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February 15, 2000
Swadeshi budget will be counter-productive, says industry body
A harsh and swadeshi-oriented tough budget will be counter-productive by increasing surcharge on income tax and exports, affecting nearly all the industries and adversely impacting growth of not only the domestic sector but exports as well, according to the All India Association of Industries.
In a memorandum to Finance Minister Yashwant Sinha, the AIAI pointed out that while the share of exports to GDP had improved from 5 per cent in 1980-81 to 9 per cent in 1998-99, there was no major change in imports (10 per cent to 11 per cent) as a proportion of GDP.
In terms of coverage of imports by exports, data revealed that import coverage had been consistently improving from 53 per cent in 1980-81 to 92 per cent in post liberalisation 1994-95. Since then, the coverage was on the decline to about 80 per cent in 1998-99, he said.
The AIAI said that India was relatively less open compared to other countries. Its percentage of total trade to GDP came down to 20 per cent in 1998-99 from 22 per cent in 1997-98. A comparison with other growing South Asian economies showed that India had not recorded major growth compared to its peers in their openness of trade from the mid nineties.
The AIAI said the country had just emerged from a two-year-long recession and the industry and trade was still burdened with higher costs of power, water, transportation and telecommunication, compared to other countries. To compound the situation, there was also a multiplicity of central and state taxation.
The AIAI said that any move therefore to impose higher income tax surcharge, taxes on exports and withdraw incentives to trade and industry would give a serious blow to the indian economy. The forthcoming budget was awaited with much trepidation in trade and industry circles due to the talk that it would be harsh and swadeshi-oriented.
The harsh measures were ostensibly aimed at curbing fiscal profligacy, including withdrawal of several direct and indirect tax exemptions, pruning of subsidies and rationalisation of expenditure on development schemes. But in the long run, they might prove to be counter-productive and seriously jeopardise industrial growth and exports, the AIAI said.
At this crucial juncture when India was poised to become a major global player after the smart rally in the Bombay Stock exchange Sensex, which recently touched the historic 6000-mark, a tough budget would send the wrong signals and bring about instability in the market place.
The AIAI said that Indian technology companies had roared to dizzying new highs even on the Nasdaq and a renewed confidence abounded in information technology stocks. As stock exchanges in the country acted as a barometer for the Indian economy, the Budget must be investor-friendly so that bear and bull cartels were not able to manipulate the market sentiment and FII purchases continued to provide the momentum to Indian bourses.
The AIAI said there was already a growing realisation that the economic recovery might be tapering off and that it might not be as deep-seated as thought earlier. In any case, the economic resurgence did not seem to be a full-blown recovery but only cyclical in nature.
Although there was an upswing in the industrial sector with the output scaling 6.2 per cent in April-December 1999 against 3.7 per cent in 1998, the acceleration in some sectors was missing. Significantly, the slow growth rate in the power sector had had a major impact on overall industrial output.
The AIAI pointed out that India now had quotas on 1,429 items, which were to be phased out in two phases by April 2001. Announcing new tariff lines for 700-odd items, which would become freely importable this year, could mark a beginning. The move would help corporates to plan the year ahead against the backdrop of effective protection and dismantling of barriers under the WTO regime.
The country still had five rates of excise duty. It was important that excise was charged at one broad rate and a similar exercise was repeated for customs duty. In theory, slab reduction was good reform as it reduced paper work for companies and traders and cut red-tape and graft by making tax computation easier.
The AIAI said the Union Budget exercise for 2000-2001 must take into account the ground realities and bring forth positive measures to enable the opening up of the Indian economy a lot more to be globally competitive. Yet, these measures must not be translated merely into a rejigging of indirect taxes, which ultimately harmed the Indian industry and trade.
However, some new tariff lines might be considered with a peak at 40 per cent and coverage protection band of 25 per cent which was still much higher than average ASEAN rates.
Revenues would anyway move up assisted by last year's surcharges and a smart jump in customs collections from the oil price hike. There had also been much talk about subsidy cuts but there had been only rollbacks. Given this record, a forward thinking policy must be adopted to avoid frenzied rumours.
The AIAI hoped that the government would take no such measures that adversely affected industrial growth and exports, which ultimately were the key indicators of continued economic growth.
The government must further explore ways and means to contain and reduce more than 60 per cent of its total spending on defence, interest payments and subsidies to avoid debt trap.
Run-up to the Budget 2000-2001
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