Economic Infirmities Will Continue Under the Union Budget 1996-97

Summary

This is a Forum of Free Enterprise booklet based on a Mumbai public lecture by chartered accountant and tax authority H. P. Ranina, dissecting Finance Minister P. Chidambaram’s maiden Union Budget for 1996-97 under the United Front Government. Ranina concedes that the Budget tries to placate the parties supporting the Government by working within the Common Minimum Programme — bumping rural development outlays by more than Rs. 1,000 crore and social services by almost Rs. 1,700 crore — but argues that across all three of its stated objectives (fiscal stabilisation, poverty alleviation, infrastructure) the Budget falls short. He warns that the budgeted deficit of Rs. 6,578 crore (nearly 5% of GDP) probably understates reality, since the customs duty projection of Rs. 44,435 crore assumes an implausible 50% collection jump, and that scheme proliferation will simply fatten the bureaucracy without reaching the intended beneficiaries.

The heart of the booklet is a tax-and-capital-markets critique. Ranina condemns the proposed Minimum Alternative Tax under section 115-JA as ‘totally regressive’ and ‘morally unjustifiable’, because zero-tax status exists by the Government’s own design (differential depreciation rules under the Companies Act 1956 and Income-tax Rules 1962) and the levy will punish exporters, R&D performers, and units in backward areas. He documents a liquidity crunch driven by Government borrowing crowding out industry, with interest rates ‘preposterously high’ at 20%, and savings rates fallen from 24% to about 19%. He treats the failure to abolish the tax on dividends — at a revenue cost of only about Rs. 75 crore — as a missed opportunity to revive investor confidence, and is sharply sceptical of new sections 54-EA and 54-EB, which he reads as a device to divert savings into Government-controlled instruments such as bonds of the new Infrastructure Development Finance Company.

On infrastructure, Ranina calls the IDFC’s Rs. 5,000 crore authorised capital and the Rs. 200 crore National Highway Authority allocation a ‘scratch on the surface’ against a fifteen-year requirement he estimates at roughly Rs. 250,000 crore. He flags the absence of any serious provision for land acquisition (35–40% of expressway costs), the dependence of the promised US$10 billion in foreign direct investment on credible infrastructure execution, and unfunded burdens in public health and irrigation. His indirect-tax pass shows winners (textiles, automobiles, electronics, pharmaceuticals, detergents) and losers (steel, cement), and his conclusion is that, apart from the long-overdue permission to issue non-voting shares, the Budget contains ‘nothing exciting’ and leaves the Finance Minister with an unfinished agenda to be tested in February 1997.

Key points

• Ranina credits Chidambaram for working within the United Front’s Common Minimum Programme and stepping up rural development (+Rs. 1,000 crore) and social services (+Rs. 1,700 crore, mostly education), but treats the political accommodation as the Budget’s defining limit.

• He doubts the credibility of the Rs. 6,578 crore (≈5% of GDP) deficit target, noting that Manmohan Singh’s Rs. 5,000 crore deficit projection for 1995-96 overshot by 50% to Rs. 7,600 crore, and that the new customs duty estimate of Rs. 44,435 crore assumes an implausible 50% collection jump.

• The proposed section 115-JA Minimum Alternative Tax is condemned as ‘totally regressive’, discriminatory against companies (sparing sole proprietors and partnerships) and as punishing units that align with national priorities — export promotion, R&D, backward-area industry.

• Industry faces a structural liquidity crunch because Government borrowing absorbs new money supply, keeping interest rates at a ‘preposterously high’ 20%, while the household savings rate has slipped from 24% to about 19% with no offsetting incentives.

• Ranina urges abolition of the tax on dividends (revenue loss only ≈Rs. 75 crore, since UTI, mutual funds and FIIs via the Mauritius route already pay little) as a low-cost lever to revive investor confidence and the capital market.

• Sections 54-EA and 54-EB are read as a mechanism to divert capital-market proceeds into Government-controlled bonds — notably IDFC paper — rather than into listed equity, monopolising savings for socially-oriented sectors.

• Infrastructure outlays (IDFC’s Rs. 5,000 crore authorised capital, Rs. 200 crore for the National Highway Authority) are dismissed as scratching the surface of an estimated Rs. 250,000 crore fifteen-year requirement, with no allocation for the 35–40% of expressway cost that goes to land acquisition.

• Sectoral winners from indirect-tax changes are textiles, automobiles, electronics, pharmaceuticals, and detergents; steel and cement are hurt by higher raw-material and freight costs; non-voting shares are the lone genuinely pro-industry reform.