A matter of just two hours. Review on Union Budget 2005

THERE WAS something special on February 28, 2005, which filled the air with lot of excitement and anticipation. Most of the people were up early in the morning to watch the live transmission of the Oscars, though it that was not the only thing which was keeping Indians on their toes. It was also the D-Day when financial health of the nation was to be sealed atleast for the next one year. It was just a matter of two hours. These two hours could catapult India to another new high or could make the economy nose-dive.

When you are about to present the budget for the largest democracy and the fourth largest economy in the world there got to be some butterflies in the stomach. Among high expectations and media attention, Finance Minister P Chidambaram presented the Union Budget for financial year 2005-06 with the following words:''I rise to present budget for year 2005-06.'' But the question is, will Indian economy rise after the budget?

Usually the rating of any budget depends upon how the stock market behaves in the post-budget week and if that is the criteria, we would have to rate it as 11 out of 10. Markets zoomed 280 points in the post-budget week taking certain key indices to a new high. Although the increase was not as sharp as witnessed after the dream budget of the 1997, still, it was no ordinary achievement considering the fact that markets were already at its peak before the budget.

If we further dig down the data, we would find that the investors' wealth accentuated by another Rs 70,000 cr during the post-budget week rally, which is a new record. If it is a budget than it has to carry a lot of figures in it and so had Chidambaram's budget 2005-06. It is said that budget is nothing but playing around with figures, you take money from one head and put it under another head. Moreover, when there are figures there has to be some manipulation of figures.

This year's budget is no different in this regard. The Fiscal Responsibility and Budget Management Act (FRBM) states that it is the responsibility of every government to improve the fiscal health of the nation in every budget. In this year's budget, the FM announced the fall in fiscal deficit from 4.5 per cent to 4.3 per cent of GDP. However, this fiscal deficit figure of 4.3 per cent of GDP is actually a facade. This figure was arrived at after transferring Rs 29,000 cr of borrowing to states, which accounts for 0.7 per cent of GDP. Also, this figure does not include Rs 10,000 cr set aside for setting up of SPV (special purpose vehicle) for infrastructure development. It is a clear case of keeping people away from the darker side of fiscal correction.

Chidambaram had to either please UPA allies or follow the FRBM and he chose the former. Since the BoP (balance of payment) is very much in control and so are the prices (since inflation has now dropped below 5 pc), FM could afford to take this luxury of pleasing Communists at the cost of fiscal correction. But is the government taking away cushion by increasing public expenditure when revenues are not growing at considerably slower pace, which will disable it to spend more if India were on the wrong side of the growth?

Is it the poor man's budget? A poor man's budget is full of schemes. Going by the schemes this budget can be called as the poor man's budget. Lot of attention has been given to priority areas identified in the Common Minimum Programme. This budget could have got 9 out of 10 if para 177 and para 166 were not a part of it. Better known as 'two irritants', 'two viruses' or 'budget bloopers' in this year's budget -- FBT (Fringe benefit tax) and BCTT (Bank cash transaction tax) -- spoiled what could be a very well knitted budget. FBT was not being considered such a big spoilsport when the FM announced it during his budget speech. Once experts got the copy of the fine print they realised that it deadly.

>As many as 18 categories of expenses have been proposed to be levied with FBT at different rates. Imagine this, you send your employee on a foreign official trip and you end up paying 30 per cent of 1/5th of the cost of travelling and boarding and lodging of that employee. Did not FM said that only perquisites will be taxed under FBT? India Inc,especially the IT sector, got up in arms against FBT.

>Almost 80 per cent of the clients of any IT company are from abroad and travel in and out of the country on official work. This will have a huge impact on the bottomline of all IT companies. Also, the ambit of FBT is large, companies with only a couple of employees working with them would also be covered in its ambit. Although experts feel that due to opposition by India Inc sales promotion and travel may come out of fringes.

>Second of the two viruses has left the entire country guessing. What is the logic behind BCTT. Here the issue is not tax but principle. For every Rs 10,000 you withdraw in a single day from a bank you are liable to pay Rs 10 as tax. Are we not withdrawing our hard earned money? How many of us keep our black money in banks? If FM is saying that he has introduced this measure to keep a tab on black money then one must acknowledge that he has a very good sense of humour.

All and all, this measure is a complete revenue collection measure. Calculations have shown that government will mop up somewhere between Rs 1200-1500 crore every month, thanks to BCTT.

One must say this is a shrewd move though not a masterpiece. FM has kept the working class in good spirits as well by accentuating the exemption limit and simplifying the tax slabs further. The budget was a mixed bag for India Inc, as corporate tax rate has been reduced to 30 pc but surcharge has been increased from 2.5 per cent to 10 per cent and depreciation rate has been reduced to 15 per cent from 25 per cent.

One could say FM has taken away from one hand what the other hand has given to India Inc. The best part in the budget was that FM has not done anything to break the momentum of the reform process.