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Speech of P. Chidambaram Minister of Finance
February 28, 2005
PART – A
Mr. Speaker, Sir,
I rise to present the Budget for the year 2005-06.
2. Last year, while presenting the Budget, I had suggested that
the vote in Elections 2004 was a vote for change. It was, I believe,
a vote in favour of a new leadership; a new Government; new policies;
and a new focus on the common citizen who is at the centre of all
politics and governance.
3. I reaffirm my belief, and I also declare my conviction that
the UPA Government under Prime Minister Dr. Manmohan Singh has charted
a new path that is more acceptable to the people of the country
and that will bring the greatest good to the greatest number.
4. Before I turn to the business of the day, I wish to record Government’s
deep sorrow on the loss of lives, property and livelihood caused
by the tsunami tragedy. So far, Government has approved relief packages
amounting to Rs.3,644 crore. The Planning Commission, which is coordinating
the Tsunami Reconstruction and Rehabilitation Programme, has drawn
up a programme at an estimated cost of Rs.10,216 crore. I wish to
assure the House, and the affected people, that the Government will
provide the necessary funds for the purpose and ensure that every
affected family is fully rehabilitated.
I. THE MACROECONOMIC BACKDROP
The Immediate Past: Where We Were in 2003-04
5. In May 2004, the UPA Government inherited an economy that had,
as we now know, registered a growth rate of 8.5 per cent in 2003-04
on the back of a poor 4 per cent in the previous year. While growth
was indeed broad-based, the impressive growth rate was due largely
to the restoration of output in the agriculture and allied sector.
I had then commented that my immediate predecessor was a very lucky
man, even while his predecessor was not! Notwithstanding the high
growth rate, there were several disturbing trends which came to
notice in May 2004. The first was the liquidity overhang at the
end of 2003-04 which had spilled over into 2004-05. The second was
the definite buildup of inflationary pressures as a result of a
sharp rise in global petroleum prices. The third was an unanticipated
13 per cent deficiency in the south-west monsoon. The fourth was
an apparent decline in business confidence that had led to a sharp
downturn in new investment, and also showed up as current account
surpluses. By any standard, these were formidable challenges, but
the UPA Government was prepared to face these challenges.
The Present: Where We Are in 2004-05
6. The National Common Minimum Programme (NCMP) mandated the Government
to maintain a growth rate of 7 - 8 per cent a year, to promote investment,
to generate employment, to accelerate fiscal consolidation, to ensure
a higher fiscal devolution, and to focus on agriculture, manufacturing
and infrastructure. The NCMP also mandated the Government to provide
universal access to education and health care and to assure one
hundred days of employment to one person in each family. I believe
that, in the space of 9 months, we have risen to the challenge and
carved out many successes.
• According to the Central Statistical Organization, the
growth rate in the current year is estimated to be 6.9 per cent,
with the manufacturing sector expected to grow at 8.9 per cent.
• Inflation which touched a high of 8.7 per cent on August
28, 2004 has been reined in. As on February 12, 2005, the rate of
inflation was 5.01 per cent which is more than one percentage point
lower than what it was in the same week in the previous year. Inflation
based on CPI for industrial workers was lower, and stood at 3.8
per cent in December, 2004.
• Business confidence has been restored and investments in
2004-05 have been buoyant. Non-food credit has increased by 21.2
per cent.
As the year draws to a close, we can predict confidently that all
the engines of the economy are running at nearly full speed.
7. We have also fulfilled many of our promises to the common citizen.
Last year, I had promised that agricultural credit will be increased
by 30 per cent, and I am happy to inform the House that, against
the announced target of Rs.105,000 crore, we are likely to achieve
a disbursement of Rs.108,500 crore. Public sector banks and regional
rural banks have added so far 58.20 lakh new farmers to their portfolio
of borrowers. I had promised that education loans would be given
liberally to students. As against 1,08,000 loans amounting to Rs.1,983
crore given in 2003-04, 1,40,000 loans amounting to Rs.2,249 crore
have been given up to December 31, 2004. I had promised that the
number of families covered under the Antyodaya Anna Yojana will
be increased from 1.5 crore families to 2 crore families, and that
promise has been kept. I had promised that a redesigned Food for
Work Programme will be launched in 150 districts. That was done
on November 14, 2004. I had promised that a National Rural Employment
Guarantee Bill will be introduced. That has been done. I had promised
that we would promote the concept of Self-Help Groups vigorously.
In the current year, against the target of 1.85 lakh SHGs, we have
already credit-linked 2.26 lakh SHGs, and we have disbursed credit
to the tune of Rs.1,197 crore. Hon’ble Members will note that
in each of these areas the focus of the Government’s attention
has been the common citizen – be it farmer, student, self-employed
woman or labourer in search of work and food.
The Year Ahead: Where We Want To Be in 2005-06
8. Growth, stability and equity are mutually reinforcing objectives.
The NCMP leans towards decisive intervention by the State in favour
of the poor. Given the resilience of the Indian economy, it is possible
to mobilize the resources and launch a direct assault on poverty
and unemployment. That is the only way to bring immediate relief
to the aam admi.
The Big Picture
9. Let me first give the big picture. In 2004-05, Gross Budgetary
Support (GBS) for the Plan was Rs.145,590 crore to which we added
Rs.2,000 crore subsequently. As I shall explain later, the pattern
of funding has changed consequent to the recommendations of the
Twelfth Finance Commission (TFC). On a like-to-like basis, GBS for
the Plan in 2005-06, works out to Rs.172,500 crore. This represents
an increase of 16.9 per cent. Support for the Central Plan in BE
2004-05 was Rs.87,886 crore and in BE 2005-06 this has been enhanced
to Rs.110,385 crore, representing a very substantial increase of
25.6 per cent. On priority sectors and flagship programmes falling
under the NCMP, I propose to provide an additional sum of Rs.25,000
crore in the next year.
10. For example, the allocation for education in 2005-06 will be
Rs.18,337 crore. Next only to education, the plan allocation for
rural development will be Rs.18,334 crore. On subsidy for fertilizers,
the estimate is Rs.16,254 crore. The estimated expenditure on health
and family welfare is Rs.10,280 crore.
II. ASSAULT ON POVERTY AND UNEMPLOYMENT
Empowering the People
11. India is not a poor country, yet a significant proportion of
our people are poor. Poverty is not only income poverty. Other indicators
of poverty are illiteracy, disease, infant mortality, malnutrition,
absence of skills and unemployment. The whole purpose of democratic
government is to eliminate poverty and give to every citizen the
opportunity to be educated, to learn a skill and to be gainfully
employed. The Government holds that it is its sacred duty to empower
the poor and eliminate the scourge of poverty.
Employment
12. In the last Budget, I had rejected the idea of jobless growth.
As I unfold the vision of the UPA Government, Hon’ble Members
will note that the central theme that runs through the various schemes
and programmes is creation of jobs. Assured irrigation facilities
to an additional 1 crore hectares of land over a period of five
years will generate employment for an additional 1 crore people
at the rate 1 person per hectare. The food processing industry is
growing at a rate which generates 2.5 lakh jobs every year. The
textile sector alone has the potential to create 1.2 crore jobs
over the next 5 years. The information technology (IT) industry
is expected to offer an additional 70 lakh jobs by 2009. Construction
industry is also expected to throw up lakhs of jobs. Sectors with
potential for generating employment will receive the highest attention
of the Government.
National Rural Employment Guarantee Scheme
13. After the National Food for Work programme was launched in
November 2004, provision was made for the cash component and the
foodgrain component. In overall terms, the expenditure in the current
year is estimated at Rs.4,020 crore. For 2005-06, a provision of
Rs.5,400 crore for the cash component and 50 lakh MT of foodgrains
have been made and, in overall terms, the allocation will increase
to Rs.11,000 crore. It is Government’s intention to convert
this programme into the National Rural Employment Guarantee Scheme.
When fully rolled out, the scheme will provide livelihood security
for crores of poor families, and I promise to find the money for
the programme.
National Rural Health Mission
14. The National Rural Health Mission (NRHM) will be launched in
the next fiscal. Its focus will be strengthening primary health
care through grass root level public health interventions based
on community ownership. The total allocation for the Department
of Health and the Department of Family Welfare will increase from
Rs.8,420 crore in the current year to Rs.10,280 crore in the next
year. The increase will finance the NRHM and its components like
training of health volunteers, providing more medicines and strengthening
the primary and community health centre system.
15. I am also happy to announce that work on the six AIIMS-like
institutions will start next year to augment medical education in
deficient States.
Antyodaya Anna Yojana
16. The Antyodaya Anna Yojana now covers 2 crore Below Poverty
Line (BPL) families. The number will be increased to 2.5 crore families
in 2005-06.
ICDS
17. The universalization of the Integrated Child Development Services
(ICDS) scheme is overdue. It is my intention to ensure that, in
every settlement, there is a functional anganwadi that provides
full coverage for all children. As on date there are 6,49,000 anganwadi
centres. I propose to expand the ICDS scheme and create 1,88,168
additional centres that are required as per the existing population
norms. Forty seven per cent of children in the age group 0-3 are
reportedly underweight. Supplementary nutrition is an integral part
of the ICDS scheme. I propose to double the supplementary nutrition
norms and share one-half of the States’ costs for this purpose.
I also propose to increase the allocation for ICDS from Rs.1,623
crore in BE 2004-05 to Rs.3,142 crore in BE 2005-06.
Mid-day Meal Scheme
18. The Mid-day Meal Scheme for children has made a promising start
throughout the country. 11 crore children are covered today. The
Central Government is now providing the cost of food grains as well
as the conversion cost at the rate of Re.1 per child. The allocation
in BE 2004-05 was Rs.1,675 crore. I propose to increase the allocation
for the next year to Rs.3,010 crore.
Sarva Shiksha Abhiyan
19. The Sarva Shiksha Abhiyan programme is the cornerstone of the
Government’s intervention in basic education for all children.
Sarva Shiksha Abhiyan was allocated Rs.3,057 crore in the Budget
Estimates for 2004-05. During the course of the year, I enhanced
the allocation to Rs.4,754 crore. A non-lapsable fund called “Prarambhik
Shiksha Kosh” has been created for funding this programme.
I propose to increase the allocation to Rs.7,156 crore in 2005-06.
Drinking Water and Sanitation
20. All drinking water schemes have now been brought under the
Rajiv Gandhi National Drinking Water Mission. In the current year,
so far, 31,355 uncovered rural habitations have been provided drinking
water facilities. During 2005-06 the emphasis will be on covering
more habitations. Emphasis will also be laid on tackling water quality
in about 2.16 lakh habitations in Andhra Pradesh, Gujarat, Karnataka,
Rajasthan, West Bengal and some other States. I propose to increase
the outlay for the Mission from Rs.3,300 crore in the current year
to Rs.4,750 crore in the next year.
21. Sanitation, however, remains critically deficient. Only about
30 per cent of the rural households have access to safe sanitation
facilities. The Total Sanitation Campaign (TSC) now operates in
452 districts. Government intends to extend the TSC to all districts,
and I propose to allocate Rs.630 crore for the next year.
Scheduled Castes and Scheduled Tribes
22. I wish to restate my commitment to inclusive economic growth.
It is important to bring scheduled castes and scheduled tribes into
the development process. For the first time, you will find in the
Budget papers a separate statement on schemes for the development
of SCs and STs. The allocation for the programmes is Rs.6,253 crore.
23. The key to empowering the scheduled castes and scheduled tribes
is to provide top class education opportunities to meritorious students.
The three on-going scholarship schemes for SC/ST students under
the Central Plan – pre-Matric, post-Matric, and merit-based
– will continue. To provide an added incentive, I propose a
new window: a short list of institutes of excellence will be notified,
and any SC/ST student who secures admission in one of those institutes
will be awarded a larger scholarship that will meet the requirements
for tuition fees, living expenses, books and a computer. The details
of the scheme will be announced by the ministry concerned.
24. Government will also introduce the Rajiv Gandhi National Fellowship
for SC and ST students for pursuing M. Phil and Ph.D. courses in
selected universities. I propose to provide funds for 2000 Fellowships
per year to be awarded from 2005-06 on the pattern of UGC Fellowships.
Women and Children
25. Last July, I promised to consider gender budgeting. Hon’ble
Members will be happy to note that I have included in the Budget
documents a separate statement highlighting the gender sensitivities
of the budgetary allocations under 10 demands for grants. The total
amount in BE 2005-06, according to the statement, is Rs.14,379 crore.
Although this is another first in budget-making in India, it is
only a beginning and, in course of time, all Departments will be
required to present gender budgets as well as make benefit-incidence
analyses.
Minorities
26. Minorities would have to be brought more into the development
process. I propose to increase the equity support, as may be required,
for the National Minorities Development and Finance Corporation.
27. A certain percentage of new schools that will be opened under
the Sarva Shiksha Abhiyan as well as the Kasturba Balika Vidyalaya
Scheme will be located in districts or blocks having a substantial
minority population. Likewise, a certain proportion of new anganwadi
centres will be located in blocks or villages which have a substantial
concentration of minorities.
28. Urdu is the mother tongue of a large number of people in Uttar
Pradesh and Bihar, but there is very little provision for teaching
Urdu. I propose to provide central assistance for recruitment and
posting of Urdu language teachers in primary and upper-primary schools
that serve a population in which at least one fourth belong to that
language group.
29. The Ministry of Social Justice and Empowerment and the Ministry
of Human Resource Development implement a number of schemes for
pre-examination coaching of candidates belonging to the minority
communities. These schemes are confined to Government institutions,
and the results have not been encouraging. Hence, I propose to expand
these schemes to include reputed private coaching institutes which
have a track record of showing good results in competitive examinations.
I propose to provide funds to pay the fees on behalf of meritorious
candidates from minority communities who enroll in these selected
private institutes.
Backward Regions Grant Fund
30. Since the announcement in the last Budget of a Grant Fund for
backward districts, a lot of thought has gone into the proposal.
An Inter-Ministerial Group (IMG) has identified 170 backward districts
based on certain socio-economic variables. The IMG has also proposed
that resources under the new facility will be conditional on Panchayati
Raj institutions being properly empowered, including devolution
of functionaries and funds. I propose to accept the recommendations
of the IMG, and I am happy to announce the establishment of a Backward
Regions Grant Fund. An allocation of Rs.5,000 crore has been made
in the Plan for 2005-06, and an equal amount will be allocated every
year in the next four years. Consequent upon the establishment of
the Fund, the existing Rashtriya Sam Vikas Yojana (RSVY), envisaged
to end in 2006-07, will be wound up with suitable transition arrangements
that will protect every district now covered under RSVY.
Bihar
31. The NCMP refers to special economic packages for Bihar, Jammu
& Kashmir and the North Eastern Region. Till now, Bihar received
special assistance through the RSVY. The transition arrangements
under RSVY will continue until 2006-07. Meanwhile, the backward
districts of Bihar will begin to receive assistance from the Backward
Regions Grant Fund. I may also point out that, recognizing the needs
of Bihar, the TFC has made substantial grants amounting to Rs.7,975
crore for the period 2005-10. Bihar has also been identified as
one of the few States requiring special grants for the health and
education sectors.
Jammu & Kashmir
32. The Government will provide special plan assistance to Jammu
and Kashmir under a recently-approved Reconstruction Plan, in addition
to the normal State Plan. As against the current year’s State
Plan of Rs.3,008 crore, the size of the State Plan for 2005-06 has
been fixed at Rs.4,200 crore. The Baglihar project was allocated
Rs.300 crore this year and will be provided adequate funds next
year too. The Udhampur—Baramulla rail line will be implemented
as a project of national importance.
North Eastern Region
33. All Ministries and Departments are required to allocate at
least 10 per cent of their plan budget for schemes and programmes
in the North Eastern Region (NER). For 2005-06, this would amount
to Rs.9,308 crore. The Kumarghat—Agartala and Lumding—Silchar—Jiribam—Imphal
projects will be supported with additional funds outside the railway
budget as projects of national importance. A special package for
highway development in the NER has also been approved, and I have
allocated Rs.450 crore in this behalf.
Rural Infrastructure
34. Government will focus on providing basic infrastructure to
the poor, especially those in rural India and in urban slums. The
Rural Infrastructure Development Fund which was revived last July
will, as in the current year, be provided a corpus of Rs.8,000 crore
in 2005-06 also.
III. BHARAT NIRMAN
35. In his address to Parliament, the President outlined an overarching
vision to build India, and called it ‘Bharat Nirman’.
Bharat Nirman has been conceived as a business plan, to be implemented
over a period of four years, for building infrastructure, especially
in rural India. It will have six components, namely, irrigation,
roads, water supply, housing, rural electrification and rural telecom
connectivity. In each of these areas, we must dare to be bold and
set for ourselves high targets to be achieved by the year 2009.
The UPA Government’s goals are:
• to bring an additional one crore hectares under assured
irrigation;
• to connect all villages that have a population of 1000
(or 500 in hilly/tribal areas) with a
road;
• to construct 60 lakh additional houses for the poor;
• to provide drinking water to the remaining 74,000 habitations
that are uncovered;
• to reach electricity to the remaining 1,25,000 villages
and offer electricity connection
to 2.3 crore households; and
• to give telephone connectivity to the remaining 66,822
villages.
‘Bharat Nirman’ will require huge resources. Government
believes that Bharat Nirman is an achievable project, and it is
our intention to give rural India a new deal fully involving the
Panchayati Raj Institutions in the planning and implementation.
IV. INVESTMENT
36. I now turn to investment which is the paramount requirement
to consolidate the growth process. In agriculture, we shall enhance
public and private investment in the infrastructure required to
support expansion, diversification and value addition. In the industrial
sector, both the public sector and the private sector will be allowed
the space to grow and compete with each other. Government will play
the leading role in providing and facilitating investment in public
goods such as roads, railways, power, seaports and airports. In
the services sector, Government will recognize the leading role
played by the private sector, and provide a supportive policy environment
and stable tax policies.
37. I am happy to announce that in 2005-06, the Government will
provide equity support of Rs.14,040 crore and loans of Rs.3,554
crore to Central Public Sector Enterprises (including Railways).
38. Success, however, will ultimately depend upon our ability to
finance the growth. Government will, therefore, through a mix of
right policies and prudent taxes, promote savings and devise ways
and means to channel these savings into productive investment. The
capital market, banks, insurance companies, pension funds and superannuation
funds would have a crucial role in mobilizing and disbursing the
financial resources required to sustain high investment.
V. AGRICULTURE
39. With about two thirds of the population dependent on agriculture,
and the sector producing only 21 per cent of GDP in 2003-04, it
is imperative that we address the problems of our farmers with a
sense of urgency. Agriculture being a State subject, the bulk of
public investment in agriculture takes place at the State level,
and the Central Government’s support to States acts as a catalyst.
Roadmap for Agricultural Diversification
40. Indian agriculture has indeed diversified from food grains
to other crops, but more needs to be done. The Ministry of Agriculture
will prepare a roadmap for agricultural diversification. The road
map will focus on fruits, vegetables, flowers, dairy, poultry, fisheries,
pulses and oilseeds.
National Horticulture Mission
41. The National Horticulture Mission, announced in the last Budget,
will be launched on April 1, 2005. I propose to allocate Rs.630
crore in 2005-06 for the Mission. The Mission will ensure an end-to-end
approach having backward and forward linkages covering research,
production, post-harvest management, processing and marketing, under
one umbrella, in an integrated manner. As the Mission gathers pace,
more funds will be provided.
Plantation Sector
42. I am aware of the difficulties that the plantation sector has
faced for some years now. While the prices of commodities such as
tea and coffee have shown some improvement, the sector still faces
difficulties. The Price Stabilization Fund has not proved very effective
or popular. Therefore, Government has set up an expert committee
to suggest improvements to the Fund and its operation. In the case
of tea, our comparative advantage has been eroded largely because
of the declining productivity of tea. Government will examine ways
and means of introducing a programme for massive replantation and
rejuvenation.
Agricultural Marketing Infrastructure
43. Government proposes to introduce a new scheme called Development/Strengthening
of Agricultural Marketing Infrastructure, Grading and Standardization.
The goal of this scheme is to induce large investments from the
private and cooperative sectors for setting up agricultural markets,
marketing infrastructure and support services such as grading, standardization
and quality certification. Assistance will be available in the form
of credit-linked, back-ended subsidy. It is proposed to implement
the scheme through the National Bank for Agriculture and Rural Development
(NABARD) and the National Cooperative Development Corporation (NCDC)
in those States which amend their Agricultural Produce Marketing
Committee (APMC) Acts. I propose to allocate Rs.72 crore for the
new scheme.
Water Resources, Flood Management and Erosion Control
44. The National Project, announced by me last July, for the repair,
renovation and restoration of water bodies will be launched in the
month of March 2005. The pilot project is planned for 16 districts
in 9 States and will cover nearly
700 water bodies, and 20,000 hectares of additional land will come
under irrigation. The allocation for the pilot project has been
increased to Rs.100 crore in 2005-06.
45. Uttar Pradesh, especially its eastern part, Bihar, West Bengal,
Orissa, Assam and the North Eastern States are regularly affected
by floods in the Ganga basin and in the Brahmaputra and Barak valleys.
A Task Force constituted to recommend measures for flood management
and erosion control has submitted its report. The Plan outlay in
2005-06 to implement the report will be Rs.180 crore. Besides, a
sum of Rs.52 crore has been allocated for the Farakka Barrage Project.
46. The Accelerated Irrigation Benefit Programme (AIBP) has been
reviewed and the focus turned to early completion of truly last
mile projects. In BE 2004-05, I had provided a sum of Rs.2,800 crore.
Having regard to the improvement in the pace of implementation,
the outlay has been increased to Rs.4,800 crore for the next year.
Micro Irrigation
47. Water-use efficiency in Indian agriculture is one of the lowest
in the world. Government will promote micro-irrigation technology,
comprising drip and sprinkler irrigation, on a large scale. About
1.2 million hectares have been covered under micro-irrigation so
far, and the plan is to increase the coverage to 3 million hectares
by the end of the Tenth Plan and to 14 million hectares by the end
of the Eleventh Plan. Accordingly, I have provided Rs.400 crore
for promoting micro-irrigation in 2005-06.
Rural Credit and Indebtedness
48. Government intends to continue with its effort to turn the
focus of commercial banks, regional rural banks (RRBs) and cooperative
banks towards providing credit, especially production credit, to
rural households and farm households. Particularly in agricultural
credit, innovations are possible. I propose to request the Reserve
Bank of India (RBI) to examine the issue of allowing banks to adopt
the agency model, by using the infrastructure of civil society organizations,
rural kiosks and village knowledge centres, to provide credit support
to rural and farm sectors.
49. In June 2004, I had announced my intention to double the flow
of agricultural credit in three years. I had also announced an indicative
target of Rs.105,000 crore. Notwithstanding a below par performance
by co-operative banks, together, all three arms will disburse Rs.108,500
crore in the current year. Continuing on the same path, I propose
to ask commercial banks, RRBs and cooperative banks to increase
the flow of credit by another 30 per cent in 2005-06. Further, the
public sector banks would be asked to increase the number of borrowers
by another 50 lakh.
50. Cooperative banks in India, with few exceptions, are in a shambles.
Six State Central Cooperative Banks and 140 District Central Cooperative
Banks do not comply with Section 11 of the Banking Regulation Act,
1949. They also have difficulty in accessing refinance for agricultural
credit. Alarmed by the gravity of the situation, I had appointed
a Task Force to examine the reforms required in the cooperative
banking system. The Task Force has submitted its report. The recommendations
include:
• Special financial assistance to wipe out accumulated losses
and strengthen the
capital base of co-operative credit institutions;
• Institutional restructuring to ensure democratic institutions;
and
• Changes in the legal framework to empower RBI to enforce
prudent financial
management.
I propose to accept the report in principle. I also propose to
call State Governments for consultation and begin the process of
implementing the recommendations in the States that show willingness
to accept the recommendations.
Farm Insurance
51. The National Agricultural Insurance Scheme (NAIS) has been
in operation since rabi 1999-2000. I have received the recommendations
made by the joint group constituted by the Ministry of Agriculture
to suggest an improved farmer-friendly crop insurance scheme. Further
consultation with all the stakeholders would be required. I, therefore,
propose to continue the NAIS in its present form for kharif and
rabi 2005-06.
Micro Finance
52. The programme of linking Self Help Groups (SHGs) with the banking
system has emerged as the major micro-finance programme in the country.
560 banks including 48 commercial banks, 196 RRBs and 316 cooperative
banks are now actively involved in the programme. I propose to enhance
the target for credit-linking in the next fiscal from 2 lakh SHGs
to 2.5 lakh SHGs.
53. At present, micro finance institutions (MFIs) obtain finance
from banks according to guidelines issued by RBI. MFIs seek to provide
small scale credit and other financial services to low income households
and small informal businesses. Government intends to promote MFIs
in a big way. The way forward, I believe, is to identify MFIs, classify
and rate such institutions, and empower them to intermediate between
the lending banks and the beneficiaries. Commercial banks may appoint
MFIs as “banking correspondents” to provide transaction
services on their behalf. Since MFIs require infusion of new capital,
I propose to re-designate the existing Rs.100 crore Micro Finance
Development Fund as the “Micro Finance Development and Equity
Fund”, and increase the corpus to Rs.200 crore. The fund will
be managed by a Board consisting of representatives of NABARD, commercial
banks and professionals with domain knowledge. The Board will be
asked to suggest suitable legislation, and I expect to introduce
a draft Bill in the next fiscal year.
54. I propose to request RBI to open a window to enable qualified
NGOs engaged in micro-finance activities to use the External Commercial
Borrowing (ECB) window. Detailed guidelines containing necessary
safeguards will be issued by RBI.
Micro Insurance
55. The benefits of opening the insurance sector are now visible
by way of vast improvement in insurance penetration and insurance
density, and the availability of a wide variety of products. Government
would like to see these benefits percolate to rural India and to
the vulnerable sections of the population. Micro insurance is a
distinct product. Its design and delivery are specialized functions.
The Insurance Regulatory Development Authority (IRDA) has published
draft Regulations for micro insurance. NGOs, SHGs, cooperatives
and MFIs will be invited to become micro insurance agents. Government
will extend full support to the effort of IRDA to promote micro
insurance.
A Knowledge Centre in Every Village
56. The National Commission on Farmers has recommended the establishment
of Rural Knowledge Centres all over the country using modern information
and communication technology (ICT). Mission 2007 is a national initiative
launched by an alliance comprising nearly 80 organizations including
civil society organizations. Their goal is to set up a Knowledge
Centre in every village by the 60th anniversary of Independence
Day. Government supports the goal, and I am glad to announce that
Government has decided to join the alliance and route its support
through NABARD. I propose to allow NABARD to provide Rs.100 crore
out of RIDF.
Agricultural Research
57. Agricultural Research has a vital role to play in the strategy
for reviving and encouraging diversification. Our agricultural universities
and research institutions have done good work in the past and now
need to be strengthened and modernized. A Task Force headed by Dr.
M S Swaminathan has recommended the creation of a National Fund
for Strategic Agricultural Research. I am happy to announce an initial
provision of Rs.50 crore for operationalizing this Fund.
VI. MANUFACTURING
58. India should build on its manufacturing capacities and scale
them up to global standards. Both the Investment Commission and
the National Manufacturing Competitiveness Council have started
work in right earnest. I believe we shall reap the first successes
of their work in the next financial year.
59. Worldwide, it is manufacturing that has driven growth. In order
to revive the manufacturing sector, particularly small and medium
enterprises, and to enable them to adjust to the competitive pressures
caused by liberalization and moderation of tariff rates, I propose
to launch a new scheme that will help them strengthen their operations
and sharpen their competitiveness. The scheme will be called the
“Manufacturing Competitiveness Programme.” The design
of the scheme will be worked out by the National Manufacturing Competitiveness
Council in consultation with the industry.
Textiles
60. In the last Budget, I made a beginning in addressing the tax-induced
rigidities in the textile sector in order to prepare the sector
for the post-quota regime. There is a new vigour in the sector,
especially in the handloom and powerloom segments. Government will
continue to nurture the textile sector which has huge potential
for employment and exports. The estimate of investment made in 2004-05
is Rs.20,000 crore. The estimate for the next year is Rs.30,000
crore. The Technology Upgradation Fund (TUF) scheme is being continued
with an enhanced allocation of Rs.435 crore. I propose to introduce
a 10 per cent capital subsidy scheme for the textile processing
sector in addition to the normal benefits available under the TUF
Scheme.
61. I think it is necessary to lend further help to the handloom
sector. The Government proposes to adopt the cluster development
approach for the production and marketing of handloom products.
The Ministry of Textiles will take up 20 clusters in the first phase
at a cost of Rs.40 crore, and the amount will be provided during
the course of the year.
62. The Government is implementing a life insurance scheme for
handloom weavers which provides insurance cover up to Rs.50,000.
At present, only 2 lakh weavers are covered. I propose to enlarge
the coverage of the scheme to 20 lakh weavers in two years which
will cost Rs.30 crore per year when fully rolled out. The Government
is also implementing a health insurance package for weavers. Here
too, the coverage is now only for 25,000 weavers. I propose to increase
the coverage to 2 lakh weavers at a recurring cost of Rs.30 crore
per year. Once the two new and enlarged schemes are approved, I
propose to provide the required funds.
Sugar Industry
63. The sugar industry has been under financial stress since 2001.
The position became worse due to two successive droughts in certain
parts of the country. The Tuteja Committee appointed by the Government
has submitted its report. After a careful examination of the report,
and after consulting RBI and NABARD, I propose the following financial
package for the revitalization of the sugar industry:
• Sugar factories that were operational in 2002-03 sugar
season will be assisted to restructure. NABARD, in consultation
with State Governments, RBI, banks and financial institutions will
work out a scheme for providing a financial package with a moratorium
of two years, on both principal and interest, and a schedule of
payment having regard to the commercial viability of each unit.
• Government has already reduced the rate of interest on
loans from the Sugar Development Fund to 2 percentage points below
the bank rate. I propose to make the same rate applicable to outstanding
loans as on October 21, 2004.
• Indian Banks’ Association (IBA) and NABARD will be
asked to work out a scheme under which individual sugar factories
may renegotiate the rate of interest on their past high interest
loans.
Pharmaceuticals and Biotechnology
64. Our human resource base gives us an exceptional advantage in
pharmaceuticals and biotechnology. The Indian pharmaceutical industry
has declared its preparedness to produce drugs under the new patent
regime. Government has already set up a Rs.150 crore research and
development corpus fund for the industry. The corpus deserves to
be increased, and I propose to do so in phases beginning next year.
India has also the potential to become an attractive destination
for outsourcing in drug discovery and clinical research, and for
co-development of drugs and manufacturing. In biotechnology, the
industry has the potential to be a global leader supplying novel
technologies and products to the health and agriculture sectors.
Government will provide a stable policy environment and necessary
incentives to help the two industries become world leaders.
Small and Medium Enterprises
65. In recent years, our approach to small scale industry has evolved,
and now we are inclined to treat the sector as the small and medium
enterprises sector. Continuing the process initiated a few years
ago, after consulting stakeholders and on the recommendation of
the Advisory Committee, the Ministry of Small Scale Industries has
identified 108 items for de-reservation. Among them, I would like
to mention 30 items in the category of “textile products, including
hosiery”, which is a sector poised for rapid growth.
66. In the last Budget, I had significantly liberalized the capital
subsidy scheme, and a provision of Rs.135 crore was made for “Promotion
of SSI Schemes”. That provision is being enhanced to Rs.173
crore in 2005-06. Small Industries Development Bank of India (SIDBI)
has established this year a SME Growth Fund with a corpus of Rs.500
crore. Small and medium units in knowledge-based industries such
as pharma, biotech, and IT will be provided equity support through
this fund.
67. There is a need for new legislation that will provide a supportive
environment for small and medium enterprises. I am glad to inform
the House that my colleague, the Minister of Small Scale Industries,
will introduce in this session the Small and Medium Enterprises
Development Bill.
Skills Training
68. Skills development, especially for youth who have only minimal
formal education, is an area which can no longer be ignored. Last
July, I had proposed a programme to upgrade 500 Industrial Training
Institutes (ITIs). I am happy to inform the House that in the current
year 100 ITIs have been identified. Out of them, 67 ITIs in 15 States/Union
Territories have been linked with industry and will be upgraded
at a cost of Rs.1.6 crore each.
69. There is a demand for specific skills of a high order which
is often unmet. I, therefore, propose a Public-Private Partnership
between Government and industry that will take up the skills development
programme under the name Skills Development Initiative or SDI. Details
of the scheme will be worked out and announced shortly.
Foreign Trade
70. We shall build on the growing external strengths of the economy.
Government has delivered on the promise to accelerate foreign trade.
In April-January 2004-05 exports and imports have grown by 25.55
per cent and 34.72 per cent, respectively, in US dollar terms. Government
has fixed an ambitious target of US$ 150 billion for exports by
the year 2008-09 in order to double India’s share in world
exports to 1.5 per cent. We intend to further liberalize trade policy
and extend full support to the efforts of our exporters.
Foreign Direct Investment
71. On foreign direct investment (FDI), I would urge Hon’ble
Members to take a pragmatic view. At the recent meeting of the Finance
Ministers of G-7 countries, to which India and China were invited,
the Finance Minister of China looked in my direction and told the
gathering that China had received US$ 500 billion worth of foreign
investment since China opened its economy in 1980. Of this, nearly
US$ 60 billion came in calendar 2004. Our own experience has been
that the automobile, software, telecommunication and electronics
sectors have benefited from FDI and have assimilated themselves
into the global production chain. I believe that there are opportunities
in other sectors as well, such as mining, trade and pensions. Government
will, after due consultation, come forward with suitable proposals.
VII. INFRASTRUCTURE
Telecommunications
72. Telecommunication is the best way to provide connectivity in
urban and rural India. By the end of January 2005, we had achieved
a tele-density of 8.75 per cent. However, we are concerned with
the low tele-density in rural areas. So far, Government has released
Rs.1,700 crore to the Universal Service Obligation (USO) Fund, which
has been fully utilized. A provision of Rs.1,200 crore has been
made for 2005-06. 1,687 subdivisions will get support under the
USO Fund for rural household telephones. 5.20 lakh village public
telephones (VPTs) have been installed so far, and BSNL has undertaken
to provide VPTs in the next three years to the remaining 66,822
revenue villages
National Highway Development Project
73. The National Highway Development Programme (NHDP) has made
steady progress, and 5,172 kms of National Highways have been four-laned
till January 2005 under NHDP I and NHDP II. To be launched in the
next fiscal, NHDP III will target selected high density highways
not forming part of the Golden Quadrilateral or the North-South
and East-West corridors. I have provided Rs.1,400 crore for this
purpose in 2005-06 to four-lane 4000 kms. A special package for
the North Eastern region has also been approved, and I have allocated
Rs.450 crore in this behalf. In overall terms, the outlay for National
Highway development will be increased from Rs.6,514 crore in BE
2004-05 to Rs.9,320 crore in 2005-06.
Rural Electrification
74. A massive programme for rural electrification will begin in
2005-06 with the objective of covering 1.25 lakh villages in five
years. The focus will be on deficient States. The programme envisages
creation of a rural electricity distribution backbone, with a 33/11
KV substation in each block and at least one distribution transformer
in each village. I have provided Rs.1,100 crore for this programme
in the next year.
Indira Awas Yojana
75. Indira Awas Yojana is the flagship rural housing scheme for
weaker sections. The allocation is being increased from Rs.2,500
crore in the current year to Rs.2,750 crore in BE 2005-06. About
15 lakh houses will be constructed during the next year.
Special Purpose Vehicle
76. The importance of infrastructure for rapid economic development
cannot be overstated. The most glaring deficit in India is the infrastructure
deficit. Investment in infrastructure will continue to be funded
through the Budget. However, there are many infrastructure projects
that are financially viable but, in the current situation, face
difficulties in raising resources. I propose that such projects
may be funded through a financial Special Purpose Vehicle (SPV).
When large infrastructure projects are implemented, the foreign
exchange resources could be drawn for financing necessary imports.
Accordingly, I propose to establish an SPV to finance infrastructure
projects in specified sectors. Roads, ports, airports and tourism
would be sectors that can benefit most from the SPV. The projects
will be appraised by an Inter-Institutional Group of banks and financial
institutions. The SPV will lend funds, especially debt of longer
term maturity, directly to the eligible projects to supplement other
loans from banks and financial institutions Government will communicate
the borrowing limit to the SPV at the beginning of each fiscal year.
For 2005-06, I propose to fix the borrowing limit at Rs.10,000 crore.
77. I have also made a provision of Rs.1500 crore for “viability
gap” funding for infrastructure projects. That mechanism will
be used also in conjunction with the funding mechanism through the
SPV.
PURA Clusters
78. The unorganized or informal sector accounts for 92 per cent
of the employment and absorbs the bulk of the annual accretion to
the labour force. PURA or Provision of Urban Amenities in Rural
Areas is an idea that contains within itself possible solutions
to a number of problems that afflict rural India such as unemployment,
isolation from markets, lack of connectivity and migration to cities.
The National Commission on Enterprises in the Unorganized/ Informal
Sector has proposed pilot projects for ‘growth poles’
applying the PURA principles. The objectives are to expand production
and employment in the unorganized enterprises around existing clusters
of industrial activities and services as well as encourage the formation
of new clusters. Once the proposals are firmed up, Government will
take up the creation of a few growth poles, as pilot projects, in
2005-06.
National Urban Renewal Mission
79. The demographic trends in the country indicate a rapid increase
in urbanization. India needs urban facilities of satisfactory standards
to cope with the challenge. If our cities are not renewed, they
will die. The National Urban Renewal Mission is designed to meet
this challenge. It will cover the seven mega cities, all cities
with a population of over a million, and some other towns. I propose
to make an outlay of Rs.5,500 crore in 2005-06, including a grant
component of Rs.1,650 crore for the Mission.
80. The Mumbai Metro Rail Project, the Mumbai Trans Harbour Link,
the Mumbai Western Expressway Sealink and the Bangalore Metro Rail
Project are examples of projects which could be supported through
the Mission.
VIII. FINANCIAL SECTOR
81. The incipient investment boom in infrastructure, industry (including
housing), and services needs to be nurtured through further reforms
in the financial sector including reforms in bank finance and debt
and equity markets.
Banking
82. The banking sector presents a picture of paradoxes. There are
many banks in India but none among the top twenty in the world.
Our largest bank, the State Bank of India, ranks 82 in terms of
business. It is universally acknowledged that the key drivers of
the banking sector in the future will be Competition, Consolidation
and Convergence. RBI has prepared a road map for banking sector
reforms and will unveil the same. While most proposals will be implemented
by the RBI on its own authority, some legislative changes would
be required to be made.
83. I had promised that a comprehensive Bill to amend the Banking
Regulation Act, 1949 will be introduced in the Budget Session. In
consultation with the RBI, I propose to introduce amendments to
the Act –
• to remove the lower and upper bounds to the statutory liquidity
ratio (SLR) and provide flexibility to RBI to prescribe prudential
norms;
• to allow banking companies to issue preference shares,
since preference share capital can be treated as regulatory capital
under specified circumstances as per Basel norms;
• to introduce specific provisions to enable the consolidated
supervision of banks and their subsidiaries by RBI in consonance
with the international best practices in this regard;
I also propose to introduce amendments to the Reserve Bank of India
Act, 1934-
• to remove the limits of the cash reserve ratio (CRR) to
facilitate more flexible conduct of monetary policy; and
• to enable RBI to lend or borrow securities by way of repo,
reverse repo or otherwise.
PFRDA
84. With increasing longevity, the problem of old-age income security
can no longer be ignored. Government had announced a defined contribution
pension scheme for newly recruited Central Government employees
which would also be extended to the unorganized sector. I am happy
to inform the House that seven State Governments – Andhra Pradesh,
Chhattisgarh, Himachal Pradesh, Jharkhand, Manipur, Rajasthan and
Tamil Nadu – have introduced similar schemes for their employees.
Other States have also evinced interest. An Ordinance was promulgated
on December 29, 2004 to set up a Pension Fund Regulatory and Development
Authority (PFRDA). I propose to introduce a Bill to replace the
Ordinance during this session.
85. Through the new scheme, it is proposed to offer a menu of investment
choices to the subscriber and to provide a strong regulatory mechanism
to ensure that the interests of subscribers are protected. I appeal
to workers all over the country to join the new pension system.
Capital Market
86. The capital market has emerged as a major vehicle for converting
savings into investment. It is also the preferred investment destination
of foreign savings. The steps announced by me last July, and implemented,
have strengthened the capital market. It is time for more measures
and, hence, I propose to –
• authorize Securities and Exchange Board of India (SEBI)
to set up a National Institute of Securities Markets for teaching
and training intermediaries in the securities markets and promoting
research; and
• permit FIIs to submit appropriate collateral, in cash or
otherwise, as prescribed by SEBI, when trading in derivatives on
the domestic market.
While India’s equity market has made progress, the corporate
bond market still lags behind. In order to address this gap, I propose
to —
• amend the definition of ‘securities’ under the
Securities Contracts (Regulation) Act, 1956 so as to provide a legal
framework for trading of securitized debt including mortgage backed
debt; and
• appoint a high level Expert Committee on corporate bonds
and securitization to look into the legal, regulatory, tax and market
design issues in the development of the corporate bond market.
Over the Counter (OTC) Derivatives
87. Over the counter (OTC) derivatives play a crucial role in mitigating
the risks of corporates, banks and other financial entities. There
is, however, some ambiguity regarding the legality of OTC derivative
contracts which has inhibited their growth. I, therefore, propose
to take measures to provide for clear legal validity of such contracts.
Stamp duty on Stock Exchange Corporatization
88. The Securities Contracts (Regulation) Act, 1956, as amended
recently, requires all stock exchanges to be corporatized and de-mutualized.
Three stock exchanges are not yet corporatized. In order to facilitate
their corporatization, I propose to grant a one-time exemption to
them from stamp duty on the notional transfer of assets.
Stamp Duty on Commercial Paper
89. In order to create a level playing field for banks and non-bank
entities to issue commercial paper, and to bring the Indian commercial
paper market closer to international standard, I propose to rationalize
the stamp duty so that it applies uniformly regardless of the issuing
entity.
Mumbai – A Regional Financial Centre
90. When I look at the map of the world, I am struck by the strategic
location of Mumbai. It lies almost midway between London and Tokyo,
two nerve centres of world finance. Mumbai is also home to the National
Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) which now
rank no.3 and no.5 among the stock exchanges of the world by the
number of trades per year. In the last decade, we have built world
class institutions on the securities markets and we now compare
with the best in terms of technological sophistication, risk management
and sound governance. I believe the time has come to begin work
on making Mumbai a regional hub for finance. In consultation with
the RBI, I propose to appoint a high powered Expert Committee to
advise the Government on how to make Mumbai a regional financial
centre.
Gold Units
91. Ten years ago we embarked on the process of ensuring that gold
inflows are through the official channels alone. I believe that
we are now in a position to introduce ‘gold units’ and
create a market for such units. I propose to ask SEBI to permit,
in consultation with RBI, mutual funds to introduce Gold Exchange
Traded Funds (GETFs) with gold as the underlying asset, in order
to enable any household to buy and sell gold in units for as little
as Rs.100. Such units could be traded in the same manner as units
of mutual funds.
IX. OTHER PROPOSALS
Institutions of Excellence
92. On January 6, 2005, the Prime Minister spoke about his intention
to set up a Knowledge Commission to look into the issue of building
quality human capital. Government believes that investments in institutions
of higher education and Research and Development organizations are
as important as investments in physical capital and physical infrastructure.
What we need are world class universities, and we must make a beginning
with one institution. We must have a university that will be ranked
alongside Oxford and Cambridge or Harvard and Stanford. I am happy
to inform the House that we have selected the Indian Institute of
Science (IISc), Bangalore, which enjoys a high reputation as a centre
of excellence in research and development. We shall work to make
IISc, in a few years, a world class university. I propose to provide
an additional sum of Rs.100 crore as a grant for this purpose.
VAT
93. In a remarkable display of the spirit of cooperative federalism,
the States are poised to undertake the most important tax reform
ever attempted in this country. All States have agreed to introduce
the value added tax (VAT) with effect from April 1, 2005. VAT is
a modern, simple and transparent tax system that will replace the
existing sales tax and eliminate the cascading effect of sales tax.
It is in force in more than 130 countries ranging from Sri Lanka
to China. India too has a VAT at the Central level (CENVAT), but
only for goods.
94. In the medium to long term, it is my goal that the entire production–distribution
chain should be covered by a national VAT, or even better, a goods
and services tax, encompassing both the Centre and the States.
95. The Empowered Committee of State Finance Ministers, with the
solid support of the Chief Ministers, has laboured through the last
7 years to arrive at a framework acceptable to all States. The Central
Government has promised its full support and has also agreed to
compensate the States, according to an agreed formula, in the event
of any revenue loss. I take this opportunity to pay tribute to the
Empowered Committee, and wish the States success on the introduction
and implementation of VAT.
Twelfth Finance Commission
96. On February 26, 2005 I laid before Parliament the recommendations
made by the Twelfth Finance Commission (TFC). TFC’s recommendations
cover tax devolution, grants to States, debt relief, financing of
relief expenditure and related matters. States stand to gain considerably
by the award.
97. However, the implementation of the TFC recommendations will
put a large burden on Central finances through the period 2005-10,
and especially in the first year, 2005-06, when the change to the
new pattern will take place. Consolidation and rescheduling of Central
loans, reduction in the interest rate and specific grants under
different heads will affect both capital and revenue receipts of
the Central Government. The total impact on the Central budget for
2005-06 will be approximately Rs.26,000 crore or an addition of
three-quarters of a percentage point as a proportion of GDP. Needless
to say, this will have an impact on Government’s capacity to
abide by the Fiscal Responsibility and Budget Management Act (FRBM)
in 2005-06.
Defence Expenditure
98. Last July, in order to catch up with the backlog of expenditure
that had not been provided for, I had increased the allocation for
Defence to Rs.77,000 crore. I am happy to inform the House that,
after a gap, defence expenditure in 2004-05 has matched the Budget
Estimates. I propose to increase the allocation for Defence in 2005-06
to Rs.83,000 crore, which will include an allocation of Rs.34,375
crore for capital expenditure.
X. FISCAL CONSOLIDATION
99. The current phase of high growth provides us an opportunity
that should not be frittered away. We must use this opportunity
to improve the fiscal health of the country. We must increase our
revenues and reorient expenditure to pay for more outlays on education,
health and infrastructure.
Outlays versus Outcomes
100. At the same time, I must caution that outlays do not necessarily
mean outcomes. The people of the country are concerned with outcomes.
The Prime Minister has repeatedly emphasized the need to improve
the quality of implementation and enhance the efficiency and accountability
of the delivery mechanism. During the course of the year, together
with the Planning Commission, we shall put in place a mechanism
to measure the development outcomes of all major programmes. We
shall also ensure that programmes and schemes are not allowed to
continue indefinitely from one Plan period to the next without an
independent and in-depth evaluation. Civil society should also engage
Government in a healthy debate on the efficiency of the delivery
mechanism.
Subsidies
101. Following my announcement last July, I placed before Parliament
a report on Central Government subsidies. There are three main products
that involve large explicit subsidies from the Budget and otherwise.
These are food, fertilizer and petroleum. Subsidies provide a measure
of protection for the poor and we shall continue to provide subsidies.
However, we must now take up the task of restructuring the subsidy
regime in a cautious manner and after a thorough discussion.
102. The Ministry of Agriculture intends to make procurement of
food grains more cost effective through decentralized procurement,
especially in the non-traditional States, without impairing the
present MSP-based procurement. A Working Group constituted by the
Department of Fertilizers is now examining several issues for implementing
the next stage of the New Pricing Scheme for fertilizers commencing
from April 1, 2006. The fertilizer subsidy bill could be pruned
if naphtha and FO/LSHS, now used as feedstock, are replaced by natural
gas. As far as petroleum products are concerned, the Government
has received the recommendations of the Lahiri Committee, and appropriate
decisions have been taken, to which I shall refer in Part B of my
speech.
103. What gives me satisfaction is that, while faithfully attempting
to implement the mandate of the NCMP, I have been able to remain
on the path of fiscal consolidation. According to the revised estimates
for 2003-04, the revenue deficit was 3.6 percent and the fiscal
deficit was 4.8 per cent of GDP. The FRBM Act requires a reduction
in the two ratios, respectively, of 0.5 per cent and 0.3 per cent
every year. I am happy to inform the House that we will achieve
this degree of fiscal correction in 2004-05, and the year is expected
to end with a revenue deficit of 2.7 per cent and a fiscal deficit
of 4.5 per cent of GDP.
XI. BUDGET ESTIMATES FOR 2005-06
104. Now I turn to the Budget Estimates for the next fiscal.
Plan Expenditure
105. Plan expenditure for 2005-06 is estimated, on a like-to-like
basis, at Rs.172,500 crore. However, the Budget shows Plan expenditure
at Rs.143,497 crore, and the balance amount of Rs.29,003 crore will
be raised as loans by the State Governments directly, in accordance
with the recommendations of the TFC.
Non-Plan Expenditure
106. Non-Plan expenditure in 2005-06 is estimated to be Rs.370,847
crore, the increase being mainly due to enhanced grants to the States
as recommended by TFC.
Revenue Deficit and Fiscal Deficit
107. Mr. Speaker, Sir, in the Budget Estimates for 2005-06, the
total expenditure is estimated at Rs.514,344 crore. I estimate total
revenue receipts of the Central Government at Rs.351,200 crore and
the revenue expenditure at Rs.446,512 crore. Consequently, the revenue
deficit is estimated at Rs.95,312 crore which is equal to 2.7 per
cent of the estimated GDP. The fiscal deficit is estimated at Rs.151,144
crore, which is 4.3 per cent of the estimated GDP.
108. Consequent to accepting the recommendations of the Twelfth
Finance Commission and the drastically changed pattern of devolution
and funding, there has been a considerable strain in making the
Budget for 2005-06. I was left with no option but to press the ‘pause’
button vis-a-vis the FRBM Act. I am relieved that we have not been
forced to go in the opposite direction. I may add that we are perilously
close to the limits of fiscal prudence and there is no more room
for spending beyond our means. I am confident that we can resume
the process of fiscal correction with effect from 2006-07 and achieve
the FRBM goals by 2008-09.
PART – B
XII. TAX PROPOSALS
109. Mr. Speaker, Sir, I shall now present my tax proposals.
110. I had articulated the UPA Government’s principles and
our approach to taxation in my Budget speech in July 2004, and,
hence, there is no need to repeat them. While adhering to those
principles, it is Government’s intention, as announced by the
Prime Minister, to undertake major tax reforms to improve the tax
to GDP ratio, expand the tax payer base, increase tax compliance
and make tax administration more efficient.
Indirect Taxes
111. I shall begin with my proposals on indirect taxes. First,
customs duties.
112. I intend to advance the Government’s declared policy
of making the customs duty structure closer to that of our East
Asian neighbours. Therefore, I propose to reduce the peak rate for
non-agricultural products from 20 per cent to 15 per cent.
113. Consistent with the peak duty rate, I propose to bring down
the customs duty rates on capital goods and raw materials as well
as correct any inverted duty structures.
114. In order to promote investment, I propose to reduce the customs
duties on selected capital goods and parts thereof to below 15 per
cent, to 10 per cent in some cases and to 5 per cent in some others.
115. For most textile machinery, I propose to reduce the duty from
20 per cent to 10 per cent, in order to help the textile industry
acquire a competitive edge in the post-quota regime. Similarly,
to encourage the food processing industry, I propose to reduce the
duty on refrigerated vans from 20 per cent to 10 per cent.
116. To give a leg-up to the leather and footwear industry, I propose
to reduce the customs duties on seven specified machinery from 20
per cent to 5 per cent. The duty on ethyl vinyl acetate (EVA), an
input for the footwear industry, is also proposed to be reduced
from 20 per cent to 10 per cent.
117. Pharmaceuticals and biotechnology are sunrise sectors. I propose
to reduce the customs duty on nine specified machinery used in these
two sectors to 5 per cent.
118. I also propose to reduce the customs duties on specified parts
of battery-operated road vehicles and for printing presses from
20 per cent to 10 per cent.
119. For primary and secondary metals, I propose to reduce the
customs duties from 15 per cent to 10 per cent. Similarly, industrial
raw materials such as catalysts, refractory raw materials, basic
plastic materials, molasses and industrial ethyl alcohol, which
are key inputs to manufacture, will now be liable to a reduced customs
duty rate of 10 per cent. On lead, I propose to reduce the duty
to 5 per cent.
120. Coking coal with high ash content attracts a duty of 15 per
cent. I propose to bring the rate down to 5 per cent.
121. Keeping in mind the crucial need to encourage the textile
sector, the customs duty rates on polyester and nylon chips, textile
fibres, yarns and intermediates, fabrics, and garments are proposed
to be reduced from 20 per cent to 15 per cent.
122. The electronics and telecom sectors merit special attention.
On 217 Information Technology Agreement (ITA) bound items, the duty
is required to be brought down to nil. Consequently, to provide
a level-playing field to the domestic industry, I propose to remove
the customs duty on specified capital goods and all inputs required
for the manufacture of ITA bound items.
123. However, I intend to take the power to impose a countervailing
duty (CVD) of 4 per cent on all imports to compensate for the State
level taxes, in particular the forthcoming State level VAT that
is proposed to be imposed on corresponding domestic goods. For the
present, I propose to levy a CVD of 4 per cent only on the imports
of ITA bound items and their inputs that attract nil duty. Credit
for the CVD will be available against payment of excise duty. However,
because we have a soft corner for these wares, IT software will
be exempt from the proposed CVD.
124. I do not propose to make any changes in the customs duties
applicable to agricultural goods. In fact, I have decided to increase
the duty on cut flowers from 30 per cent to 60 per cent. However,
at the request of the trade, and since there is little domestic
production, I propose to reduce the duty rate on cloves to 35 per
cent.
125. In order to encourage the import of technology to produce
pure drinking water, I propose to reduce the import duty on atmospheric
drinking water generators from 20 per cent to 5 per cent.
126. I have some proposals on the Excise side too. Government’s
intention is to bring as many goods as possible to the CENVAT rate
of 16 per cent. Today, 5 items attract 24 per cent. Out of the 5,
I have picked out three — polyester filament yarn, tyres and
air conditioners — and I propose to reduce the excise duty
on these goods to 16 per cent. Manufacturers of motor cars and aerated
drinks, the other two items, would have to wait for some more time.
127. Last year, I took a big step forward to prepare the textile
industry to meet the challenges of the post-quota regime. I re-affirm
that the CENVAT exemption route for natural fibres will remain in
force. I now propose to give independent texturizers the option
to avail of the exemption route or pay 8 per cent excise duty with
CENVAT credit.
128. Imitation jewellery now attracts an excise duty of 16 per
cent. Since they are products predominantly consumed by the less
affluent sections, I propose to reduce the excise duty to 8 per
cent. At the same time, expensive and premium jewellery is now manufactured
and sold under alluring brand names. On such branded jewellery,
I propose to levy an excise duty of 2 per cent. I may clarify that
there is no levy on unbranded jewellery, including unbranded gold
jewellery.
129. In order to remove certain distortions in the tax treatment
of comparable products, I propose to levy an excise duty on mosaic
tiles at 8 per cent and on road tractors for semi-trailers of engine
capacity exceeding 1800 cc at 16 per cent. I may clarify that agricultural
tractors will continue to remain exempt.
130. Some sectors deserve relief, since they produce goods for
the common citizen. Today, there is a surcharge of Re.1 per kg on
tea. I propose to abolish the surcharge. There is also an excise
duty of Re.1 per kg on refined edible oils and Rs.1.25 per kg on
vanaspati. I propose to abolish both levies and fully exempt the
two items.
131. Even while protecting the handmade sector that makes matches,
it is necessary to give some relief to the mechanized and semi-mechanized
sectors. Hence, I propose to reduce the excise duty from 16 per
cent to 12 per cent on matches made by these two sectors. Hand-made
matches are fully exempt from excise duty and, therefore, will continue
to enjoy adequate protection.
132. I would like to provide some tax relief to the small scale
industry (SSI). Hence, I propose to raise the ceiling for SSI exemption
based on turnover from the level of Rs.3 crore per year to Rs.4
crore per year. Further, SSI units will now have only two options:
either full exemption on the first clearance of Rs.1 crore or normal
duty on the first clearance of Rs.1 crore with CENVAT credit.
133. I propose to restore the excise duty rate on iron and steel
to the normal level of 16 per cent. This should have little effect
on prices because the entire duty is modvatable by most categories
of consumers.
134. I propose to increase the specific duty on molasses from Rs.500
per MT to Rs.1000 per MT to adjust partially for a hefty increase
in molasses prices. I also propose to increase the specific duty
on cement clinkers from Rs.250 per MT to Rs.350 per MT as an anti-avoidance
measure.
135. The National Highways Development Project requires very large
resources. In order to raise additional resources, I propose to
increase the cess on petrol and diesel by 50 paise per litre. The
additional resources will be earmarked exclusively for the national
highways, and a suitable amendment is being proposed to the Central
Road Fund Act, 2000.
136. The levy of an education cess has been widely applauded. The
health sector demands similar treatment. What better way is there
to fund health care than tax those goods which are health hazards?
I, therefore, propose to raise some additional resources and allocate
the proceeds to finance the National Rural Health Mission. Accordingly,
I propose to increase the specific rate on cigarettes by about 10
per cent and impose a surcharge of 10 per cent on ad valorem duties
on other tobacco products including gutka, chewing tobacco, snuff
and pan masala. However, biris will not be subject to this levy.
137. Finally, there is the issue of taxes on petroleum products.
After examining the Lahiri committee’s report, I propose to
make major changes in the customs and excise duty rates. The customs
duty on crude petroleum will be reduced from 10 per cent to 5 per
cent.
138. On LPG for domestic consumption and on subsidized kerosene,
the customs duty will be nil. On both products, the excise duty
will also be nil.
139. On other petroleum products, including motor spirit (MS) and
diesel (HSD), I propose to reduce the customs duty from the current
level of 20 or 15 per cent to 10 per cent. I also propose to fix
the excise duties on petrol and diesel as a combination of ad valorem
and specific duties.
140. The proposed changes are revenue neutral, and I have been
assured that there will be no increase in the retail prices of these
products as a result of the changes in the duty structure.
141. Consequent upon the changes made in customs and excise duties,
the drawback rates for exported goods will be reviewed and modifications,
wherever necessary, will be notified by April 30, 2005.
142. Hon’ble Members are aware that many goods are chargeable
to excise duty on a value with reference to their maximum retail
price (MRP), after allowing suitable abatement. The system of quantifying
the abatement should be made transparent. There should also be a
mechanism to review the rate of abatement to reflect changed circumstances.
Hence, as a trade facilitation measure, I propose to set up an advisory
committee to advise the Government on the extent of abatement for
both excise duty and service tax.
143. The other indirect tax is service tax. Since the services
sector accounts for about 52 percent of the GDP it is necessary
to cast the net wide.
144. Last July, I raised the rate of service tax to 10 per cent.
I propose to maintain that rate.
145. I also propose to grant relief to small service providers.
Accordingly, I propose to exempt from service tax those service
providers whose gross turnover does not exceed Rs.4 lakh per year.
According to my calculation, 80 per cent of the present service
tax payers will gain from the exemption.
146. I propose to include some additional services in the service
tax net. New services to be covered include pipeline transport of
goods; site formation, demolition and like services; membership
fees of clubs and associations; packaging and specialized mailing
services; survey and map making services; dredging services in rivers
and harbours; cleaning services for commercial buildings and similar
premises; and construction of planned residential complexes, with
more than 12 dwelling units, developed by builders.
147. I also propose to expand the coverage of certain services,
but I shall not burden you with the details.
Direct Taxes
148. I shall now turn to my proposals on direct taxes.
149. Last July, as an interim measure, I made a provision under
which a person with a taxable income of Rs.100,000 would not be
required to pay any income tax. About 1.4 crore assessees got relief.
I promised to revisit the subject in this Budget.
150. As part of a major overhaul of direct taxes, I propose to
alter the tax brackets after taking due note of the universal demand
of Members of Parliament and the need to provide stability in the
medium term.
151. Accordingly, I propose that the new tax brackets and the new
rates will be as follows:
Up to Rs.1 lakh .. nil
Rs.1 lakh to Rs.1.5 lakh .. 10 per cent
Rs.1.5 lakh to Rs.2.5 lakh .. 20 per cent
Above Rs.2.5 lakh .. 30 per cent
Further, the level at which the surcharge of 10 per cent will apply
will be raised to Rs.10 lakh taxable income. Hon’ble members
will be happy to note that tax payers in every tax bracket will
gain from my proposal.
152. Besides, I propose to fix the threshold exemption level for
women at Rs.1.25 lakh and the exemption level for senior citizens
at Rs.1.5 lakh. These revised exemption levels will be in lieu of
the prevailing tax rebate provisions.
153. Given the higher exemption limits and the scaling up of tax
brackets, the need for a separate personal allowance does not exist.
Therefore, in conformity with growing international practice, I
propose to remove the standard deduction.
154. There is now a plethora of exemptions, ostensibly intended
to promote savings. Some exemptions are based on the principle of
deduction from taxable income and some exemptions are based on the
principle of tax rebate. I believe the time is ripe to clean up
these exemptions. At the same time, it is necessary to encourage
savings, and tax relief is a method to induce people to save. Further,
I think that the State must be neutral between one form of saving
and another, and allow the tax payer greater flexibility in making
savings/investment decisions.
155. For all these reasons, in addition to the basic exemption
limits, I propose to allow every tax payer a consolidated limit
of Rs.1 lakh for savings which will be deducted from the income
before tax is calculated. All prevailing sectoral caps will be removed.
The rebate under Section 88 is being eliminated and Section 80L
is being omitted to reflect the new regime.
156. In addition to the sum of Rs.1 lakh, the following six deductions
will continue to receive the same tax treatment as prevails today:
i) interest paid on housing loan for self-occupied house property;
ii) medical insurance premia;
iii) specified expenditure on disabled dependant;
iv) expenses for medical treatment for self or dependant or member
of a HUF;
v) deduction in respect of interest on loans for pursuing higher
studies; and
vi) deduction to a person with disability.
157. Tax treatment of savings is a complex issue but we can benefit
from the best international practices in this regard. We have already
introduced EET-based taxation in the defined contribution pension
scheme applicable to newly recruited government servants. Before
we fully migrate to the EET system for all kinds of savings, it
is necessary to resolve a number of administrative issues. Hence,
without making any change for the present, I propose to set up a
committee of experts that will work out the road map for moving
towards an EET system.
158. Bowing to popular demand, I propose to continue the exemption
from tax on interest earned on accounts maintained by Non Resident
Indians.
159. While the tax reliefs that I have given today should warm
the hearts of the tax payers, I have also an obligation to raise
resources, especially to meet the large requirements of NCMP-mandated
programmes.
160. I have looked into the present system of taxing perquisites
and I have found that many perquisites are disguised as fringe benefits,
and escape tax. Neither the employer nor the employee pays any tax
on these benefits which are certainly of considerable material value.
At present, where the benefits are fully attributable to the employee
they are taxed in the hands of the employee; that position will
continue. In addition, I now propose that where the benefits are
usually enjoyed collectively by the employees and cannot be attributed
to individual employees, they shall be taxed in the hands of the
employer. However, transport services for workers and staff and
canteen services in an office or factory will be outside the tax
net. The tax is not a new tax, although I am obliged to call it
by a new name, namely, Fringe Benefits Tax. The rate will be 30
per cent on an appropriately defined base.
161. I believe I have given a large measure of relief to personal
income tax payers, and I hope all sections of the people and all
members of the House are happy. This leads me to corporate income
tax.
162. The corporate income tax rate, the surcharge thereon and the
rates of depreciation are inter-linked. Any reform would have to
address all three elements. The international best practice is to
provide for depreciation at rates that would enable the investor
to replace the asset before its economic life ends. In India, in
addition to the depreciation rate we have allowed an initial depreciation
in order to encourage new investment. Hon’ble members may recall
that, last July, I reduced the condition relating to increase in
installed capacity from 25 per cent to 10 per cent.
163. I am also obliged to keep in mind that a number of profit
making companies continue to pay low tax, even if well within the
law, by taking advantage of liberal depreciation rates and of exemptions
and incentives. Moreover, the current depreciation rates lean towards
employing capital rather than labour.
164. There is also a demand that corporate tax rates should be
aligned with the highest marginal personal income tax rate.
165. After careful consideration of the pros and cons, the interest
of the revenue and the need to give the corporate sector a measure
of relief, I propose the following tax structure.
166. For domestic companies, the corporate income tax rate will
be 30 per cent. There will also be a surcharge of 10 percent. The
rate of depreciation will be 15 per cent for general machinery and
plant, but the initial depreciation rate will be increased to 20
per cent.
167. The corporate sector will find that the proposed tax structure
is fair, gives them relief of nearly 3 per cent in the tax rate,
encourages new investment and ensures equity among all sections
of corporate tax payers.
168. As a further measure of relief, I propose to remove the requirement
of 10 per cent increase in installed capacity for availing of the
benefit of initial depreciation.
169. To encourage technological upgradation, I propose to reduce
the withholding tax on technical services from 20 per cent to 10
per cent.
170. I also propose that credit will be allowed for the Minimum
Alternate Tax (MAT) paid under Section 115 JB of the Income Tax
Act.
171. I do not propose to make any changes in the tax regime applicable
to foreign companies.
172. Last July, I had indicated that I would review the terminal
dates on exemptions given for specific purposes. Accordingly, I
propose to extend the terminal date, in the following three cases,
from March 31, 2005 to March 31, 2007:
• Weighted deduction of 150 per cent of expenditure on in-house
research and development facilities of companies engaged in the
business of biotechnology, pharmaceuticals, electronics, telecommunication,
chemicals or any other notified product;
• Deduction of profits of new industrial undertakings in
Jammu & Kashmir;
• 100 per cent deduction of profits of companies carrying on
scientific research and development and approved by the Department
of Scientific and Industrial Research.
173. In deference to the request from Air India and Indian Airlines,
I propose to extend up to September 30, 2005 the exemption from
tax on agreements to acquire aircraft or aircraft engines on lease.
174. The securities transaction tax (STT) has stabilized, but the
rates are widely perceived to be too low. I, therefore, propose
to make a very nominal increase in the rates for all categories
of transactions. Thus, a day trader who is liable to pay STT at
0.015 per cent will now be liable to pay at 0.02 per cent. This
small increase should not ruffle anyone’s feathers. This nominal
rate of increase will apply to all categories.
175. As Hon’ble Members are aware, there have been significant
developments in the past decade in the capital market including
the introduction of trading in financial derivatives. We have also
established a transparent system of trading with adequate safeguards
for audit trail. Hence, I propose to amend the Income Tax Act to
provide that trading in derivatives in specified stock exchanges
will not be treated as “speculative transactions” for
the purposes of the Income Tax Act.
176. I propose to amend the one-in-six criteria for filing income
tax returns. Mobile telephone will be removed. Instead, payment
for electricity of more than Rs.50,000 per year will be included
as a criterion for filing a return of income.
177. The NCMP requires the Government to introduce special schemes
to unearth black money and assets. I am obliged to carry out the
mandate, but without giving undeserved relief or an amnesty. I am
concerned about large cash transactions, especially withdrawals
of cash, when there is no ostensible purpose to withdraw such large
amounts of cash. These cash withdrawals leave no trail, and presumably
become part of the black economy. Therefore, I propose to introduce
two anti tax-evasion measures: Firstly, I propose to levy a tax
on withdrawal of cash on a single day of over Rs.10,000 or more
from banks at the rate of 0.1 per cent. Thus, a person withdrawing
Rs.10,000 in cash would have to pay a small sum of Rs.10. Secondly,
I propose to require banks to report to the Government all deposits
which are exempt from TDS on interest. I intend to observe the results
of these steps before I propose any further measures.
178. Many administrative reforms are underway in the Department
of Revenue. Among them are the tax information network (TIN) and
the on-line tax accounting system (OLTAS).
179. As a measure of facilitation, I propose to follow international
practice and establish large taxpayer units (LTUs). To begin with,
these units will be set up in major cities. I would like to invite
large tax payers, whether of corporate tax or income tax or excise
duties or service tax, to participate in the programme and avail
of the single window service. For small taxpayers, I propose to
set up Help Centres in cooperation with industry associations, professional
bodies and NGOs.
180. I have received many suggestions on amendments to the direct
tax laws and the indirect tax laws. I have decided to accept some
suggestions that require to be acted upon immediately, but I do
not propose to burden the Finance Bill with those changes. Instead,
I intend to introduce a separate Bill for that purpose during this
session. In due course, I intend to place before Parliament a revised
and simplified Income Tax Bill.
181. My tax proposals on direct taxes are expected to yield a gain
of Rs.6,000 crore. On the indirect taxes side, they are broadly
revenue neutral.
XIII. CONCLUSION
Mr. Speaker, Sir,
182. One of India’s proudest sons, Dr Amartya Sen, argues
in his book “Development as Freedom” that development
is a process of expanding the real freedoms that people enjoy. He
says, “Growth of GNP or of individual incomes can, of course,
be very important as means to expanding the freedoms enjoyed by
the members of the society. But freedoms depend also on other determinants,
such as social and economic arrangements (for example, facilities
for education and health care) as well as political and civil rights.”
The UPA Government accepts this ethical dimension to the discussion
of economic issues, and in this Budget I have attempted to reflect
that dimension. More or less the same idea was articulated two thousand
years ago by Saint Tiruvalluvar who said:
“Pini Inmai Selvam Vilaivu Inbam Emam
Ani Enba Nattirkku Iv Iyndhu”
(Health, wealth, produce, the happiness that is the result, and
security
These five, the learned say, are the ornaments of a polity)
183. This Budget, Mr Speaker, is an attempt to lay down a path
in which growth and equity will reinforce each other and build a
new India.
184. Sir, with these words, I commend the Budget to the House.
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