If india's efforts to become a free market and integrate with the global economy-the two are often clubbed together by policy wonks into one evocative term, economic reforms-is a journey, then the Indian Finance Minister is pretty much like a station wagon or a Multi-Utility Vehicle (MUV), more a Toyota Qualis than a zippy sedan. That much, a study of the style of past FMs, Chidambaram himself in 1996 and 1997, Yashwant Sinha between 1998 and 2002, and Jaswant Singh in 2003 and 2004, reveals. He starts off slowly, even tentatively, like vehicles of the genre mentioned are apt to, picks up speed, and, when in overdrive, moves rapidly towards the destination, often bullying his way through obstacles. Anyone who has had occasion to encounter the Qualis on nh8 between Delhi and Gurgaon (and beyond), ferrying employees of business process outsourcing firms, a visible manifestation of India's with-it status in the global economy, should get the picture.

That's something everyone, to whom a July Budget brings back painful memories, would do well to remember. In 1996, when Chidambaram presented his first budget as Finance Minister in the United Front government, he imposed a 7.5 per cent minimum alternate tax (MAT) on companies that didn't pay any. Some analysts considered the move draconian, others thought it only fair that companies adopting legal accounting sleights of hand to avoid paying tax be targeted, and the debate still rages on. The minister also levied a 2 per cent special customs duty on imports, later increased to 5 per cent through an executive order, a step described in 1998 by then University of Maryland professor and India watcher Arvind Panagariya as "a sabotage of India's trade reform agenda". Chidambaram more than made up in his second budget and although economist Surjit S. Bhalla, who heads Oxus Research and Investments, believes Budget 2004 will be reformist because "he cannot afford to mess up as the markets will not tolerate it," there's the Common Minimum Programme (CMP), the United Progressive Alliance's vision statement to be considered.

The 2 per cent education-CESS, a sure thing judging by the statements emanating from the government, sounds good on paper but it is more likely to add to the tax burden than improve the quality of primary education: no Indian government has been able to monitor spending on education efficiently and there's a near consensus that the Rs 5,000 crore a year raised by the CESS will vanish into a bureaucratic blackhole. The CMP's promise of guaranteed 100-day employment for at least one member of poor families through a New Deal like initiative is well-meaning, but identifying such households and ensuring that the money reaches them is nothing short of a logistical nightmare. "Where is the delivery mechanism?" asks Bhalla.

Then, there's the MUV factor. No one really expects Chidambaram to go out and do his thing. This, after all, is the UPA's first budget and it is for a seven-month period. "We are likely to see a realistic Budget rather than a dream one," says Subir Gokarn, Chief Economist, crisil, a credit rating agency. "The Finance Minister has had little time to settle down and is still building bridges with coalition partners."

Chidambaram has already spelt out his broad economic agenda: increasing investments in agriculture and manufacturing to sustain growth, generating employment, and reducing the fiscal deficit. "Continuity is pretty clear as we are going back to the original reforms of Manmohan Singh," he said in his first press conference after assuming office, a reference to the UPA's commitment to economic reform and its desire to do things differently than the previous government. The focus of Budget 2004, then, will be on reviving the co-operative sector, increasing investments in infrastructure, especially in areas such as roads and irrigation, and enhancing rural credit. Raising the requisite revenues could pose the fm some problems (See Funding The Fisc... on Page 22), but most economists believe that the increased spending is unlikely to result in inflation spiralling out of control, not when public sector banks are flush with funds as they now are. "Inflation isn't an issue although there could be some increase in the non performing assets of banks," says Bidisha Ganguly, Economist, Confederation of Indian Industry. For his part, Chidambaram will try to balance the equation some by taxing more services, some 20 to 30 of them: in 2003-04, service tax on 58 services earned the government Rs 8,000 crore.

Budget 2004 is also likely to see a reduction on the peak corporate tax rate from 35 per cent to a little over 30 per cent (including the education CESS), a move that, according to Deven Choksey, the Managing Director of Choksey Shares and Securities, could "improve the after-tax earnings of companies and provide them with money to fund their expansion and modernisation." That will help the cause of investments (how Chidambaram feels about this can be judged from the fact that while speaking to industrialists in Mumbai last month, he described himself as the Minister for Investments). The Budget could well provide for the creation of an Investment Commission that seeks to attract, private, even foreign investments. The essential function of the Foreign Investment Promotion Board, say officials in the Finance Ministry, could be brought under the purview of the commission.

Agriculture, infrastructure, and investment, will be the three focus areas of Budget 2004. As for the details-you will find several fragments on the following pages, about the likely increase in the price of jams and the scrapping of the capital gains tax on stock market transactions-we will just have to wait till July 8. Chidambaram may just surprise all of us.

-By Ashish Gupta

SECOND
We're Not Looking Forward To July 8
Here are five sectors or entities that would well be better off without the Budget.

Information Technology And IT-enabled Services

If, on July 8, finance minister P. Chidambaram should choose to levy a service tax on it and it-enabled services, he will only be doing what some economists believe should have been done long ago. The Indian software and services business grew by 30.5 per cent in 2003-04 and registered revenues of $12.5 billion (Rs 57,500 crore). The software services business ($8.9 billion, Rs 40,940 crore), grew by 25 per cent, while the ITEs one ($3.6 billion, Rs 16,560 crore), grew by 46 per cent. These are numbers no Finance Minister facing the challenge of increasing tax revenues can afford to ignore. Executives working in the two industries, believe the move could backfire. "Taxation on the services sector, which is a major contributor to Gross Domestic Produce is tempting," acknowledges Deepak Ghaisas, CEO (India Operations), and CFO, i-flex, "but ITEs should not be taxed immediately or it could lose its competitive advantage." That may be a bit of an overstatement: average net profit margins in the Indian it services and ITEs business are 23.36 per cent and 12 per cent, respectively; while the tax, if it is levied, could bring these down some, it is unlikely to render the entire India-logic irrelevant.

Special Economic Zones

The government, reports originating from north block, the seat of the Finance Ministry claim, may well decide to do away with some of the duty exemptions available to companies operating from Special Economic Zones. The details aren't out yet (they will probably find mention in the Budget) but the logic for scrapping these is impeccable. Sops such as zero import duty on imports, exemption from stamp paper duty, full tax exemption on export profits for the first five years and a 50 per cent exemption for the next two, are costing the national exchequer a great deal (in notional losses) without bringing in the expected results. Surat's SEZ, for instance, say Finance Ministry officials, imported more than it exported in 2003-04. Then, there's the thing about most SEZs remaining non-starters. The Federation of Indian Export Organisation believes the way out is for the government to extend the facilities being made available to new units setting shop in the SEZs to existing units wishing to relocate there. The Budget is unlikely to address that.

Textiles

The textile industry is set for a rocky ride. With Textile Minister Shanker Sinh Vaghela indicating that he would like the cenvat (Central Value Added Tax) regime to exempt small weavers and processors and with the Dravida Munnetra Kazhagam, a key constituent of the UPA government in favour of the move, Finance Minister P. Chidambaram may have no option but to break the cenvat chain. That would, in one fell stroke, give master weavers an unfair advantage, create huge distortions in the taxation system, and cripple growth in the industry. The timing, if this actually transpires, cannot be worse: the World Trade Organisation's Agreement on Textiles and Clothing says all quotas on exports will go by December 31, 2004. "We do not want Chidambaram to tinker with the cenvat structure," says O.P. Lohia, Managing Director, Indo Rama. "In fact, what little exemptions are there should also go to make the (tax) structure rational."

Auto

If this writer were to look for an ideal candidate for the 2 per cent education CESS the Finance Minister will levy on certain products, it would be cars. That should drive up the prices of cars some-in the small car segment for instance, prices could increase by over a per cent. The Society of Indian Automobile Manufacturers is lobbying for a 8 percentage point reduction in the excise duty on cars and utility vehicles (from the existing 24 per cent to 16 per cent), the scrapping of the 1 per cent national calamity contingent duty imposed last year, and the removal of the 4 per cent special additional duty. It is likely to get nothing.

Exports

Exporters can all but wave goodbye to the various sops that helped them enjoy profits that were, in part, tax free (the facility was phased out over five years and starting 2004-05, profits from exports are fully taxable). The United Progressive Alliance government is unlikely to restore the sop although exporters have been lobbying hard for it. The latter claim that with transaction costs being as high as they are in India, the government should either strive to reduce them or, make amends by making at least part of their profits tax-free. The Budget is unlikely to be able to do anything in the area of transaction costs and the Finance Ministry has already articulated its position that there can be no question of bringing back an exemption that has been phased out. For the record, despite an appreciating rupee in 2003-04, India's exports grew by a healthy 17.26 per cent to $61.8 billion (Rs 243,800 crore).