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FEB 26, 2006
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Oil On Boil
A surge in oil prices to almost $70 a barrel on concerns about the restart of Iran's nuclear programme only hints at what may lie ahead? Experts believe prices could soar past $100 a barrel if the UN Security Council authorises trade sanctions against the Middle Eastern nation and Iran curbs oil exports in retaliation. A look at the unfolding energy scenario.

Scrolling E-Tourism
As consumers increasingly look for tailor-made vacations, e-tourism is taking a new shape. Now, search engines are allowing customers to find the best value or lowest price for air tickets and hotels. Here is a look at global trends.
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Business Today,  February 12, 2006
Budgets For All Seasons
Will the Finance Minister deliver an Ideal or Dream Budget, one that walks a tightrope or a Budget that paints the national economy red? Here's a look at what each option might hold.

It's that time of the year once more. P. Chidambaram will soon present his third Budget as Finance Minister in the United Progressive Alliance government. The big questions are: will it be another dream Budget? Will he bow to the dicates of his Marxist allies? Or will he walk the middle path between these two extremes? The answers will be available on February 28. A Dream or Ideal Budget will, obviously, be one that takes the reforms process forward, and generates growth, without any baggage of Left influence; the most Likely Budget will pamper the common man, keep his partners happy and include a few incremental reformist measures; while a Left-oriented Budget (God forbid) is too horrendous even to think about.

The Ideal Budget

The direction of such a Budget is a no-brainer. It should contain measures to push manufacturing sector growth, currently hovering at around 7-8 per cent, up to 12 per cent, thereby increasing the overall growth rate. "It will be difficult, but not impossible, to achieve," says Rajiv Kumar, Chief Economist, Confederation of Indian Industry (CII). Correcting the inverted customs duty structure on a wide range of industrial items-import duties on raw materials and inputs are higher than those on finished goods, thus, discouraging value addition within the country-will be a good first step towards this end.

AGRICULTURAL SLOWDOWN: Agricultural growth has seesawed from -7 per cent in 2002-03 to 9.6 per cent the next, to 1.5 per cent in 2004-05. It is unlikely to cross the 3 per cent mark this fiscal, pulling back overall economic growth.

SLOW PACE OF REFORMS: There has been no progress on disinvestments, labour reforms, subsidy cuts and on easing caps on foreign investments in certain sectors. Given the legislative arithmetic in the Lok Sabha, this state of socialist bliss is likely to continue.

GROWING CURRENT ACCOUNT DEFICIT: The current account deficit grew 54.3 per cent to $7.66 billion (Rs 34,470 crore) for the quarter ended September 30, 2005. This may lead to higher borrowing costs for consumers and companies, slowing down economic activity.

TAXATION ISSUES: The Fringe Benefit Tax is a step backward. Value Added Tax has been introduced without phasing out the 4 per cent central sales tax, adding to the burden of domestic producers. And higher customs duties on intermediates than finished products penalise Indian manufacturers.

THE OIL ECONOMY: The government is wary of raising oil prices in a year when five states will go to the polls. Result: rising subsidies, which are farmed out to public sector oil companies. Indian Oil Corporation incurred a loss last quarter while the profits of Bharat Petroleum and Hindustan Petroleum fell 43 per cent and 33 per cent, respectively, in 2004-05. Clearly, such losses are unsustainable in the long run. And that's over and above the oil import bill that will touch Rs 1,72,326 crore this fiscal.

The ideal Budget should also make it mandatory for all states and Union Territories to uniformly implement Value Added Tax (vat) and simultaneously do away with the 4 per cent Central Sales Tax (CST). "It will be even better if the government announces a single rate goods and services tax (GST) at an early date to remove all disputes and anomalies in the central excise and service tax structure," says D.K. Srivastava, Director, Madras School of Economics. If implemented, these two measures will rationalise the lop-sided indirect taxes structure in the country and nudge the manufacturing sector into a higher growth orbit.

An ideal Budget will obviously have a high feel good quotient. Abolishing the Fringe Benefit Tax (FBT) and the Banking Cash Withdrawal Tax will generate disproportionate amounts of it as will a reduction in the indirect tax rates (both vat and excise duty). Introduced in the last (2005-06) Budget, FBT shifted the tax burden on perquisites from employees to employers and became a nightmare for the latter. The reason: many legitimate expenses, such as business promotion activity and work-related travel, have been classified as perquisites and are being taxed at varying rates. Says Rahul Bajaj, Chairman, Bajaj Auto: "The FBT is neither logical nor equitable and creates all kinds of problems while filing income-tax returns. So, I would humbly urge the Finance Minister to rethink the tax." India Inc. is even willing to pay for this: industry leaders say they don't mind paying an additional 2 per cent corporate tax-over and above the current rate of 30 per cent-to compensate the government for any losses. FBT apart, the direct tax structure in the country is benign and needs only some minor adjustments to further improve collections.

The other elements of the big picture: large investments in infrastructure and agriculture, land reforms, and the creation an all-India market. This last will mean doing away with or amending laws such as the Essential Commodities Act 1955, Standard of Weights and Measures Act 1976, and the like.

In services, the Finance Minister should ensure that foreign companies with captive business process outsourcing arms are neither taxed, nor made to file their returns here. "Otherwise, the country stands to lose up to $1 billion (Rs 4,500 crore) in revenues and a sizeable number of jobs. And worse, India may even miss the target of $60 billion (Rs 2,70,000 crore) from it and ITEs exports by 2010," says Sunil Mehta, Vice President, Nasscom.

"The Budget needs to increase the weighted deduction for research and development for the pharmaceutical sector from 150 per cent to 200 per cent"
Habil Khorakiwala
Chairman, Wockhardt

But Chidambaram also needs to generate substantial revenues to fund the government's massive social sector and infrastructure schemes. The simplest way forward: reduce the number of tax-related litigations, involving potential revenues of Rs 1 lakh crore, which are currently pending in various courts. One solution could be to set up special economic courts or special arbitration processes. Large public investments in infrastructure development will create a virtuous circle and lead to a "crowding in" of private sector investment. "An annual target for gross capital formation in infrastructure should be announced by the government," says CII's Kumar.

And on the policy front, the Finance Minister should encourage consolidation in the banking sector by amending the Banking Regulation Act of 1949, introduce legislation to govern the micro-finance sector, and raise the foreign direct investment (FDI) ceiling in the insurance sector from 26 per cent to 49 per cent, open up the retail sector and announce labour reforms.

The cumulative impact of all these measures will almost certainly push the gross domestic product growth rate to 9-10 per cent. Will it happen? Given the political compulsions of the ruling coalition, it's highly unlikely.

The Likely Budget

The focus of the forthcoming Budget will be "on the common man and the rural masses", the Finance Minister has already announced. So, we can expect Chidambaram to unveil measures to generate employment and announce higher budgetary allocations for health, education, rural infrastructure and irrigation. And sectors such as textiles, chemicals, handicrafts, food processing, pharmaceutical and automobiles can expect tax breaks because of their employment generation potential.

"Given the state of Indian infrastructure, the Budget needs to allocate an additional Rs 10,000 crore per year for infrastructure development"
Venugopal Dhoot
Managing Director, Videocon Industries

Since Prime Minister Manmohan Singh and Chidambaram himself have promised to bring down customs duties to the levels prevailing in the Association of South East Asian Nations, peak import tariffs will come down from 15 per cent at present to 10-12 per cent. This apart, the Budget is unlikely to unveil radical changes in the country's tax-both direct and indirect-structure other than doing away with area and location-based tax incentives (tax breaks for setting up industries in backward areas). "Since there is little scope for tinkering with the tax rates, the thrust will be on the tightening of the tax administration to prevent leakages. The goal will be to make life easier for tax payers," says a senior finance ministry official. But evaders watch out. The Finance Ministry, armed with countrywide data on big-ticket purchases and other lifestyle expenditure, will intensify the drive to catch the big fish, broadbase the tax base and increase collections.

Some more pointers: the investment climate will become more friendly, and Left or no Left, and the government will disinvest minority stakes in non-Navratna public sector units. And, this is iffy, Chidambaram may once again try to prune the food and oil subsidy bills, and then roll this measure back as a "concession" to Leftwing and populist sensibilities in return for having his way on other issues.

But the real positives in this Budget will be the expected announcement that the government has met the targets set forth in the Fiscal Responsibility Act and the Budget Management Act despite high oil prices, the tsunami, and political compulsions. The negatives will be the unbridled rise in the current account deficit and the absence of any tough reforms measures which are necessary to take the economy up to the next level.

The Left-inspired Budget

The formula for this is simple and should be familiar to anyone who's lived through India's disastrous tryst with socialism: tax the rich further, levy higher taxes on consumer goods and other targets of Marxist ire and squander precious revenues on dubious pro-poor schemes which look good on paper but whose economic value will remain unquantifiable. Says M.K. Pandhe, President of the CPI(M)-affiliated Centre for Indian Trade Unions (CITU) and a member of the party's politburo: "The government will have to face the consequences if it does not desist from taxing the poor and helping the rich and the corporate houses."

"The Budget has to be pro-growth and pro-investment. The Finance Minister wants to refine the Fringe Benefit Tax; but I would humbly beg him to scrap this obnoxious levy"
Rahul Bajaj
Chairman, Bajaj Auto

This means the pension sector will continue to suffer; foreign investment in the insurance sector will remain capped at 26 per cent, and the telecom sector at 74 per cent; disinvestment will be a non-starter; and the small-scale sector will continue to be protected from international competition by high tariff walls.

The comrades feel the "rate of effective taxation" in the country is rather low; so they want higher corporate tax rates, higher income-tax rates for people at higher income levels, and a 15 per cent short-term capital gains tax. Nagesh Kumar, Director-General, Research and Information System for Non-Aligned and other Developing Countries, partially agrees with this idea. "There is a need to moderate the inflow of foreign funds into the Indian stock markets to control the volatility; hence, it won't be such a bad idea to levy some kind of an exit tax when this money leaves the country," he says.

But higher taxes will almost certainly lead to lower revenues and a deceleration of growth rates that economists call the Laffer Curve Effect. And if the government accepts the Sixth Pay Commission Report, the massive resultant outflow on salaries will take the fiscal deficit into the stratosphere. The combined result of these measures will puncture the current consumption-led economic boom, lop off a few percentage points from the GDP and other growth figures, fuel inflation, lead to a crash in the stock markets (remember the first days of the UPA government when every Left leader worth his salt shot his mouth off about economic policy?), and take us back to the era of the Hindu rate of growth (an unfortunate communalisation of a socialist construct). The poor, in whose name the Left would want to visit this scenario upon us, will be the worst losers, but inconvenient facts have rarely ever worried the ideologically pure comrades. Fortunately, though, the Left lacks the numbers to dictate such a Budget.

Then again, Chidambaram may well say "none of the above" and surprise us with something totally different and unexpected. Wait till February 28.

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