BOMBAY, 12 July 2004 — On July 8, Finance Minister P. Chidambaram presented the union budget for 2004-05. He surely had a tough task at hand, a balancing act of keeping both economic pragmatism and political correctness intact.

If the previous government concentrated more on urban development, this newly elected government’s main focus area was rural upliftment and agricultural progress. The main objective of the budget seems to have been fiscal and agricultural consolidation.

There is a lot which Chidambaram has attempted to do in this budget but with the new government coming to power just 2-3 months back, it would have been too much to expect Chidambaram to revamp and redo all that which the previous government had done.

The main emphasis in this budget has been on agriculture and upliftment of the farmer. Major portion of the budget allocation has gone toward this. The last five years saw macro growth and this budget aims at changing the emphasis to a more micro level.

But the big question is — will the well meant plans get implemented or will they remain merely on paper with most of the funds getting siphoned off by corrupt politicians, as has always been the practice? Though the Finance Minster (FM) has given a break-up of the proposed expenses in rural India, there is no clear direction presented in terms of how it is ensured that this earmarked money actually gets spent for the purpose that it has been allocated for. In short, there is no roadmap for implementation. The budget can be labeled as “visionary.” The main aim of the FM, through this budget seems to be to improve rural India which in turn is expected to give impetus to demand for industrial goods.

For the Non-Resident Indians (NRIs) this was not a very good budget as interest earned from a Non-Resident (External) Account and interest paid by banks to a Non- Ordinary Resident on deposits in foreign currency will now no longer be exempt from tax. These exemptions will cease prospectively from Sept. 1, 2004. This means that interest income from these deposits will be clubbed with the other income of NRIs earned in India, and be subject to income tax.

It’s a clear signal from the government that NRI deposits are no longer welcome. In fact, the FM explicitly said the tax exemptions had outlived their utility. One of the main triggers for the FM’s move is that forex reserves are really robust, and clearly Reserve Bank of India doesn’t feel the need to give special sops to attract NRI money. The outstanding NRI deposits have increased from $13.7 billion at end-March 1991 to $33.2 billion at end-March 2004.

Like the farmer, the FM has tried to keep the lower middle class also happy. He hiked the income tax exemption limit to Rs.1 lakh. But finance being a business of give and take, he also imposed a 2 percent education cess on all central taxes to raise upto Rs.50.00 billion a year.

There was clarification on the issue of gift tax also. This tax was abolished in 1997. Though that decision remains, the FM has taken steps to plug the loophole to prevent money laundering. Accordingly, purported gifts from unrelated persons (not blood related), above the threshold limit of Rs.25,000, will now be taxed as income. Gifts received from blood relations, lineal ascendants and lineal descendants, and gifts received on certain occasion like marriage will continue to be totally exempt.

Coming to the issue of small savings instruments, no changes were made in the existing rates of interest. Consequently, PPF, GPF and the Special Deposit Scheme will continue to attract 8 percent interest this year.

For senior citizens, a new scheme has been introduced, called the Senior Citizens Savings Scheme offering an interest rate of 9 percent per annum. The Government Savings Bond which will carry an interest rate of 8 percent per annum will also continue.

He has tinkered with the capital gains tax also which actually caused a lot of heartburn with the Indian stock markets. He abolished the tax on long-term capital gains from securities transactions altogether and following his policy of give and take, a 0.15 percent tax on transactions in securities was levied.

Chidambaram has made changes in tax on dividends distributed by mutual funds also. Equity-oriented mutual funds will continue to be exempt from tax. While, debt-oriented mutual funds and individuals will continue to have the same rate of 12.5 percent, corporate unit holders will have to pay 20 percent. This was done mainly to close the window of arbitrage opportunity.

Apart from all the tax angles, the budget is expected to be inflationary. The cost of living might certainly go up. Prices of wheat and rice are expected to go up. Cars will cost more as excise on steel has been hiked.

Computers, mobile phones, tractors and gas stoves will become cheaper with the lowering of duties while imitation jewelry, steel, cakes and pastries will become costlier. Apart from these, pens and ball point pens, non-alcoholic beverages such as chocolate and malted food drinks, branded and packaged preparations of meat, fish and poultry would also become cheaper with reduction or exemption in excise duties.

However, items such as contact lens, playing cards, candles, prefabricated buildings, laboratory glassware, plastic insulated ware, clocks and watches will become costlier.