Finance minister Yashwant Sinha has his task cut out for himself. He has to stimulate growth of the manufacturing sector, which has been stagnating, through a set of fiscal and non-fiscal measures in the forthcoming Budget. Although the perennial problem of balancing the conflicting demands of furthering fiscal prudence and loosening the purse strings to engineer growth will haunt Mr Sinha as he sits down to prepare the budget for 2002-03, he will have to gamble on growth to make these diametrically opposite ends meet.

The need, at the moment, is to fight the menace of fiscal deficit through the antidote of economic growth and Mr Sinha’s success would be judged by his efforts to reverse slowdown and stimulate growth

Despite the pressing need for additional resource mobilisation to improve sluggish tax collections, Mr Sinha is unlikely to tinker with the tax rates as the same may emanate wrong signals and delay industrial revival. The focus, however, will be on increasing revenue collection by stimulating growth. Removal of tax exemptions and tightening of the tax administration, of course, would form a part of his strategy to check evasion.

On the non-fiscal front, the battle to free the agriculture sector from fetters of legislation, take recommendations of the Expenditure Reforms Commission to its logical conclusion, eliminate de-merit subsidy, privatise public sector undertakings, further labour and power sector reforms, and second generation reforms will continue. The other pressing agenda before Mr Sinha will be to fulfil his last Budget promise of dismantling the administered price mechanism for the petroleum sector.

As far as taxes are concerned, current direct tax rates are likely to be retained, although the slabs may be adjusted in case of personal income tax taking into account inflation and other factors. Mr Sinha has already indicated that the corporate and personal income tax rates at present were reasonable.

However, various exemptions on the personal income tax side, including those provided to small savings and charitable institutions are under examination, and are set to be rationalised. Contribution to pension may be included in Section 88 of the Income Tax Act to provide a boost to pension sector reforms.

The government is also likely to tighten its grip over the tax deducted at source (TDS) and capital gains tax to stop revenue leakages. The TDS ambit may also get extended to new areas such as share transactions with rationalisation of TDS rates. Further, the vigil on accounting by companies and deductions claimed by them may also get strengthened through the required changes in the norms.

One segment which may get some relief in the budget is exports. As per the projection of the ministry of commerce and industry, exports during the current year will grow by only 3 per cent against 20 per cent recorded in the previous financial year. Considering the fact that exports are not doing well, Mr Sinha may reschedule the removal of tax exemption for exporters. Under the existing schedule, tax exemption to exporters has to be reduced to 50 per cent from 70 per cent in 2002-03.

To make industry competitive in the globalised atmosphere, corporate restructuring norms may also get relaxed in the next budget for the purpose of providing tax breaks. Amalgamation and de-merger norms may see some major changes including reduction in the stipulated period for continuation of business activity for the amalgamated company.

On the indirect tax side, service tax is going to be the focus area in the current budget. The government is likely to extend service tax to new areas and transfer services of the local nature to the states. Tightening of service tax administration would also be one of the areas of action in the budget. The ultimate aim of the government is to integrate services with the Cenvat (Central value added tax) structure.

Customs is also set to witness major changes as Mr Sinha is likely to outline the roadmap for restructuring of import duty rates in the budget. The finance minister has already set a goal of reducing the peak customs duty rate to 20 per cent in three years from 35 per cent at present in his previous budget.

As suggested by the inter-ministerial group on customs tariff structure, Mr Sinha may introduce customs duty reforms based on a two-tier rate structure, which may ultimately be transformed into a uniform duty regime over the years. With this, he is also set to continue with the removal of exemptions on various items initiated in the last budget by imposing 5 per cent customs duty on them. The two-tier customs duty structure suggested by the panel envisages two rates — one for producer goods and another for consumer goods.

In case of excise duty, again the efforts would be to remove exemptions and bring more exempted items under the 4 per cent excise duty category and gradually taxed them at 16 per cent. The items brought under 4 per cent category in the last Budget would be shifted to the 8 per cent category. The idea is to concretise the rate structure of 8 per cent, 16 per cent and 32 per cent for excise duty into a single 16 per cent Cenvat.

The government will also formulate the post-APM excise and customs duty structure for the petroleum sector in Budget 2002-03. The proposal under considera- tion is to switch over from the existing ad valorem excise duty structure for petroleum products to a specific excise duty regime after the dismantling of administered pricing mechanism from April 2002.

Under the new mechanism, it is proposed that for the year 2002-03, the government would levy a specific excise duty/CVD (countervailing duty) of 32 per cent on petrol and aviation turbine fuel (ATF) and 16 per cent on all other petroleum products. However, for subsidised products like PDS (public distribution system) kerosene, domestic LPG and naphtha or fertiliser and power sectors, it is proposed that the excise duty rates should either be zero or at best equivalent to 8 per cent. While doing this, the existing prices may be taken as base for converting the ad valorem excise duty rate to specific rates.

Besides, it has also been decided to have a graded specific excise duty structure for diesel, which constitutes almost 40 per cent of the total consumption of petroleum products. The graded specific excise duty rates for diesel have been proposed to check the variations in retail consumer prices of diesel in states which are remotely located from the coastal areas.

The post-APM customs duty rates are likely to be 5 per cent on crude and 15 per cent on petroleum products. Officials have indicated that while subsidised products, like kerosene, LPG and naphtha for fertiliser and power sector will again have a lower customs duty but in no case would the duties on these products be lower than the duty on crude oil.

On the expenditure front, Mr Sinha will be required to fix realistic revenue targets and work out his expenditure proposals accordingly. Having burnt his fingers this time with revenue estimates going haywire, Mr Sinha will set conservative targets. The finance minister should also resist the temptation of putting too many things on the plate and focus on specific areas of investment that stimulate growth and encourage economic activity. However, this has to be done keeping in mind revenue projections and the need for containing ballooning fiscal deficit.

Although the Fiscal Responsibility and Budget Management Bill has not yet become a statute, no finance minister can overlook the cancerous growth of fiscal deficit which over the years has drastically reduced the manouverability of the government to channelise funds for productive purposes. The need at the moment is to fight the menace of fiscal deficit through the antidote of economic growth and Mr Sinha’s success would be judged by his efforts to reverse slowdown and stimulate growth.