Vat promise spreads cheer but for high debt

Chennai | Updated: Jul 31 2006, 05:30am hrs
The promise to introduce value added tax (Vat) and the absence of any fresh levy, along with signs of transparency and partnership in governance, in Tamil Nadus budget 2006-07 has cheered trade, industry and investors.

But economists sounded a note of caution. They view high borrowings and increasing repayment commitments as lurking dangers with the potential to derail the governments fiscal plans.

Progressive and industry-friendly, is how industry associations and chambers of commerce have described TNs budget 2006-07. One of their major demands was the Vat introduction.The budget has given a firm commitment of Vat introduction from January 1, 2007.

The governments openness and pre-policy consultations are being viewed as positive signals that would augur well for its development. This would increase investment flow and speed up project implementation, say industry sources.

Critics point out that the governments debt liability as on March 31, 2001, was Rs 28,685 crore. By March 31, 2006, its debt liability mounted to Rs 56,094 crore. Added to this is the proposal in budget 2006-07 to fund the entire fiscal deficit through a net borrowing of Rs 7,453 crore.

The state finance department, however, justifies this borrowing by saying that the fiscal deficit has been kept below 3%. Another justification is that even now the debt burden is below 15% of gross state domestic product. Anything below 20% would keep the state out of a debt trap, say theofficials.