Train to Pakistan

Train to Pakistan
Tejinder Singh Rawal
tsrawal@tsrawal.com

Jis ne Lahore nahi wekhya o jamya hi nai (One who has not seen Lahore is not yet born: your life is worthless if you have not seen Lahore) goes an old Punjabi saying. These words were constantly echoing in my mind when I received an invitation from the Institute of Chartered Accountants of Pakistan (ICAP) for participating in a conference in Lahore. It was an invitation too difficult to resist.

Pakistan is a very special place for me, as it is for every member of the huge displaced Punjabi community, which suffered the pangs of the partition and settled in India, becoming refugees in their own country. I am born and brought up in India, of parents who hailed from that part of India, which is now Pakistan. My father and grandfather once lived in a small village called Akora Khattak in Nowshera in NWFP, while my mother and her relatives lived near Rawalpindi. So when ICAP extended an invitation to me to participate in a Conference in Lahore, I was so excited. For me a visit to Pakistan was a visit to my motherland, my matrabhumi, and I applied for the visa immediately.The first setback I received when the visa application was not accepted for processing by the Pakistan Embassy on the ground that they had not yet received the clearance from Ministry of Interiors. I live in Nagpur, a city in the central part of India, far off from Delhi. The planned day of my departure was 13th January and until 11th, the clearance of the Ministry of Interiors had not been received. I was in a tight corner: I could not book my air tickets or bus ticket since I did not have visa issued to me. I thought of giving up, but the desire to visit the place where my parents once lived was so great, I was determined to go. When I enquired about the bus service, I was told that the bus was booked fully until the 20th; in any case, they would not book my ticket unless I had a visa granted to me. Indian Airlines flies twice a week to Lahore and the days were not suitable to me.

I boarded a train to Delhi without a visa in my hand on 11th night. I instructed my travel agent to apply for visa again on 12th morning. I kept calling my agent from my cell during my journey and her reply was in the negative, every time I called, she would tell me that visa was yet to be processed. I reached Delhi, called her, she asked me to meet her in her office, and she expected the visa to be delivered by the time I reached there. Reaching her office, my joy knew no bounds when I found that my passport had been stamped with a visa to visit Pakistan. I had already my train ticket booked for Ludhiana by 8 PM train from Old Delhi station, and rushed there to board the train in time.
Next morning I was at Wagah border proudly showing my papers, when I received another setback: "Sorry sir, you can't cross the border on foot unless you have a foreign passport, or unless you have a special permission from Ministry of External Affairs" I vaguely remembered one of the delegates was talking about obtaining the permission, but since I was in time for the train at Atari, I decided to travel 5 kilometres to Atari and board the train, Samjhota Express, from there. Though subsequently the permission from the Ministry was received, I preferred the rail journey for the return trip also. I was wondering why they should give special privileges to foreign passport holders? I met an NRI, an American passport holder who proudly walked through Wagah whereas we lesser mortals are required to go through the ordeal of the train journey.The Indian officer at Atari gave me a strange look when he found a Sikh travelling to Pakistan, and looked at my visa with suspicion. Obviously, people who travel by Samjhota are the people in India and Pakistan who have relatives on the other side of the border. And there are only a handful of Sikhs who live in Pakistan. The visa read, 'Indian Delegation' and he enquired about the rest of the members of the delegation, I replied that he might consider me as a one-man delegation. He was certainly not amused. I then had to tell him politely that it was none of the business of the Indian authorities to look into the reason why the visa was granted, it was for the Pakistani authorities to look into that. The officer advised me to remove my disemarkment form from Passport and keep it safely elsewhere, since the officers on the other side were likely to throw it away, and I would have difficulties on return. I asked him, are they bad on us, his reply was, "Assi unha nu taan bilkul hi nahi bakshde, oh saanu kyoun bakshange?" ( "We certainly don't spare them, why would they spare us?") I noticed a similar attitude across the border also when I asked a Pakistani officer whether people sometimes cross the border illegally. "Tusi tapde ho, assi nahi" [ "You (guys) jump ( the border) we don't ], then added that it was 10 years ago at the height of the Punjab border, now it doesn't happen. I later realised that this hostility exists only at both side of the border, and is non-existent as you travel in the countries. Sparing these two incidences, I did not come across any other occasion when anybody spoke bad about people on the other side of the border.
The train journey is the most traumatic experience. This journey deserves an entry in the Guinness Book of World Records as the slowest train journey in the world. It may take you more than 12 hours to travel 60 kilometres!! First, nobody at the station will ever tell you when the train is likely to arrive. Time for the start of the train from Lahore is 8 AM, it reaches Wagah, the Pakistani side of the border where, all 400 odd passengers alight for immigration and customs clearance, the train restarts after all the passengers have been cleared, which usually happens in late afternoon. The train arrived at 3 PM, and we boarded the train. I found 3 more delegates at the station and we now became a delegation in true sense of the term. Having boarded the train, I congratulated myself thinking that it was only an hour more for me to reach Lahore!! When I asked the officers when the train reaches Lahore, everyone smiled, and like always were non-committal. The train, guarded by Indian army men, who rode on horseback to see off the train to Pakistan border, entered Pakistan, and soon we were at Wagah station, not knowing that we had to go through another frustrating experience. There were two immigration officers and two customs officers and they were supposed to clear more than 400 travellers. People travelled with so much baggage, as if they were moving house! Baskets of paan ( betel) leaves, yards of clothes, mixer-grinder, kitchen appliances were being carried by most of the passengers. I was also told that some of them even dissemble bicycles and carry them in their baggage, since the price of a bicycle in Pakistan is Rs 3000! The attitude of the officers was that of callousness and indifference. One officer would shout at people at the top of his voice, when I sarcastically told him he had a very impressive voice, he proudly said that when he shouted the BSF jawans at the Indian border could also hear him!

Samjhota Express, was an obsolete looking train and truly justified the name samjhota, compromise! Pakistan still manages with the technology that is at least 3 decades old. The train stopped a few kilometres before Lahore, since a Toyota van had obstructed the track! We finally reached Lahore in the middle of the night. To our pleasant surprise, our hosts were eagerly waiting for us at the railway station. Throughout our trip the hosts made sure that we were comfortable and showed great hospitality to all the Indian delegates. We were transported to our hotel at Mall Road. I had heard a lot about Lahore from my parents and grandparents, and was obviously not interested in sleeping, but would rather like to visit places even if it was the middle of the night. When I told this to Major Ajmal Masoon, Asstt Manager Admn, ICAP, he readily obliged, and took us straight to the Food Street at Gawalmandi. It is a pedestrians' lane, well lit, surrounded by pre-partition Indian architecture. It offers the choicest of Mughlai, Lahori, Pakistani and bar-be-cue cuisine at a very reasonable price. Even at such odd hours I could see so many people glutting, indeed Lahoris are voracious eaters whose lives revolve around food!Next morning we began our trip in the alleys and lanes of Anarkali, a place I had heard a lot bout from my parents and grandparents. Of all the bazaars in Lahore, Anarkali is most fascinating. You name anything and you get it here, whether it is leather goods, or handicrafts, or ethnic wears, or anything else under the sun. Legend has it that the bazaar was named after Anarkali who was Akbar's courtesan . She, according to legend was put to death by Emperor Akbar for having a love affair with prince Salim, later known as Jehangir. Anarkali is the place to discover the old world charm, the glib-talking shopkeepers who obviously enthused to see Indians visiting them, would not let you go without buying their stuff. The Food Street in Anarkali was a connoisseur’s delight. With a wide variety of food, it is sure to add inches to your waistline. It was a delight to see such dishes as katlamma, exotic kebabs and biryanis.What is most amazing is the attitude of the people in Pakistan. I being a turban wearing Sikh am too conspicuous to be ignored. "Sardarji Sat-sri-akal" the greetings followed me wherever I went. And I would reply to them with the same enthusiasm. People stopped us for no reasons just to greet us. "Assi twade tabedaar haan, tusi saade mulk aaye ho" ( “We are grateful to you for having come here”) was what was echoed everywhere we went. The offer to have a cup of tea with them was difficult to refuse, with the result that every few minutes I would be found sipping a cup of tea with a stranger who would narrate his experiences with great enthusiasm and would suggest that the border should be thrown open for the public of both countries to visit each other without restrictions. The shopkeepers would refuse to take money for the goods bought saying that they will not take any money from their guests. One small shop owner selling imarti was in tears when I offered him the money for a few pieces of piping hot imartis I had bought from him , “Tusi saade mehman o, assi Lahoriye pyaar de pukkhe haan, paise de nai” ( “You are our guests, we Lahoris want your love not money”) Even the autorikshaw-wallah would accept the fare only after much insistence!!
One of the most prominent structures in Lahore is the massive Lahore Fort which was built by Akbar in the 1560s, and which towers over the old city of Lahore. Then there is the famous Minar-e-Pakistan, where the Muslim League first passed a resolution for a separate Muslim nation. Opposite the Lahore Fort is the samadh of Guru Arjan Dev, who lost his life while fighting near here in the waters of the Ravi River, which used to flow past the Fort walls those days. Samadhi of Maharaja Ranjit Singh is located outside Lahore Fort.
More than the prominent historical buildings and structure, it is the bright dresses, beautiful women, warm hospitality, the hustle and bustle of the city and a happy-go-lucky attitude of people with genuine love for their own brethren from India, which left me spellbound. Despite what politicians on both sides of the border say!
Speaking of politicians, the Chief Guest in the ICAP Conference was Omar Ayub Khan, Minister of State for Finance , Pakistan, son of the ex-Foreign Minister Gohar Ayub and the grandson the the ex-President Field Marshall Ayub Khan. A very impressive young man Omar Ayub Khan spoke at length about the state of Pakistan economy and the rapid pace of progress of the country under the regime of the President Musharraf. A very impressive speech it was from a very learned Minister. However the topic suddenly changed to Kashmir and he advised the Indian guests to “pressurise your government” to solve the Kashmir problem. It was a quick aside, and the Minister quickly resumed his earlier discussion. Obviously, the politician had not forgotten that he would not be able to justify his existence to many unless he touched upon the Kashmir issue. Later in private conversation with the Minister, I found that he had great love for the Sikhs, ostensibly because his room-mate for 4 years during his University studies in the USA was a Sikh.
On my return journey a wise old Lahori smiled and remaked, “Tussi hun jum paye ho” ( “You are now born, having visited Lahore” How true!!

Tejinder Singh RawalM.Com, MA( Economics and Public Administration), LLB, FCA, ISA(ICA), CISA(USA), CISM(USA)Chartered AccountantE 13, Anjuman Complex, Sadar,Nagpur 440 001 IndiaPh: +91 712 2582923 Fax +91 712 2583522Email: tsrawal@tsrawal.com

Amendments to S 80 HHC

Amendments in respect of Export Profits u/s 80HHC
Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

Introduction: The Amendment in respect of exports profits comes on the basis of the recommendations of the Economic Advisory Council to the Prime Minister which has Dr.C.Rangarajan, (former Chairman, 12th Finance Commission) as Chairman, and prominent economics such as Dr.Suresh Tendulkar (former Director, Delhi School of Economics), Dr.G.K.Chadda, (Vice-Chancellor, Jawaharlal Nehru University), Dr.Govinda Rao (Director-General, National Institute of Public Finance & Policy) and Dr.Saumitra Choudhuri, (Economic Adviser, ICRA) as members.

Apart from advice on policy matters referred to the Council by the PM from time to time, the EAC prepares a monthly report on economic developments at home and abroad for the Prime Minister. It also monitors economic trends on a regular basis and brings to the PM’s attention important developments at home and abroad and suggest suitable policy response.
Exporters were expecting that the Government would not go entirely by the recommendations of the Prime Minister's Economic Advisory Council on this issue. Faced with equally convincing but opposing arguments from the exporting community and the Revenue Department on the issue of taxation of income arising from sale of DEPB licences, the Prime Minister, Dr Manmohan Singh, had in early April referred the issue to his Economic Advisory Council. He had asked the council to look into all legal aspects relating to the taxation of profits arising from transfer of DEPB licences.

While concurring with the contention of the Revenue Department, the Prime Minister's Economic Advisory Council had suggested that the pain of taxation should be reduced for small exporters by specifying a threshold (Rs 10 crores) below which recovery proceedings are not to be initiated by the Tax Department.

The Existing Section:
The existing section is explained below, and the amendment has been explained below it. Kindly note that no deduction under section 80HHC is available from the assessment year 2005-06.

Deduction in respect of export profits (Section 80HHC)

1. The deduction under this section is available to an Indian company or to a person other than company, who is resident in India;


2. While computing the total income of above assessee a deduction of the profits derived by the assessee from the business of exports of goods or merchandise, shall be allowed if certain conditions are satisfied. Essential conditions for claiming deductions u/s 80HHC

(a) there must be export out of India;
(b) export must be of any goods or merchandise other than (i) Mineral oil and (ii) mineral and ores (other than processed minerals and ores specified in the Twelfth Schedule) of the Income-tax Act.
(c) the sale proceeds of the goods or merchandise exported should have been received in or brought into India by the exporter in convertible foreign exchange.
(d) The sale proceeds should have been received in or brought into India within a period of six months from the end of the financial year in which the export was made or within such further period as the competent authority may allow in this behalf. For this purpose the competent authority means the RBI or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange.
(e) The assessee should furnish a report in the prescribed form (Form No. 10CCAC) from a Chartered Accountant, certifying that the deduction has been correctly claimed. The report must be attached along with the return of income. Category of assessees: For the purpose of deduction under this section, assessees have been divided into two categories:
(I) Direct exporter: A Direct exporter can be of three types:
(a) Manufacturer exporter i.e. an exporter who exports the goods/merchandise manufactured or processed by him.
(b) Trading exporter Le. an exporter who exports the goods/merchandise manufactured or processed by others.
(c) Manufacturer as well as trading exporter Le. an exporter who exports goods manufactured or processed by him as well as goods manufactured or processed by others.
(II) Supporting manufacturer: Supporting manufacturer is a person who manufactures or processes goods/merchandise, but does not export such goods/ merchandise himself and sells them to any person who is holding Export house certificate or Trading house certificate and such Export house or Trading house has issued a certificate to the supporting manufacturer to enable him to claim a deduction under this section.

The amendment:
The Taxation Laws (Second Amendment) Act, 2005 has amended S. 80-HHC as under:
In section 80-HHC of the Income-tax Act, -
(i) in sub-section (3) -
(A) after the proviso, the following provisions shall be inserted and shall be deemed to have been inserted, with effect from the 1st day of April, 1998, namely : -
'Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent. of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee :
provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, -
(a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme :
Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent. of any sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, -
(a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being Duty Remission Scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowance under the duty Free Replenishment Certificate, being Duty Remission Scheme.
Explanation - For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free replenishment Certificate, being Duty Remission Scheme calculated in the manner as may be notified by the Central Government.':
(B) after the fourth proviso as so inserted, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1992, namely : -
"Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent. of -
(a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or
(b) any sum referred to in clause (iiid) or clause (iiie) as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third proviso or the forth, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.";
(ii) in the Explanation occurring at the end, with effect from the 1st day of April 1998,-
(I) in the proviso to clause (ba), for the word, brackets, figures and letter "and (iiic)", the brackets, figures, letter and word "(iiic), (iiid) and (iiie)" shall be substituted and shall be deemed to have been substituted;
(II) in clause (baa), in sub-clause (I), for the word, brackets, figures and letter "and (iiic)", the brackets, figures, letter and word "(iiic), (iiid) and (iiie)" shall be substituted and shall be deemed to have been substituted.

Analysis:

As per the amendment, an explanation has been introduced below the proviso to Section 80HHC(3) to allow the deduction even in case of loss. As per this proviso, in case there is a loss under clause (a), (b) or (c) of sub-section 3 of Section 80HHC, such loss shall be set off against 90% of the export incentive, meaning thereby that in case of negative profit, 80HHC deduction will be allowed. Ostensibly the amendment has been brought to over-rule judgement of Bombay High Court in the case of ‘Rohan Dyes & Intermediates P.Ltd’, (2004) 270 ITR 350 (Bom)and Kerala High Court in Commissioner of Income Tax v. A. M. Moosa, Bharath Sea Foods’, [2005] 272 ITR 29 (Ker)

Further any profit on transfer of Duty Entitlement Passbook Scheme (DEPB) and any profit on transfer of Duty Free Replenishment Certificate shall also be considered as export incentive eligible for deduction under Section 80HHC in case of those exporters whose export turnover does not exceed Rs.10 crores during the previous year.

However, in the case of exporters whose turnover exceeds Rs.10 crores the benefit of DEPB and Duty Free Replenishment Certificate shall be allowed only when the exporter as per the scheme had an option to choose either the duty drawback or DEPB and the rate of the drawback credit attributable to Customs duty was higher than the rate of credit allowable under the DEPB.

Thus, full benefit of 80HHC deduction will be available to those exporters with turnover not exceeding Rs.10 crores whereas those exporters with turnover exceeding Rs.10 crores will not be able to claim benefit of DEPB in case they fail to fulfil the above two conditions.

The amendments have been made retrospective, with effect from April 1, 1998.

The original Section allows an exporter, while computing total income, a deduction to the extent of profits derived from such exports. "Export turnover," as per 80 HHC, means sale proceeds received in or brought into India by an assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of any goods or merchandise to which the section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the Customs station as defined in the Customs Act, 1962.



No penalty/interest in respect of the fresh demand:
Circular No.02 /2006, DATED 17-1-2006 has been issued to provide that no penalty shall be levied or interest shall be charged in respect of any fresh demand raised consequent to the enactment of Taxation Laws (Amendment) Act, 2005, on account of variation in the returned/assessed income attributable to profits on sale of DEPB credits or DFRC. The Circular reads as under:
“Section 80-HHC read with section 28 of the Income-tax Act, 1961 has been amended by the Taxation Laws (Amendment) Act, 2005. The section 80-HHC so amended, inter-alia, provides that
Profits on sale of Duty Entitlement Pass Book Scheme (DEPB) credits or Duty Free Replenishment Certificate (DFRC) will be treated at par with duty drawback for the purposes of proportionate increase of profits derived from exports computed under clause (a) or clause (b) or clause (c) of sub-section (3) of section 80-HHC in the case of,-
(i) an exporter having export turnover not exceeding Rs.10 crores;
(ii) in the case of an exporter having export turnover exceeding Rs.10 crores if-
(a) he had an option to choose either duty drawback or duty entitlement pass book scheme; and
(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under duty entitlement pass book scheme.
OR
(c) he had an option to choose either duty drawback or duty free replenishment certificate; and
(d) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under duty free replenishment certificate.
2. The amendments relating to Duty Entitlement Pass Book Scheme and Duty Replenishment Certificate have been brought into the statute with retrospective effect. Therefore, it has been decided that no penalty shall be levied or interest shall be charged in respect of any fresh demand raised consequent to the enactment of Taxation Laws (Amendment) Act, 2005, on account of variation in the returned/assessed income attributable to profits on sale of DEPB credits or DFRC. Further, in such cases where assessments have already been completed and,-
(i) interest has been charged, the Chief Commissioner of Income-tax shall waive the interest relating to claim of profit on sale of DEPB credits or DFRC for deduction u/s 80-HHC;
(ii) penalty has been levied, the Chief Commissioner of Income-tax shall waive the penalty relating to claim of profit on sale of DEPB credits or DFRC for deduction u/s 80-HHC; or
(iii) penalty relating to claim of profit on sale of DEPB credits or DFRC for deduction u/s 80-HHC, has been initiated but not levied, the penalty proceedings shall be dropped.
3. Further, it is also directed that such demand shall be recovered over a period of 5 years. For this purpose, every Assessing Officer raising such a demand will maintain the details of such demand in a separate register so that the information can be furnished to the Board as and when required. These registers shall be kept in the custody of the Assessing Officers who will hand it over to their successors at the time of their transfer.”

Discriminatory: The amendment to levy tax on exporters who have exported goods over Rs 10 crores is discriminatory, particularly the decision to tax only those who had opted for DEPB/DFRC route of incentives and exempting others who had opted for drawback facility. It is a sound principle of law that a retrospective amendment which is detrimental to the interest of the assessee, should not be made. Had the exporters been aware that their opting for the DEPB scheme would negate the exemption under Section 80 HHC, they would have taken a conscious decision to opt out of the alternative scheme available at that time.

The Amendment brings legal validity to the Income-Tax Department's efforts to recover income-tax on retrospective basis on the profits earned by exporters from transfer of DEPB licences from 1997.

The Amendment has made it clear that profits earned on the transfer of DEPB licences should be treated as business income.
Exporters with annual export turnover of Rs 10 crore or less would not be required to fork out any tax on such profits, as they would be entitled for the Section 80HHC benefits without having to meet any conditions.

For exporters with annual export turnover exceeding Rs 10 crore, the Section 80HHC deduction would be available so long as the exporter conforms to two specific conditions:

a) he had an option to choose the duty drawback or DEPB scheme for his export item and

(b) the rate of drawback credit attributable to the customs duty was higher than the DEPB credit allowed for the exported product or item.

Conclusion: The article can be summed up in the words of a Rajya Sabha member C. Ramachandraiah who raised the issue in a debate in Rajya Sabha on 20th Dec 2005, “ This section of 80HHC deduction would be available so long as exporter conforms to these two conditions. One is that he has an option to choose the duty drawback of DEPP schemes for his export. Second, the rate of drawback attributed to the customs duty, which is higher than the DEPP rate, for the items exported. Sir, in my opinion, more than 90 per cent of the exporters having turnover of Rs.10 crores would not be able to comply with these two conditions. They would, therefore, be required to pay tax on profits on transfer of DEPP licences. Moreover, the limit of Rs. 10 crores would affect a large number of small and medium industries.”

Review of the Economy

Review of the Economy on the Eve of Budget 2006-07
Challenges Before the Finance Minister

Dr. Tejinder Singh Rawal
Chartered Accountant
tsrawal@tsrawal.com

Come February 28, and the Finance Minister, P Chidambaram, who has been named the finance minister of the year 2005 for Asia by 'Banker' magazine for pushing reforms and reining in fiscal deficit, will be presenting another reform Budget for the year 2006-07. The Finance Minister’s job is not an easy one, and balancing the desire to be progressive with the pressure from the coalition partners of the Government is a tight rope walk for him.

The Budget is not merely a statement of projected income and expenditure of the Government. It explains the direction the Finance Minister wishes the economy to take during the coming year, and explains the deviation in the policy in comparison to the existing policies. Second, policies on various expenditure items also come under the scanner. The Finance Minister will, no doubt, be expected to spell out details of his divestment proposals, or at least such of them as remain after the gruelling negotiations with the Left.

Alarming Fiscal Deficit: While the engines of the economy are working a full speed, and the economy is accelerating at an impressive pace, fiscal deficit at 8.3 percent of gross domestic product is alarming. Let us understand the implication of fiscal deficit. There is a limited pool of savings available in the country for the Centre, the states and the private enterprise to borrow from. In order to meet the deficit the Govt has to access this pool. As long as there is a comfortable liquidity situation in the country, there is no problem, but when the liquidity deteriorates, borrowing by the Government has an effect of increasing the interest rates, which might throw out of gear the efforts of the Government to keep inflation under control.

One may argue that there is nothing wrong in the borrowings by the Government, if there is nothing wrong in private enterprises borrowing money from the market. This situation would have been comfortable if the Government borrowings had resulted in the creation of new capital investments, thus providing an impetus to growth. However, when the borrowings are used to finance the revenue spending, it defies all norms of financial prudence. Already 22 paisa of every rupee the Government earns towards meeting interest obligation of the debts contracted by the Government.

Implement FRBM Act: The Finance Minister has decided to keep in abeyance the implementation of the Fiscal Responsibilities and Budget Management Act 2003 (FRBM Act), which Act was conceived with a view to eliminating the revenue deficit. FRBM Act had provided for the gradual reduction in deficit to zero by 2007-08, the Finance Minister had deferred this date to 2008-09, so that, he argued, it is conterminous with the term of the present Government. The Finance Minister now knows that meeting this target is not possible. He confesses of having “pressed the pause button to the FRBM Act”. What is apprehended is that it might turn out to be the ‘stop’ button instead of the ‘pause button’
While effective steps have been taken to attack the problem of deficit by increasing revenue, more efforts are required on the expenditure side. Government needs to address issues of downsizing itself, tighter control on Governmental spending, and reduced allocation to certain sectors. For example, the budgeted expenditure on defence last year was a whopping Rs. 83,000 Crores, out of which Rs.34,000 were budgeted to go towards capital expenditure. Defence consumes as much as 14 paisa of every rupee earned by the Government. It certainly makes a case of improving relationship with our neighbour, rather than spending more of defence budget, since defence allocation has been eating into the resources of our as well as our neighbouring country’s not-so-healthy economy.

If the commitment the Government has made under FRBM Act is to be honoured, the Revenue Deficit will have to be reduced by Rs.90000 in three years, which is a Herculean task. It means a reduction of Rs. 30000 every year: this is something unheard of in Indian economy: only twice in last 20 years has the deficit fallen in comparison to the previous figures in absolute terms, on both occasions the reduction was less than Rs. 1000 crores.

The Left Factor: The greatest stumbling block in India’s progress has been the stand its Leftist coalition partners have been taking on various items of the reform agenda. Last year they made it difficult for the Prime Minister to go full stream with his reform process, disinvestment of many profitable PSU’s had to be kept in abeyance, the decision to allow FDI in important sectors had to be postponed.

Subsidies account for nearly nine per cent of government spending. It is an open secret that the subsidy ,more often than not , does not reach the people it is intended for, with the result that while it is big burden to the exchequer, it does not benefit the target clientele: something the country can ill afford, with a huge fiscal deficit. Successive governments have talked about scaling down subsidies but have always shied away from implementing it, lest they lose populist support. There is no escaping the fact that the exchequer has to pay for every concession, every subsidy the Budget offers.

The Finance Minister's success as a Budget-maker will be tested by his resoluteness in resisting the temptation to offer too many freebies. Mr. Chidambaram has a difficult task on his hands, given the demands of infrastructure and the compulsions of coalition politics, in framing a Budget that will please most, if not all, and help take the nation forward on a path of sustained economic growth with stability.

Particularly depressing is the scenario on petroleum prices, with his own ministerial colleague sticking to his stand that the rise in international prices should not be passed on to the public. This has serious repercussions in form of lower dividend payments by oil companies and thus affects the revenue deficit directly. While rise in petroleum prices affects everyone badly, and the opposition comes from all quarters, the Government shall have to learn to pass on the additional cost to the people. Actually, the inability to do so stems from the past blunders of the Government. In the past the Government did not let the citizens enjoy the benefits of reduced prices when there was a drop in international prices. Obviously, now they don’t have the nerve to displease the voter by loading him with additional cost burden. An unsustainable Budget is no good, however many sops it offers. There is no escape from the economic lesson that the exchequer has to pay for every concession, every subsidy that the Budget offers.

One bone of contention between the Finance Minister and the Left partners is the issue of disinvestment of the PSU’s.. While some progress has been made in getting the concurrence of Left partners in regard to profit-making navaratnas, there are still great many hurdles which the Government will have to clear using the process of political bargaining.

Learn from the neighbour: The Finance Minister needs to convey to his coalition partners the lessons of the Chinese experience with the divestment of stakes in Chinese State-owned banks in recent months. Massive divestment has taken place in China through the giant-sized initial public offerings in respect of its State-owned banks. China, which still wears the garb of a communist nation is now more laissez faire than many of the supposedly market driven economies. India needs to learn the lessons of free enterprise from its Communist neighbour!

Nurture the IT superpower: We need to remember the fact that India' is becoming one of the most important players of the world in the IT sector and it is the fastest growing foreign exchange earner for the country. Several US and European companies have located their back office operations in Bangalore, Chennai, and Pune. Abundant supply of labour, low wages, cheap satellite communications and the internet have been instrumental in the decision of foreign firms to establish their back office operations in India. Such operations create job opportunities in Indian cities and help lower costs for the foreign companies. These range from billing to payroll handling, from credit appraisal to airline reservations, and from inventory management to answering customer complaints. Data transcription and transmission for hospitals in the US and telemarketing for US firms is also being undertaken by Indian companies based in various Indian metropolitan cities.
The Government will have to do more for this industry, by creating the required infrastructure in the country. The government needs to support basic science and R&D in this sector to some extent because India has world-class engineers and scientists that have already brought it ahead in an important way and could keep it in the very forefront of this new technology. We had missed the bus of industrialisation in the sixties and seventies when the Western world which wholeheartedly climbed the bandwagon of industrial revolution. India had been able to make up for that by being a front runner in the IT race, it becomes imperative for the government to provide the right environment for the sector to flourish.

Labour Laws: Labour law reforms are critical as India has signed several free trade agreements with neighbouring countries. India has never succeeded in becoming the manufacturing hub for the world despite it being a low cost producer, because of archaic labour laws. But reform of rigid labour laws, which make it hard for firms to sack workers, is unlikely, given the expected fierce opposition from Communists and trade unions. Without labour reforms, competitiveness of the small and medium enterprises will be hurt, which in turn could impact export and industrial growth. It is time political parities think in terms of economics and not politics, if India is to usher into the league of developed nations.

Tax reforms: The regime of Manmohan-Chidambaram has been that of tax reforms. Tax collection has been higher than ever before, system more transparent and administration more conducive. However, in his over-enthusiasm, the Finance Minister seems to have treaded into controversial territories. One such example is the Fringe Benefit Tax (FBT). No other tax provision in recent times has caused so much dissatisfaction in recent times as FBT. FBT as implemented is indirectly a tax on expenditure. Moreover, the administration mechanism of the tax is complicated and confusing. The Constitutional validity of the law is being challenged at various Courts. The Finance Minister will have to completely re-write the law if he wishes it so serve as a logical instrument of tax revenue.

The Stock Market: The stock market has been on fire for quite some time, with indices scaling unprecedented heights. This is thanks to the inflow of huge foreign money on the strength of a buoyant economy. FII money will stay in only if the reform process continues, more FDI opportunities open up, and the GDP not only continues to grow, but grows at a pace faster than other emerging markets. This will also depend on the extend to which India is able to integrate itself with the global economy.

The $700 bn Indian economy, Asia`s third-largest, is expected to grow 7.0-7.5 per cent in the fiscal year ending March 31 but India needs to grow at sustained double-digit levels to reduce mass poverty. China`s economy has grown at about nine per cent a year for the past decade while India`s economy has averaged about six per cent. Tough reforms aimed at downsizing the Government, reducing the cost of governance, streamlining the bureaucracy, curtailing the financial deficit, coupled with labour reforms will be needed to give India the much needed growth rate of 10 per cent by the end of the decade.