News: Budget 2007-08 - Focus on agriculture and infrastructure

(Sify 20/02/2007) Mumbai - Since last year’s budget, the stock markets have gained 35 per cent in face of strong corporate earnings, foreign investment buoyancy and a generally a fast growing economy. In addition, we may be looking at a second straight year when the Gross Domestic Product is growing at over 9 per cent. The Budget for 2007-08 therefore had to be a balance one, so as to not disturb the long-term growth perspective. Key areas like infrastructure and agriculture need urgent attention, along with spiraling inflation and fiscal discipline. While tax collections have been buoyant during 2006-07 and may continue to be so in the forthcoming fiscal, a check on non-plan expenditure is in order in the forthcoming Union Budget for 2007-08 to be presented by the Finance Minister P Chidambaram on February 28. Inflation to head list Cutting import duties on some commodities, reducing fuel prices and increasing the cash reserve ratio (CRR) in two tranches for banks are some of the recent measures taken by the Government to control the inflation rate which has touched 6.5 per cent in January 2007. Monetary tightening measures have been implemented by the Reserve Bank of India (RBI) almost throughout the financial year 2006-07. These include raising repo rates for banks, which have already led to a general rise in interest rates in the economy. However, inflation in the food articles category was a thumping 9.97 per cent, pointing to supply-side constraints in this area. The government is likely to spell out ways to ease infrastructural bottlenecks and facilitate higher supply of commodities to ease inflation. Focus on agriculture Agriculture has grown at only 2.7 per cent last year, according to advance estimates of Central Statistical Organisation. The approach paper for the Eleventh Plan has hinted at the need for another Green Revolution for sprucing up agricultural growth and restructuring of existing agricultural policies. In Budget 2006-07, the government announced it would give interest subvention of 2 per cent a year to public sector banks and regional rural banks for short-term production credit up to Rs 3 lakh extended to farmers for Kharif and Rabi 2006-07. The banks were to lend at 7 per cent. The Indian Banks’ Association has recently asked the Finance Minister for an increase in subvention from 2 per cent to 3-4 per cent on farm loans. This development assumes significance as Agriculture Minister Sharad Pawar has urged Chidambaram to further reduce interest rates for farmers to 4 per cent a year given the situation of agriculture in some States, particularly Maharashtra and Andhra Pradesh. Rationalising the tax structure Budget 2007-08 is expected to introduce major changes in non-resident taxation, partly aimed at making it easier for foreign companies to do business in India and encouraging greater investment inflows. These proposals are expected in the new Direct Taxes Code. An amendment is also likely to made in Section 115A, which provides for taxing income from dividends, royalty and technical service fees for non-residents (not being a company) at lower rates of 30, 20 and 10 per cent, depending on the date of the agreement. An amendment to Income Tax Act, 1961, which will define India (for taxation purposes) is also on the cards. The present Act defines a permanent establishment as a fixed place of business and this has resulted in a lot of tax litigation. However, experts feel that three crucial sections - 115AB, 115AC, 115 AD - which deal with tax treatment of individual non-residents and foreign institutional investors are unlikely to be changed in a major way, despite the call for equality from the task force on non-resident taxation. According to JP Morgan Research, while the Budget is likely to continue the process of tax rationalisation, there is no expectation of any meaningful reduction in tax rates. However, any marginal tax rate cut is likely to be accompanied with removal of some tax exemptions. The Government is committed to bringing import duties down to ASEAN levels. Moderation of import duties with continued protection to some sectors is likely to be on the cards. More services are likely to come under the tax net considering that the sector now contributes to more than 50 per cent of the GDP. While agriculture, infrastructure, fiscal prudence, rationalizing taxes and above all controlling inflation, will take precedence over other matters, it is widely felt that sectors like automobiles, capital goods, logistics, food-processing, power, retailing and telecommunication will also get special attention in the forthcoming budget.