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Politics for the individual

Feb 28, 2003

If last year’s budget was the economist vs the individual, this year it is the politician for the Individual. Of course, the railway budget in which there was no hike in passenger fares was a sign of things to come. There was hardly any doubt that the budget would be to clam those annoyed last time. In the budget FY03, the Government had chosen to bite the bullet by choosing to lower the small saving interest rates by 0.5%. However, what had really ruffled feathers was the decision to re-introduce dividend taxes, a 5% surcharge on income taxes and reduction in tax exemptions under section 80L. However, post the FY04 budget announcements taxpayers are likely to rejoice. (Read more).

Lower cost of capital
But the most interesting aspect of the budget announcement has been a bid to woo the populace, while ploughing ahead with structural reforms. Infact, if the announcements made are implemented, they will have significant structural benefits. The boldest step the Government has taken is to reduce the small saving rate by 1%. This will help lower the interest rates in the banking system that loses its flexibility (infact the RBI has already responded to the budget by cutting the Repo rate and the interest offered on savings bank deposits). Consequently, the industry has to borrow at a higher cost and this becomes a barrier to investment. By continuing to maintain a soft interest rate regime, Government is making it attractive for the industry to invest in additional capacity.

Lower cost of capital also helps fuel consumption demand as a significant amount of purchases especially in the auto and housing industry are on loans. Cheaper loans were one of the factors responsible for the strong growth posted by the auto sector between April to November 2002. For banks, housing loans have been the fastest growing segment.

However, the blow to the segment that is hurt the most due to lower small savings rate – the retired and senior citizens, has been softened by introduction Varistha Pension Bima Yojna, a special pension scheme that will provide assure returns of 9% p.a. to the retired and senior citizens. The Government will fund the gaps between the returns of the funds managed and the assured return.

Infrastructure – Shifting to top gear

Another area where the Government has put a significant amount of effort has been infrastructure. This budget announced plans to spend Rs 600 bn in infrastructure projects. These projects include:

  • 48 new road projects comprising of 10,000 Kms at a cost of Rs 400 bn. 25% of these roads are expected to be concretised as announced by the finance minister.

  • Announcement to renovate 2 airports as well as 2 seaports at a cost of Rs 110 bn.

  • Announcement to build two convention centers at a cost of Rs 10 bn.

  • The Rail Vikas Project at a cost of Rs 80 bn.

While these projects will not only improve the operating environment for the Indian industry, but also, generate additional demand for sectors like cement and steel. Further, the employment these projects generate will also help fuel consumption demand. Once the projects are executed, the industry will find operating expenses like freight cost getting lowered due to lesser effort required to transport raw materials and goods.

For development of the power infrastructure, the FM announced that mega power status would now be given to all power projects meeting the existing norms. On the transmission and distribution side, customs duty reduced on high voltage equipments from 25% to 5%. This will lower the procurement cost of the equipments for the power industry.

In our previous article we had highlighted the significant steps taken in the past to lower all factors that act as barriers to industrial growth. With the government continuing to keep its feet on the reforms paddle, the industry is likely to witness an improved operating environment going forward. Thus, while the government has taken steps to please the angered middle class, it has not lost focus on the reforms process.

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