The stage, you could say, a decade after the dream budget was set for an encore. In 1997, he unleashed India to enable it to cohabit with the world by slashing duties, taxes and levies. Ten years later as India Inc. seems set to conquer new markets, he could have yet again gone for big bang reforms, used buoyant revenues to slash taxes and unleash the entrepreneurial spirits. In an environment where there was scarce applause in Parliament and outside for his achievements-be it the 9.2 per cent GDP growth or the low fiscal deficit-Chidambaram chose to or was forced to be dour rather than daring. The optics of politics overwhelmed the scale of economic opportunity. Not surprisingly, the overwhelming sense was one of lost opportunity. CII President R. Seshasayee said the Budget was "disappointing", while FICCI President Habil Khorakiwala said the increase in cess (for education) and dividend distribution tax "would send a wrong signal to the corporate world".

It would be churlish to conclude that he did nothing. He has taken a few bold steps too. The establishment of a Debt Management Office will free the RBI from the conflicting roles of being both the monetarist and the government's money manager. The cutting of peak import duty from 12.5 per cent to 10 per cent aligns India with east Asian levels and makes free trade agreements with ASEAN and other countries easier. The duty cuts may also bring down manufacturing inflation in some sectors. The real estate sector is threatened by an artificial asset value bubble and by targeting pass-through benefits to venture capitalists investing in the sector, he has attacked realty inflation.

SMALL MADE BEAUTIFUL

The Budget boosts entrepreneurial spirit with its SME package Chidambaram has taken several measures to give a boost to small and medium enterprises (SMEs). Industries with a potential to grow have been given a quiet nudge through tax holidays. This year's Budget will give legroom to SMEs in textile, hospitality, gems and jewellery sectors. The biggest measure in this area has been the abolition of surcharge on corporate tax. The finance minister has exempted half of the four lakh small service providers from the service tax net. Specific initiatives like the proposal to increase the provision of funds under Textile Upgradation Fund Scheme to Rs 911 crore, will have a long-standing impact. According to B.K. Goenka, vice chairman and managing director, Welspun Group, "The reduction of peak customs duty rate from 12.5 to 10 per cent on non-agricultural products would benefit the industry as a whole." Chidambaram has also proposed to start a credit rating process for SMEs to help them obtain credit at better interest rates. "The gains may be limited, as banks are garnering deposits at high rates," says Sandeep Nanda, head of research at Sharekhan Securities. Budget hotel chains, a new crop of hospitality companies that have been seeking government assistance, have got their share of sops. Anticipating a shortage of hotel accommodation in NCR by 2010, when Delhi will host the Commonwealth Games, the finance minister has proposed to give a five-year tax holiday to hotels that come up in the region. The jewellery sector, which provides employment to about four million people, mostly comprises SMEs. A significant reduction in import duty on gems and rough synthetics is a positive step that will go a long way in helping the companies in this space. Says Vijay Kalantri, president of All-India Association of Industries, "The excise exemption hike announced from Rs 1 crore to Rs.1.5 crore for small-scale industries should have been enhanced to Rs 2 crore." Clearly, there is scope for more in this sector. -By Malini Bhupta

Chidambaram has also done corrections in bits and pieces. The tax exemption on money spent on research, the retention of pass-through mechanism for VC funds for technology, biotech and agri sectors will deliver cutting-edge competitiveness. The raising of exemption for SSIS to Rs 1.5 crore, the removal of surcharge on companies with taxable income of Rs 1 crore, infrastructure status for cross-country gas distribution networks, the creation of a facility for companies to raise exchangeable bonds, interest-free loans to enable new entrants produce bidding documents, cuts in taxes on water pipes-all these steps will help unleash entrepreneurs in small and medium enterprises (see box). It is not very well articulated but the Budget will have a positive downstream effect, creating new players. Also, while Dalal Street may be disappointed, while taxes cannot be exported, there is no reason why profits from exports should not be taxed.

But all this is stuff investors and India Inc. would expect of lesser finance ministers. Chidambaram was expected to set the house of exemptions in order. He has held the view for long that exemptions cost the tax-GDP ratio a lot-Rs 1,75,000 crore at the last count. This enables corporates to pay as little as an average tax of 19.5 per cent when the upper limit is 33 per cent plus cess. Instead of dismantling the exemption Raj, the Budget has indulged in tokenism of the avoidable kind ranging from a new cess to higher dividend distribution tax. Short-term capital tax at 10 per cent is lower than tax on business income (33-plus per cent) and creates a moral hazard. If he had brought short-term capital gains on level with business income, revenues could have been boosted. By not clearing the anomaly he has allowed tax authorities to use discretion to profit.

SENSITIVE INDEX

Sensex slid on echoes from global market and fears of populism Almost an hour before the budget was presented, east Asian markets were in a tizzy. They were worried about China penalising companies for malpractices and clouds above Wall Street. The Budget being seen as a populist exercise only added to the global cues and local fears. Except for the BSE FMCG index all the sectoral indices were hammered. The BSE it index plunged 5.85%, the BSE Teck shed 4.65% and the BSE Metal index declined 4.64%. In the broader market, the losers outnumbered the gainers. Of the 2,530 stocks traded on the BSE, 1,900 declined and 598 soared. The Sensex recovered somewhat but ended the session at 12,938, down 541 points. What has really spooked the stockmarkets is the increase in the dividend distribution tax from 12.5 per cent to 15 per cent and the minimum alternative tax (MAT) being cast on the IT companies which are heavyweights in the Sensex. However, the new tax structure needs to be put into perspective. Profit of it companies from exports will be tax exempt in India. However, it companies pay tax on business done outside India (onsite) in the respective countries where they operate. They do not pay tax here on overseas earnings. Now they will pay mat on exports and get credit of tax paid overseas. "In our opinion, the mat effect, and it is 11.8 per cent including surcharge and cess, will be much less. Infosys, for instance, already pays more tax than mat and can claim credit on tax paid in those countries," says Sunil Godhwani, CEO of Religare Enterprises. One good thing is that there has been no change in the security transaction tax (STT), which the market feared. By and large, however, the significance of the Budget has been steadily declining as policy measures have become more transparent and the Government seems to be keen on maintaining continuity in the growth cycle. While not many policy initiatives were announced, not too many were expected either and this stability matters to the capital market. A zero increase in STT, corporate tax, personal tax rate, service tax, and capital gains tax are signs of the Government not wanting to rock the boat. -By Malini Bhupta

19% is the effective tax rate shelled out by companies, thanks to the exemptions raj The budget could have corrected long-term anomalies in the farm sector and spurred investment in industry to resolve supply and capacity constraints to fix inflation. High Growth can only be sustained if the problems of poor infrastructure and skilled manpower shortage are addressed. The budget fails to do so. 17% is the post budget growth in government expenditure. The high level of forex reserves at $180 billion is not being leveraged sufficiently. It could have been used to create strategic reserves of crude and foodgrain.

The unfettered tinkering with levies, taxes and duties suggests a babu mindset. What the Budget lacks is a big vision. The great leap forward needed to attain 10-plus per cent growth. If there is talk about overheating, it is primarily driven by asset inflation caused by supply constraints, by lack of adequate skills training for manpower supply and by lack of infrastructure. The Budget does not address this adequately. The second part of the overheating story is about capacity constraints-be it in industrial capacity or in power. This is mainly because of the time-lag between investment intent and actual production. A kitty for big power projects, a fund for airport upgradation, a time-bound plan for clearing investments could have enabled faster capacity creation driving output, supply and competition to keep prices down.

Instinctively, one gets the feeling that Chidambaram has held back on his ideas. Perhaps he believes that industry is on a roll and doesn't need intervention or he didn't want to create headlines that would dent the political climate. Either ways, it is a bad call. The Indian economy used the low interest regime to restructure, compete and go global to notch high growth rate. Now it is poised like traffic at the end of a flyover, facing a bottleneck that is bound to slow it down.

-with Malini Bhupta and Nandini Vaish

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