This year’s union budget, presented by our Finance Minister P. Chidambaram in Parliament, on 28 February 2006, has an accent on welfare without compromising on growth measures. He rightly said in his budget speech that “growth is the best antidote to poverty,” and perhaps the entire budget was constructed on the basis of this underlying idea. GDP growth rate for the Tenth Plan was set at 8 per cent, and in his budget, the Finance Minister is likely to generate enough economic muscle to finance that growth. By his own admission, his tax proposals on direct taxes are estimated to garner a gain to the tune of Rs 4000 crore, whereas through indirect taxes, the economy will incur an estimated gain of Rs 2000 crore. Moreover, the budget of 2006-07 makes a sincere attempt to cater to all the classes of our entirely complex economy, without being overtly populist in character.

Let us begin with hard statistics. In this budget, the Gross Budgetary Support or the plan expenditure is estimated at Rs 172,728 crore, which is a 20.4 percent increase over that of the previous year’s budget. Of this, the allocation to the Central Plan has also been increased to Rs 131,285 crore, which is a substantial enhancement over the Rs 110,385 crore allocation for the Central Plan, in the previous budget. The non-plan expenditure for 2006-07 is estimated at Rs 391,263 crore, which is a 5.5 percent increase over that of the previous year’s budget figures. The total expenditure for the 2006-07 budget is estimated at Rs 563,991crore and the fiscal deficit is estimated to be confined to a fairly manageable Rs 148,686 crore, which accounts for only 3.8 percent of India’s GDP. The total estimated revenue receipts of the union government for the 2006-07 budget has been Rs 403,465 crore, and the total estimated revenue expenditure is Rs 488,192 crore. This accounts for an estimated revenue deficit of Rs 84.727 crore, which is 2.1 percent of the GDP. All these reflect a fiscally healthy economy that can bring in significant growth trends if the investments are channelled in the desired direction.

For the common taxpayer, there is no great news, but there aren’t any heartbreaks either. The Finance Minister has left the personal income tax rates totally unchanged but has increased the ambit of services under the tax net. The service tax has also been made to climb from 10.2 percent to 12 percent. He has also increased the rates of Minimum Alternate Tax (MAT) and Securities Transaction Tax (STT), which may cause some frowns from corporates and investors alike. But there hasn’t been any hike in corporate tax, which is good news for Indian business at large. Moreover, the FM has extended the income tax deduction benefits of section 80C by including bank fixed deposits and pension plans in it. This will encourage savings in the economy and also strengthen the social security net.

The weightage to welfare is reflected in the allocations for education, and health and family welfare. In the former sector, the budgetary allocation has increased by 31.5 percent as compared to the previous fiscal’s, whereas in health and family welfare, there has been a 22 percent increase in allocation over the same period. The outlay for Sarva Siksha Abhiyan has also been increased to Rs 10,041 crore from that of Rs 7156 crore in the 2005-06 budget. Chidambaram also informed that under this project, 500,000 additional class rooms will be constructed and there will be appointments of 150,000 additional teachers. He also said that in the 2006-07 fiscal, a sum of Rs 8746 crore will be transferred to the Prarambhik Siksha Kosh “from the revenues raised through the education cess.” This welcome step will surely give a fillip to the dismal state of primary education. Furthermore, to give encouragement to the education of the girl child, the Harvard returned minister has sanctioned the opening of 1000 residential schools for girls from SC, ST, OBC and minority communities in the 2006-07 fiscal under the Kasturba Gandhi Balika Vidalaya Scheme.

However, over the years, there have been some developments in the basic education front too. According to the minister, now 12 crore children are covered under the Mid-day Meal Scheme. It is the largest school lunch programme in the world, which has definitely been an incentive for the children of marginalised families to study. And Chidambaram has taken the right step by enhancing the allocation for the Mid-day Meal Scheme in this budget to Rs 4813 crore. It is a right step towards welfare. In the 2005-06 budget, the allocation for this welfare scheme was Rs 3010 crore. Drinking water and sanitation is a major infrastructural blockage in the health sector, particularly in rural areas, and this has also been adequately taken care of in the current budget. In this budget, the provision for Rajiv Gandhi National Drinking Water Mission has been increased from Rs 3645 crore to Rs 4680 crore, and the provision for Rural Sanitation Campaign has been increased from Rs 630 crore to Rs 720 crore.

Rural health has been a neglected area in India’s economy, and the minister has taken measures to remedy this by increasing the allocation for the National Rural Health Mission for the current fiscal to Rs 8207 crore; in the last budget it was only Rs 6553 crore. To give the agricultural sector necessary support, the minister has also proposed to increase farm credit to Rs 175,000 crore and has asked banks to add another 50 lakh farmers to their portfolio. The Finance Minister has also asserted that the target of doubling the farm credit in three years will not only be achieved, but exceeded. He has proposed to grant some relief to those farmers who had availed of crop loans from scheduled commercial banks, RRBs and PACS for the Kharif and Rabi seasons in 2005-06. In his budget statement, the minister stated, “Accordingly, an amount equal to two percentage points of the borrower’s interest liability on the principal amount up to Rs 100,000, will be credited to his/her bank account before March 31, 2006. I have provided a sum of Rs 1700 crore for this purpose.”

The union budget has given adequate importance to the development of rural areas. To counter rural unemployment and poverty, the allocation for rural employment in this budget has been an impressive Rs 14,300 crore. The corpus of Rural Infrastructure Development Fund XII has been proposed to be enhanced in this budget to Rs 10,000 crore and the minister urged state governments “to make the best use of these funds.” He has also proposed to “allow specified projects under the Public Private Partnership (PPP) model to access RIDF funds.” Moreover, the funds proposed for Bharat Nirman in the 2006-07 budget, has been enhanced by 54 percent. It has reached Rs 18,696 crore as compared to Rs 12,160 crore allocated in the last financial year. Here it deserves a mention that Bharat Nirman has reflected considerable success as far as infrastructural development in rural areas is concerned.

At the same time, a grant of Rs 4595 crore has been sanctioned for the Jawaharlal Nehru National Urban Renewal Mission, against an estimated outlay of Rs 6250 crore. Under this scheme, besides the Mumbai and Bangalore metro rail projects, many other prestigious urban projects in Maharashtra, Madhya Pradesh and Gujarat are under active consideration.

For generating more growth and employment in the manufacturing sector, the minister has also introduced a spate of incentives in textiles, handlooms and food processing industries. All of these are employment-intensive industries. The allocation for the Technology Upgradation Fund (TUF) scheme for the textiles sector has been increased to Rs 535 crore from that of Rs 435 crore in the last year’s budget. Moreover, for the Scheme for Integrated Textiles Parks (STIP), Rs 189 crore has been sanctioned in this budget. For the handloom sector also the provision has been increased from Rs 195 crore to Rs 241 crore, and the budget has proposed a sharp reduction in excise duty on all man-made fibre yarn and filament yarn. It has been reduced from 16 percent to a much more healthy 8 percent. The minister has earmarked the food processing industry as a priority sector for bank credit. He stated in his budget speech that “NABARD will create a separate window with a corpus of Rs 1000 crore for refinancing loans to the sector, especially for agro-processing infrastructure and market development.”

The Finance Minister has also aimed to make India a manufacturing hub for textiles, steel, metals and petroleum products and has decided to promote India as a semiconductor manufacturing hub. For the pharmaceutical industry, the reduction on the import duty on anti-cancer and anti-AIDS drug comes not only as a boon to the industry, but also has an important welfare angle. However, there are no excise cuts or additional sops on R&D, which would give an impetus towards India’s emergence as a knowledge economy. The reduction in fringe benefit tax (FBT) for the hospitality sector is also welcome.

For the gems and jewellery industry, which accounts for one of the largest contribution to the country’s foreign exchange, the Finance Minister has proposed the setting up of an experts’ body for accessing the sector’s potential with the objective of “developing India as a hub for the gems and jewellery industry.” Probably the fast changing profile of the upwardly mobile Indian middle class in metros has prompted the government to exclude small cars and aerated drinks from the realm of luxury; otherwise there can be no accounting for an excise duty reduction on small cars and aerated drinks. The excise duty on aerated drinks has been reduced from 24 percent to 16 percent, and the excise duty on small cars has also been reduced to 16 percent. But there is a positive side to this also; the measures are likely to give an added momentum to the growth of the automobile and the soft drinks industry, which may in turn generate additional employment. As far as the IT sector goes, this budget hasn’t been an absolutely welcome affair. The 8 percent excise duty on packaged software and the re-imposition of 12 percent excise duty on computers may increase the prices of legal software and may not cause a decline in the price of computers.

In the area of infrastructure, there has been some minor incentives for the power sector too, which include a Rs 597 crore corpus for non-conventional energy resources, tax holidays to ultra mega power projects and sanctioning of an investment of Rs 1300 crore for developing the power sector in Jammu & Kashmir. Chidambaram also aims to provide electricity to 40,000 more villages in 2006-07. However, he has maintained that “the key to the success of this programme is the engagement of franchises and proper commercial and contractual arrangements for distribution, billing and collection.” In telecommunications, rural connectivity is given its due importance. The minister has proposed the rolling out of 50 million rural connections in three years, which can bridge the digital divide between urban India and rural Bharat to a significant extent.

There are some minor disappointments in the realm of energy and infrastructure. The Finance Minister’s proposal to increase the domestically produced petroleum crude cess by Rs 700 per metric tonne (in this budget it has been increased from Rs 1800 to Rs 2500 per metric tonne) will adversely affect the bottom line of oil companies and may even have an escalating effect on the price of petroleum products. However, Chidambarm has been assured “that this increase will be absorbed by the oil producing companies and have no impact on retail prices of petroleum products.” But the economic logic of this assurance is still an enigma.

The proposal to increase the budgetary support for the National Highways Development Programme(NHDP) from Rs 9320 crore in 2005-06 to Rs 9945 crore in 2006-07 will facilitate the gliding of Indian economy in the highway of progress. That’s not all. Chidambaram also informed in his budget speech that “a special accelerated road development programme for the North Eastern region at an estimated cost of Rs 4618 crore has been approved.” He also added, “For 2006-07, I propose to provide a sum of Rs 550 crore for this programme.” 1000 km of access-controlled Expressways will also be developed, and they will be constructed on the design, build, finance and operate (DBFO) model. The minister informed that the Vadodra-Mumbai, Delhi-Chandigarh, Delhi-Meerut, Delhi-Jaipur, Delhi-Agra, Kolkata-Dhanbad and Bangalore-Chennai sections have been identified.

If infrastructure offers the backbone to the manufacturing and the services sector, then the capital market reflects the sentiment. The measures in the 2006-07 budget of increasing the FII investment limit in government securities from US$1.75 billion to US$2 billion could infuse greater stability and vitality to the capital market. FII investment limit on corporate debt has also been increased in the present budget from US$0.5 billion to US$1.5 billion.