Finance Minister P Chidambaram, on Thursday, announced the Annual Bughet for 2004-05. Here he explains the thinking behind his first UPA Budget.

The general impression is that you have taken a series of small steps in your Budget but there is no big vision. What is your big vision for this Budget?

I am surprised that you should say that. Let's not forget that we are the original reformers and we are eight years older and wiser. This Budget was for reforms.

There is the farmer constituency, a rural constituency, young men and women with very little education and no jobs, no votes, no sanitation, no roads, no primary education for their children, no basic medical care. That constituency is being addressed.

If you want a quote to describe it, I can only quote Joseph Stiglitz, who said, "We must learn to care and reason." We have brought both thought and passion into this Budget.

One of the three major objectives you said in your speech was growth. What is there in the Budget for growth?

If agriculture grows, everything will grow. If agriculture grows, there is more investment, more income, more money to buy things, so everything will grow.

So you are pinning everything on agricultural revival...

But I have not done anything negative to manufacturing.

But you have not done anything positive.

We have been doing positive things for these guys for the last seven or eight years starting from my cutting corporate taxes. What does manufacturing want that we have not done?

But you are expecting a 40 per cent increase in corporate tax revenues. Where is that going to come from?

Now there is a historical growth trend in corporate taxes and in the first quarter corporate taxes have been growing. Add the 2 per cent cess that we have imposed on all taxes, plus a tidy sum from undisputed arrears in tax.

But you have also assumed a 25 per cent increase in income tax collections despite a huge giveaway.

What I have given away is Rs 1,750 crore (Rs 17.5 billion).  

But you have a 25 per cent growth in income tax this year over last year.

Well, last year, BE (Budget Estimates) was Rs 44,000 crore (Rs 440 billion) and if you compare BE to BE, which is the right comparison, Rs 50,000 crore (Rs 500 billion) is only a 20 per cent increase and that is consistent with the historical growth trends.

But why don't you take the RE (Revised Estimates) , which is the real base and reflects reality?

That's never done. RE can be because of lax tax administration, or because in the run-up to the election tax has not been collected and so on. You always compare BE to BE and RE to RE.

If one works through the Budget numbers, the assumption for GDP growth is about 13.5 per cent. If you deduct 5 to 5.5 per cent inflation, you are looking once again at close to 8 per cent growth. Agriculture can't give you that, given the high base last year, so aren't you making optimistic assumptions on growth and taxes?

Growth will give me a certain amount of revenue. But I will also get revenue from undisputed arrears. And I will tighten excise.

Did you take over an economy and government finances in good shape or in poor shape?

We took over an economy that was resilient, with very comfortable forex exchange reserves. But we also took over when crude oil prices shot through the roof and the American economy was probably overheating.

What about the state of government finances? Did you have empty coffers?

There is no such thing as empty coffers -- that's just political rhetoric -- money is a flow. But we were also handed over huge defence capital expenditure.

That's the big question. Why have you actually decided to double capital expenditure in defence?

Those are one-time extraordinary demands, contracts have been signed. But except for the post-Kargil year, please look at defence capital expenditure, it has virtually stagnated.

So this no signal to the world that India is becoming a big defence spender?

No, it does not signal anything. On the contrary, we are committed to the peace process.

Coming to the stock markets, it has fallen about 100 points. Are you concerned or not bothered?

I am concerned in the sense that the stock market has not fully absorbed the entire Budget. It is reacting to the securities transaction tax. But we can debate that. I have material to show that many countries have a similar tax at much higher levels.

Can I point to two contradictions. Number one, if you make short-term capital gains on the futures market, you pay 33 per cent. If you make gains on the spot market, you only pay 10 per cent tax. The second contradiction is that if you make a windfall gain on a stock market in two days or one week or whatever, you pay 10 per cent. But on normal income you pay up to 30 per cent. Isn't there an equity issue here?

There is no equity issue here. For futures, they are treating that as a speculative transaction but we are looking into that. That's simply a matter of tax treatment.

Let's look at the fiscal aspect. What are we saying? We are saying we treat all securities transaction alike but we impose a very, very small tax on those transaction -- it's much lower than in most other countries.

But what if the stock market falls, you will actually lose revenue...

That's just an initial reaction. Besides, I have abolished tax on long-term capital gains. The point is that this is a neat, simple tax, completely transparent. Eventually it will pick up. That has been the history of many countries.

How much extra money do you expect from this tax?

It is very difficult to say because six months have gone. We assume another Rs 500 crore (Rs 5 billion) to Rs 600 crore (Rs 6 billion). Nobody can estimate what capital gains we collect, so we can only make an assumption.

Was this really meant to neutralise the "Mauritius effect"?

That's only a part of it. We need to get over this definition of long-term and short-term. What is long-term for one may be short-term for another. What is long-term for one scrip may be short-term for another.

If the markets takes this badly and continue to fall, would you consider lowering 0.15 per cent?

0.15 per cent is rock bottom.

But you are still collecting money from the market...

We think we are going to collect money. Nobody knows what capital gains we collected. We think it is revenue positive or, at best, revenue neutral.

The Left parties are already upset with the increase in foreign direct investment limits in insurance. Is there a possibility of a rollback there?

I had sounded them out before the Budget that this was an idea I was considering. But on insurance we need more capital. I started with 20 per cent, which was defeated, a bill on 26 per cent was cleared, the IRDA recommends 49 per cent, the insurance companies want 49 per cent. I think over time, we will accept the logic of insurance going up to 49 per cent.   

The real achievement you can see in the numbers is the reduction in the deficit. Is this helped by your debt swap with the states? You are taking back loans from the state and the new money that they are borrowing is not from your Budget. So some of the state debt goes out of Budget.

No, it's a capital receipt for me. I credit it into the NSSF (National Social Security Fund) only twice a year. I am taking a capital receipt. Let us see what the revenues and expenditures are like I may credit the whole amount to NSSF if I don't need it.

You have pleased a lot of people, but the stock markets are still very unhappy with you. Are you willing to talk to them about this securities transaction tax?

I will, but please remember that the idea of this tax was put to me in my meetings in Mumbai.

Do you have a problem with the income tax payers who expected the tax slabs to be spaced out?

It can't be done this year, there would have been a huge revenue loss. You can do that only if you remove all exemptions. The Kelkar committee made certain recommendations.

The Kelkar task force, whose draft report I have only just seen, changes some of these recommendations. I will get the final report on Monday or Tuesday next. So we will examine this and something will happen in next year's Budget, I promise you that.

Will the turnover tax decision affect the overall assessment of your Budget?

No I don't think it's a mistake. I can't look for judgements being made by the stock markets. I must look at everybody's judgement. The stock market is only one part. If they have made a negative judgement, I will do my best to allay their apprehensions.

Are you willing to be flexible and reconsider certain areas like transaction tax -- there may be many others?

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