Budget Speech

Updated on: 28 February 2003 12:0 am

Budget Speech

Mr. Speaker,

I am greatly honoured to present the sixth successive budget of the Government of the NationalDemocratic Alliance (NDA), under the premiership of Shri Atal Behari Vajpayee.

I wish to place on record high appreciation of my distinguished predecessor, Shri YashwantSinha, who so ably steered the country’s finances in the earlier budgetary exercises. That has made my taskso much easier today.

II. THE CHALLENGE AND THE RESPONSE

At the core of our economic endeavour and management of the country’s finances are theinterests of our citizens; all this effort is for their total well being. That is our central objective,towards which the NDA government has a non-negotiable commitment. Through Budget 2003-2004, the Government,therefore, addresses the following five objectives, as ‘Panch Priorities’, for our citizens and for the economic security of our country, though these are not listed in anyhierarchial order of importance:

a) poverty eradication; addressing the ‘life time concerns’ ofour citizens, covering health, housing, education and employment;

b) infrastructure development;

c) fiscal consolidation through tax reforms and progressiveelimination of budgetary drags, including reform of the additional excise duty, introduction of service tax,and introduction of Value Added Tax (VAT) from April 1, 2003 at the State level.

d) agriculture and related aspects including irrigation; and

e) enhancing manufacturing sector efficiency, including promotionof exports and further acceleration of the reform process.

Permit me to share the conceptual underpinning of these ‘panch priorities’. Let us, tostart with readily acknowledge that the essential entrepreneurial character and the creative genius of ourcitizens is our greatest asset. This energy has to be released. For that, and for converting the liability ofwant into the asset of ability, eradication of poverty is crucial; that is the moral and economic issue of ourtimes. Too often it is observed that budgetary exercises float over the wide mass of India, relating only to afew. This is not so here. And that is why a closely interrelated concern is renewed progress on the front ofagriculture; our nation’s life blood. A second revolution, to follow the earlier Green Revolution is thevital need of today.

But neither in agriculture, nor in industry, shall we be able to attain our objective, ifinfrastructure, both physical and social, is not rapidly and efficiently developed. For this, private andpublic interest must combine so as to generate maximum social welfare. Upon these foundations, and throughencouraging specific manufacturing sectors, particularly activities where knowledge is industry, we willenhance growth, improve incomes, generate employment and promote exports. For our growth to be sustained,fiscal consolidation is the basis; it is the central pillar. Government has to totally eliminate budgetarydrags, and be rid of the self-laid traps; they retard both the pace and the robustness of our growth. What isneeded is a continuous and self-reliant progression of accelerating, all round growth, with a widerdistributive spread of national wealth and greater spending power in the hands of all our citizens. We have torecognise the need to address a reduction of not just our social but economic inequalities, too. This cannotbe postponed. That is why reforms are so critical. And, our reform agenda must not be held hostage; either toyesterday’s debates, or to subjective and selective interpretations of it. This is a collective need, forthe nation’s growth, which all of us have to address together.

Mr. Speaker, there is palpable impatience in the country for progress and growth. The nationcan not afford the luxury of prolonged periods of reflection, or a leisurely implementation schedule. Theworld will otherwise pass us by. Beyond deregulation, it is more and ever more de-bureaucratisationthat is needed, as much of systems as of the mind. Of course, institutions matter, correct design andapplication of rules, too, but all in the service of our national objectives; not either as obtuseabstractions or as partisan goals. The core need in the country is of releasing national creativity. TheBudget 2003-2004, of the NDA Government endeavours to do just that. This is our economic and social compact.

III. THE BACKDROP

I want to now briefly share with Hon’ble Members the backdrop in which we address ourresponsibilities.

Geo-politics

The circumstances in which we meet are defined by the current global uncertainties; theirvortex lies over the Gulf, and Iraq is at the very core of it, even as the Israel-Palestine conflict smoulders.Vast naval armadas crowd the waters of the North Arabian Sea, and land and air forces prepare for battle.Nearer, our neighbour Afghanistan, torn by decades’ old violence, continues to struggle with post-Talibantremors. In North-East Asia, old animosities are flared to near criticality through irresponsible externalassistance. And, our immediate western neighbour, riven internally by multiple fault lines, spews venomousterrorism from the cauldron of its compulsive hostility for India.

Macroeconomic circumstances

Despite all this, and despite the present volatility in international oil prices, alongside acontinuing sluggishness in global recovery, uncertain markets, a 9-month long military stand-off on ourborders; the simultaneous challenge of combating externally aided and abetted terrorism; and the worst droughtthat we have faced in three decades; objectively, the country’s macroeconomic circumstances have never beenbetter for attaining our developmental objectives of enhanced and sustainable growth, poverty eradication,employment generation, and improving the quality of life.

Economic performance: 2002-03

10.

Sir, the overall economic performance in 2002-03 has been reported in detail in the EconomicSurvey. I do not wish to repeat all that except to highlight that despite the agricultural GDP decline of anestimated 3.1 per cent, caused entirely by a large decline in crop output, the country, registered a realgrowth of 4.4 per cent in GDP, net of inflation. Growth rates of industry (6.1 per cent) and services (7.1 percent) accelerated very encouragingly, as did exports by a healthy 20.4 per cent.

11.

From 1956 onward, continuously, we have endured serious foreign exchange constraints. Not anylonger. After a gap of 24 years, our current account turned into a surplus in 2001-02, and continued to be insurplus during the first two quarters of the current year. Our reserves’ build up during the last year hasbeen the highest ever in a single year, with reserves crossing $75.5 billion in the third week of February. Inearly-February, the Government decided to prepay $3 billion of its external loans. India is now an exporter ofgrain to 15 countries, and donor of hard currency aid to a dozen, alongwith rupee aid to another dozencountries. The rupee, with foreign assets to currency ratio of 124.8 per cent, is stable. Gross domesticsavings, as a proportion of GDP at market prices, have also improved and stand at around 24 per cent. In thecourse of the last four years, our interest rates on Government securities, have rapidly gone down from 12 toaround 7 per cent, thus setting the stage for growth of investment.

The Tenth Five-year Plan

12.

The National Development Council, in December 2002, approved the Tenth Five Year Plan, with abold and ambitious target of 8 per cent annual growth on the average. One of the crucial aims of the TenthPlan is to promote a balanced and equitable regional development and to advance the necessary policy andadministrative reforms at the State level. The allocation for 2003-04 includes several additional initiativessuch as promoting infrastructure by leveraging public money through private sector partnership, provision of 2lakh hand-pumps in water-scarcity areas and schools, rejuvenation of 1 lakh traditional water sources invillages, research and development (R&D) support in pharmaceuticals, wind and solar energy, among others.

13.

Permit me, Sir, to now address the ‘Panch Priorities’.

Antyodaya Anna Yojana

14.

For eliminating poverty, it is only reforms that result in sustained growth and highemployment that are the durable solution. However, given our comfortable food stock, there is both scope and aneed for a direct attack, too.

15.

Mr. Speaker, Sir, I am sure you agree that the disadvantaged must always be the first chargeon our exchequer. This is our belief, it is our creed; this is also at the heart of ‘integral humanism’.Therefore, it has been decided, and I want this to be the first announcement that is made, that the AntyodayaAnna Yojana will be expanded from April 1, 2003, to cover an additional 50 lakh families raising the totalcoverage to more than a quarter of all BPL families during the year 2003-04. The additional budgetaryexpenditure on this account will be Rs.507 crore.

16.

Sir, may I, in humility, say that this does cover the first part of my assurance: "Garibke pet me dana,….".

17.

Rural development, rural industries and artisans, and poverty alleviation in urban areas areaddressed severally through various schemes in different ministries. A need has, therefore, been felt forsometime that all these schemes, of the same genre, be rationalised. To do that, a Committee headed by theDeputy Chairman, Planning Commission, is proposed. It will examine all schemes having a bearing on povertyalleviation and rural development, and recommend their practical convergence.

Life-time concerns

18.

The Prime Minister had on Independence Day, 2002, announced the Government’s commitment toimproving national well-being by addressing the ‘life-time concerns’ of our citizens, a noble and holisticobjective.

Housing

19.

Of these, I take housing first. It is a basic necessity. While promoting the all importantemployment-generating activity of construction, it also stimulates demand for core industries like steel andcement. To maintain its present momentum of growth, it is proposed that interest deductible under income taxup to Rs.1,50,000, for construction or purchase of a self-occupied house property, be continued. In addition,it is proposed that income from housing projects for construction of residential units, of prescribedspecification, approved by the local authorities up to March 31, 2005, will now be exempt from income tax.Thus, not only has the limitation with regard to the year of sanction, earlier frozen at March 31, 2001, nowbeen extended, but the benefits of the scheme also made available irrespective of the year of completion. TheFinance Ministry is further examining what additional incentives can be given to basic infrastructuraldevelopments that must accompany slum upgradation, sewerage system laying and green-field housing projects.

Education

20.

Education is the central vein of our ‘life-time concerns’. Therefore, at the level of thecitizen taxpayers, as a first step education expenses up to Rs.12,000 per child for two children, will be madeeligible for rebate under Section 88 of the Income Tax Act.

21.

India is a highly creative, knowledge-based society; but authorship of books has never beensufficiently rewarded, certainly not monetarily. Therefore, royalty income up to Rs.3 lakh per annum, receivedby authors of literary, artistic and scientific books shall henceforth be fully exempt; as will be royaltyreceived by individuals from exploitation of patents. This is in addition to the other existing exemptionbenefits.

22.

I declare, Mr. Speaker, a possible, personal benefit here as an author of some books, withvariable but always modest royalty income. There, however, is no conflict of interest, Sir, because thismeasure has not been announced with any personal benefit in mind.

Games and sports

23.

Games and sports are a necessity, as much for recreation as for developing sound bodies andminds. They must be encouraged. But, for a nation of a billion plus, sports facilities available to our youngare woefully inadequate. Therefore, development of sports infrastructure will now be supported through directfunding of public-private joint initiatives. Guidelines in this regard will be issued shortly.

Health

24.

With three principal objectives in mind: to contribute to enhanced national health; to promoteIndia as a global health destination; and to enable easier access to health facilities to our disadvantagedcitizens, a number of additional measures are now proposed.

25.

In order to encourage private hospitals to either establish new or to expand existing medicalfacilities, it is proposed to extend the benefit of Section 10(23 G) of IT Act to such financial institutionsas provide long-term capital to private hospitals with 100 beds or more.

26.

In view of the rapid strides made in R&D in medical equipment, there is recognisable needto frequently upgrade and replace the existing equipment with the more ‘state of the art’. It istherefore, proposed to increase the rate of depreciation from the present 25 per cent to 40 per cent inrespect of life saving medical equipment.

27.

To assist citizens with impaired vision, the basic customs and excise duties on roughophthalmic blanks shall be reduced from 25 to 5 per cent, and from 16 to 8 per cent, respectively. To helppeople give up their addiction to tobacco and its products, excise duty on Nicotin Polacrilex gum shall bereduced from 16 to 8 per cent.

28.

It is also proposed to reduce the customs duty on specified life saving equipment from 25 percent to 5 per cent, and also exempt them from CVD (additional duty of customs). In respect of life savingequipment already exempt from CVD, it is proposed to exempt them from excise duty as well, so as to encourageindigenous manufacturers.

29.

A large number of life saving drugs are either exempt from customs duty or attract a nominal 5per cent duty. It is proposed to extend the concessional duty rate of 5 per cent to some more drugs. Lifesaving drugs currently attracting nil or 5 per cent customs duty will also be exempt from excise duty. Basiccustoms duty on glucometers and glucometer strips used by diabetics, will be reduced from 10 per cent to 5 percent; and they will be exempt from excise duty as well. Cyclosporine will be exempted from excise duty. Thisreduction of excise duty to nil, wherever imports are exempt from CVD, will certainly make our domesticindustry more competitive, as also better enable them to face the new intellectual property right regime from2005.

Health insurance

30.

For a large majority of our less advantaged citizens, easy access to good health services isjust not there. In order to correct this and offer health protection, of some choice, the public sectorgeneral insurance companies have been encouraged to design a community-based universal health insurance schemeduring 2003-04. Under this scheme, a premium equivalent to Re.1 per day (or Rs.365 per year) for anindividual, Rs.1.50 per day for a family of five, and Rs.2 per day for a family of seven, will entitleeligibility to get reimbursement of medical expenses up to Rs.30,000 towards hospitalisation, a cover fordeath due to accident for Rs.25,000, and compensation due to loss of earning at the rate of Rs.50 per day upto a maximum of 15 days. To make the scheme affordable to BPL families, the Government has decided tocontribute Rs.100 per year towards their annual premium. Full details will be publicized shortly.

31.

I request Hon’ble Members to give this scheme the widest possible coverage in theirconstituencies. The benefits Sir, are real.

32.

In the first phase, at least an additional 50 lakh BPL families will be covered during2003-04.

Disabled and handicapped

33.

The Government is committed to providing equal opportunities, protection of rights, andall-round development of persons with disabilities. A number of initiatives have already been taken in thisregard.

34.

Now, for income tax purposes, it is proposed that the physically handicapped or persons withsuch dependents be entitled to a deduction for permanent physical disability of Rs.50,000, and an enhanceddeduction of Rs.75,000 in case of severe disability.

35.

I also propose to reduce the customs duty on hearing aids, crutches, wheel chairs, walkingframes, tricycles, braillers and artificial limbs to 5 per cent without Special Additional Duty (SAD). Theywill be exempt from CVD, and the domestic manufacturers will also be exempt from excise duty. I also proposeto reduce the customs duty on parts of hearing aids and wheel chairs to 5 per cent without CVD and SAD.

36.

The Government will establish a college of rehabilitation sciences at Gwalior, and a nationalinstitute for empowerment of persons with multiple disabilities at Chennai.

The salaried

37.

A constant refrain of the salaried has been limited standard deduction for income taxpurposes. It is asserted that as a group they consistently demonstrate the best tax compliance. I agree, theydo. It is, therefore, proposed that the standard deduction for such employees be raised to 40 per cent ofsalary, or Rs.30,000, whichever is less, for salary income up to Rs.5 lakh; and allow a deduction of Rs.20,000for salary income above Rs.5 lakh. It is also proposed that relief be provided to employees opting forvoluntary retirement scheme (VRS), by exempting VRS payments up to Rs.5 lakh, even when taken in instalments.

38.

The Government will restore the Leave Travel Concession (LTC) facility to its employees. Mr.Speaker, Sir, permit me to hope that the consequential additional outgo from the exchequer on this account,will at least benefit some in our tourism industry.

Senior citizens and pensioners

39.

India will shortly become home to the second largest number of elderly persons in the world.The population of our elderly, at present estimated at 76 million, is expected to increase to 100 million in2013. The interests of the pensioners and senior citizens are, therefore, a particular responsibility of theNDA Government.

40.

To enable them to live their life of retirement in dignity, the tax rebate to senior citizensis proposed to be increased to Rs.20,000. As a result, their income up to Rs.1.53 lakh will henceforth becomefully exempt from income tax. In the case of senior citizens on pension, the effective exemption limit mayhereafter be actually higher and become Rs.1.83 lakh, because of standard deduction. They can get furtherrelief by taking advantage of the tax rebate available under Section 88. In addition, to reduce their cost ofcompliance, but of much greater importance to them – to reduce bureaucratic hassles – I propose to acceptself-declarations filed by our senior citizens, in regard to no deduction of tax at source from interestincome, income from units, and such other sources.

Insurance pension scheme

41.

Nevertheless, in the context of the declining rates of interest, I do take on board thedifficulties that are often voiced and could be faced by our senior citizens and others. In order to providerelief to them, the Life Insurance Corporation of India (LIC) will launch a special pension policy,guaranteeing an annual return of 9 per cent, in the form of a monthly pension scheme.

42.

This scheme will be called: Varishtha Pension Bima Yojana, through which a pensioner,or any citizen above 55 years of age, could on payment of a lump-sum amount get benefits calculated at 9 percent per annum. For this scheme, and with pensions in mind, any citizen above the age of 55 years of age willqualify, and will get a monthly return in the form of a pension for life. Upon demise, the initial amountdeposited will be returned to the spouse/nominee under the policy. The minimum and maximum monthly pensionsproposed are Rs.250 and Rs.2,000 per month. This monthly pension will start from the month following thepayment of the lump-sum amount by the citizen. The difference between the actual yield earned by the LIC, onthe funds invested under the scheme, and the assured return of 9 per cent, will be reimbursed to the LICannually, by the Government. Other details of this scheme will be announced shortly by the LIC.

Ex-servicemen: our veterans

43.

For ex-servicemen, whose welfare is so close to my heart, I propose to grant income taxexemption to corporations set up under a Central or State Act for their benefit. It is a matter of greatpersonal satisfaction to me, that of the Prime Minister’s scheme for establishing 227 ex-servicemen medical(XSM) facilities in the country, the first will be inaugurated in April this year. The Ministry of Financefully supports this scheme

Restructured pension scheme

44.

My predecessor in office had, in 2001, announced a road map for a restructured pension schemefor new Central Government employees, and a scheme for the general public. This scheme is now ready. It willapply only to new entrants to Government service, except to the armed forces, and upon finalisation, offer abasket of pension choices. It will also be available, on a voluntary basis, to all employers for theiremployees, as well as to the self-employed.

45.

This new pension system, when introduced, will be based on defined contribution, sharedequally in the case of Government employees between the Government and the employees. There will, of course,be no contribution from the Government in respect of individuals who are not Government employees. The newpension scheme will be portable, allowing transfer of the benefits in case of change of employment, and willgo into ‘individual pension accounts’ with Pension Funds. The Ministry of Finance will oversee andsupervise the Pension Funds through a new and independent Pension Fund Regulatory and Development Authority.

V. PHYSICAL INFRASTRUCTURE

46.

I now come to the second of the ‘panch priorities’ – physical infrastructure. Demandgenerated by enhanced public investment in infrastructure has been a key stimulant underlying our currentindustrial recovery. In October 1998, the Prime Minister launched the National Highway Development Project (NHDP),one of the most ambitious highway projects in the world, providing strong backward linkages for our steel andcement industries. There is simply no alternative to providing quality roads, railroads, ports, airports,reliable and reasonably priced power supply, safe drinking water and sanitation. Without these India can nottake full advantage of the opportunities now offered by technology and competition.

47.

In developing infrastructure, there is need to encourage public-private partnership, so thatpublic funds are leveraged, and the quality of service delivery improved, thus yielding better value formoney.

48.

Accordingly, Budget 2003-04 undertakes to provide a major thrust to infrastructure,principally to roads, railways, airports, and seaports, through innovative funding mechanisms. Thiscomprehensive initiative will cover the following:

- 48 new road projects at an estimated cost of around Rs.40,000 crore; with a quarter of them being made of cement concrete;

- National Rail Vikas Yojana projects worth Rs.8,000 crore;

- Renovation/modernisation of two airports, and two seaports at an estimated cost of Rs.11,000 crore; and

- establishing two global standard international conventioncentres at an estimated cost of Rs.1,000 crore.

49.

The total estimated cost of the above projects is about Rs.60,000 crore. In addition, theNorth-South and East-West corridors will be funded through the additional levy of a cess of 50 paise per literof diesel and motor spirit. This levy will contribute a further Rs.2,600 crore for road development.

50.

The essence of the new funding mechanism is to leverage public money through private sectorpartnership, wherever possible. The three critical components of the scheme are: release of public funds onlywhen linked to specific and well-defined milestones in completion of the project, in physical terms; a sharingof the risks with the private promoters and financiers; and no open-ended Government guarantees at any stage.

Roads

51.

These 48 projects, with a total length of over 10,000 kms., are over and above the NHDP. Theyhave been identified where the traffic volume justifies four-laning. These projects will be funded on abuild-operate-and-transfer (BOT) basis, with the Government providing a subsidy in the form of an annuity flowto meet only the shortfall between anticipated revenue and loan repayment liabilities. In the first year,2003-04, at least 3,000 kms., of roads, or almost a third of the total of these 48 projects, will be taken upfor four-laning.

National Rail Vikas Yojana

52.

Ministry of Railways has established a special purpose vehicle (SPV) to take up projects worthRs.8,000 crore for the Golden Quadrilateral. Their projects will be funded through Rs.3,000 crore worth ofequity, provided by the Government, and Rs.5,000 crore worth of loans. This SPV will raise debt from themarket. Repayment of debt will be done by earmarking Railway receipts over the period of amortisation.Further, safety upgradation programme on the Golden Quadrilateral will be taken up simultaneously under thismechanism.

Airports

53.

In addition to the existing initiatives for leasing of major airports, as well as of settingup two private airports in Bangalore and Hyderabad, it has now been decided to take up the Delhi and Mumbaiairports, as the principal hubs of international travel to India, for modernisation to internationalstandards. Two separate companies will be formed with initial equal equity participation from the AirportsAuthority. These two companies could also take joint venture partners. On completion, the management will beleased out.

Seaports

54.

It is proposed to facilitate the implementation of comprehensive modernisation projects forJawaharlal Nehru Port Trust (JNPT), Navi Mumbai and Cochin Port, designed to bring them up to internationalstandards. JNPT and Cochin ports need dredging and modernisation. These projects are expected to cost overRs.7,500 crore. The user charges levied by the two port authorities, and the additional custom flowing inafter dredging and modernisation is completed, are expected to cover the debt service obligations. Here, too,the Government will provide only the viability gap funding to bridge any possible shortfall.

Convention Centres

55.

To redress the lack of convention centres of international standards in the country, theGovernment will enable the establishment of two such centres through public-private partnership; with theGovernment covering the viability funding gaps only.

56.

For the 48 road projects, National Rail Vikas Yojana, the two airports, the two sea-ports, andthe two convention centres, a sum of Rs.2,000 crore is being provided as initial contribution from theGovernment. On a flow basis, the average annual commitment for all these projects, under the viability gapfunding basis, is expected to be around Rs.2,000 crore per annum in the medium-term, to be met annually fromthe budgets of the Railways and the Government.

Rural roads

57.

Encouraged by the success of the scheme of funding rural roads under the Pradhan Mantri GramSadak Yojana by earmarking 50 per cent of the cess on diesel, it is proposed that the resources for ruralroads be augmented. Accordingly, apart from allocating the anticipated Rs.2,325 crore from the existing cesson diesel for 2003-04, additional funds will be made available for rural roads from the proposed additionalcess on diesel of 50 paise.

Power

58.

As Hon’ble Members know, the Electricity Bill, 2001 was introduced in the Lok Sabha inAugust, 2001 and subsequently referred to the Standing Committee on Energy for examination. The report of thiscommittee has been received. This Bill seeks to provide a legal framework for our reforms and restructuring ofthe power sector, also in simplification of administrative aspects. We should take up this Bill now for earlyconsideration.

59.

Simultaneous to the emphasis on improvement in power distribution, our attention on capacityaddition remains. The Government had earlier, in 1999, notified 18 power projects as mega projects, conferringupon them various duty and licensing benefits. The Government now proposes to liberalise the mega powerproject policy further by extending all these benefits to any power project that fulfills the conditionsalready prescribed for mega power projects.

60.

Given the importance of transmission in the power sector, it is proposed to reduce customsduty on specific equipment for high voltage transmission projects from 25 per cent to 5 per cent.

61.

To further research in solar energy, wind turbines, and hydrogen fuel as alternatives tofossil fuels, the Government is especially allocating Rs.20 crore to the Council for Scientific and IndustrialResearch, for launching incentive-driven research in these three fields.

Drinking Water

62.

Supply of safe drinking water is an essential component of infrastructure development. Ordershave been issued to grant depreciation at the rate of 100 per cent on plant and machinery, and buildings thathouse such plant and machinery, forming part of a water supply project or a water treatment system. Watersupply projects are now totally exempt in regard to capital goods and machinery, both from customs and exciseduties. In addition, pipes have been exempted from excise duty for bringing raw water from source to thetreatment plant and for conveying treated water to the storage place. I do hope that this will provide furtherincentive to new water treatment and supply projects for augmenting the supply of safe drinking water in thecountry.

VI. FISCAL CONSOLIDATION AND DEBT RESTRUCTURING

63.

Mr. Speaker, Sir, I have already said that for our growth to be sustained fiscal consolidationis essential. The Government has nurtured macroeconomic stability – held inflation low, and maintained astrong balance of payments position – while promoting growth. It has done so not only in the face of anunprecedented drought, but also in a global economy where growth is ‘tepid’, uncertainty great, and oilprices high. We have carefully balanced the need for fiscal consolidation with the need for a contra-cyclicalpolicy stance. Simultaneously, as I said, Government is committed to totally eliminating budgetary drags, berid of the self-laid traps; and go forward with fiscal consolidation through revenue enhancement under amodern tax administration, and expenditure rationalisation.

Cash Management

64.

Appropriate cash management is integral to expenditure management. There is, at present, noeffective cash management in our system as cash is available to the Ministries up to the budget ceiling assoon as the Appropriation Bill is passed by Parliament. The Government, therefore, now proposes to initiatecash management, on a pilot basis, in some major spending ministries, releasing budgetary allocations in atime-sliced manner to permit convergence with available resources within the year. Monthly or quarterly cashlimits, based on the actual requirements of the Ministries will be prescribed. This will avoid mis-matchesbetween receipts and expenditure and avoid rush of expenditure and the associated possible waste of resourcesin the last quarter.

External debt prepayment

65.

At the Central level, interest payments in 2002-03 are estimated at Rs.115,663 crore,equivalent to 48.8 per cent of the Government’s revenue receipts. The average interest rate on Government ofIndia’s outstanding debt has come down from 11 per cent in 1999-2000 to 9.4 per cent in 2001-02. But, Mr.Speaker, because of the legacy of high cost debt from the past, this reduction in the interest cost is notenough; it does not keep pace with the decline in the market rates of interest. The Government has, therefore,already started to act on three fronts.

66.

First, taking advantage of our comfortable foreign exchange reserves and lower domesticinterest rates, the Government has effected premature repayment of ‘high-cost’ currency pool loans of theWorld Bank, and of the Asian Development Bank totalling around $ 3 billion. We intend to continue with thispolicy of prudently managing the external liabilities and of proactively liquidating relatively higher costcomponent of our external debt portfolio.

Domestic debt of the Central Government

67.

Second, a large proportion of the banks’ holding of Central Government domestic debt,contracted under the high interest regime of the past, is thinly traded. With the softening of interest rates,ordinarily, such loans should command a premium over their face value. In effect though, banks are oftenunable to encash this because of limited liquidity. The Government therefore, now proposes to offer a buy backof such loans – entirely on a voluntary basis – from banks that are in need of liquidity, or of encashingthe premium for making provisions for their non-performing assets (NPAs) thereby improving their balancesheets, or otherwise. The premium to be offered will be set on a transparent basis. If the banks declare thepremium received as business income, for income tax purposes, they will be allowed additional deduction to theextent such income is used for provisioning of their NPAs.

State Governments’ debt

68.

Third, is the restructuring of State Governments’ debt. Mr. Speaker, Sir, the XII FinanceCommission will also be making an assessment of the debt position of the States and suggest such correctivemeasures as are necessary. Meanwhile, the Central Government and the State governments have mutually agreed tointroduce a debt-swap scheme. Out of the total stock of debt of Rs 2,44,000 crore owed by the States to theGovernment of India, a little over Rs1,00,000 crore bear coupon rates in excess of 13 per cent per annum, arate that is far in excess of the current market rates. In consequence the interest burden of the States nowconstitutes a major item of expenditure for them; leaving little for even routine purposes.

69.

The debt swap scheme introduced by the Government of India will enable States to prepay highcost debt and substitute them by current, low-coupon-bearing small savings and Open Market Loans. Twenty-sixof the twenty-eight States have consented to participate in the scheme from the current year itself, while theremaining two States will join from 2003-04.

70.

Over a three-year period ending in 2004-05, all State loans to the Government of India bearingcoupons in excess of 13 per cent will have been swapped. In consequence, the States will save, at the veryminimum, an estimated Rs 81,000 crore in interest, and deferred loan repayments, over the residual maturityperiod of the loans. Furthermore, and equally importantly, this scheme will restrain the debt build-up inStates through the small savings scheme.

VII. AGRICULTURE

71.

Agriculture, the life-blood of our economy, after giving the country adequate food security,is now again at the cross roads, as it prepares to diversify and move up the value chain. It also needs torespond robustly to second generation issues such as land degradation and water logging. Diversification,resonance with market-forces, and a swift adoption of sunrise technologies are the other needs.

72.

Mr. Speaker, Sir, India has the largest irrigated, arable landmass in the world; our grossarable land being second only to the United States of America. We must acknowledge the vital import of thesefacts: they are both an unrecognized, and an unused asset; it is our great reserve. We now need to give itfull encouragement.

Diversification into horticulture, floriculture, etc.

73.

Promising gains from remunerative agricultural diversification into horticulture, thissignificant contributor to both GDP, and food and nutritional security, will have to be sustained. With thisin view, during the current year, it is proposed to introduce a new Central Sector Scheme on Hi-techHorticulture and Precision Farming. Major components of the scheme will be use of hi-tech interventions likefertigation, use of biotechnological tools, green food production, and hi-tech green houses. Deployment ofprecision farming technology aimed at judicious utilisation of resources like land, water, sunlight as well astime, including demonstration of these technologies will also be part of the scheme. I propose to provide,initially, a sum of Rs.50 crore under this scheme.

Sugar

74.

The state of the sugar industry is a matter of serious concern for the government. There isaccumulation of stocks in factories, simultaneously with growing arrears of payment for cane supplied byfarmers, partly in consequence of soft market conditions. This has both economic and social consequences. Inorder to provide relief to both the farmers and industry, the Reserve Bank of India has already issuedinstructions to Cooperative Banks for the conversion of shortfall in margins into medium-term working capitalloans, subject of course, to their furnishing adequate security or State Government guarantees. The ReserveBank of India has also issued instructions to extend the repayment period of medium-term loans to 9 years. Inaddition, the Ministry of Food and the Ministry of Finance will jointly address the problems of the sugarindustry and propose a comprehensive scheme for this important agro-industry soon.

Plantations

75.

Our plantation sector, a hundred and fifty year old agro-industry, is passing through a roughpatch, because of price instability in international markets. The Government has already introduced a seriesof measures to provide relief to small and marginal farmers of plantation crops like tea, coffee and rubber,and help these sectors negotiate the difficult period.

76.

With a view to providing stability in terms of income for the small growers, from 2003-04onwards, Government has announced a Price Stabilisation Fund of Rs.500 crore for the benefit of tea, coffee,and natural rubber growers. The Fund will become operational in 2003-04.

77.

In addition, I propose to abolish the excise duty of Re. 1 per kg. on tea and replace it by acess of Re.1 per kg., for creating a separate fund for development, modernisation and rehabilitation of thetea plantation sector. This measure, Mr. Speaker, will not impose any additional burden on the tea industry,but it will redesign the duty to help the industry. Further, coffee plantations will henceforth be eligiblefor income tax deduction of sums deposited in a development account, as in the case of tea.

Animal husbandry and veterinary medicine

78.

India has the world’s largest cattle wealth; it produces more milk than any other country inthe world, it has the second largest number of goats and third largest number of sheep in the world. These aregreat assets. In addition, animal husbandry provides employment to about 20 million, directly and indirectly.But our live-stock quality has deteriorated. Therefore to promote the health of our livestock and give afillip to animal husbandry and dairying, I propose to reduce the basic customs duty on specified veterinarydrugs from 15 per cent to 10 per cent. To promote marine food industry, I propose to reduce the customs dutyon shrimp larvae feed from 15 per cent to 5 per cent, and exempt it from CVD.

Credit availability

79.

Timely availability of adequate credit is of utmost importance for the development of therural economy and agriculture. At present Regional Rural Banks, commercial banks and credit cooperatives,encouraged mainly by the Government, undertake this function. I am not satisfied with this arrangement. We cannot have a system wherein credit for motor cars is on easier terms than for farm equipment or tractors.Therefore, subject to the Reserve Bank of India’s prudential norms and approvals, private banks willhereafter be encouraged to open branches in rural areas, to service both farm and non-farm sectors there. Iwill also examine afresh this whole question of franchising agricultural credit, including through PostOffices.

80.

The full benefits of the declining rates of interest have not percolated to critical sectorssuch as agriculture and small-scale industry. This has to be rectified. Therefore, in order to pass on thebenefits of lower rates of interest to agriculture and the SSI sector, the State Bank of India has announcedan interest rate band of 2 per cent above and below its prime lending rate (PLR) for secured advances. TheIndian Bank Association (IBA) is now advising all its member banks to adopt a similar interest rate band. Thisis a welcome move. Agriculture and SSI will hereafter have to pay no more than an extra 2 percentage pointsthan the best bank customers.

81.

The Self-Help Group (SHG)-Bank Linkage Programme being propagated by NABARD, for the last tenyears, has been recognized as the largest and fastest growing micro-finance programme in the world. Ourexpectations of providing bank credit to 1.25 lakh SHGs during the current year have been surpassed onceagain, and by January 2003, bank credit of Rs.598 crore has already been provided to about 25 lakh poorfamilies through 1.50 lakh new SHGs. The programme has also set in motion the process of women empowerment.However, the spread of the programme across the country has been uneven and has largely remained confined to afew States. I urge all States to vigorously join in our endeavour to make the SHG-Bank Linkage Programme awidespread success.

Fertiliser subsidy

82.

Hon’ble Members no doubt appreciate that despite the grave uncertainties on the oil front,the Government has by and large absorbed the crude price rise. Now, in view of the likely increase in napthaand gas feed-stock, at least the fertilizer subsidy has to be contained. Therefore, the issue price offertilizers will be raised by a modest amount of Rs.12 for urea, and Rs.10 for DAP and MOP, per 50 kg bag. Theprice of complex fertilizers will also be suitably modified.

Water management and irrigation

Drip irrigation

83.

The recent drought again brings into sharp focus the need for conserving our water resources.A number of initiatives have already been taken to conserve land and water resources. States are alsoencouraged to promote drip and sprinkler irrigation through supply of equipment at subsidized rates. But theseefforts have to be intensified. Therefore, a bipartisan Task Force, headed by the Chief Minister of AndhraPradesh, and with a Minister of Agriculture from another State, as one of the members, will be constituted torecommend measures needed to be adopted firstly, to expand the coverage of such irrigation, thereafter to alsosuggest safeguards so that the intended benefits actually reach the target groups.

River-interlinking

84.

Despite major developments in the water resource sector since Independence, the country hasnot really come out of the flood-drought-flood syndrome. This is principally on account of, among otherreasons, three major factors: faulty water management practices, unbalanced development of irrigation sourcesin the country, and a highly uneven distribution of water resources.

85.

To expedite the proposal for inter-linking of rivers, the Prime Minister has appointed a TaskForce, which will suggest modalities for arriving at a consensus amongst the States on transfer of water todeficit areas and for identifying the priority links which could be implemented early, as well as a mechanismfor their clearance and funding. Adequate outlay is being provided to support this Task Force.

Desert pasturage development

86.

A special programme, Maru Gochar Yojana, is proposed to be taken up for the desertdistricts of Rajasthan. This programme will provide for rehabilitation of traditional pastures – ‘Oran’or ‘Gauchar’ – by developing at least one large pasturage nursery in each of the identifieddistricts, as a Central scheme, for restoration of traditional water courses, and other measures so as toprovide effective drought proofing. A Task Force will be established for working out modalities for itsimplementation. Rupees 100 crore will be provided for this purpose, over a period of three years, with only aquarter of the contribution coming from the State Government. Provision for 2003-04 for this purpose will beRs.50 crore.

VIII. INDUSTRY

87.

As Hon’ble Members know, in the current year so far, industry has stimulated overall growth,despite a decline in agriculture. We must, therefore, consolidate these gains and build on the robustindustrial growth demonstrated in the last few quarters.

Promoting investment: tax treatment of dividends and capital gains

88.

For this, we need to promote investment in the industrial sector, and improve the debt andequity markets. Mr. Speaker, I am also committed to bringing the small investors back to the equity markets byrestoring their confidence.

Dividend distribution tax

89.

From April 1, 2003, it is proposed that dividends be tax free in the hands of theshareholders. Correspondingly, there will be a 12.5 per cent dividend distribution tax on domestic companies.While mutual funds, including UTI-II, renamed UTI Mutual Fund, will also pay dividend distribution tax, it isproposed to exempt equity oriented schemes from the purview of the tax for one year. UTI-I, however, will beexempt from the dividend distribution tax.

Long-term capital gains tax

90.

In order to give a further fillip to the capital markets, it is now proposed to exempt alllisted equities that are acquired on or after March 1, 2003, and sold after the lapse of a year, or more, fromthe incidence of capital gains tax. Long term capital gains tax will, therefore, not hereafter apply to suchtransactions. This proposal should facilitate investment in equities. I will, however, reexamine the effectsof this exemption in the next Budget, and the Scheme will be in force until then.

Stock markets

91.

My predecessor had already announced that stock exchanges will have a corporate structure. Toenable this, necessary amendments to the Securities Control and Regulation Act will be proposed in the currentsession. With a view to enhancing investor confidence, it is necessary to separate the ownership of thesestock exchanges from their management; resulting in demutualisation. In the process of corporatisation ordemutualisation, it is possible that capital gains accrue. Therefore, as a one time measure, at the time ofcorporatisation or demutualisation of the stock exchanges, in accordance with a scheme approved by the SEBI,should gains arise, then the consequential transactions shall be fully exempt from capital gains tax.

Research and development

92.

Hon’ble members, as I have already said, knowledge is industry; and this is particularly sowhen our imperative is to be the best, in all aspects in general, but particularly in product design andquality. To encourage R&D, it is proposed to extend the tax holiday to R&D companies established up toMarch 31, 2004.

Textiles

93.

In industry, textiles is the largest employment provider in the country. It also contributessubstantially to our exports. The main thrust of my proposals for the textile sector, therefore, is to have amoderate rate structure; to complete the CENVAT chain to promote compliance; to encourage modernisation; and,to eliminate evasion. Keeping these objectives in view, as a package of incentives, the following measures areproposed:

94.

The procedure for the decentralized sector will be simplified so as to exempt job workers frommaintaining any central excise records or even from central excise registration. Garments and fabricsmanufactured by non-profit charitable institutions will, however, be exempt from excise duty.

95.

As for customs, the duty on apparel grade raw wool shall now be reduced from 15 per cent to 5per cent. Further, to encourage modernisation of the textile industry, it is proposed that the customs duty ona large number of textile machinery and their parts be reduced from the existing 25 per cent to just 5 percent.

96.

Simultaneously, it is necessary to give a helping hand to the power-looms. For thisdecentralized sector, it is proposed to strengthen the existing programme for Induction of Technology in theWeaving Sector further by offering a ‘Power-loom Package for Modernisation’. This package will have thefollowing three features.

97.

First, the Technology Up-gradation Fund Scheme will be enlarged to cover modernisation ofpower-looms.

98.

Second, to create a better working environment and obtain higher productivity, a newPower-loom Workshed Scheme will be introduced by the Ministry of Textiles together with the State Governments.Improvement of other infrastructure of existing power-loom clusters will be taken up under the revised TextileSector Infrastructure Development Scheme.

99.

Third, as a welfare measure, all powerloom workers will be covered under the Special InsuranceScheme, which will provide them insurance cover against death, accident and disability.

100.

Recognising the need to prevent sickness in the textile industry, Government is considering amechanism for restructuring the debt portfolios of viable and potentially viable textile units. The detailswill be decided in consultation with all the stake holders.

Pharmaceuticals

101.

All the benefits listed under health-care will also promote pharmaceutical industry. Besides,income tax concessions to pharmaceuticals, bio-technology and information technology are at par. All drugs andmaterials imported or produced domestically for clinical trials will be exempt from customs and excise duties.Customs duty on import of Reference Standards by the industry has been reduced from 25 per cent to 5 per cent.

Information technology (IT)

102.

IT is India’s showpiece success story. We have to not just maintain its momentum of growth,but continuously encourage it. Therefore, it is proposed that the concessions extended to IT under Sections10A and 10B of the Income Tax Act will continue as originally envisaged. As per law such companies as arecurrently covered by these tax exemptions lose the benefits upon change in their ownership or shareholding.This is not logical. I am, therefore, removing these restrictions; the benefit of such tax exemptions willremain even in the case of amalgamation or de-merger.

103.

Another anomaly is levy of excise duty on pre-loaded software in the case of computers. Assoftware is already exempt from excise duty, I see no reason why this benefit should be denied simply becauseit gets loaded in a computer. From now, the value of pre-loaded software will be excluded for the purpose ofcharging excise duty on computers.

104.

Customs duty on specified electronic components for IT industry is being reduced in conformitywith our WTO commitment.

105.

In addition, customs duty on a number of capital goods used by the telecom and IT sector formanufacture of components will be reduced from 25 per cent to 15 per cent. For optical fibre cables, usedwidely for networking to provide bandwidth to the IT community, the customs duty is also being reduced from 25per cent to 20 per cent. To help the domestic industry to manufacture e-glass roving used for making opticalfibres, it is proposed to reduce the import duty on specified raw materials for the manufacture of e-glassroving from 30 per cent to 15 per cent.

106.

Telecom and domestic satellite service companies enjoy the benefit of tax holiday. Since ittakes quite some time for such projects to materialize, I propose to extend the deadline of setting up theunits by one more year to March 31, 2004.

Bio-technology

107.

Biotech is our today’s sunrise, tomorrow’s showpiece industry. The Government, tofacilitate units engaged in R&D in bio-technology and the pharmaceuticals sector, has decided to removethe existing restriction of minimum export obligation of Rs.20 crore for availing exemption from customs dutyfor specified equipments. Further, the restriction of full exemption being limited to only 1 per cent of lastyear’s export turnover is also lifted for R&D units. Moreover, in respect of R&D units withmanufacturing facilities, the benefit of full customs duty exemption for specified equipment will also beavailable for their manufacturing activity to the extent of 25 per cent of the previous year’s exportturnover.

108.

So far as benefits under direct taxes are concerned, biotech enjoys the same tax incentives asthe IT or pharmaceuticals industry.

Tourism

109.

Tourism, in addition to generating incomes, is amongst the most effective employment creatingsectors. To provide a set of incentives to this industry, the following proposals will be implemented:

a) withdraw the expenditure tax;

b) extend the benefit of Section 10(23G) to financial institutionsthat advance long-term capital to hotels in three-star and above categories;

c) the benefit of set-off of unabsorbed loss and depreciation onamalgamation will henceforth be available to hotels under Section 72A of the Income Tax Act;

d) continue the exemption for the hotel industry from the levy ofservice tax; and

e) reduce basic customs duty on imported equipment for ropewayprojects to 5 per cent without payment of CVD and SAD.

110.

It is our hope and expectation that the States, on their part, will now give a commensurateboost to the tourism sector by abolishing the luxury tax that they charge.

Gems and jewellery

111.

Traditionally, India has always excelled in the field of diamond and gem cutting, polishingand in the craft of gold smithy. With a view to nurturing this industry, it is proposed to reduce the customsduty on rough, coloured gem stones from 5 per cent, and on semi-processed, half-cut or broken diamonds from 15per cent to nil. Customs duty on cut and polished diamonds and gem stones will also be reduced from thepresent 15 per cent to 5 per cent.

112.

As for gold, it is proposed to reduce the customs duty on imported gold to Rs.100 per 10 gramsfrom the present level of Rs.250 per 10 grams, but only when it is brought in the form of serially numberedbars, or in the form of gold coins, not as ‘tola’ bars, please. It is my hope and expectation that thiswill become the first step in enabling India to shortly emerge as the gold-trading capital of the world.

113.

The gems and jewellery industry has also been quite apprehensive about withdrawal of benefitsunder Sections 10A and 10B of the Income Tax Act. I would like to assure them that no such step iscontemplated. Keeping in view the substantial value addition that takes place in the case of cutting andpolishing of diamonds and gems, it is also proposed to extend the benefits under Sections 10A and 10B of theIncome Tax Act to these activities.

Strengthening ECGC

114.

Export Credit Guarantee Corporation of India Ltd. (ECGC) has been playing a crucial role byproviding credit insurance cover for exports from the country. There is great potential for project exportsfrom India with our exporters winning bids against intense international competition. In order to enable ECGCto provide adequate underwriting support to such projects, the Government has decided to increase its sharecapital to Rs.80 crore.

Small-scale industry (SSI)

115.

A vibrant small-scale industry, contributing to both industrial and export growth, is criticalfor sustained growth in income and employment.
Mr. Speaker, as I have already said, the full benefits of the declining rates of interest have percolatedneither to agriculture, nor to small-scale industry. The recent announcement by the State Bank of India andthe decision by the Indian Bank Association about an interest rate band of 2 per cent above and below PLR forsecured advances will help the SSI sector in obtaining bank finance at moderate rates of interest. Inaddition, benefits and entitlements available to this sector shall be placed on the Ministry’s website, forready reference.

116.

Accessing the global market with consumer goods of quality, at competitive prices, produced inboth large- and small-scale establishments operating under flexible conditions, is the goal that we need totarget. Members will recall that last year, Government had announced the dereservation of over 50 items. Afterconsultations with stakeholders in respect of certain other items in the reserved list, it is now proposed towithdraw SSI reservation from another 75 items of laboratory chemicals and reagents, leather and leatherproducts, plastic products, chemicals and chemicals products and paper products. The Minister of Small ScaleIndustries will announce the details of these items separately. To help further investment in the SSI sector,Government will examine the question of a limited partnership act.

Promoting India: India Development Initiative

117.

An initiative to promote India as both a production centre and an investment destination,called ‘India Development Initiative’, shall be established in the Ministry of Finance, with an allocationof Rs.200 crore for 2003-04. This initiative will also leverage and promote our strategic economic interestsabroad.

Disinvestment

118.

Disinvestment receipts for the current year are estimated at Rs.3360 crore. I am confidentthat the pace of disinvestment will accelerate in the coming year. I wish to also state that details about thealready announced Disinvestment Fund and Asset Management Company, to hold residual shares post disinvestment,shall be finalized early in 2003-04. Mr. Speaker, Sir, disinvestment is not merely for mobilizing revenues forthe Government, it is mainly for unlocking the productive potential of these undertakings, and for reorientingthe Government, away from business and towards the business of governance.

Banking

119.

Foreign direct investment (FDI) in the banking companies in India is presently capped at 49per cent from all sources under the automatic route. For facilitating the setting up of subsidiaries byforeign banks, as well as for inviting investment in private banks, this limit will be raised to at least 74per cent.

120.

The voting rights of any person holding shares of a banking company are restricted to 10 percent irrespective of his/her shareholding. The Banking Regulation Act, 1949 will be amended to remove thislimitation.

121.

I now also extend the benefit of Sec. 72A of Income Tax Act to nationalized banks. Any bankingcompany can now merge with a nationalized bank with consequential tax benefit.

122.

As the Hon’ble Members know, the Government is determined to contain the problem ofnon-performing assets (NPA) and ensure a credit market that functions efficiently. Following the Budgetannouncement last year, the Credit Information Bureau has already been established. It is proposed to providethe necessary legislative support to this Bureau.

Interest rate

123.

High rates of interest, in a low inflation regime, clearly act as disincentive to investment.It is, therefore, important that administered interest rates on public provident fund and other small savingschemes be adjusted in line with the market rates. Accordingly, rates of interest on public provident fund,and small savings schemes, etc. will be reduced by one percentage point with effect from March 1. Interest onrelief and savings bonds will also be reset accordingly. Hon’ble Members may, however, note that the realreturns – adjusted for inflation – offered on these instruments are still a remunerative 6.3 per cent peryear; higher than what they were between 1991-92 and 1995-96.

Capital account

124.

Over the last few months, Government has taken a number of steps to ease restrictions oncapital account mobility. After careful assessment,
I would like to announce the following additional steps:

To enable diversification, overseas investment under the automaticroute will be permitted to corporates with a proven track record, even where the investment is not in the samecore activity. Further, the current restriction, limiting such investment to 50 per cent of the net worth ofthe Indian company, will now be raised to 100 per cent.
Prepayment of ECB dues under the automatic route will be permittedby removing the current ceiling of US $100 million.

125.

The Government is already considering a major review of sectoral limits for investments byForeign Institutional Investors. In order to facilitate their easy entry into the stock markets, the processof their registration will be further streamlined. Several steps have recently been taken to ease flows ofCapital. There will be more initiatives in this regard.

External aid

126.

Mr. Speaker, Sir, a stage has come in our development where we should now, firstly, review ourdependence on external donors. Second, extend support to the national efforts of other developing countries.And, thirdly, reexamine the line of credit route of international assistance to others. Having carefullyweighed all aspects, I propose the following measures:

a) While being grateful to all our development partners of thepast, I wish to announce that the Government of India would now prefer to provide relief to certain bilateralpartners, with smaller assistance packages, so that their resources can be transferred to specifiednon-governmental organisations (NGO’s) in greater need of official development assistance. The currentagreed programmes will, however, continue and reach their completion. Of course, there will be no more ‘tiedaid’ any longer.

b) Having fought against poverty, as a country and a people, weknow the pain and the challenge that this burden imposes. For the Heavily Indebted Poor Countries (HIPCs),owing overdue payments of substantial sums to India, I am happy to announce that we will be considering a debtrelief package. This will be announced shortly in consultation with the Ministry of External Affairs.

c) I am also happy to announce that the Government proposes togenerally discontinue the practice of extending loans or credit lines to fellow developing countries. Instead,in future, I propose to utilize the ‘India Development Initiative’, which I have already announced, forproviding grants or project assistance to developing countries in Africa, South Asia and other parts of thedeveloping world.

Reform and reorganisation of the Ministry of Finance

127.

Responsibilities of the Department of Company Affairs, the Foreign Promotion Investment Board(FIPB), and the regulation of the new Pension Funds Scheme have recently been added to the Ministry ofFinance. There is, therefore, need to reorganize the Ministry, also to go back to the simpler and more directname as the Ministry of Finance. The Department of Company Affairs is now being absorbed as a Department –and will sadly no longer stand shoulder to shoulder with Finance.

128.

In the Ministry of Finance, the Department of Economic Affairs will be restructured and haveseparate divisions dealing with economic policy; analysis: international and national; capital markets;budget; banking; trade and aid concerns; and infrastructure and coordination.

129.

To remain better abreast of agriculture, an Expert Advisory Council, to advise the Ministry ofFinance, will be set up for agriculture.

BUDGET ESTIMATES

130.

I now come to taxes, tax reforms, and the book-keeping of the current year, as also 2003-04.Mr. Speaker, I want to emphasise six important aspects in this regard. First, the coming year will be historicwith the States switching over to a Value Added Tax (VAT). The Central Government has been a partner with theStates, in the highest tradition of cooperative federalism, in this path-breaking reform. This will alsoinvolve an amendment to the Additional Excise Duty Act. Second, it is proposed to make 2003-04 the year when along-overdue Constitutional amendment to integrate services into the tax net in a comprehensive manner isenacted and implemented. This will give a boost to revenues, and help implement VAT. Third, there will bemajor improvements in tax administration through greater application of IT, and a discretion-free, impersonalsystem. Fourth, excise duties are being rationalised further. Fifth, the momentum of reducing customs duty isbeing maintained so as to improve the competitiveness of Indian industry in international markets. And, sixth,Government shall continue to strive towards fiscal consolidation through expenditure reprioritisation, andrevenue augmentation.

State-level Value Added Tax (VAT)

131.

The Conference of State Chief Ministers, presided over by the Prime Minister, held on October18, 2002 confirmed the final decision that all States and Union Territories would introduce VAT from April2003. The Empowered Committee of State Finance Ministers, on February 8, 2003, has again endorsed thesuggestion that all State legislations on VAT should have a minimum set of common features. Apart fromavoiding cascading of taxes, the introduction of VAT is expected to increase revenues as the coverage expandsto value addition at all stages of sale in the production and distribution chain. However, in view of theapprehensions expressed by a large number of States, about possible revenue loss, in the initial years ofintroduction of VAT, the Central Government has agreed to compensate 100 per cent of the loss in the firstyear, 75 per cent of the loss in second year and 50 per cent of the loss in the third year of the introductionof VAT; this loss being computed on the basis of an agreed formula.

132.

The Government of India considers the introduction of VAT, at the State level, to be ahistoric reform of our domestic trade tax system, It will assist the States to transit successfully from theerstwhile sales tax system to a modern domestic system, at present in use in over 120 countries.

Additional excise duty (AED) in lieu of sales tax

133.

While continuing to give States the additional 1.5 per cent of all shareable taxes and duties,in order to enable them to generate more revenues, the Additional Duties of Excise (Goods of SpecialImportance) Act, 1957 is being amended, from a date to be notified. This will allow the States to levy salestax on textiles, sugar and tobacco products at a rate not exceeding 4 per cent. This will also enable theStates to integrate these three important products in the VAT chain.

Service tax: a proposed Constitutional amendment

134.

To enable levy of tax on services as a specific and important source of revenue, an amendmentto the Constitution is proposed. This Constitutional amendment, and the consequent legislation would give theCentral Government the power to levy the tax and both the Central and the State Governments sufficient powersto collect the proceeds.

Central Sales Tax

135.

With the introduction of VAT, there is need to now phase out the CST, and move to a completelydestination-based system. This can not be done in one step. We must let VAT stabilize; but also recognize thatthese two – VAT and CST – cannot remain in tandem, in perpetuity. Therefore, in the first instance, theceiling rate of CST for inter-State sale between registered dealers will be reduced to 2 per cent during2003-04, with effect from a date to be notified. The Government of India will compensate the States for lossof revenue from this reduction of the CST. This will be done, as all these steps have been undertaken, onlyafter arriving at a consensus with the Empowered Committee of State Finance Ministers.

136.

I do wish to place on record my high appreciation of the cooperation that I have received fromthis Committee. Without that, I simply could not have reached here.

Task Forces

137.

As the Hon’ble Members are aware, in September 2002, three Task Forces were set up: one eachon Direct and Indirect Taxes, and the third on Corporate Governance.

138.

These were chaired respectively by Dr. Vijay Kelkar and Shri Naresh Chandra. The former alsoissued preliminary proposals in November, in the form of consultative papers for public comment. Afterevaluating all these comments, final reports were given in December, 2002.

139.

Public response to these Task Forces and their Reports has been overwhelming. This is atribute to the excellent work done by Dr. Kelkar and Shri Naresh Chandra and their selfless and dedicatedteams.

140.

By opening up the budget-making process, the Kelkar Committee Reports have more than fulfilledmy basic purpose of involving, as far as practical, our citizens, in the annual budgetary exercise. I havepersonally benefited very greatly from these Reports, as also from this open debate. I take this opportunityto express my sincere gratitude to the two Chairmen and all members of the Task Forces, as also members of thepublic for their valuable comments and suggestions.

141.

With regard to the Naresh Chandra Committee Report, corporate governance is high on theGovernment’s agenda. There will be a set of regulations that does not inhibit managerial initiative whileinstituting a mechanism for early detection of frauds and their prevention. For this purpose, a Serious FraudsOffice has already been set up.

142.

Now, let me deal with the two reports on taxation. The Ministry has analysed them fully.

143.

The basic philosophy of these reports is sound. For a modern, forward-looking and in the longrun, revenue-beneficial taxation system the proposals that have been mooted may be the most appropriate. Thereis need to, eventually, move away from an exemption and discretion based system to a different, more currentorder. That is the ideal that the Task Forces, particularly in respect of direct taxes have suggested; aradically new approach to taxation.

144.

This ideal is difficult to achieve in one leap, and I can scarcely cross the existingconceptual chasm in two. We cannot ignore the commitments made, or wish them away. That is why I choose tobridge the divide. We will, therefore, stay with the basics of the present system of taxation, but we will,indeed have already accepted, most of the suggestions made by the Task Forces designed to eliminate proceduralcomplexities, reduce paper work, simplify tax administration and to enhance efficiency, also integrate suchtax proposals as the system can, at present, absorb, with one overriding thought: Mr. Speaker, Sir, this willbe a move away from a suspicion-ridden, harassment generating, coercion-inclined regime to a trust-based,‘green channel’ system. I do this entirely on the basis of my faith in my countrymen and women.

145.

I now come to the tax proposals proper. What I describe below are the major changes proposed,not every detail of change, apart from those already described in the portion dealing with specific sectors.Details are contained in the Finance Bill and the relevant notifications, which will be laid on the Table ofthe House in due course. Moreover, as the Hon’ble Members are aware, Budget Day restrictions in respect ofclearance of goods have been revoked to allow economic activity to continue without any hindrance.

Direct taxes

Rates

146.

Rates of income tax, both corporate and non-corporate, have remained largely stable since1997. As stability and continuity are commended as virtues in tax regimes, I intend to be virtuous. Corporatetax structure will, therefore, be left as it is; except that the 5 per cent surcharge, levied last year inconnection with the security of India, will be halved in the case of corporate assessees, firms, foreigncompanies, cooperatives, and local authorities. In the case of individuals, Hindu Undivided Families (HUF),and Association of Persons etc., this surcharge will be removed entirely, except in the case of those earningan income above Rs.8.5 lakhs. From them, that is those earning above Rs.8.5 lakh, I will collect a 10 per centsurcharge on the tax, which works out to less than 3 paise out of an income of a rupee. But, I have providedsome relief to them, as well, for example, in standard deduction.

Standard deduction

147.

There are more salaried taxpayers at income levels of Rs.2 lakh and above than thenon-salaried. I do often wonder, why? That is why the salaried always complain, saying they do not have –that cliché phrase – a level playing field; I agree, they do suffer a more exacting regime. Therefore, asalready announced, their standard deductions are raised.

148.

Individual taxpayers having income from dividends, interest, etc. are given a generaldeduction of Rs.9,000. As promised by me earlier, this deduction has now been increased to Rs.12,000. Anadditional deduction of Rs.3,000 is allowable in respect of interest from Government securities. Thus, thetotal deduction available under Section 80L will be Rs.15,000. Though dividend will not be taxable in thehands of the recipient from next year, I propose to retain this deduction at Rs.15,000 for next year also.

Tax deduction atsource

149.

A lot of unintended difficulties are caused by certain provisions dealing with tax deductibleat source (TDS); much too tedious to elaborate here. I want to correct this. Therefore, in simple terms, it isnow provided that individuals and HUF carrying on business or profession need not deduct tax at source, frompayments made by them for personal purposes.

Not ordinarilyresident

150.

There is a category of taxpayers in India ordinarily not found elsewhere – the ‘notordinarily resident’. They do not normally have to pay tax on their foreign sourced income. There has beenconfusion on this provision in the past due to differing legal interpretations. To set matters at rest, therelevant definition has been suitably amended so that the benefit will now be available to persons for twoyears in case they remain non-residents for the last nine out of 10 years.

Administrative reform

151.

In the area of tax administration, Government has initiated a whole basket of reforms, mainlyon the basis of the recommendations of the Kelkar Committee. Some of the principal ones are:

(a) outsourcing of non-core activities of Income Tax Department,namely allotment of PAN, and creation of data bank of high value transactions through tax information network;

(b) immediate abolition of present discretion-based system forselection of returns for scrutiny; this will be replaced by a computer generated, intelligent, randomselection of only 2 per cent of the returns, annually;

(c) expanding the scope of taxpayer services, including extensionof interactive voice response system to more cities and software for preparation of returns;

(d) direct crediting of all refunds to the bank account of thetaxpayer, through electronic clearance system; but obviously only if the taxpayer furnishes a bank accountnumber;

(e) reduce the compliance cost of the taxpayer, through halvingthe number of forms presently used in furnishing of applications, returns, etc., for the purposes of taxdeduction and tax collection at source, from the present 42 to just 22. Hon’ble Members, if in only oneattempt I could halve this headache, please reflect upon the immense possibilities that lie on this route;

(f) immediate introduction of a one-page only return form forindividual tax payers, having income from salary, house property and interest, etc. This has already beendevised, and will come into operation from April 1 onwards;

(g) the Income Tax Act is being amended to enable electronicfiling of returns;

(h) abolition of tax-clearance certificates currently needed by aperson leaving India, or any person submitting a tender for a government contract. Henceforth, onlyexpatriates who come to India in connection with business, profession or employment, would have to furnish aguarantee from their employer, etc. in respect of the tax payable before they leave India. An Indian citizen,before leaving India, will only have to give his/her permanent account number, and the period of his/herintended visit abroad to the emigration authorities; and

(i) simplifying the procedure and methods employed during searchand seizure, and during survey by the Income Tax department. First, hereafter, stocks found during the courseof a search and seizure operation will not be seized under any circumstances. Second, no confession shall beobtained during such search and seizure operations. Third, no survey operation will be authorized by anofficer below the rank of Joint Commissioner of Income Tax. Finally, books of account impounded during surveywill not be retained beyond ten days, without the prior approval of the Chief Commissioner.

152.

These, Hon’ble Members, are only a few steps on this long road called simplification andrationalisation of taxation. It is not for nothing that even Albert Einstein had ruefully observed that hefound ‘Income Tax the most difficult thing upon Earth to understand’.

153.

Mr. Speaker, please sympathize with me. I endeavour to make easy that which Einstein found sodifficult.

Indirect taxes: excise

Rationalisation and relief

154.

Rationalisation of excise rate structure and reduction of the multiplicity of rates areintegral to the total tax reform process. In this regard, I propose to prescribe a 3-tier excise dutystructure of 8 per cent, 16 per cent and 24 per cent. These rates would, however, not apply in the case ofpetroleum and tobacco products, pan masala, and items attracting specific duty rates. I have already announceda separate package for textiles, and some changes in the duty structure relevant for some other key sectorswhile dealing with those sectors. I will now refer to the changes proposed in various other commodities.

155.

Currently, tyres, aerated soft drinks, polyester filament yarn, air-conditioners and motorcars attract excise duty of 32 per cent. I propose to reduce the duty on these items to 24 per cent.

156.

Certain exempt items were brought under the tax net during the last two years with an optionalduty of 4 per cent without CENVAT, or 16 per cent with CENVAT. I propose to eliminate the 4 per cent dutywithout CENVAT. However, keeping in view the number of representations received for exemptions, I propose tofully exempt the following items of the ordinary citizen’s use, currently attracting 4 per cent excise duty:

Unbranded surgical bandages
Registers and account books
Umbrellas
Kerosene pressure lanterns
Articles of wood
Imitation zari
Adhesive tapes
Tubular knitted gas mantle fabrics
Walking sticks
Articles of mica
Bicycles and parts
Toys
Mosaic tiles
Utensils and kitchen articles
Knives, spoons and similar kitchenware/tableware
Glasses for corrective spectacles

157.

Rest of the items attracting 4 per cent without CENVAT will now attract duty at 8 per centwith CENVAT.

158.

I also propose to fully exempt from excise duty matches made by the non-mechanized sector.However, matches made by semi-mechanized and mechanized sector will attract an ad-valorem duty of 8 per centwithout CENVAT.

159.

I also propose to reduce the excise duty chargeable under the Medicinal and ToiletPreparations Act, on medicines and toilet preparations containing alcohol, from the present high rates of 20to 50 per cent to a uniform rate of 16 per cent, at par with the rates on similar items not containingalcohol. However, exemptions on ayurvedic and unani medicines, containing self-generated alcohol, willcontinue.

160.

I propose to reduce the excise duty on items like pressure cookers, ophthalmic blanks,biscuits, boiled sweets and dental chairs from 16 per cent to 8 per cent. Recorded audio compact discs (CDs)will be fully exempt from excise duty.

161.

It is my conviction, Mr. Speaker, that these measures will result in "Grihini ki tukiamein anna": the second part of my assurance.

Transport

162.

As I have earlier stated, efficient transportation is critical for rapid development. I havealready announced major reduction in excise duty on motor cars and tyres. Further, on environmentalconsiderations, I propose to reduce the duty on electric vehicles from 16 per cent to 8 per cent.

163.

Presently, there is an inequitous duty structure between buses and trucks, manufactured by anintegrated unit, vis-à-vis independent body builders, who are exempt from excise duty. To reduce the dutydifferential and to promote body building by integrated bus and truck manufacturers, as a measure of roadsafety, I propose to increase the duty on chassis from 16 per cent, to 16 per cent plus Rs.10,000 per chassis,cleared for outside body building. The body building activity in the unorganized sector would, however,continue to remain exempt.

164.

It is an accepted principle that while taxation should be moderate, the tax base has to belarge, so that every sector contributes moderately to the national economy. Following this principle, Ipropose to impose fresh excise levy of 8 per cent on the following items, with the CENVAT credit facilityavailable to them: branded refined edible oil and vanaspati packed in sealed containers for retail sale –this will not apply to unbranded oil; lay flat tubing; chemical reagents; wood-free particle or fibre boardmade from agro base; paper and paper board made from non conventional raw material; and populated printedcircuit board for black and white TV sets.

165.

Considering that specific rates on cement and clinker have remained unchanged for aconsiderably long period of time, I propose to now increase these rates by Rs.50 per tonne. This will mean amodest increase of Rs.2.50 per 50 kg. bag of cement.

166.

I also propose to impose additional excise duty of Rs.1.50 per litre on light diesel oil tofurther discourage its use as an adulterant.

Trade facilitation measures

167.

For trade facilitation, I propose to take the following measures,-

(a) The present system of fortnightly payment of excise duty willbe liberalized to permit payment of duty at the end of the month. Further, the excise duty will be consideredto have been paid on the date the cheque is presented to the bank subject to realisation.

(b) Deduction from the transaction value is allowed on actualfreight incurred, provided that is clearly shown in the invoice. This facility will now be extended to caseswhere freight is worked out on an equalized basis also.

(c) Over the years, the Maximum Retail Price (MRP) based exciselevy has proved to be an effective measure of simplification by reducing valuation disputes. I propose toextend the MRP-based excise levy to chewing tobacco and insecticides.

National CalamityContingency Fund

168.

Unfortunately, the Nation has been facing a severe drought this year. The funds raised earlierunder the National Calamity Contingent Duty are not sufficient. It is, therefore, proposed to impose a 1 percent National Calamity Contingent Duty on polyester filament yarn, motor cars, multi utility vehicles andtwo-wheelers. Similarly, crude, domestic or imported, will also be subjected to a duty of Rs.50 per metrictonne for this purpose. However, these new levies will be limited to one year only.

169.

While the Small Scale Exemption Scheme aims at providing a distinctive advantage to labour-intensiveunits, there are reports of misuse of this facility in certain sectors. I propose to withdraw this facility incase of a few items and rationalize the eligibility limit of Rs.3 crore under the general SSI scheme.

Service tax

170.

I propose to enhance the general service tax rate from 5 per cent to 8 per cent, and alsoimpose service tax on 10 new services. While the increase in the tax rates will come into effect on enactmentof the Finance Bill, the levy of tax on the new services will take effect from a date to be notified.

171.

Last year credit of service tax on input services were extended for payment of service tax,provided the input and the final services fell within the same category. I propose to extend this facilityacross all services. Thus, the credit will now be available even if the input and the final services fallunder different categories.

Indirect taxes: customs

External liberalisation

172.

Rate rationalisation and reduction of peak rates of customs duties has been an integral partof economic reform in the country. The economy has not only ‘weathered’ the removal of quantitativerestrictions on imports and the reduction in customs duty rates, but has responded by improving itscompetitiveness and demonstrating the inherent strength of its external balance of payments. As a part of thiscontinuous process, and in line with the pronouncements made by several of my predecessors, I now propose toreduce the peak rate of customs duty from 30 per cent to 25 per cent, excluding agriculture and dairyproducts.

Rationalisation and relief

173.

It has been our policy to minimize sector-specific and end-use based customs duty exemptions.This policy will continue. Metallurgical coke and nickel attract customs duty rates at 15 per cent and 5 percent, depending upon their usage. I, therefore, propose to rationalize the customs duty on these two items toa uniform rate of 10 per cent.

174.

Conch shells and seed lac are really handicraft items. Their duty will come down from 30 percent – why was it ever 30 per cent – to 5 per cent.

175.

Import duty on oleo pine resin, a raw material for rosin shall be reduced from 15 per cent to10 per cent.

176.

Value limit for a full customs duty exemption, for bona fide commercial samples and gifts,however, shall be raised from Rs.5,000 to Rs.10,000.

177.

I also propose to reduce the customs duty on passenger baggage from 60 per cent to 50 percent.

178.

Phosphoric acid, an input for fertilizers, is exempt from the Special Additional Duty ofCustoms (SAD). For the sake of uniformity, I propose to exempt rock phosphate and crude sulphur, inputs forphosphoric acid, also from SAD.

179.

The basic customs duty on alcoholic liquor will come down to 166 per cent in conformity withour WTO commitments. I also propose to rationalize the countervailing duty in respect of imported alcoholicbeverages including wines.

Capital goods and infrastructure

180.

Considering higher usage levels of Liquified Natural Gas (LNG),
I propose to reduce the customs duty on LNG regassification plants from 25 per cent to 5 per cent.

181.

There is need to support cleaner and environment-friendly technologies. With this end in view,I propose to reduce the customs duty on components of membrane cell technology used in the caustic sodaindustry from 15 per cent to 5 per cent.

182.

Safety and modernisation are key issues before Indian Railways. I propose, therefore, toreduce customs duty on spares for diesel locomotives, parts for conversion of locomotives from DC to AC from25 per cent to 15 per cent, and loco simulators for training of drivers from 25 per cent to 5 per cent.

183.

Given the importance of promoting food-processing and transporting agricultural products, Ipropose to reduce the customs duty on refrigerated trucks from 25 per cent to 20 per cent.

Trade facilitation

184.

I assure Hon’ble Members of faster clearance hereafter of cargo and fewer procedures, byreducing the transaction cost, thus facilitating exports and imports. For this, a number of measures have beentaken to simplify and modernize the customs clearance procedures, with the main emphasis being on cutting downcontact of trade with the officers, to the extent possible, and introducing computerisation in customsclearances. While these efforts will continue, as a further trade facilitation measure, I propose to increasethe interest-free period for warehoused goods from 30 to 90 days and to reduce the rate of interest for theperiod beyond 90 days to reflect the market rate of interest.

185.

To bring our customs clearance procedures at par with best international practices, I proposeto introduce, this year itself, a self-assessment scheme for importers and exporters. Briefly stated, underthe self-assessment scheme, the importer himself/herself will determine the classification of goods, includingclaim for any exemption benefit, and the system will calculate the duty based on his/her declaration. Physicalinspection of imported goods will be done by using risk-assessment and management techniques on acomputer-based system and not on the orders of customs examining staff. Further, the existing system ofconcurrent audit of import documents will be replaced by post-clearance audit, as prevalent in developedcountries.

186.

Sir, my proposals made in this budget on the Direct Taxes will result in a revenue loss ofRs.2,955 crore while the proposals relating to indirect taxes will result in a gain of Rs.3294 crore.

Revised Estimates for 2002-2003

187.

The revised estimates for the current fiscal year show a decrease in expenditure of Rs.6,296crore as compared to the Budget estimates. This reduction in overall expenditure has been achieved despiteadditional expenditure on drought relief, food subsidy, and the Delhi Metro Rail Project.

188.

Net tax revenues for the Centre are estimated to be Rs.164,177 crore compared to the Budgetestimate of Rs.172,965 crore, thereby reflecting a shortfall of Rs.8,788 crore. Non tax revenue is estimatedat Rs.72,759 crore, Rs.619 crore more than the estimated level of Rs.72,140 crore. However, disinvestmentreceipts, at Rs.3,360 crore are lower than the Budget estimate of Rs.12,000 crore.

Budget Estimates for 2003-2004

189.

In the budget estimates for 2003-2004, the total expenditure is estimated at Rs.438,795 crore,of which Rs.120,974 crore is for Plan and Rs.317,821 crore for non-Plan.

Plan expenditure

190.

In order to strike the right balance between the developmental needs on one hand and fiscalstability on the other, the Gross Budgetary Support (GBS) for Plan 2003-04 has been fixed at Rs.120,974 crore.This is Rs.7,474 crore more than last year, indicating an increase of 6.6 per cent. Out of this, an amount ofRs.72,152 crore is being provided as Budget support for Central Plan. This is an increase of Rs.5,281 crore,or 7.9 per cent, over the last year. Similarly, the Central Assistance for State Plans has been pegged atRs.48,822 crore, which is Rs.2,193 crore more than last year.

Non-plan Expenditure

191.

Non-Plan expenditure in 2003-2004 is estimated to be Rs.317,821 crore compared to Rs.289,924crore in Revised estimates for 2002-2003. The increase in non-plan expenditure is mainly in interest payments(Rs.7,560 crore), subsidies (Rs.7,162 crore), and defence (Rs.9,300 crore). Government is fully committed tomodernizing the armed forces, and equipping them with the best available. This is non-negotiable. Therefore,during the next year, any additional requirement that may emerge on account of modernisation needs of thethree defence services, or on account of the Married Accommodation Project, will be fully met. There will beno shortage of funds for defence.

Revenue estimate and Fiscal deficit

192.

Mr. Speaker, Sir, with these proposals I estimate total revenue receipts of the Centre atRs.253,935 crore and the fiscal deficit at Rs.153,637 crore, which is 5.6 per cent of the estimated GDP.

XI. CONCLUSION

193.

Sir, in formulating the Budget for 2003-04, the Government has had to carefully and delicatelybalance the need for accelerating growth, while simultaneously making progress on the front of fiscalconsolidation. I know that what Government has done is the most judicious under the circumstances.

194.

This budget is about addressing the problem of poverty and life-time concerns of our citizens;of giving a major boost to infrastructure; and laying the foundations for balanced, accelerated growth ofagriculture and industry, plus tax reform. I have tried to address the ‘Panch Priorities’, and I hope,that after this year of drought, our economy will respond favourably to the Budget package and demonstrateimpressive growth in 2003-04.

195.

Let me end, Mr. Speaker, by reiterating that this Budget is of an "India that is on themove." An India, that now rapidly advances to prosperity. It is about an India that banishes poverty, andbuilds on its great resource base, the strength of its human capital and the immense reservoir of itsknowledge.

196.

Sir, I commend the Budget to the House.

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