February 28, 2006, New Delhi, Press Release

Mr Chidambaram’s budget for 2006-07 did not come out with any fanfare. It simply followed the famous American maxim, “If it ain’t broke, don’t fix it,” says Pradeep S. Mehta, Secretary General, CUTS International.

Taking cue from yesterday’s economic survey which projected economic growth of 8.1% the Finance Minister did not raise the corporation tax or income tax paid by the rich but did not dither from raising the indirect taxes paid by all the others, Mr Mehta said.

What he gave with one hand, he took away with the other. On the taxation front, where as the custom duty on non agri products is reduced from 15% to 12.5%, a CVD of 4% is imposed on most imports. Thus the import duty has gone up from 15% to 17%. Similarly, the rate of Service Tax has been raised from 10% to 12%.

As all domestic production in an open economy is priced on trade parity basis, one can expect prices to go up. This is contrary to the advice given in Economic Survey to keep a check on inflation, Mr Mehta said.

Indirect taxes on manufactured goods in India are among the highest in the world. Consumers pay CENVAT at 16% and over and above this is the cascading 12% VAT raising the total to almost 30% taxation.. This is against an average indirect tax in China of about 13-14% and even in developed countries in the West of about 18-23%.

Even the risk averse small investor who was seeking an equitable treatment for investment in Fixed Deposits in banks has been given only a token concession as a very long maturity cut off of five years has been set.

The only real concession to the small investor is the creation of an Investor Protection Fund under SEBI to be funded by fines and penalties.

Mr Mehta however welcomed the FM’s move to recognise that the poor can not wait indefinitely for the fruits of growth to trickle down to them. In addition to aiming for 10% growth of GDP in the next fiscal, he made allocations to specific sectors which target the weaker areas of the economy including rural electrification, rural telephone connectivity, farm credit, irrigation, low cost loans to farmers and development of tourism destinations.

Education and health have been given particular emphasis and they are certainly areas where government intervention is most necessary. Similarly, setting up of gender budgetary cells to support women is a welcome move.

In the manufacturing sector, emphasis has been laid on textiles, food processing, petroleum, chemicals and petrochemicals, leather while in services, tourism and software have been identified all of which can generate large number of jobs, Mr Mehta added.

Food processing is one area which has till now not been given its due attention. Food processing will now be treated as priority sector industry for bank credit and should be able to reduce wastage on the farms and thereby increase farm income.