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March 1, 2000
Govt bit the bullet to curb fiscal deficit: Sinha defends Budget 2000
The Union Budget 2000-01 has taken hard options to curb fiscal deficit by reducing subsidies and increasing tax revenues even though big ticket privatisation was not chosen, Finance Minister Yashwant Sinha said in New Delhi today.
The government has slashed food and fertiliser subsidies by over Rs 60 billion and has increased tax rates to garner a similar amount. ''If we had not taken these measures, the fiscal deficit could have been much worse,'' Sinha said at a post-Budget meeting organised here by the Federation of Indian Chambers of Commerce and Industry or FICCI.
Sinha defended the 5.1 per cent fiscal deficit envisaged in the current Budget stating that the government was constrained by several additional provisions during the year. It included Rs 130 bullion towards defence and Rs 110 billion to states according to the 11th Finance Commission recommendations.
The finance minister expressed confidence that the ''modest'' divestment target of Rs 100 billion for the coming fiscal was achievable and the proceeds would be used partly to retire internal debts.
''The fiscal deficit could have reduced further to even three per cent by increasing the divestment target of an imaginary figure of Rs 400-500 billion. But that would not have been realistic.''
''We are confident that given the preparations made this year, we will be able to exceed the Rs 100 billion target. But we deliberately decided on a modest target,'' Sinha added.
Sinha refused to come open on the tactical moves for downsizing the government, pruning subsidies and privatisation as it ''would create more problems than solutions''.
''Please trust me, have confidence in me. I could not have taken harder options without creating problems in Parliament,'' he said, adding the Budget has apportioned the increased tax burden equitably on all sections of the society.
If farmers have to deal with the cut in fertiliser subsidies, corporates have to bear the slight increase in surcharge on income tax.
Sinha said the Budget should be appreciated since it has undertaken a major rationalisation of tax structure by doing away with various exemptions. The whole tendency of ''I'm special, I should not be taxed,'' should be given up, he added.
In this context, doubling of dividend income tax to 20 per cent is ''not such a calamity, as is made out to be''.
Similarly, export income has no reason to be treated differently especially when customs duty have been scaled down to 35 per cent and it is comforted by the rupee exchange rate mechanism. ''Income is income and it needs to be taxed. Foreign exchange earnings are important but they cannot be kept on a pedestal.''
On downsizing the government, Sinha ruled out across-the-board ban on fresh recruitment but said it would be kept to bare minimum in armed forces, paramilitary and scientific establishments.
''There will be some movement on the Expenditure Commission recommendations in the next few months. We need to hasten slowly in downsizing the government,'' he added.
Sinha said this Budget would generate ten million jobs as it has given major incentives to knowledge-based industries, small-scale industries, rural and agro-based units besides emphasising on housing and road construction.
Full convertibility of the rupee not now
Sinha further said the time for full convertibility of the rupee has not yet come.
"We can only be slow on that (full convertibility)," he said, without elaborating further.
"I'm not in a position to complain about the rate (rupee exchange rate) as they are market determined," Sinha said.
The RBI will come out with further guidelines to move towards capital account convertibility, he said.
He reiterated that the value of the rupee is market determined and the Reserve Bank of India has been acting (to cool the market) whenever the market is unstable.
'Stockmarket would rebound after understanding Budget properly'
Defending the hike in dividend tax in his first Budget of this millennium, Sinha said that the stockmarket would rebound once it properly understands the financial implications of the Budget.
In fact, the sentiment started looking up in the morning session today. The Sensex was up around 113 points by 1230 hours, against a crash of 300 points yesterday.
In a way, the market seemed to be more hopeful than Sinha himself and did not wait even for a ''few days'' for a rally.
''Various benefits given in the Budget would take some time to sink in. Next few days, stock market is bound to bounce back,'' Sinha said.
A cent per cent increase in dividend tax to 20 per cent might have sent a wrong signal to the capital market yesterday, but it should not be forgotten that it has zoomed up by 70 per cent in the last 12 months, he added.
'Dividend income is, after all, income so exemption isn't necessary'
He said the increase in dividend tax will affect only affluent section of investors as mainly those who are in the 30 per cent income-tax bracket are investing in the equity market.
''Anyway, every income should be treated as income and there is no reason why should dividend income be looked at differently. The problem is that each one of us wants to be special. That mindset has to go.''
A hike in dividend tax is not such a calamity as is being made out to be, he said. ''After all, corporates know how to pass the tax on to shareholders,'' he quipped.
Sinha also justified the procedure of taxing investors of employment stock option scheme at the time of purchase of shares, stating that levy at the time of disposal of such scrips would make matters complicated.
Sinha said if tax is levied at the time of share disposal, it will create a problem of putting a levy on transfer of shares as gift tax no longer exists.
Twenty per cent tax on export earnings was also a move in the right direction as domestic investors also face similar competition as exporters in the changing economic scenario. As such, exporters should also be brought under the tax net, he added.
These measures, alongwith rising fiscal deficit, created tremors at the capital market yesterday. Even other measures like increase in the FIIs' investment cap to 40 per cent from 30 per cent and liberalisation of acquisition norms abroad for knowledge-based industries could not lift the sentiment.
'Budget paved way for RBI to change interest rate regime'
The Union Budget has created a right atmosphere for the Reserve Bank of India to effect any changes in the interest rate regime, Sinha said today.
Sinha said any move to reduce interest rates is strictly under the RBI domain but the 2000-01 budget has signalled the central bank to effect changes.
The Budget has cut the General Provident Fund interest rates by one per cent to 11 per cent, besides removing the two per cent interest tax on bank deposits.
''My responsibility is to create necessary conditions (for cutting interest rates). It is upto the RBI to bring any changes in interest rates,'' he said.
''We propose to amend the RBI Act to give it a greater autonomy,'' Sinha said, adding the government has ''stubbornly refused'' to enter into RBI domain for the past two years.
Reacting to industry demands for a steep two per cent cut in interest rates which would bring back the 'feel good factor' to the industry, Sinha said, ''feel good factor is very elusive concept''.
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