Chidambaram bets big on growth

Updated: Mar 1 2006, 06:36am hrs
Finance minister P Chidambaram placed all his bets on the continuation of the growth momentum to project a 19.5% rise in gross tax revenue next fiscal. Projecting a nominal GDP growth rate of 12% (8% real growth, assuming an average inflation of 4%), he has chosen to steer clear of all controversies by skipping difficult reforms like subsidies, privatisation and petro-products pricing. The impending elections in five states and the Lefts take on these issues too seem to have weighed heavily on his mind.

Mirroring these dilemmas, the Budget has cut the peak customs duty to 12.5% from 15% bringing it closer to Asean levels. In a partial concession to India Inc the provisions of the fringe benefit tax have been modified. Despite a 25% across-the-board increase in the securities transaction tax rate, the markets gave the thumbs up to the Budget, with the Sensex rising 88 points to close at 10,370.

Mr Chidambaram has, however, hiked the service tax rate to 12% and added 15 more services like cruise trips, international business class travel and internet telephony, to mop up Rs 34,500 crore under this head. Services, after all, contribute 54% to GDP but account for just about 6% of the total tax revenues. Stating that this was the first step towards integrating the goods and services taxes, he set April 1, 2010 as the date for ringing in a uniform goods and service tax regime.

The FMs major policy initiatives include dereserving about 180 items in the small-scale category, leaving less than 400 items in the exclusive SSI list and treating SMEs in the services sector on a par with SMEs in the manufacturing sector. He wants to use viability gap funding and funds from the infrastructure SPV to provide equity support to companies manufacturing hi-tech products and chips in a bid to make up for the lost opportunities in hardware.

To give a leg-up to the capital markets, he has tripled the FII investment limit in corporate debt to $1.5 billion and hiked it from $1.75 billion to $2 billion in g-secs.

The silver lining undoubtedly has been the FMs resolve to tread the path of fiscal prudence. Having bettered the projections on fiscal deficit (4.1% of GDP) and revenue deficit (2.6% of GDP) originally set for this year, he has set a stiff fiscal deficit target of 3.8% of GDP for 2006-07.