BOMBAY, 4 March 2002 — The time was 11 a.m.(IST), Feb. 28, 2002. All waited with bated breath for the biggest event of the Indian corporate world to unfold — the presentation of the union budget 2002-03. And the man of the day was Finance Minister Yashwant Sinha. He came striding into the Parliament with the “briefcase” which contained the budget. All waited and waited, 11 a.m. came and went and there was chaos in the Parliament over the unfortunate incident of the burning train in Gujarat.
Finally, some order was restored and Sinha took centerstage at 11.15 a.m. And all heaved a sigh of relief! But the sigh became a groan as the budget was unveiled. The Indian stock markets crashed by a whopping 144 points as the union budget for 2002-03 turned out to be a mixed bag. As usual some cribbed that it was tough while some said that it was a good one. In a nutshell, the budget was not as bad as it is being made out to be but then, it also is not as good as expected. There is no denying the fact that the budget has been presented in the most trying of circumstances. The global slowdown, the threat of an impending war, internal communal tensions, all these have made the conditions quite dire. On the economic front, India’s fiscal deficit soared up from the projected 4.7 percent to 5.7 percent of the Gross Domestic Product (GDP). And for the current year, the fiscal deficit has been pegged at an optimistic 5.3 percent. Under these given circumstances, the budget which Sinha has presented can be termed as a bittersweet medicine.
The boldest move made by Sinha, which is economically very sound but politically threatening is the cut in the fertilizer subsidy by raising the price of urea and other fertilizers by 5 percent. Sinha also kept his promise of continuing with the process of dismantling the administered pricing mechanism (APM) for petro products, starting from April 1, 2002.
The process was further initiated in this budget by doubling the cess on domestic crude to Rs. 1,800 per ton, while he has cut the excise on petrol from 90 percent to 32 percent and on diesel from 20 percent to 16 percent. The budget reduced the prices of petrol by Rs. 1 per liter and that of diesel by 50 paise per liter. On the other hand, he increased the price of cooking gas (LPG) by Rs. 40 per cylinder and increased the price of kerosene by Rs. 1.50 per liter.
On the personal income tax front, though Sinha left the tax rates untouched, he has tinkered around the fringes. In a way, the new tax rates have made the employee happy but the employer unhappy. There are no tax perquisites for those with a taxable salary of Rs. 1 lakhs. Sinha has also removed the tax rebate u/s 88 for those with Rs. 5 lakhs plus income.
Incentives to save have now shrunk as small savers in Public Provident Fund (PPF) and post office savings schemes receiving a 50 basis point lesser return. But the biggest factor which affected the Indian markets, leading to a 144 points fall, was the abolition of the dividend tax. This means that tax will now be repayable by the shareholders and unitholders. For the Indian companies, surcharge has been increased by 3 percent and due to this companies will now pay tax at the rate of 36.75 percent.
For the Non Resident Indians (NRIs), Sinha seems to have gone soft and become more considerate. In this budget, the Indian government has permitted full capital account convertibility. With this now, NRIs will now enjoy full convertibility of deposit schemes with the existing Foreign Currency Non-Resident (FCNR) (B) scheme and the Non Resident External Rupee (NRE) scheme continuing to be repatriable. The schemes which do not offer full convertibility to the NRIs will be discontinued from April 1, 2002.
The existing balances in the non-resident (non-repatriable) rupee accounts will be allowed to be credited on maturity to the convertible NRE account. This move is expected to lead to a strong dollar inflow into the country. And by giving the NRIs this freedom to bring and take out their monies as and when they want will go a long way in boosting the confidence of the NRIs in the Indian markets.
Apart from this, NRIs have also been given the freedom to repatriate in foreign currencies, their current earnings in India such as rent, dividend, pension, interest , based on appropriate certification. Foreign currency borrowers are also expected to benefit from this capital account convertibility. To enable external commercial borrowers (ECBs) to benefit from the lower interest rates, prepayment of the ECBs will now be allowed beyond the current limit of 50 percent of the available balances in the borrower’s export earners foreign currency (EEFC) account.
The Indian government also plans to put the foreign currency convertible bond (FCCB) scheme under the automatic route up to $50 million. And all these sops have been doled out by the government only due to the healthy forex reserves of India which currently stands at $50 billion.
Another positive development is that henceforth, NRIs returning from abroad on transfer of residence (TR) will be able to import personal effects upto a limit of Rs. 5 lakhs, up from the earlier Rs. 1.5 lakh. The customs duty has been reduced to 30 percent and has also expanded the list of “importable” things to include laptops, portable photocopy machines, digital videos and video cassette disc players.
Well, there is now some food for thought. As per figures released by the government, NRIs contributed less than 3 percent of the Foreign Direct Investment (FDI) flows into India in 2001. As against this, expat Chinese contribute two-thirds of the FDI inflows into China. Maybe, starting with this fiscal, with capital convertibility, this will also change.