects, States have been returning even the Plan allocations unspent. Mr Chidambaram's Budget has tried to provide relief to States in a number of ways. In this fiscal, the States' share of Union taxes and duties is expected to increase to Rs 82,227 crore from Rs 63,758 crore in 2003-04 (BE).

The States will be helped in other ways too. The `Debt Swap Scheme', introduced earlier, will be extended by allowing States to raise fresh loans and repay their old high-cost loans to Nabard and some other agencies. Moreover, the States will, henceforth, be allowed to increase their open market borrowings and reduce their dependence on loans from the Centre. The loans given by the Centre to States used to carry an interest of 12.5 per cent; it was reduced to 10.5 per cent in 2004-05 and it has now been decided to reduce it further to 9 per cent with effect from April 1, 2004.

In addition to the above measures, the Budget also proposes to set up a Backward States Grant Commission (BSGC) as envisaged in the NCMP. This is significant in the context of the ever-widening inter-State disparities. Around 50 per cent of the country's poor live in five States and the illiteracy rate is much higher in these States. Looking at the gravity of the situation, Central intervention has become an urgent necessity to arrest the trend.

Against this backdrop, Mr Chidambaram has announced the setting up of a Backward States Grant Fund with a corpus of Rs 25,000 crore over a period of five years. While the existing Backward Districts Initiative Scheme with an annual outlay of Rs 1,800 crore will be merged into this Fund, the balance required for the annual contribution of Rs 5,000 crore will be earmarked from out of the Central support to the Plan. The new Fund will become operational from 2005-06.

It is hoped that this will enable taking up social and physical infrastructure programmes in the poorest and most backward districts within a given time-frame. Welcoming this initiative, Dr Raja Chelliah, Chairman of Madras School of Economics, has suggested that the Centre could also arrange soft loans from the World Bank for executing projects jointly by the Government and the private sector for the development of these States.

Industry

In the case of industry, certain crucial sectors such as textiles, automobiles, computers, shipping, telecommunications and the small-scale industries sector, have been chosen for certain special packages and incentives. The most important among these is the textile industry, which will have to face new challenges in the post-quota regime from January 2005.

The cotton textile industry has been freed from the mandatory Cenvat duty. Every segment of the industry — handloom, powerloom and composite mills — has been allowed to choose between complete exemption from payment of excise duty or taking the Cenvat route. The manufacturers of manmade fibres and filament yarn, including textured yarn, however, would still come under the mandatory Cenvat scheme. This will provide relief to lakhs of handlooms and powerlooms spread all over the country, the textile clusters and also the mill sector, though the duty sops are expect to cost the exchequer around Rs 3,800 crore.

Automobile industry which made great strides over the last few years will, henceforth, be entitled to 150 per cent deduction on expenditure on in-house R&D. Computers are to be fully exempt from customs duty. Shipping industry gets the option of tonnage-based tax, fulfilling its long-standing demand. In the case of telecom sector, the FDI limit has been raised from 49 per cent to 74 per cent, thus providing special impetus for its continued expansion.

Moreover, the hike in FDI limits for civil aviation and insurance sectors from 40 per cent to 49 per cent, despite stiff opposition from the Left parties should also help the organised industrial sector by sending right signals on the reforms front.

There is also a package for the small-scale industries sector. The Budget has proposed to raise the ceiling for loans under the Capital Subsidy Scheme for SSI units from the existing Rs 40 lakh to Rs 1 crore and to raise the subsidy amount from 12 per cent to 15 per cent. At the same time, it has been decided to de-reserve another 85 items from those reserved exclusively for the SSI sector. The Finance Minister has made a provision of Rs 135.24 crore for the promotion of SSI schemes, including capital subsidy.

The move could see more SSI units going for the much-needed technology upgradation. It is further stated that SSI units would be encouraged to obtain credit ratings. Simultaneously, efforts would be made for the regeneration of traditional industries such as coir, handloom, handcrafts, sericulture, leather,

pottery. A fund would be created for this purpose with an initial allocation of Rs 100 crore.

The Finance Minister stated in his Budget speech: "Small scale industry is, and must be regarded as, an engine of growth. At the same time SSI units must also be given the space to grow into medium enterprises. World over, policies are devised to meet the requirements of small and medium enterprises (SME)."

Areas of concern

Unfortunately, the Budget has failed to address some of the areas of concern evidently because of the compulsions of coalition politics and the dependence of the Government on the support from the Left parties. A major concern, of course, relates to the bloating subsidies with doubtful benefits to the target groups and the economy. The allocation for food subsidy alone is Rs 25,800 crore, 61 per cent of the major subsidies amounting to Rs 42,021 crore estimated in the Budget. Among other subsidies, fertilisers would account for Rs 12,662 crore and petroleum products Rs 3,559 crore.

The process of disinvestment and privatisation has also suffered a serious setback, again because of pressure from the Left parties. The disinvestment target of Rs 16,000 crore set by the previous Government's Interim Budget has been cut drastically to Rs 4,000 crore. Moreover, the Budget contains a proposal to provide equity support of Rs 14,194 crore and loans worth Rs.2,132 crore. There is little justification for this since the PSUs could have approached the market and the banks for raising the required funds.

The projected growth of 24.64 per cent in tax receipts during the current fiscal over the revised estimates for 2003-04 to Rs 317,733 crore appears over-ambitious. In particular, the assumption of 40 per cent jump in corporation tax and 27 per cent growth in income-tax appears unrealistic. Since the direct tax proposals are expected to bring in an additional Rs 2,000 crore and indirect tax proposals are revenue-neutral, almost all the increase in tax revenue will have to come from and unprecedented tax buoyancy. This is unlikely to happen unless the economy grows by 7-8 per cent and the industrial sector registers double-digit growth.

The proposed increase in Central outlay by 15.49 per cent in nominal terms at Rs 163,720 crore over the revised estimate of Rs 141,776 crore for 2003-04 may not materialise if there is a shortfall in tax revenues from the projected levels.