Indian Budget 2004-05: Cautious And Radical

Economic policies can make or mar governments. No jugglery of figures on gross domestic product [GDP], fiscal deficits or inflation sways (especially in case of Pakistan and many developing countries) anyone unless there is a real change in living standards, jobs, incomes, infrastructure and much more. The results of elections in the recent past indicate, that Indian population is turning increasingly touchy on issues of governance and development and the defeat of BJP-Led government in is the prime example of that interesting phenomenon.

The 2004-05 maiden budget of the Congress Party-led and Left-backed United Progressive Alliance government presented by finance minister P Chidambaram last week. The budget is continuation of Common Minimum Program [CMP] focusing on social issues of education, health and employment and economy sectors like agriculture, and telecoms, insurance etc have been given impetus. It dealt with many multidimensional issues such as tax relief for agro-based industries and products, starting from spades to tractors, huge expenditure on the country’s water bodies, extra exploration of water resources, food for work, midday meals for poor students, comprehensive schemes for rural and urban poor, income tax and others indirect relief for the middle class, and the like. According to Left parties it is a balanced, budget that would push forward the reform process, including fiscal consolidation in India.

Sr. No.

Main Budgetary Data of 2004-05

Amount Rs.





capital receipts









fiscal deficit

billion (4.4 percent of GDP)



billion (2.5 percent of GDP)


5.87 percent



Forex reserves




billion (April-May)


Indian Budget 2004-05 Highlights

– Fiscal deficit at 4.4 percent of GDP. Curb the budget deficit US$27.4 billion to 4.4% of GDP in the year to March 31, 2005, the lowest in eight years, from 4.6% last year.

– Revenue deficit at 2.5 percent of GDP

– Net tax revenue at 2.34 trillion rupees for 2004/05. Government to widen service tax net in order to increase its revenue and spend it to eradicate poverty, illiteracy and check the increasing ratios of unemployment

– Sustained GDP growth of 7-8 percent (Asia’s third-largest economy after China, and Japan). Nominal GDP growth for 2004/05 assumed at 12-13 percent.

– To line up tariffs with ASEAN countries (Pakistan has recently, also been included in ASEAN, due to which there is severe competition among the countries of Southeast countries).

– Interest payments for 2004/05 at 1.3 trillion rupees.

– Peak customs duty maintained at 20 percent for this fiscal year

– Net government borrowings at 1.503 trillion rupees, including 600 billion rupees market stabilisation securities.

– Focus on infrastructure and rural sectors to provide much needed huge opening for employment in different states of India. It is also essential for rapid socio-economic development.

– Budget to provide additional 100 billion rupees for expenditure, especially for social welfare works.

– Doubling farm sector credit in next three years. (Government of Pakistan has also announced comprehensive credit facilities packages to the farmers). There are frequent floods, droughts, communal riots, severe financial dependency among the Indian framers at large due to which the government of India has announced comprehensive relief and incentive package so that they feel easy and work hard to achieve targeted goals of the government.

– Surcharge of 2 percent on taxes aggregating 40-50 billion rupees to fund education. 2 per cent education cess imposed on income tax, corporation tax, excise duties, custom duties and service. It is noble and great move made by the finance minister of India in order to educate more people and furthermore, enhance the levels of research and higher educational facilities through out the country.

– Banks, financial institutions to provide 400 billion rupees for basic infrastructure. More focus will be given to private sector to enhance the process of rapid industrialization.

– Government to provide Rs. 21.32 billion debt support to state firms, railways in order to give better, easy, comfortable and sustained services to general masses of India.

– Government to remove 85 items from reserved list for small sector.

– No change in interest rates of small savings like PPF, GPF and special deposit schemes. It is the hall mark of all the regional countries of Asia and recent government of India is also pursuing the major policies of pervious government but having clear cut paradigm shift i.e. corporate to rural development or economic growth with a human face in the days and years to come.

– Interest on loans to states reduced to 9 percent from 10.5 percent in order to provide much needed financial cushion to deprived states, enabling them for better and enhanced social works.

– Allocation of 250 billion rupees for backward states. Bihar received Special economic package of Rs 32.25 billion (Lalo Black mailing factor).

– Additional provision of Rs 100 billion for food for work programme, sarva shiksha abhiyan, basic health, drinking water programme
Planned expenditure for 2004/05 estimated at 1.45 trillion rupees

– Benefit for salaried class, income tax exemption doubled to Rs 100,000/- US$2,186. Tax slabs and rates unchanged for others. The demands of salaried juntas have been honored.

– Service tax levied on transport booking, airport services firms but no service tax on road transport firms.

– Excise duty on tractors cut to zero from 16 percent. It is very noble and one of the salient features of the Indian budget 2004-05, just in order to increase the ratios of agriculture growth and ratios of profitability of poorer farmers.

– Excise duty exemptions for some television, mobile phone parts

– Service tax hiked to 10 percent from 8 percent

– The fruits of economic growth, forecast by the central bank or reserve bank of India at 7% this fiscal, will be used for increased spending on health 3% of GDP, education and 6% of GDP and aid to the poor.

– Emphasis on investments in airports, seaports and tourism. Investment Commission to be established

– Hike in FDI limit on insurance to 49 percent from 26 percent

– Government to hike investments in state-run power, telecom and petroleum firms

– Asset sale target in 2004/05 lowered to 40 billion rupees ($873 million) from 160 billion rupees.

– Securitisation law to be changed to hasten bank loan recovery.

– The allocation for implementing the CMP is a mere 0.33% of the GDP, though its computed costs are much higher.

– Medium-term inflation to be in the range of 4-5 percent

– Inflation in 2004/05 to be in the range of 5-6 percent

– Boost investment from overseas by raising foreign-investment limits in insurance companies to 49% from 26% and in telecommunications to 74% from 49%. The FDI limit in the civil aviation sector has also been increased from 40% to 49%. Overseas companies will also now be allowed a 49% stake in an Indian venture against the existing 26%.

– Over Rs 20,000 crore allocated to irrigation projects, restoring water bodies, and flood control.

According to Indian Prime Minister Manmohan Singh, the budget finds a solution to the ills plaguing various sectors and endeavors to combine the rapid economic growth with enhanced social equity. Finance Minister P Chidambaram also focused on the previous government policy of disinvestments. He fully committed to continue of that policy but with lesser speed and intensity. Ruling party is determined to sell the National Thermal Power Corporation Ltd to raise about US$870 million in the remaining seven months of the current fiscal from the sale of part of the government’s stake in state-owned companies.

Despite, the severe opposition of communists in the government the finance P. Chidambaram has taken bold step to attract foreign direct investment [FDI] in the sectors of insurance and aviation and telecom. The budget raised the foreign direct investment [FDI] limit in insurance to 49% from the existing 26%, allowed 74% FDI in telecoms from the earlier 25%, and slightly relaxed the cap in aviation by allowing foreigners to invest up to 49% in Indian airline companies and airports, from the earlier 40%. It is estimated that move would make India inch closer to its aim of attracting $10 billion in FDI a year.

The finance minister of India has also announced some meaningful and applicable reforms and incentives for foreigner investors in order to make India more investment friendly and safe heaven for potential industrialists. The budget 2004-05 facilitated easy and speedy mechanism of registration and operations procedures for foreign institutional investors. The budget 2004-05 also offered huge incentive to foreigner investors in shape of their investment ceiling in debt funds from $1 billion to $1.75 billion. It also waived the tax on gains from investments for all investments held for more than a year. The budget also reduced the short-term capital gains tax from 30% to a flat 10% for all. However, in lieu of the long-term capital gains tax, the budget introduced a new tax called the turnover tax a tax on the total transaction of securities at 0.15% on all capital market players, which incidentally spooked the stock markets.

Generally applauding the United Progressive Alliance’s maiden budget, the country’s apex chambers and captains of Indian industry said this Budget would drive demand and encourage investment that would benefit the corporate sector as a whole. Like Pakistan’s stock exchanges (imposition of CVT Tax+ other Wealth Taxes) the Indian counterparts also shocked by the imposition of the new tax. The Indian stock market players such as brokers and speculators hammered the markets down by 112 points last week quickly realized that at 0.15% its impact is miniscule compared to the erstwhile long-term capital gains tax rate of 20%, afterwards the markets recovered, gaining 101 points to close at 4,945 points.

Budget 2004-05: Incentives and Initiatives of Agriculture and Allied Sectors

Shining India as coined or propagated by the pervious government of BJP-led Alliance is a misnomer. It benefited a few while the rest were left behind. The majority was made to watch from the sidelines while others celebrated their success. Bangalore and Hyderabad, the two boroughs of shining India, saw their chief Ministers ate humble pie at the hustings as another India not often seen or heard in the form of farmers, peasants and landless laborers made their presence felt in the recent polls.

The mantra of today India is on the wall that mere economic reforms and growth cannot be accomplished without distributive justice as a human face. The anti-vote against Vajpayee’s shinning India” and feel easy was not an _expression against macro- economic reforms; but it is the voice of all those who have been left out and who want to be included in the high road of economic progress. Many have benefited in the past, as reflected in the recently published economic survey and figures of poverty, which have declined from 39% to 24% in urban areas and from 39% to 26% in rural areas, in the past 15 years. But those out of the economic loop want the new dispensation to change the situation for them, and others who desire even more improvement.

It was expected, after the clear cut verdict given by the millions of framers and poorer of India in the last elections that government would initiate comprehensive reforms in order to control increasing ratios of poverty and make life easier for depressed and helpless farmers of the country from whom they are in the power. In the budget 2004-05 the farm sector has been given special importance that included cheaper credit, enhanced farm and cattle insurance, and tax concessions for allied activities such as horticulture and dairying. The government also announced extra spending of $2.2 billion for the poor and farmers of the country. The finance minister is very keen to Boost agriculture growth through diversification and development of agro-processing, which was one of the key objectives of the Common Minimum Program [CMP].

One of the key areas of the budget 2004-05 is speedy development of agriculture sector of India. Of the few thrust areas listed in the budget, most dealt purely with farming. These included doubling farm credit, accelerating the completion of irrigation projects and investing in rural infrastructure. Efforts will be made to make improvements in the market for farm products and promoting agro-business, and providing farm insurance and livestock insurance. Expanding water harvesting, watershed development and minor-irrigation and micro-irrigation schemes would also be among the thrust areas. The biotechnology research industries/companies have been waived of 10-year 100% tax exemption.

Repercussions Indian Budget 2004-05 to Pakistan

India has raised Defence spending for 2004/05 to 770 billion rupees from 660 billion earlier. There are great worries for Pakistan and rest of the region on the issues of continued defence spending of India. The Indian Defence Budget has been increasing year after year. It went up by 28% in the financial year 2000-2001; by 14% in 2001-2002; by 8% in 2002-2003; by a fair amount in 2003-2004 and now there has been an increase of another 18% in the defence budget for the financial year 2004-2005. The plea of India that the increase in defence budget is essential for its survival gathers nothing but seems to be a ghost chase. There are no immediate regional or global threats to the territorial sovereignty of India. Peace process is being carried out between Pakistan and India. Efforts are being made to reconcile bitter relationships with China. Furthermore, new nuclear non-proliferation doctrine is being propagated in the region. Then way India feels insecure from its immediate neighbours. United States of America, despite being the mightiest military power, is no threat to Mexico nor to Canada, which are its immediate neighbours. Pakistan will have to strive harder so that it can meet the rising defence requirements, in the light of India’s burgeoning defence budget, without diverting its resources from equally pressing needs.


Economics works in integration. Strong macro economic indicators gather nothing but dissent from the general masses and recent government of India should be aware of that. Despite its excellent and sustained economic growth, sound foreign reserves, and booming exports volumes the unexpected fall of BJP-Led coalition government resultant of the general people miseries, living under the poverty line, and deprived of basic necessities of life. It is recommend that economic reforms must be accompanied by active government intervention in creating human capital, infrastructure and health facilities so that more and more people are in a position to fastener on to the train of progress and prosperity. It is estimated that over 400 million Indians are eking out a miserable existence on less than a dollar a day.

A socio-economic equilibrium may save India from falling into sea of poverty and unemployment. A balanced approach towards economic development ought to be adopted. The rapid growth in the service sector has to be accompanied by the unleashing of manufacturing as the only way to ensure mass employment, as well as the movement of labor away from agriculture. There has to be a proactive approach on the part of the government to ensure farmers’ institutional credit, power and irrigation. The policy makers of India should seriously reduce the ever-increasing defence budget in order to give its countrymen a true, pure and safe heaven of progress, social enlightenment and prosperity.