The Hindu : Fiscal compulsions

Online edition of India's National Newspaper
Friday, Aug 02, 2002

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Fiscal compulsions

THE TAX SOPS that the Union Finance Minister, Jaswant Singh, has announced are not substantial, but this is as far as the Government could go in the present circumstances. Of greater significance is his promise to streamline the existing laws on direct and indirect taxes before the next budget. The very need for tax concessions mid-way through a financial year would not have arisen but for the change of guard at the Finance Ministry. Anxious to make his mark early in his tenure, Mr. Jaswant Singh had promised that he would like to "put more money" in the hands of consumers. There was also the pressure from the BJP for sops that would please the urban middle-class electorate. In the event, after poring over the numbers the Finance Minister probably realised that any major ad-hoc provision of tax concessions would unsettle Government finances. A new factor that has emerged is the possible need to provide for substantial outlays on drought relief expenditure.

The hike in the exemption limit for interest income from bank deposits and Government securities, and introduction of new tax-free bonds are the only sops in direct taxes which are of any significance. The Finance Minister has, however, taken a major decision which should benefit the small investors who have been hurt most by the problems at the Unit Trust of India. In addition to the Rs. 500 crores of budgetary support (included in the Supplementary Demands), the Government has decided to stand guarantee for up to Rs. 1,000 crores of borrowings by the UTI. The tax concessions that have been announced may be all that were possible at this stage. But that does not settle the issue of a paucity of safe investment avenues for the small investor and the need to provide retirement-related savings schemes. The answers may come from the new task force on direct taxes. A removal of most of the existing tax exemptions appears to be on the anvil, which may clear the way for providing only one kind of tax concessions on interest income. That would be on long-term savings on the lines recommended by the 2001 Y.V. Reddy Committee on interest rates. In the search for new investment opportunities, Indian citizens will now be able to invest in foreign companies through the proposed "Indian Depository Receipts", which will be a further (and risky) movement on the road to capital account convertibility. In line with developments abroad where Governments are moving to deal with corporate crimes, a Serious Frauds Office is to be established in the Department of Company Affairs to facilitate coordinated investigation of corporate offences. The Finance Minister expects the economy to grow in 2002-03 by 5.5 per cent (lower than the RBI forecast of 6 per cent) and this is predicated on agriculture expanding by 3.5 per cent. Mr. Jaswant Singh, who is also a member of the ministerial task force on the drought, has warned that agricultural production may not be able to record such growth this year. To cope with the fallout of the drought, the Finance Minister has promised higher public investment in infrastructure and larger rural credit allocations. In keeping with tradition, lest the Finance Minister be accused of not showing compassion for the vulnerable, Mr. Jaswant Singh has announced the introduction of the Anna Antyodaya Yojana which will provide cereals at highly subsidised rates for the poorest of the poor in rural areas. This may seem like a major boon in a drought year, except that there is one small problem. The AAY is already in operation, having been launched in January 2001. Independent surveys suggest that unlike most welfare schemes, this one has begun to make a difference to the nutrition intake of the destitute. If Mr. Jaswant Singh is planning to increase budgetary allocation for the AAY it is a different matter, but he has certainly not announced a new scheme.

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