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Taking the Economic Challenges Head on: India Spends for Its Masses

Saturday, August 15th, 2009
Ecconomic Challenges

The second inning under Indian Premier Manmohan Singh gave Union Finance Minister Pranab Mukherjee the first opportunity to present his budget, and with his experienced decision, he proved that he will go a long way.

The Finance Minister has abolished the Commodity Transaction Tax (CTT), which was announced in the budget last year, to help industrial development in India. This will make the domestic market more efficient and globally competitive, attractive to foreign investors and allow for more effective risk management. Though there is no exemption of corporate tax, the removal of the fringe benefit tax is being regarded as a welcome move for producers as well as consumers. Custom, excise and import duties are being reduced in certain products. The customs duty on LCD televisions, for example, has been reduced from 10 percent to 5 percent, which will be beneficial for South Korea, China and Japan, the largest exporters of LCD televisions. The budget proposal to reduce the customs duty will obviously reduce the production cost, which will then motivate international trade. Besides LCD panels, a 4 percent reduction in Cenvat (Central Value Added Tax) on imported mobile phone accessories and machinery is being introduced, which will have a major impact on market development.

The budget also reduced the basic customs duty on influenza vaccine and nine other specified life-saving drugs used for treating breast cancer, hepatitis-B, rheumatic arthritis, etc. It has also reduced the basic customs duty for two bulk drugs used in manufacturing these medicines from 10 percent to 5 percent. The customs duty will also be reduced from 7.5 percent to 5 percent on two specified life-saving devices used in treating heart ailments. These devices will also be fully exempt from excise duty and countervailing duty. The budget has proposed an increased excise duty on gold and silver, which makes jewelry more expensive; however, women's favorite branded imitation jewelry has been exempted from import duty. With the most common cosmetic surgeries now also subjected to customs duty, Indian women will have to spend more money from their purse to beautify themselves. Exempt from excise duties are bio-diesel products and several kinds of software. Heavy vehicles have also had duties reduced to 8 percent from 20 percent.

Pranab Mukherjee rose through a series of cabinet posts to become the Finance Minister of India from 1982 to 1984 and presented his money-saving budget according to the 20-point program. The budget for 2009-2010 is essentially oriented towards rural development. Mr. Mukherjee has made an effort in bridging the urban-rural divide by pushing social welfare spending. There has been a record increase in the allocation for the national rural employment guarantee fund, and a 45 percent increase in money for irrigation benefit schemes, such as the Bharat Nirman Scheme, which seeks to upgrade and modernize rural infrastructure, while reducing the gap between Bharat and India. An allocation of Rs. 70 billion has been made to Rajiv Gandhi Grameen Vidyutikaran Yojana, which represents a 27 percent increase over 2008-2009.

Additionally, the National Rural Employment Guarantee Act (NREGA), Pradhan Mantri Gram Sadak Yojna (PMGSY), and Rashtriya Krishi Vikas Yojana (RKVY) have received a budgetary increase of 144 percent, 59 percent and 30 percent respectively. The stated main purpose of the budget changes is the modernization of Indian rural areas in order to bring them closer to mainstream development. A new scheme called Pradhanmantri Adarsh Gram Yojana (PMAGY) has been launched for the integrated development of 40,000 scheduled castes and scheduled tribes-dominated villages in the country.

Motivated by the 4 percent annual growth in agriculture, the government announced an agricultural debt waiver and debt relief schemes for farmers. Increasing the credit flow to the farm sector from the existing Rs. 2,87,000 crore to Rs. 3,25,000 crore, [OU1] providing relief to farmers by extending the loan recovery period to the end of the year and setting up a task force specifically to check suicide cases among farmers in different states are surely steps in the right direction.

The budget also focuses to minimize the impact of the global recession on the Indian economy. Towards this end, it is necessary to provide stimulus to our economy. A handsome additional allocation has been made for inclusive growth and other flagship programs such as the Urban Renewal Mission and the National Rural Health Mission. On the export front, the extension of subsidies on interest of credit for labor-intensive export units until the end of September can be seen as a positive step. Disappointed with the Railway Budget 2009-2010, the interim budget gave transporters great relief. Railway has implemented a 10 percent service tax on carriage, which would give the industry an overall increase of three percent. It will also generate revenues from different states. Government will provide additional budgetary support of Rs. 50 billion to Railways in the fiscal year 2009-2010, and its financing arm, the Indian Railways Finance Corporation, will issue tax-free bonds. The government has also given transporters a sigh of relief by taking back all cases of service tax. The interest subvention of 2 percent - specifically on interest on pre- and post-shipment credit for employment-oriented sectors - will now be extended beyond March 31 to Sept. 30. It will be beneficial for sectors like textiles, carpets, leather, gems and jewelry, marine products and other small and medium enterprises. The finance minister extended the stimulus package for the print media by another six months, until Dec. 31, 2009, bringing relief to the industry hurt by falling advertising revenue.

The budget provides a road map for future economic policy, suggested tax simplification, subsidy reform and divestment as remedies for India's fiscal problems. Finance Minister Mukherjee announced initiatives that would remove the intermediaries in the supply chain and deliver subsidies directly to the intended beneficiaries. It aims to move to a system of direct transfer of fertilizer subsidy to farmers and introduce a nutrient-based subsidy regime (direct transfer of fertilizer to small and medium farmers would provide them with an incentive). The government will set up an expert group to advise on a viable and sustainable system of domestic pricing of petroleum products to reflect global changes. It also proposed to encourage people's participation in our disinvestment program. Public sector enterprises such as banks and insurance companies will remain in the public sector and will be given all support, including capital infusion, to grow and remain competitive. This is aimed at pursuing structural changes in direct taxes by releasing the new Direct Taxes Code within the next 45 days and in indirect taxes by accelerating the process for the smooth introduction of the Goods and Services Tax (GST). With a view to providing interim relief to small and marginal taxpayers and senior citizens, the personal income tax exemption limit has been increased by Rs.15,000 from Rs.2.25 lakh [OU2] to Rs.2.40 lakh for senior citizens. Similarly, it has been proposed to raise the exemption limit by Rs.10,000 from Rs.1.80 lakh to Rs.1.90 lakh for women tax payers and by Rs.10,000 from Rs.1.50 lakh to Rs.1.60 lakh for all other categories of individual taxpayers.[OU3] 

The Swarna Jayanti Gram Swarozgar Yojna (SGSY) is being restructured as the National Rural Livelihood Mission to make it universal in application, focused in approach and time-bound for poverty eradication by 2014-2015. Here also, the formation of women's Self Help Groups (SHGs) will be stressed. Apart from providing a capital subsidy at an enhanced rate, it has also been proposed to provide interest subsidies to poor households for loans up to Rs. 1 lakh from banks. The corpus of the Rashtriya Mahila Kosh would be raised to Rs. 5 billion from the exiting Rs. 1 billion in recognition of its role as an instrument of socio-economic change and development. This fund has been working towards the facilitation of credit support or micro financing for poor women and has developed a number of innovative schemes for their benefit.

The National Food Security Act (NFSA) will ensure that every family living below the poverty line in rural or urban areas will be entitled by law to 25 kilos of rice or wheat per month at Rs. 3 per kilo. The government proposed to put the draft Food Security Bill on the website of the Department of Food and Public Distribution for public debate and consultations. In order to provide a strategy for adapting to climate change and enhancing ecological sustainability, eight national missions representing a multi-pronged, long term and integrated approach are being launched, and necessary funds for these missions are being proposed. Owing a debt of gratitude to valiant ex-Servicemen, the budget introduced its 'One Rank, One Pension' (OROP) program. On this basis, the government has decided to substantially improve the pension scheme of defense pensioners below officer rank (PBOR), resulting in an enhanced pension for more than 12 lakh jawans [OU4] and JCOs.

The setting up of the Unique Identification Authority of India (UIDAI) is a major step towards national security, and a provision of Rs. 1.2 billion has been proposed for this project. The UIDAI will set up an online database with identity and biometric details of Indian residents, while also providing enrolment and verification services across the country.

In order to convert the young population into a dynamic, economically advantageous position by providing them the right education and skills, provisions for the scheme 'Mission in Education through ICT' have been substantially increased to Rs. 9 billion. Similarly, the provision for setting up and upgrading of Polytechnics under the Skill Development Mission has been increased to Rs. 4.95 billion. The government shall take forward its intent of having one Central University in each uncovered State and has allocated Rs. 8.27 billion, while setting aside Rs. 2.11 billion for IITs and NITs. The budget proposes to launch a new project for modernization of the Online Employment Exchanges in public private partnership to provide 1.2 crore worth of employment every year[OU5] . A job seeker can register online from anywhere and approach any employment exchange. Substantially enhancing the allocations for the Commonwealth Games from Rs. 2.11 billion in the Interim Budget to Rs. 3.47 billion, the Finance Minister expressed that it would provide an opportunity to showcase Indian potential as an emerging Asian Power.

The global economic recession has increased the fiscal deficit to an intolerable rate of 6.8 percent, posing a difficult challenge. There was nothing in the budget to enthuse the market and change the mood of the trade, foreign investment and corporate worlds. Sixth pay commission, fertilizer subsidy and relief packages gave an extra burden to the government, which must ensure that the allocations are properly utilized in such a way that the outcome is equivalent to or commensurate with spending accruing to the nation. Towards this, the government must simply ensure good governance. A monitoring system should be put in place to measure and evaluate outcomes. The finance minister has stated his goal of controlling the deficit in the coming years. He has proposed various funds, schemes and programs for infrastructure and rural development to counter the economic recession, all of which would strengthen the economic structure of a future India. Employment schemes would increase individuals' incomes, potentially changing the market conditions and contributing to achieving the targeted 9 percent GDP growth rate.

In summary, Pranab Mukherjee has three main challenges - achieving a 9 percent GDP growth rate, constant economic development, and opening a new development threshold to strengthen and ensure good governance. The budget is only the beginning, and the coming years will hopefully provide evidence of healthy development of a growing dia.

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