FM deserves credit for reduction in the fiscal deficit

Nandan M. Nilekani

Nandan M. Nilekani
Chief Executive Officer and Managing Director
Infosys Technologies Limited

This budget has many positives, among which the focus on the social sector is one of the biggest.

The increase in the allocation for Bharat Nirman by 32%, for education by 34%, and health and family welfare by 22% are good. The increased outlay on education, particularly primary and secondary education, is commendable. There is a thrust on arresting the drop-out ratio, strengthening teacher training institutions, constructing 500,000 more classrooms, and appointing 200,000 more teachers.

The increased outlay on the social sector in terms of water supply, irrigation and other areas, and increased focus on the agriculture sector is good for India. All districts are expected to complete the preparation of district health action plans. Outlay for women-specific programs is up as also for schemes directed at the socially and economically weaker sections of our society.

I particularly welcome the “Aam Aadmi Bima Yojana” scheme for providing death and disability insurance cover for the rural landless. This is a step in the right direction with respect to providing social security for our masses and we hope to see much more in this area.

A further positive of the budget is the fiscal balance. A 30% increase in tax collection is outstanding and shows the importance of good governance in tax administration. For the reduction in fiscal deficit to less than the target, reduction in revenue deficit and the overall better management of expenditure for fiscal 20’07, the Finance Minister deserves our respect and kudos.

On the negative side, lack of structural changes in indirect taxes, particularly in excise duties, is glaring. Indirect taxes make up 24%-30% of the total taxes on goods in India. Reduction in excise duties was called for to create a common market for India. However, this opportunity has been missed. Reduction in customs duty will boost India by increase competition and reducing cost. Increase in the rate of dividend distribution tax and increase in the surcharge on corporate taxes are obviously not needed at a time when corporate tax collections have grown by close to 40%. This may set back corporate tax collection in the future.

On the FBT front, it seems that only one side of the equation has been studied – FBT is proposed to be levied on exercising stock options while the same is not tax-deductible for the employer. The industry will indeed be hurt by these measures as it goes against the idea of employee ownership.