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February 27, 1999
This Budget is probably the least inflationary over the past decade
Economic commentator R C Murthy on the Budget.
Finance Minister Yashwant Sinha hiked personal and corporate income tax, through a 10 per cent surcharge, and risked adverse market reaction rather than resort to indirect taxation, stirring a hornet's nest.
It was a bolt from the blue for the corporate sector and the investor community as a whole. The reversal of the falling incidence of income-tax seen over the past four years is unexpected indeed.
Apparently, the government did not want to take chances of slapping new indirect imposts on the recession-hit industry, worsen its plight and trigger a wave of price increases to the detriment of the economy as a whole.
The only major burden in this Budget-making exercise this season is the 4 per cent rail freight rise announced on February 25. Looked at from an inflation angle, Sinha's second Budget is probably the least inflationary, indeed over the past decade.
Care is also taken to eliminate fresh tax incidence on LPG, kerosene and toilet soaps and attract the wrath of urban residents. In fact, some relief is given by abolishing excise on packaged tea.
The incentive package for the stock market has been cleverly formulated. To neutralise the shock of 10 per cent income-tax surcharge, the capital gains tax on shares for local investors is halved to 10 per cent and mutual fund dividend exempted fully from income tax.
Sinha's gamble appears to have paid off. The stock market jumped, up sharply by more than 5 per cent, led by infotech and pharma shares. The 10 per cent IT surcharge is brushed aside.
Stock traders are bullish but with a rider: Policies announced have to be translated into reality.
Will the sops announced pull industry out of recession? Basically, tax concessions to corporates and individuals for housing are intended to spur job creation and demand for cement and steel. In turn, that demand is to have a multiplier effect on the economy.
The rationalisation of customs duties is within the guidelines of World Trade Organisation. A minimum 5 per cent import duty, against zero per cent at present, may look a reversal of the policy.
But India has three full years to fall in line with WTO norms. The interregnum should be used to give a breather to recession-hit sectors of industry, to become efficient and ready to face competition when the floodgates are open for imports.
The finance minister has won the first round and it is going to be a long slog in driving home the Budget's positive features. To narrow the information gap, the government brought on television within minutes of the Budget speech, Finance Secretary Vijay Kelkar, who formulated the Budget, and N K Singh of the Prime Minister's Office, another key architect, to explain the philosophy and nuances.
There is still some confusion on the fiscal deficit. Against 5.l per cent fiscal deficit for 1998-99 (April-March) projected earlier,the deficit turned out to be 6.5 per cent of GDP. Sinha has postulated the fiscal deficit at 5.4 per cent for the new year.
Looking at the BJP government's track record, the fiscal deficit appears to be under-estimated. As in the past, there are enough signals in the Budget for 1999-2000 of the government's plans for fiscal correction.
There is a ray of hope of success this time. Sinha is now on the prime minister's wavelength, having deserted his earlier mentor, Home Minister L K Advani, in the internecine feud within the BJP. After all, the prime minister has a hand at Budget-making and is therefore more committed to its success than ever.
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