He pushes growth on the one hand, reins in deficit on the other

• The budget estimate for the revenue deficit of 2006-07 has been set at 2.1%, while the fiscal deficit has been set at 3.8%, both indicating that we are on the path to fulfilling fiscal prudence requirements. However, damage is being done by the UPA’s flagship schemes as there is an increase in revenue expenditure through the big spending Central schemes. In 2005-06, this rose by 30.5% and in 2006-07, it is budgeted to rise by another 26%. These increases take the value from Rs 87,500 crore to Rs 145,000 crore over two years. While the government often pays lip service to the goal of spending more on capital expenditure, the overall capital expenditure has dropped from 3.6% of GDP in 2005-06 to 1.9%.

Further, the deficit numbers have been computed assuming that nominal GDP will grow by 12%. This breaks up to 4% inflation and 8% GDP growth. While India has been in a patch of rapid GDP growth, prudent fiscal policy would have stuck with an assumption of trend GDP growth, which is closer to 7%.

• Progress has been made in movement towards the Goods and Services Tax (GST). The number of services covered by the service tax has increased. By taking the service tax up to 12%, the gap between taxation of goods (at 16%) and services which were taxed at 10% has been reduced. Further, by removing many exemptions in excise—the tax on goods, the rate differences have been brought down. This has been also accompanied by imposition of a CVD on imports, a forerunner to a GST on imports. The budget speech has fixed 2010 for the launch of the Goods and Services Tax.

• The peak customs rate has been cut, as has been done in many previous budgets, in the continued effort to move towards ASEAN tariff levels. Further, cuts have been applied to many customs rates on important import items. Equally important, the FM has taken on the exemption raj in customs and end-use exemptions and those requiring certificates have been removed.

The list of items where exemptions exist runs into nearly 2000. Today the importer gives the appraising officer the relevant literature and a certificate from one of 33 approved certifying agencies. These steps involve multiple contact points with the government, and enormous costs of compliance, since appraising officers have to get engaged in questions of both valuation and end-use.

Elimination of exemptions will serve to improve compliance and raise revenues. This would also serve to remove the involvement of agencies which certify end use. It will remove the involvement of customs officers who can today choose who qualifies for the exemption and who does not. This reform is far bigger than meets the eye.

• The structural reforms in finance gives investors a positive signal. The decisions to increase FII limits on investment in government bonds and corporate bonds, and the flexibility for mutual funds to build superior products based on globally diversified portfolios, are small steps in the long process of liberalisation of the capital account.

However, they have signaling value, especially to the foreign investor for they depart from the enhanced controls on capital inflows often sought by RBI.

Further, there is an attempt to build a corporate bond market, by having trading on exchanges and regulation by SEBI. This will double the impact of the increase in the FII limit for corporate bonds.

• An interest rate of 7 percent for farmers, the 2 percent subsidy for farmers and an increase in defined benefit pensions of Rs 200 for destitute pensioners are a step backwards in the move towards market-determined interest rates and a defined contribution pension system.