Finance Minister Jaswant Singh presented a try-and-please-all Budget to Parliament on Friday, with a modest attempt at deficit reduction and an even more modest tax effort of Rs 339 crore.
Interest rates were nudged further down and the stock market given some sweeteners. There were incentives for key sectors like infrastructure, textiles and tourism, forming the core of the revival thrust in the Budget.
The finance minister said he was focusing on reviving growth, and said in an interview that he had tried to balance competing objectives of equal validity.
The feel-good factor came through concessions in direct taxes: benefits on standard deduction for salaried tax-payers, changes in the income tax surcharge, reverting to the dividend distribution tax on companies while making it tax-free for shareholders, and abolishing the long-term capital gains tax on fresh investments for one year, from tomorrow.
In a bow to the election season, the finance minister also announced an expansion of the subsidised food programme for poor families, a new low-budget group insurance scheme with a government subsidy thrown in, and re-instatement of the leave travel concession for government employees.
Against this, the principal revenue raising measure was a hike in the service tax from 5 per cent to 8 per cent, and the most important act in terms of biting the bullet was dropping the interest rate on small savings by one percentage point -- which the Reserve Bank followed up by announcing cuts in the repo rate and the savings bank rates.
All the expected tax reform measures were presented: introduction of the state VAT from April, a drop in the peak tariff rate by 5 per cent, to 25 per cent, and elimination of the 4 per cent and 32 per cent slabs in excise duty (leaving three duty slabs of 8, 16 and 24 per cent).
In the process, cars, air-conditioners, soft drinks and polyester yarn (among others) have become cheaper (following the abolition of the 32 per cent slab), as have bicycles and toys (among several that are now exempted from excise following the abolition of the 4 per cent slab).
Some manufacturers have already announced price cuts, and more are expected. Companies have their tax surcharge halved to 2.5 per cent, while individuals have it abolished.
But those with a taxable income beyond Rs 8.5 lakh will pay more, since the surcharge has been doubled to 10 per cent (in effect creating a new tax slab of 33 per cent for individuals).
Among non-fiscal initiatives, the finance minister announced the removal of 75 more items from those reserved for small-scale industry, while the 10 per cent voting limit for any one shareholder in a bank was abolished.
The foreign investment allowed in private banks was raised to 74 per cent, and incentives were announced for mergers and acquisitions in the banking sector -- the combined effect being to prepare the ground for foreign banks to take over some Indian ones.
The Kelkar reports were recognised only to the extent of dividend tax and capital gains tax changes, and several steps will be taken to ease the taxpayer's interface with the tax machinery, including changes in the rules for search and seizure.
Spending through the Budget has been kept within tight limits: total spending is up less than 9 per cent, and support for the annual Plan has increased by barely 6 per cent.
But the finance minister announced an ambitious new road programme costing Rs 40,000 crore, which will take some time to materialise. Part of the funds will come from an increase in the cess on diesel, from a rupee per litre to Rs 1.50.
The stock market responded uncertainly, while virtually every businessman interviewed on the TV shows expressed satisfaction.
There was nothing in the Budget to provoke popular discontent, other than the cut in interest rates, but the announcement of a very small increase in fertilizer prices provoked an instant response from the Opposition benches in the Lok Sabha.
At the end of a Budget speech that set a record by lasting well over two hours, Jaswant Singh said his fiscal deficit next year would be 5.6 per cent, down from the current year's revised estimate of 5.9 per cent (originally 5.3 per cent).
Since the revenue growth estimates, at 13 per cent, are only slightly higher than the postulated growth of nominal GDP, at 11 per cent, the assumptions in the Budget numbers are more cautious than a year ago.
But if the Budget stimuli don't spark higher growth, then the fiscal calculations could go wrong yet again.
The Policy Initiatives