APRIL 13, 2015

By BV Kumar

THE Finance Minister in his budget speech, mentioned the following vision of the Prime Minister:

(i) A roof for each family in India. The call given for 'Housing for all' by 2022 would require Team India to complete 2 Crore houses in urban areas and 4 Crore houses in rural areas.

(ii) Each house in the country should have basic facilities of 24-hour power supply, clean drinking water, a toilet, and be connected to a road.

(iii) At least one member from each family should have access to the means for livelihood and, employment or economic opportunity, to improve his or her lot.

(iv) Substantial reduction of poverty. All our schemes should focus on and centre around the poor. Each of us has to commit ourselves to this task of eliminating absolute poverty.

(v) Electrification, by 2020, of the remaining 20,000 villages in the country, including by off-grid solar power generation.

(vi) Connecting each of the 1,78,000 unconnected habitations by all-weather roads. This will require completing 1,00,000 km of roads currently under construction plus sanctioning and building another 1,00,000 km of road.

(vii) Good health is a necessity for both quality of life, and a person's productivity and ability to support his or her family. Providing medical services in each village and city is absolutely essential.

(viii) Educating and skilling our youth to enable them to get employment is the altar before which we must all bow. To ensure that there is a senior secondary school within 5 km reach of each child, we need to upgrade over 80,000 secondary schools and add or upgrade 75,000 junior/middle, to the senior secondary level. We also have to ensure that education improves in terms of quality and learning outcomes.

(ix) Increase in agricultural productivity and realization of reasonable prices for agricultural production is essential for the welfare of rural areas. We should commit to increasing the irrigated area, improving the efficiency of existing irrigation systems, promoting agro-based industry for value addition and increasing farm incomes, and reasonable prices for farm produce.

(x) In terms of communication, the rural and urban divide should no longer be acceptable to us. We have to ensure connectivity to all the villages without it.

(xi) Two-thirds of our population is below 35. To ensure that our young get proper jobs, we have to aim to make India the manufacturing hub of the world. The Skill India and the Make in India programmes are aimed at doing this.

(xii) We also have to encourage and grow the spirit of entrepreneurship in India and support new start-ups. Thus can our youth turn from being job-seekers, to job-creators.

(xiii) The Eastern and North Eastern regions of our country are lagging behind in development on many fronts. We need to ensure that they are on par with the rest of the country.

In addition, the Finance Minister mentioned that he has adopted certain broad themes, which inter alia include:

- Measures to curb black money

- Job creation through revival of growth and investment and promotion of domestic manufacturing and “Make in India”

- Minimum Government and Maximum Governance to improve the Ease of doing business

- Benefits to middle class tax payers

- Improving the quality of life and public health through Swachch Bharat initiatives; and

- Standalone proposals to maximize benefits to the economy.

While the thirteen objectives are to be achieved by 2022 (75th Year of India's Independence), in the short run repeatedly statements have been made to the effect that 'our object is to make India Industry friendly' and “the Government would work for the down trodden”.

Are these hollow slogans or mere rhetoric? Have any steps been taken to achieve the above objectives. A careful reading of the budget proposals, particularly relating to Indirect Taxes, would show that there is an attempt to increase the present level of Excise Duties either directly or by withdrawing existing exemption notifications. Further, the rate of Service Tax is proposed to be increased from the existing level of 12% plus Ed. Cess to 14% by subsuming the Ed. Cess in the basic rate. The previous budgets as well as the present budget have lost sight of the fact that Service Tax is mostly paid by the self-employed and any increase will have a dampening effect on this area of activity.

While the Finance Minister's task is unenviable, he has to take into account the backdrop of the ground realities as they exist today, both within the country and the global scenario. For this purpose one has to study the basic economic indicators, some of which are mentioned below:

- In February 2015, the Consumer Price Index stood at 6.30%. This figure takes into account the average price which consumers spend on a market based 'basket' of goods and services. If only food articles are taken into account the CPI stood at 39.73% and if beverages and tobacco are included the CPI stood at 49.71%

- The fiscal deficit upto November 2014 stood at Rs. 5.25 trillion and in March 2015 the fiscal deficit stood at 4.0% of GDP.

- In the current year the estimated net Tax Revenue was only 42.3% of the estimated Tax Revenue of Rs. 8.77 trillion until November 2014

- The Current Account deficit stood at US$ 8226.25 Million.

- The current GDP growth, according to the Finance Minister, is expected to accelerate to 7.4%.

- The industrial production stood at 4.7%.

- Private investment stalled in 2014-15 due to the legacy of distressed Corporate Balance Sheets and low Corporate Profitability hindered investment. The Honeymoon period is over and the common man has lost his patience and is in despair. How long would he be fed on slogans?

It is common knowledge that corruption is rampant in almost all the Central Government Offices, leave alone State Government Offices, particularly in the taxation departments. The assessing officers openly demand a consideration, for what has to be done in a routine manner. The assessees are contacted by phone initially and if no compromise is struck, they are threatened with demand notices with a warning that they may ultimately succeed at the Tribunal Level and in the meanwhile, the assessees have to undergo the agony of legal proceedings.

The author has witnessed consideration being demanded by a senior GAIL official posted in Hyderabad for giving gas connection to a power plant in West Godavari District. Till date the gas connection has not been provided. Similarly, officials posted / attached to Custom Houses to give clearance of agricultural / food preparations under the PFA Regulations refuse to permit clearance of goods even after drawing samples and the Commissioner feels helpless. Similar is the position with officials of the Drug Controller's administration attached to the Custom Houses. The story is the same with almost all the regulatory authorities. They have become parasites on our society and hindering economic growth and increasing transaction costs. The 'Sevotham' facility introduced in the Commissionerates refuse to put the rubber stamp in token of having received a letter, unless the person at the counter is paid a minimum of Rs.50/-. Is any serious effort being made to eradicate corruption at the senior most levels so that it percolates and has a ripple effect on the lower levels of the bureaucracy? It is not understood as to why the provisions of rule 56J of the Civil Service Regulations are not invoked to compulsorily retire those officers who are known to be corrupt by everyone, both within and outside the departments.

The budget has not addressed the serious problems faced by the farmers, who are still dependent on the monsoon, instead of assured irrigation and power. Nowhere in the budget there is any mention of building major or medium hydro-electric projects providing both power and irrigation. With food inflation rising every day, no concrete measures have been announced to control food inflation which affects 80% of the population. No steps have been announced as to how food prices would be brought down. Will the essential items required for basic consumption, would be imported or procured and distributed so that the benefit would go to the farmers and not middlemen. The Budget has not addressed as to how basic healthcare would be provided by starting new hospitals in the states where common people can get either free or treatment at reasonable costs. The decontrol of the prices of pharmaceutical preparations and drugs has resulted in depriving the common man access to medical facilities unless he gets indebted. Education has gone beyond the reach of the children of the poor. The Government cannot plead ignorance of the cost of admission to primary and middle schools unless a capitation fee is paid. What has happened to the Education Cess that has been collected? Why is not being used to set up Central Schools in all the Districts and Taluks and so also Industrial Training Institutes? What has the budget provided for these areas, if one wants to achieve the 13 objectives?

Apparently there is crony capitalism and only a few of the industrialists are benefited and not the industry at large. The measures declared so far which the Government claims as 'big bang reforms' only helps overseas investors and not Indian entrepreneurs. What are the special incentives given to the Indian Industry in the current budget? Is there a reduction in taxes if there is excess production? Is there an excess production rebate if an industry exceeds its previous year's production? Will he get the incentives for exporting goods without hassles?

While resources have to be raised to meet the ambitious programmes envisaged for social and economic development, economic revival is to be achieved by providing a package of incentives and stimuli to industry, agriculture and the service sector.

Studies in economic growth have shown that accelerated economic growth can be achieved without increasing the level of taxation. In fact in the late 80's and the early 90's bringing down the rates of direct and indirect taxes have resulted in increased Revenue Receipts.

Economic growth may occur as a result of stimuli in the form of an increase in capital formation or availability of new technical knowledge, and changes in economic institutions. Moulding of attitudes by the Government or the community, which are favourable to growth, would help to bring about economic growth, as against attitudes, which are inimical to growth. When such stimuli are combined with incentives in the form of rewards for efforts for promoting economic growth and provide the necessary freedom to seize economic opportunities and exploit such situations by the entrepreneurs, it will result in accelerated economic growth. While growth occurs as a result of each stimulus, it tends to become tangential when it ultimately reaches its limit. Continuous growth, therefore, implies successive stimuli and the introduction of the new stimulus should be before its predecessor begins to flag. This will yield, if not a steady rate of growth, successive surges of expansion.

As an economist and as a former tax administrator, my firm belief is that the Finance Minister should start dismantling the various repressive taxation policies followed by his predecessors and be a Finance Minister with a vision.

Some of the steps that the Finance Minister could consider introducing in the Budget proposals before it is passed by Parliament are:

- The small-scale sector, which approximately contributes 50% of the Gross National Product as far as industrial production is concerned and which is labour intensive requires to be encouraged.

- In addition to the proposals on taxation, it is also necessary to bring about reforms in the Customs Act, 1962 the Central Excise Act, 1944 and the Finance Act, 1994, and the Rules and Regulations made thereunder, which are repressive.

- The mandatory penalty of 100% combined with other penalties under the Customs and Central Excise enactments are required to be abolished and status quo ante is required to be restored. The introduction of the mandatory penalty has resulted in increased corruption and unnecessary litigation.

It is necessary for the Government to revamp the Development Plans, shifting its emphasis to agriculture and infrastructure. It is time for the Finance Minister to totally exempt investment in power, fertilizers, ports, highways, hydroelectric projects and other infrastructure projects from direct and indirect taxes, including Service Tax.