Minister of Finance
February 28, 2005
PART – A
Mr. Speaker, Sir,
I rise to present the Budget
for the year 2005-06.
2. Last year, while presenting the
Budget, I had suggested that the vote in Elections 2004 was a
vote for change. It was, I believe, a vote in favour of a new
leadership; a new Government; new policies; and a new focus on
the common citizen who is at the centre of all politics and
3. I reaffirm my belief, and I
also declare my conviction that the UPA Government under Prime
Minister Dr. Manmohan Singh has charted a new path that is more
acceptable to the people of the country and that will bring the
greatest good to the greatest number.
4. Before I turn to the business
of the day, I wish to record Government’s deep sorrow on the
loss of lives, property and livelihood caused by the tsunami
tragedy. So far, Government has approved relief packages
amounting to Rs.3,644 crore. The Planning Commission, which is
coordinating the Tsunami Reconstruction and Rehabilitation
Programme, has drawn up a programme at an estimated cost of
Rs.10,216 crore. I wish to assure the House, and the affected
people, that the Government will provide the necessary funds for
the purpose and ensure that every affected family is fully
THE MACROECONOMIC BACKDROP
The Immediate Past: Where We Were in
5. In May 2004, the UPA Government
inherited an economy that had, as we now know, registered a
growth rate of 8.5 per cent in 2003-04 on the back of a poor 4
per cent in the previous year. While growth was indeed
broad-based, the impressive growth rate was due largely to the
restoration of output in the agriculture and allied sector. I
had then commented that my immediate predecessor was a very
lucky man, even while his predecessor was not! Notwithstanding
the high growth rate, there were several disturbing trends which
came to notice in May 2004. The first was the liquidity
overhang at the end of 2003-04 which had spilled over into
2004-05. The second was the definite buildup of
inflationary pressures as a result of a sharp rise in global
petroleum prices. The third was an unanticipated 13 per
cent deficiency in the south-west monsoon. The fourth
was an apparent decline in business confidence that had led to a
sharp downturn in new investment, and also showed up as current
account surpluses. By any standard, these were formidable
challenges, but the UPA Government was prepared to face these
The Present: Where We Are in 2004-05
6. The National Common Minimum
Programme (NCMP) mandated the Government to maintain a growth
rate of 7 - 8 per cent a year, to promote investment, to
generate employment, to accelerate fiscal consolidation, to
ensure a higher fiscal devolution, and to focus on agriculture,
manufacturing and infrastructure. The NCMP also mandated the
Government to provide universal access to education and health
care and to assure one hundred days of employment to one person
in each family. I believe that, in the space of 9 months, we
have risen to the challenge and carved out many successes.
to the Central Statistical Organization, the growth rate in the
current year is estimated to be 6.9 per cent, with the
manufacturing sector expected to grow at 8.9 per cent.
Inflation which touched a high of 8.7 per cent on August 28,
2004 has been reined in. As on February 12, 2005, the rate of
inflation was 5.01 per cent which is more than one percentage
point lower than what it was in the same week in the previous
year. Inflation based on CPI for industrial workers was lower,
and stood at 3.8 per cent in December, 2004.
Business confidence has been restored and investments in 2004-05
have been buoyant. Non-food credit has increased by 21.2 per
As the year draws to a close, we can
predict confidently that all the engines of the economy are
running at nearly full speed.
7. We have also fulfilled many of
our promises to the common citizen. Last year, I had promised
that agricultural credit will be increased by 30 per cent, and I
am happy to inform the House that, against the announced target
of Rs.105,000 crore, we are likely to achieve a disbursement of
Rs.108,500 crore. Public sector banks and regional rural banks
have added so far 58.20 lakh new farmers to their portfolio of
borrowers. I had promised that education loans would be given
liberally to students. As against 1,08,000 loans amounting to
Rs.1,983 crore given in 2003-04, 1,40,000 loans amounting to
Rs.2,249 crore have been given up to December 31, 2004. I had
promised that the number of families covered under the Antyodaya
Anna Yojana will be increased from 1.5 crore families to 2 crore
families, and that promise has been kept. I had promised that a
redesigned Food for Work Programme will be launched in 150
districts. That was done on November 14, 2004. I had promised
that a National Rural Employment Guarantee Bill will be
introduced. That has been done. I had promised that we would
promote the concept of Self-Help Groups vigorously. In the
current year, against the target of 1.85 lakh SHGs, we have
already credit-linked 2.26 lakh SHGs, and we have disbursed
credit to the tune of Rs.1,197 crore. Hon’ble Members will note
that in each of these areas the focus of the Government’s
attention has been the common citizen – be it farmer, student,
self-employed woman or labourer in search of work and food.
The Year Ahead: Where We Want To Be in
8. Growth, stability and equity
are mutually reinforcing objectives. The NCMP leans towards
decisive intervention by the State in favour of the poor. Given
the resilience of the Indian economy, it is possible to mobilize
the resources and launch a direct assault on poverty and
unemployment. That is the only way to bring immediate relief to
the aam admi.
The Big Picture
9. Let me first give the
big picture. In 2004-05, Gross Budgetary Support (GBS) for the
Plan was Rs.145,590 crore to which we added Rs.2,000 crore
subsequently. As I shall explain later, the pattern of funding
has changed consequent to the recommendations of the Twelfth
Finance Commission (TFC). On a like-to-like basis, GBS for the
Plan in 2005-06, works out to Rs.172,500 crore. This represents
an increase of 16.9 per cent. Support for the Central Plan in
BE 2004-05 was Rs.87,886 crore and in BE 2005-06 this has been
enhanced to Rs.110,385 crore, representing a very substantial
increase of 25.6 per cent. On priority sectors and flagship
programmes falling under the NCMP, I propose to provide an
additional sum of Rs.25,000 crore in the next year.
10. For example, the allocation for
education in 2005-06 will be Rs.18,337 crore. Next only to
education, the plan allocation for rural development will be
Rs.18,334 crore. On subsidy for fertilizers, the estimate is
Rs.16,254 crore. The estimated expenditure on health and family
welfare is Rs.10,280 crore.
ASSAULT ON POVERTY AND UNEMPLOYMENT
Empowering the People
11. India is not a poor country, yet
a significant proportion of our people are poor. Poverty is not
only income poverty. Other indicators of poverty are illiteracy,
disease, infant mortality, malnutrition, absence of skills and
unemployment. The whole purpose of democratic government is to
eliminate poverty and give to every citizen the opportunity to
be educated, to learn a skill and to be gainfully employed. The
Government holds that it is its sacred duty to empower the poor
and eliminate the scourge of poverty.
the last Budget, I had rejected the idea of jobless growth. As
I unfold the vision of the UPA Government, Hon’ble Members will
note that the central theme that runs through the various
schemes and programmes is creation of jobs. Assured irrigation
facilities to an additional 1 crore hectares of land over a
period of five years will generate employment for an additional
1 crore people at the rate 1 person per hectare. The food
processing industry is growing at a rate which generates 2.5
lakh jobs every year. The textile sector alone has the
potential to create 1.2 crore jobs over the next 5 years. The
information technology (IT) industry is expected to offer an
additional 70 lakh jobs by 2009. Construction industry is also
expected to throw up lakhs of jobs. Sectors with potential for
generating employment will receive the highest attention of the
Employment Guarantee Scheme
the National Food for Work programme was launched in November
2004, provision was made for the cash component and the
foodgrain component. In overall terms, the expenditure in the
current year is estimated at Rs.4,020 crore. For 2005-06, a
provision of Rs.5,400 crore for the cash component and 50 lakh
MT of foodgrains have been made and, in overall terms, the
allocation will increase to Rs.11,000 crore. It is Government’s
intention to convert this programme into the National Rural
Employment Guarantee Scheme. When fully rolled out, the scheme
will provide livelihood security for crores of poor families,
and I promise to find the money for the programme.
National Rural Health Mission (NRHM) will be launched in the
next fiscal. Its focus will be strengthening primary health
care through grass root level public health interventions based
on community ownership. The total allocation for the Department
of Health and the Department of Family Welfare will increase
from Rs.8,420 crore in the current year to Rs.10,280 crore in
the next year. The increase will finance the NRHM and its
components like training of health volunteers, providing more
medicines and strengthening the primary and community health
15. I am
also happy to announce that work on the six AIIMS-like
institutions will start next year to augment medical education
in deficient States.
Antyodaya Anna Yojana now covers 2 crore Below Poverty Line (BPL)
families. The number will be increased to 2.5 crore families in
universalization of the Integrated Child Development Services (ICDS)
scheme is overdue. It is my intention to ensure that, in every
settlement, there is a functional anganwadi that provides full
coverage for all children. As on date there are 6,49,000
anganwadi centres. I propose to expand the ICDS scheme and
create 1,88,168 additional centres that are required as per the
existing population norms. Forty seven per cent of children in
the age group 0-3 are reportedly underweight. Supplementary
nutrition is an integral part of the ICDS scheme. I propose to
double the supplementary nutrition norms and share one-half of
the States’ costs for this purpose. I also propose to increase
the allocation for ICDS from Rs.1,623 crore in BE 2004-05 to
Rs.3,142 crore in BE 2005-06.
Mid-day Meal Scheme for children has made a promising start
throughout the country. 11 crore children are covered today.
The Central Government is now providing the cost of food grains
as well as the conversion cost at the rate of Re.1 per child.
The allocation in BE 2004-05 was Rs.1,675 crore. I propose to
increase the allocation for the next year to Rs.3,010 crore.
Sarva Shiksha Abhiyan programme is the cornerstone of the
Government’s intervention in basic education for all children.
Sarva Shiksha Abhiyan was allocated Rs.3,057 crore in the Budget
Estimates for 2004-05. During the course of the year, I
enhanced the allocation to Rs.4,754 crore.
A non-lapsable fund called “Prarambhik Shiksha Kosh” has been
created for funding this programme. I propose to increase the
allocation to Rs.7,156 crore in 2005-06.
drinking water schemes have now been brought under the Rajiv
Gandhi National Drinking Water Mission. In the current year, so
far, 31,355 uncovered rural habitations have been provided
drinking water facilities. During 2005-06 the emphasis will be
on covering more habitations. Emphasis will also be laid on
tackling water quality in about 2.16 lakh habitations in Andhra
Pradesh, Gujarat, Karnataka, Rajasthan, West Bengal and some
other States. I propose to increase the outlay for the Mission
from Rs.3,300 crore in the current year to Rs.4,750 crore in the
Sanitation, however, remains critically deficient. Only about
30 per cent of the rural households have access to safe
sanitation facilities. The Total Sanitation Campaign (TSC) now
operates in 452 districts. Government intends to extend the TSC
to all districts, and I propose to allocate Rs.630 crore for the
Castes and Scheduled Tribes
wish to restate my commitment to inclusive economic growth. It
is important to bring scheduled castes and scheduled tribes into
the development process. For the first time, you will find in
the Budget papers a separate statement on schemes for the
development of SCs and STs. The allocation for the programmes
is Rs.6,253 crore.
key to empowering the scheduled castes and scheduled tribes is
to provide top class education opportunities to meritorious
students. The three on-going scholarship schemes for SC/ST
students under the Central Plan – pre-Matric, post-Matric, and
merit-based – will continue. To provide an added incentive, I
propose a new window: a short list of institutes of excellence
will be notified, and any SC/ST student who secures admission in
one of those institutes will be awarded a larger scholarship
that will meet the requirements for tuition fees, living
expenses, books and a computer. The details of the scheme will
be announced by the ministry concerned.
Government will also introduce the Rajiv Gandhi National
Fellowship for SC and ST students for pursuing M. Phil and Ph.D.
courses in selected universities. I propose to provide funds
for 2000 Fellowships per year to be awarded from 2005-06 on the
pattern of UGC Fellowships.
July, I promised to consider gender budgeting. Hon’ble Members
will be happy to note that I have included in the Budget
documents a separate statement highlighting the gender
sensitivities of the budgetary allocations under 10 demands for
grants. The total amount in BE 2005-06, according to the
statement, is Rs.14,379 crore. Although this is another first
in budget-making in India, it is only a beginning and, in course
of time, all Departments will be required to present gender
budgets as well as make benefit-incidence analyses.
Minorities would have to be brought more into the development
process. I propose to increase the equity support, as may be
required, for the National Minorities Development and Finance
certain percentage of new schools that will be opened under the
Sarva Shiksha Abhiyan as well as the Kasturba Balika Vidyalaya
Scheme will be located in districts or blocks having a
substantial minority population. Likewise, a certain proportion
of new anganwadi centres will be located in blocks or villages
which have a substantial concentration of minorities.
is the mother tongue of a large number of people in Uttar
Pradesh and Bihar, but there is very little provision for
teaching Urdu. I propose to provide central assistance for
recruitment and posting of Urdu language teachers in primary and
upper-primary schools that serve a population in which at least
one fourth belong to that language group.
Ministry of Social Justice and Empowerment and the Ministry of
Human Resource Development implement a number of schemes for
pre-examination coaching of candidates belonging to the minority
communities. These schemes are confined to Government
institutions, and the results have not been encouraging. Hence,
I propose to expand these schemes to include reputed private
coaching institutes which have a track record of showing good
results in competitive examinations. I propose to provide funds
to pay the fees on behalf of meritorious candidates from
minority communities who enroll in these selected private
Regions Grant Fund
the announcement in the last Budget of a Grant Fund for backward
districts, a lot of thought has gone into the proposal. An
Inter-Ministerial Group (IMG) has identified 170 backward
districts based on certain socio-economic variables. The IMG
has also proposed that resources under the new facility will be
conditional on Panchayati Raj institutions being properly
empowered, including devolution of functionaries and funds. I
propose to accept the recommendations of the IMG, and I am happy
to announce the establishment of a Backward Regions Grant Fund.
An allocation of Rs.5,000 crore has been made in the Plan for
2005-06, and an equal amount will be allocated every year in the
next four years. Consequent upon the establishment of the Fund,
the existing Rashtriya Sam Vikas Yojana (RSVY), envisaged to end
in 2006-07, will be wound up with suitable transition
arrangements that will protect every district now covered under
NCMP refers to special economic packages for Bihar, Jammu &
Kashmir and the North Eastern Region. Till now, Bihar received
special assistance through the RSVY. The transition arrangements
under RSVY will continue until 2006-07. Meanwhile, the backward
districts of Bihar will begin to receive assistance from the
Backward Regions Grant Fund. I may also point out that,
recognizing the needs of Bihar, the TFC has made substantial
grants amounting to Rs.7,975 crore for the period 2005-10.
Bihar has also been identified as one of the few States
requiring special grants for the health and education sectors.
Jammu & Kashmir
Government will provide special plan assistance to Jammu and
Kashmir under a recently-approved Reconstruction Plan, in
addition to the normal State Plan. As against the current year’s
State Plan of Rs.3,008 crore, the size of the State Plan for
2005-06 has been fixed at Rs.4,200 crore. The Baglihar project
was allocated Rs.300 crore this year and will be provided
adequate funds next year too. The Udhampur—Baramulla rail line
will be implemented as a project of national importance.
North Eastern Region
33. All Ministries and
Departments are required to allocate at least 10 per cent of
their plan budget for schemes and programmes in the North
Eastern Region (NER). For 2005-06, this would amount to
Rs.9,308 crore. The Kumarghat—Agartala and Lumding—Silchar—Jiribam—Imphal
projects will be supported with additional funds outside the
railway budget as projects of national importance. A special
package for highway development in the NER has also been
approved, and I have allocated Rs.450 crore in this behalf.
Government will focus on providing basic infrastructure to the
poor, especially those in rural India and in urban slums. The
Rural Infrastructure Development Fund which was revived last
July will, as in the current year, be provided a corpus of
Rs.8,000 crore in 2005-06 also.
III. BHARAT NIRMAN
35. In his address to Parliament, the President outlined
an overarching vision to build India, and called it ‘Bharat
Nirman’. Bharat Nirman has been conceived as a business plan,
to be implemented over a period of four years, for building
infrastructure, especially in rural India. It will have six
components, namely, irrigation, roads, water supply, housing,
rural electrification and rural telecom connectivity. In each
of these areas, we must dare to be bold and set for ourselves
high targets to be achieved by the year 2009.
The UPA Government’s goals are:
• to bring
an additional one crore hectares under assured irrigation;
• to connect
all villages that have a population of 1000 (or 500 in
hilly/tribal areas) with a
construct 60 lakh additional houses for the poor;
provide drinking water to the remaining 74,000 habitations that
reach electricity to the remaining 1,25,000 villages and offer
to 2.3 crore households; and
• to give telephone
connectivity to the remaining 66,822 villages.
will require huge resources. Government believes that Bharat
Nirman is an achievable project, and it is our intention to give
rural India a new deal fully involving the Panchayati Raj
Institutions in the planning and implementation.
36. I now
turn to investment which is the paramount requirement to
consolidate the growth process. In agriculture, we shall enhance
public and private investment in the infrastructure required to
support expansion, diversification and value addition. In the
industrial sector, both the public sector and the private sector
will be allowed the space to grow and compete with each other.
Government will play the leading role in providing and
facilitating investment in public goods such as roads, railways,
power, seaports and airports. In the services sector,
Government will recognize the leading role played by the private
sector, and provide a supportive policy environment and stable
37. I am
happy to announce that in 2005-06, the Government will provide
equity support of Rs.14,040 crore and loans of Rs.3,554 crore to
Central Public Sector Enterprises (including Railways).
Success, however, will ultimately depend upon our ability to
finance the growth. Government will, therefore, through a mix
of right policies and prudent taxes, promote savings and devise
ways and means to channel these savings into productive
investment. The capital market, banks, insurance companies,
pension funds and superannuation funds would have a crucial role
in mobilizing and disbursing the financial resources required to
sustain high investment.
about two thirds of the population dependent on agriculture, and
the sector producing only 21 per cent of GDP in 2003-04, it is
imperative that we address the problems of our farmers with a
sense of urgency. Agriculture being a State subject, the bulk
of public investment in agriculture takes place at the State
level, and the Central Government’s support to States acts as a
Indian agriculture has indeed diversified from food grains to
other crops, but more needs to be done. The Ministry of
Agriculture will prepare a roadmap for agricultural
diversification. The road map will focus on fruits, vegetables,
flowers, dairy, poultry, fisheries, pulses and oilseeds.
National Horticulture Mission, announced in the last Budget,
will be launched on April 1, 2005. I propose to allocate Rs.630
crore in 2005-06 for the Mission. The Mission will ensure an
end-to-end approach having backward and forward linkages
covering research, production, post-harvest management,
processing and marketing, under one umbrella, in an integrated
manner. As the Mission gathers pace, more funds will be
42. I am
aware of the difficulties that the plantation sector has faced
for some years now. While the prices of commodities such as tea
and coffee have shown some improvement, the sector still faces
difficulties. The Price Stabilization Fund has not proved very
effective or popular. Therefore, Government has set up an expert
committee to suggest improvements to the Fund and its operation.
In the case of tea, our comparative advantage has been eroded
largely because of the declining productivity of tea.
Government will examine ways and means of introducing a
programme for massive replantation and rejuvenation.
Agricultural Marketing Infrastructure
43. Government proposes to introduce
a new scheme called Development/Strengthening of Agricultural
Marketing Infrastructure, Grading and Standardization. The goal
of this scheme is to induce large investments from the private
and cooperative sectors for setting up agricultural markets,
marketing infrastructure and support services such as grading,
standardization and quality certification. Assistance will be
available in the form of credit-linked, back-ended subsidy. It
is proposed to implement the scheme through the National Bank
for Agriculture and Rural Development (NABARD) and the National
Cooperative Development Corporation (NCDC) in those States which
amend their Agricultural Produce Marketing Committee (APMC)
Acts. I propose to allocate Rs.72 crore for the new scheme.
Water Resources, Flood Management and
44. The National Project, announced
by me last July, for the repair, renovation and restoration of
water bodies will be launched in the month of March 2005. The
pilot project is planned for 16 districts in 9 States and will
700 water bodies, and 20,000 hectares of additional land will
come under irrigation. The allocation for the pilot project has
been increased to Rs.100 crore in 2005-06.
Pradesh, especially its eastern part, Bihar, West Bengal, Orissa,
Assam and the North Eastern States are regularly affected by
floods in the Ganga basin and in the Brahmaputra and Barak
valleys. A Task Force constituted to recommend measures for
flood management and erosion control has submitted its report.
The Plan outlay in 2005-06 to implement the report will be
Rs.180 crore. Besides, a sum of Rs.52 crore has been allocated
for the Farakka Barrage Project.
Accelerated Irrigation Benefit Programme (AIBP) has been
reviewed and the focus turned to early completion of truly last
mile projects. In BE 2004-05, I had provided a sum of Rs.2,800
crore. Having regard to the improvement in the pace of
implementation, the outlay has been increased to Rs.4,800 crore
for the next year.
Water-use efficiency in Indian agriculture is one of the lowest
in the world. Government will promote micro-irrigation
technology, comprising drip and sprinkler irrigation, on a large
scale. About 1.2 million hectares have been covered under
micro-irrigation so far, and the plan is to increase the
coverage to 3 million hectares by the end of the Tenth Plan and
to 14 million hectares by the end of the Eleventh Plan.
Accordingly, I have provided Rs.400 crore for promoting
micro-irrigation in 2005-06.
Rural Credit and Indebtedness
48. Government intends to continue
with its effort to turn the focus of commercial banks, regional
rural banks (RRBs) and cooperative banks towards providing
credit, especially production credit, to rural households and
farm households. Particularly in agricultural credit,
innovations are possible. I propose to request the Reserve Bank
of India (RBI) to examine the issue of allowing banks to adopt
the agency model, by using the infrastructure of civil society
organizations, rural kiosks and village knowledge centres, to
provide credit support to rural and farm sectors.
June 2004, I had announced my intention to double the flow of
agricultural credit in three years. I had also announced an
indicative target of Rs.105,000 crore. Notwithstanding a below
par performance by co-operative banks, together, all three arms
will disburse Rs.108,500 crore in the current year. Continuing
on the same path, I propose to ask commercial banks, RRBs and
cooperative banks to increase the flow of credit by another 30
per cent in 2005-06. Further, the public sector banks would be
asked to increase the number of borrowers by another 50 lakh.
Cooperative banks in India, with few exceptions, are in a
shambles. Six State Central Cooperative Banks and 140 District
Central Cooperative Banks do not comply with Section 11 of the
Banking Regulation Act, 1949. They also have difficulty in
accessing refinance for agricultural credit. Alarmed by the
gravity of the situation, I had appointed a Task Force to
examine the reforms required in the cooperative banking system.
The Task Force has submitted its report. The recommendations
• Special financial
assistance to wipe out accumulated losses and strengthen the
capital base of co-operative credit institutions;
restructuring to ensure democratic institutions; and
• Changes in the
legal framework to empower RBI to enforce prudent financial
I propose to
accept the report in principle. I also propose to call State
Governments for consultation and begin the process of
implementing the recommendations in the States that show
willingness to accept the recommendations.
National Agricultural Insurance Scheme (NAIS) has been in
operation since rabi 1999-2000. I have received the
recommendations made by the joint group constituted by the
Ministry of Agriculture to suggest an improved farmer-friendly
crop insurance scheme. Further consultation with all the
stakeholders would be required. I, therefore, propose to
continue the NAIS in its present form for kharif and rabi
programme of linking Self Help Groups (SHGs) with the banking
system has emerged as the major micro-finance programme in the
country. 560 banks including 48 commercial banks, 196 RRBs and
316 cooperative banks are now actively involved in the programme.
I propose to enhance the target for credit-linking in the next
fiscal from 2 lakh SHGs to 2.5 lakh SHGs.
present, micro finance institutions (MFIs) obtain finance from
banks according to guidelines issued by RBI. MFIs seek to
provide small scale credit and other financial services to low
income households and small informal businesses. Government
intends to promote MFIs in a big way. The way forward, I
believe, is to identify MFIs, classify and rate such
institutions, and empower them to intermediate between the
lending banks and the beneficiaries. Commercial banks may
appoint MFIs as “banking correspondents” to provide transaction
services on their behalf. Since MFIs require infusion of new
capital, I propose to re-designate the existing Rs.100 crore
Micro Finance Development Fund as the “Micro Finance Development
and Equity Fund”, and increase the corpus to Rs.200 crore. The
fund will be managed by a Board consisting of representatives of
NABARD, commercial banks and professionals with domain
knowledge. The Board will be asked to suggest suitable
legislation, and I expect to introduce a draft Bill in the next
propose to request RBI to open a window to enable qualified NGOs
engaged in micro-finance activities to use the External
Commercial Borrowing (ECB) window. Detailed guidelines
containing necessary safeguards will be issued by RBI.
benefits of opening the insurance sector are now visible by way
of vast improvement in insurance penetration and insurance
density, and the availability of a wide variety of products.
Government would like to see these benefits percolate to rural
India and to the vulnerable sections of the population. Micro
insurance is a distinct product. Its design and delivery are
specialized functions. The Insurance Regulatory Development
Authority (IRDA) has published draft Regulations for micro
insurance. NGOs, SHGs, cooperatives and MFIs will be invited to
become micro insurance agents. Government will extend full
support to the effort of IRDA to promote micro insurance.
Centre in Every Village
National Commission on Farmers has recommended the establishment
of Rural Knowledge Centres all over the country using modern
information and communication technology (ICT). Mission 2007 is
a national initiative launched by an alliance comprising nearly
80 organizations including civil society organizations. Their
goal is to set up a Knowledge Centre in every village by the 60th anniversary
of Independence Day. Government supports the goal, and I am
glad to announce that Government has decided to join the
alliance and route its support through NABARD. I propose to
allow NABARD to provide Rs.100 crore out of RIDF.
Agricultural Research has a vital role to play in the strategy
for reviving and encouraging diversification. Our agricultural
universities and research institutions have done good work in
the past and now need to be strengthened and modernized. A Task
Force headed by Dr. M S Swaminathan has recommended the creation
of a National Fund for Strategic Agricultural Research. I am
happy to announce an initial provision of Rs.50 crore for
operationalizing this Fund.
should build on its manufacturing capacities and scale them up
to global standards. Both the Investment Commission and the
National Manufacturing Competitiveness Council have started work
in right earnest. I believe we shall reap the first successes of
their work in the next financial year.
Worldwide, it is manufacturing that has driven growth. In order
to revive the manufacturing sector, particularly small and
medium enterprises, and to enable them to adjust to the
competitive pressures caused by liberalization and moderation of
tariff rates, I propose to launch a new scheme that will help
them strengthen their operations and sharpen their
competitiveness. The scheme will be called the “Manufacturing
Competitiveness Programme.” The design of the scheme will be
worked out by the National Manufacturing Competitiveness Council
in consultation with the industry.
the last Budget, I made a beginning in addressing the
tax-induced rigidities in the textile sector in order to prepare
the sector for the post-quota regime. There is a new vigour in
the sector, especially in the handloom and powerloom segments.
Government will continue to nurture the textile sector which has
huge potential for employment and exports. The estimate of
investment made in 2004-05 is Rs.20,000 crore. The estimate for
the next year is Rs.30,000 crore. The Technology Upgradation
Fund (TUF) scheme is being continued with an enhanced allocation
of Rs.435 crore. I propose to introduce a 10 per cent capital
subsidy scheme for the textile processing sector in addition to
the normal benefits available under the TUF Scheme.
61. I think it is necessary to lend
further help to the handloom sector. The Government proposes to
adopt the cluster development approach for the production and
marketing of handloom products. The Ministry of Textiles will
take up 20 clusters in the first phase at a cost of Rs.40 crore,
and the amount will be provided during the course of the year.
62. The Government is implementing a
life insurance scheme for handloom weavers which provides
insurance cover up to Rs.50,000. At present, only 2 lakh
weavers are covered. I propose to enlarge the coverage of the
scheme to 20 lakh weavers in two years which will cost Rs.30
crore per year when fully rolled out. The Government is also
implementing a health insurance package for weavers. Here too,
the coverage is now only for 25,000 weavers. I propose to
increase the coverage to 2 lakh weavers at a recurring cost of
Rs.30 crore per year. Once the two new and enlarged schemes are
approved, I propose to provide the required funds.
sugar industry has been under financial stress since 2001. The
position became worse due to two successive droughts in certain
parts of the country. The Tuteja Committee appointed by the
Government has submitted its report. After a careful
examination of the report, and after consulting RBI and NABARD,
I propose the following financial package for the revitalization
of the sugar industry:
• Sugar factories
that were operational in 2002-03 sugar season will be assisted
to restructure. NABARD, in consultation with State Governments,
RBI, banks and financial institutions will work out a scheme for
providing a financial package with a moratorium of two years, on
both principal and interest, and a schedule of payment having
regard to the commercial viability of each unit.
• Government has
already reduced the rate of interest on loans from the Sugar
Development Fund to 2 percentage points below the bank rate. I
propose to make the same rate applicable to outstanding loans as
on October 21, 2004.
• Indian Banks’
Association (IBA) and NABARD will be asked to work out a scheme
under which individual sugar factories may renegotiate the rate
of interest on their past high interest loans.
human resource base gives us an exceptional advantage in
pharmaceuticals and biotechnology. The Indian pharmaceutical
industry has declared its preparedness to produce drugs under
the new patent regime. Government has already set up a Rs.150
crore research and development corpus fund for the industry.
The corpus deserves to be increased, and I propose to do so in
phases beginning next year. India has also the potential to
become an attractive destination for outsourcing in drug
discovery and clinical research, and for co-development of drugs
and manufacturing. In biotechnology, the industry has the
potential to be a global leader supplying novel technologies and
products to the health and agriculture sectors. Government will
provide a stable policy environment and necessary incentives to
help the two industries become world leaders.
Small and Medium Enterprises
65. In recent years, our
approach to small scale industry has evolved, and now we are
inclined to treat the sector as the small and medium enterprises
sector. Continuing the process initiated a few years ago, after
consulting stakeholders and on the recommendation of the
Advisory Committee, the Ministry of Small Scale Industries has
identified 108 items for de-reservation. Among them, I would
like to mention 30 items in the category of “textile products,
including hosiery”, which is a sector poised for rapid growth.
the last Budget, I had significantly liberalized the capital
subsidy scheme, and a provision of Rs.135 crore was made for
“Promotion of SSI Schemes”. That provision is being enhanced to
Rs.173 crore in 2005-06. Small Industries Development Bank of
India (SIDBI) has established this year a SME Growth Fund with a
corpus of Rs.500 crore. Small and medium units in
knowledge-based industries such as pharma, biotech, and IT will
be provided equity support through this fund.
is a need for new legislation that will provide a supportive
environment for small and medium enterprises. I am glad to
inform the House that my colleague, the Minister of Small Scale
Industries, will introduce in this session the Small and Medium
Enterprises Development Bill.
Skills development, especially for youth who have only minimal
formal education, is an area which can no longer be ignored.
Last July, I had proposed a programme to upgrade 500 Industrial
Training Institutes (ITIs). I am happy to inform the House that
in the current year 100 ITIs have been identified. Out of them,
67 ITIs in 15 States/Union Territories have been linked with
industry and will be upgraded at a cost of Rs.1.6 crore each.
is a demand for specific skills of a high order which is often
unmet. I, therefore, propose a Public-Private Partnership
between Government and industry that will take up the skills
development programme under the name Skills Development
Initiative or SDI. Details of the scheme will be worked out and
shall build on the growing external strengths of the economy.
Government has delivered on the promise to accelerate foreign
trade. In April-January 2004-05 exports and imports have grown
by 25.55 per cent and 34.72 per cent, respectively, in US dollar
terms. Government has fixed an ambitious target of US$ 150
billion for exports by the year 2008-09 in order to double
India’s share in world exports to 1.5 per cent. We intend to
further liberalize trade policy and extend full support to the
efforts of our exporters.
foreign direct investment (FDI), I would urge Hon’ble Members to
take a pragmatic view. At the recent meeting of the Finance
Ministers of G-7 countries, to which India and China were
invited, the Finance Minister of China looked in my direction
and told the gathering that China had received US$ 500 billion
worth of foreign investment since China opened its economy in
1980. Of this, nearly US$ 60 billion came in calendar 2004. Our
own experience has been that the automobile, software,
telecommunication and electronics sectors have benefited from
FDI and have assimilated themselves into the global production
chain. I believe that there are opportunities in other sectors
as well, such as mining, trade and pensions. Government will,
after due consultation, come forward with suitable proposals.
Telecommunication is the best way to provide connectivity in
urban and rural India. By the end of January 2005, we had
achieved a tele-density of 8.75 per cent. However, we are
concerned with the low tele-density in rural areas. So far,
Government has released Rs.1,700 crore to the Universal Service
Obligation (USO) Fund, which has been fully utilized. A
provision of Rs.1,200 crore has been made for 2005-06. 1,687
subdivisions will get support under the USO Fund for rural
household telephones. 5.20 lakh village public telephones (VPTs)
have been installed so far, and BSNL has undertaken to provide
VPTs in the next three years to the remaining 66,822 revenue
Highway Development Project
National Highway Development Programme (NHDP) has made steady
progress, and 5,172 kms of National Highways have been four-laned
till January 2005 under NHDP I and NHDP II. To be launched in
the next fiscal, NHDP III will target selected high density
highways not forming part of the Golden Quadrilateral or the
North-South and East-West corridors. I have provided Rs.1,400
crore for this purpose in 2005-06 to four-lane 4000 kms. A
special package for the North Eastern region has also been
approved, and I have allocated Rs.450 crore in this behalf. In
overall terms, the outlay for National Highway development will
be increased from Rs.6,514 crore in BE 2004-05 to Rs.9,320 crore
massive programme for rural electrification will begin in
2005-06 with the objective of covering 1.25 lakh villages in
five years. The focus will be on deficient States. The
programme envisages creation of a rural electricity distribution
backbone, with a 33/11 KV substation in each block and at least
one distribution transformer in each village. I have provided
Rs.1,100 crore for this programme in the next year.
Indira Awas Yojana is the flagship rural housing scheme for
weaker sections. The allocation is being increased from
Rs.2,500 crore in the current year to Rs.2,750 crore in BE
2005-06. About 15 lakh houses will be constructed during the
Special Purpose Vehicle
76. The importance of
infrastructure for rapid economic development cannot be
overstated. The most glaring deficit in India is the
infrastructure deficit. Investment in infrastructure will
continue to be funded through the Budget. However, there are
many infrastructure projects that are financially viable but, in
the current situation, face difficulties in raising resources.
I propose that such projects may be funded through a financial
Special Purpose Vehicle (SPV). When large infrastructure
projects are implemented, the foreign exchange resources could
be drawn for financing necessary imports. Accordingly, I
propose to establish an SPV to finance infrastructure projects
in specified sectors. Roads, ports, airports and tourism would
be sectors that can benefit most from the SPV. The projects
will be appraised by an Inter-Institutional Group of banks and
financial institutions. The SPV will lend funds, especially
debt of longer term maturity, directly to the eligible projects
to supplement other loans from banks and financial institutions
Government will communicate the borrowing limit to the SPV at
the beginning of each fiscal year. For 2005-06, I propose to
fix the borrowing limit at Rs.10,000 crore.
77. I have also made a provision of
Rs.1500 crore for “viability gap” funding for infrastructure
projects. That mechanism will be used also in conjunction with
the funding mechanism through the SPV.
78. The unorganized or informal
sector accounts for 92 per cent of the employment and absorbs
the bulk of the annual accretion to the labour force. PURA or
Provision of Urban Amenities in Rural Areas is an idea that
contains within itself possible solutions to a number of
problems that afflict rural India such as unemployment,
isolation from markets, lack of connectivity and migration to
cities. The National Commission on Enterprises in the
Unorganized/ Informal Sector has proposed pilot projects for
‘growth poles’ applying the PURA principles. The objectives are
to expand production and employment in the unorganized
enterprises around existing clusters of industrial activities
and services as well as encourage the formation of new clusters.
Once the proposals are firmed up, Government will take up the
creation of a few growth poles, as pilot projects, in 2005-06.
National Urban Renewal Mission
79. The demographic trends in the
country indicate a rapid increase in urbanization. India needs
urban facilities of satisfactory standards to cope with the
challenge. If our cities are not renewed, they will die. The
National Urban Renewal Mission is designed to meet this
challenge. It will cover the seven mega cities, all cities with
a population of over a million, and some other towns. I propose
to make an outlay of Rs.5,500 crore in 2005-06, including a
grant component of Rs.1,650 crore for the Mission.
80. The Mumbai Metro Rail Project,
the Mumbai Trans Harbour Link, the Mumbai Western Expressway
Sealink and the Bangalore Metro Rail Project are examples of
projects which could be supported through the Mission.
81. The incipient investment boom in
infrastructure, industry (including housing), and services needs
to be nurtured through further reforms in the financial sector
including reforms in bank finance and debt and equity markets.
82. The banking sector presents a
picture of paradoxes. There are many banks in India but none
among the top twenty in the world. Our largest bank, the State
Bank of India, ranks 82 in terms of business. It is universally
acknowledged that the key drivers of the banking sector in the
future will be Competition, Consolidation and Convergence. RBI
has prepared a road map for banking sector reforms and will
unveil the same. While most proposals will be implemented by
the RBI on its own authority, some legislative changes would be
required to be made.
had promised that a comprehensive Bill to amend the Banking
Regulation Act, 1949 will be introduced in the Budget Session.
In consultation with the RBI, I propose to introduce amendments
to the Act –
• to remove the
lower and upper bounds to the statutory liquidity ratio (SLR)
and provide flexibility to RBI to prescribe prudential norms;
• to allow banking
companies to issue preference shares, since preference share
capital can be treated as regulatory capital under specified
circumstances as per Basel norms;
to introduce specific provisions to enable the consolidated
supervision of banks and their subsidiaries by RBI in consonance
with the international best practices in this regard;
I also propose
to introduce amendments to the Reserve Bank of India Act, 1934-
• to remove the
limits of the cash reserve ratio (CRR) to facilitate more
flexible conduct of monetary policy; and
to enable RBI to lend or borrow securities by way of repo,
reverse repo or otherwise.
84. With increasing longevity, the
problem of old-age income security can no longer be ignored.
Government had announced a defined contribution pension scheme
for newly recruited Central Government employees which would
also be extended to the unorganized sector. I am happy to
inform the House that seven State Governments – Andhra Pradesh,
Chhattisgarh, Himachal Pradesh, Jharkhand, Manipur, Rajasthan
and Tamil Nadu – have introduced similar schemes for their
employees. Other States have also evinced interest. An
Ordinance was promulgated on December 29, 2004 to set up a
Pension Fund Regulatory and Development Authority (PFRDA). I
propose to introduce a Bill to replace the Ordinance during this
85. Through the new scheme, it is
proposed to offer a menu of investment choices to the subscriber
and to provide a strong regulatory mechanism to ensure that the
interests of subscribers are protected. I appeal to workers all
over the country to join the new pension system.
86. The capital market has emerged
as a major vehicle for converting savings into investment. It
is also the preferred investment destination of foreign
savings. The steps announced by me last July, and implemented,
have strengthened the capital market. It is time for more
measures and, hence, I propose to –
authorize Securities and Exchange Board of India (SEBI) to set
up a National Institute of Securities Markets for teaching and
training intermediaries in the securities markets and promoting
permit FIIs to submit appropriate collateral, in cash or
otherwise, as prescribed by SEBI, when trading in derivatives
on the domestic market.
equity market has made progress, the corporate bond market still
lags behind. In order to address this gap, I propose to —
• amend the
definition of ‘securities’ under the Securities Contracts
(Regulation) Act, 1956 so as to provide a legal framework for
trading of securitized debt including mortgage backed debt; and
appoint a high level Expert Committee on corporate bonds and
securitization to look into the legal, regulatory, tax and
market design issues in the development of the corporate bond
Over the Counter (OTC) Derivatives
87. Over the counter (OTC)
derivatives play a crucial role in mitigating the risks of
corporates, banks and other financial entities. There is,
however, some ambiguity regarding the legality of OTC derivative
contracts which has inhibited their growth. I, therefore,
propose to take measures to provide for clear legal validity of
Stamp duty on Stock Exchange
88. The Securities Contracts
(Regulation) Act, 1956, as amended recently, requires all stock
exchanges to be corporatized and de-mutualized. Three stock
exchanges are not yet corporatized. In order to facilitate their
corporatization, I propose to grant a one-time exemption to them
from stamp duty on the notional transfer of assets.
Stamp Duty on Commercial Paper
order to create a level playing field for banks and non-bank
entities to issue commercial paper, and to bring the Indian
commercial paper market closer to international standard, I
propose to rationalize the stamp duty so that it applies
uniformly regardless of the issuing entity.
Mumbai – A
Regional Financial Centre
I look at the map of the world, I am struck by the strategic
location of Mumbai. It lies almost midway between London and
Tokyo, two nerve centres of world finance. Mumbai is also home
to the National Stock Exchange (NSE) and the Bombay Stock
Exchange (BSE) which now rank no.3 and no.5 among the stock
exchanges of the world by the number of trades per year. In the
last decade, we have built world class institutions on the
securities markets and we now compare with the best in terms of
technological sophistication, risk management and sound
governance. I believe the time has come to begin work on making
Mumbai a regional hub for finance. In consultation with the
RBI, I propose to appoint a high powered Expert Committee to
advise the Government on how to make Mumbai a regional financial
years ago we embarked on the process of ensuring that gold
inflows are through the official channels alone. I believe that
we are now in a position to introduce ‘gold units’ and create a
market for such units. I propose to ask SEBI to permit, in
consultation with RBI, mutual funds to introduce Gold Exchange
Traded Funds (GETFs) with gold as the underlying asset, in order
to enable any household to buy and sell gold in units for as
little as Rs.100. Such units could be traded in the same manner
as units of mutual funds.
January 6, 2005, the Prime Minister spoke about his intention to
set up a Knowledge Commission to look into the issue of building
quality human capital. Government believes that investments in
institutions of higher education and Research and Development
organizations are as important as investments in physical
capital and physical infrastructure. What we need are world
class universities, and we must make a beginning with one
institution. We must have a university that will be ranked
alongside Oxford and Cambridge or Harvard and Stanford. I am
happy to inform the House that we have selected the Indian
Institute of Science (IISc), Bangalore, which enjoys a high
reputation as a centre of excellence in research and
development. We shall work to make IISc, in a few years, a
world class university. I propose to provide an additional sum
of Rs.100 crore as a grant for this purpose.
93. In a remarkable display of the spirit of cooperative
federalism, the States are poised to undertake the most
important tax reform ever attempted in this country. All States
have agreed to introduce the value added tax (VAT) with effect
from April 1, 2005. VAT is a modern, simple and transparent tax
system that will replace the existing sales tax and eliminate
the cascading effect of sales tax. It is in force in more than
130 countries ranging from Sri Lanka to China. India too has a
VAT at the Central level (CENVAT), but only for goods.
94. In the medium to long term, it is my goal that the
entire production–distribution chain should be covered by a
national VAT, or even better, a goods and services tax,
encompassing both the Centre and the States.
95. The Empowered Committee of State Finance Ministers,
with the solid support of the Chief Ministers, has laboured
through the last 7 years to arrive at a framework acceptable to
all States. The Central Government has promised its full support
and has also agreed to compensate the States, according to an
agreed formula, in the event of any revenue loss. I take this
opportunity to pay tribute to the Empowered Committee, and wish
the States success on the introduction and implementation of
96. On February 26, 2005 I laid before Parliament the
recommendations made by the Twelfth Finance Commission (TFC).
TFC’s recommendations cover tax devolution, grants to States,
debt relief, financing of relief expenditure and related
matters. States stand to gain considerably by the award.
97. However, the implementation of the TFC recommendations
will put a large burden on Central finances through the period
2005-10, and especially in the first year, 2005-06, when the
change to the new pattern will take place. Consolidation and
rescheduling of Central loans, reduction in the interest rate
and specific grants under different heads will affect both
capital and revenue receipts of the Central Government. The
total impact on the Central budget for 2005-06 will be
approximately Rs.26,000 crore or an addition of three-quarters
of a percentage point as a proportion of GDP. Needless to say,
this will have an impact on Government’s capacity to abide by
the Fiscal Responsibility and Budget Management Act (FRBM) in
July, in order to catch up with the backlog of expenditure that
had not been provided for, I had increased the allocation for
Defence to Rs.77,000 crore. I am happy to inform the House
that, after a gap, defence expenditure in 2004-05 has matched
the Budget Estimates. I propose to increase the allocation for
Defence in 2005-06 to Rs.83,000 crore, which will include an
allocation of Rs.34,375 crore for capital expenditure.
99. The current phase of high growth
provides us an opportunity that should not be frittered away.
We must use this opportunity to improve the fiscal health of the
country. We must increase our revenues and reorient expenditure
to pay for more outlays on education, health and
Outlays versus Outcomes
100. At the same time, I must caution
that outlays do not necessarily mean outcomes. The people of
the country are concerned with outcomes. The Prime Minister has
repeatedly emphasized the need to improve the quality of
implementation and enhance the efficiency and accountability of
the delivery mechanism. During the course of the year, together
with the Planning Commission, we shall put in place a mechanism
to measure the development outcomes of all major programmes. We
shall also ensure that programmes and schemes are not allowed to
continue indefinitely from one Plan period to the next without
an independent and in-depth evaluation. Civil society should
also engage Government in a healthy debate on the efficiency of
the delivery mechanism.
Following my announcement last July, I placed before Parliament
a report on Central Government subsidies. There are three main
products that involve large explicit subsidies from the Budget
and otherwise. These are food, fertilizer and petroleum.
Subsidies provide a measure of protection for the poor and we
shall continue to provide subsidies. However, we must now take
up the task of restructuring the subsidy regime in a cautious
manner and after a thorough discussion.
Ministry of Agriculture intends to make procurement of food
grains more cost effective through decentralized procurement,
especially in the non-traditional States, without impairing the
present MSP-based procurement. A Working Group constituted by
the Department of Fertilizers is now examining several issues
for implementing the next stage of the New Pricing Scheme for
fertilizers commencing from April 1, 2006. The fertilizer
subsidy bill could be pruned if naphtha and FO/LSHS, now used as
feedstock, are replaced by natural gas. As far as petroleum
products are concerned, the Government has received the
recommendations of the Lahiri Committee, and appropriate
decisions have been taken, to which I shall refer in Part B of
103. What gives me satisfaction is
that, while faithfully attempting to implement the mandate of
the NCMP, I have been able to remain on the path of fiscal
consolidation. According to the revised estimates for 2003-04,
the revenue deficit was 3.6 percent and the fiscal deficit was
4.8 per cent of GDP. The FRBM Act requires a reduction in the
two ratios, respectively, of 0.5 per cent and 0.3 per cent every
year. I am happy to inform the House that we will achieve this
degree of fiscal correction in 2004-05, and the year is expected
to end with a revenue deficit of 2.7 per cent and a fiscal
deficit of 4.5 per cent of GDP.
BUDGET ESTIMATES FOR 2005-06
104. Now I turn to the Budget
Estimates for the next fiscal.
105. Plan expenditure for 2005-06 is
estimated, on a like-to-like basis, at Rs.172,500 crore.
However, the Budget shows Plan expenditure at Rs.143,497 crore,
and the balance amount of Rs.29,003 crore will be raised as
loans by the State Governments directly, in accordance with the
recommendations of the TFC.
106. Non-Plan expenditure in 2005-06
is estimated to be Rs.370,847 crore, the increase being mainly
due to enhanced grants to the States as recommended by TFC.
Revenue Deficit and Fiscal Deficit
107. Mr. Speaker, Sir, in the Budget
Estimates for 2005-06, the total expenditure is estimated at
Rs.514,344 crore. I estimate total revenue receipts of the
Central Government at Rs.351,200 crore and the revenue
expenditure at Rs.446,512 crore. Consequently, the revenue
deficit is estimated at Rs.95,312 crore which is equal to 2.7
per cent of the estimated GDP. The fiscal deficit is estimated
at Rs.151,144 crore, which is 4.3 per cent of the estimated
108. Consequent to accepting the
recommendations of the Twelfth Finance Commission and the
drastically changed pattern of devolution and funding,
there has been a considerable strain in making the Budget for
2005-06. I was left with no option but to press the ‘pause’
button vis-a-vis the FRBM Act. I am relieved that we have not
been forced to go in the opposite direction. I may add that we
are perilously close to the limits of fiscal prudence and there
is no more room for spending beyond our means. I am confident
that we can resume the process of fiscal correction with effect
from 2006-07 and achieve the FRBM goals by 2008-09.
PART – B
109. Mr. Speaker, Sir, I shall now
present my tax proposals.
110. I had
articulated the UPA Government’s principles and our approach to
taxation in my Budget speech in July 2004, and, hence, there is
no need to repeat them. While adhering to those principles, it
is Government’s intention, as announced by the Prime Minister,
to undertake major tax reforms to improve the tax to GDP ratio,
expand the tax payer base, increase tax compliance and make tax
administration more efficient.
111. I shall begin with my proposals
on indirect taxes. First, customs duties.
112. I intend to advance the
Government’s declared policy of making the customs duty
structure closer to that of our East Asian neighbours.
Therefore, I propose to reduce the peak rate for
non-agricultural products from 20 per cent to 15 per cent.
113. Consistent with the peak duty
rate, I propose to bring down the customs duty rates on
capital goods and raw materials as well as correct any inverted
114. In order to promote investment, I
propose to reduce the customs duties on selected capital goods
and parts thereof to below 15 per cent, to 10 per cent in some
cases and to 5 per cent in some others.
most textile machinery, I propose to reduce the duty from 20 per
cent to 10 per cent, in order to help the textile industry
acquire a competitive edge in the post-quota regime. Similarly,
to encourage the food processing industry, I propose to reduce
the duty on refrigerated vans from 20 per cent to 10 per cent.
give a leg-up to the leather and footwear industry, I propose to
reduce the customs duties on seven specified machinery from 20
per cent to 5 per cent. The duty on ethyl vinyl acetate (EVA),
an input for the footwear industry, is also proposed to be
reduced from 20 per cent to 10 per cent.
Pharmaceuticals and biotechnology are sunrise sectors. I propose
to reduce the customs duty on nine specified machinery used in
these two sectors to 5 per cent.
118. I also
propose to reduce the customs duties on specified parts of
battery-operated road vehicles and for printing presses from 20
per cent to 10 per cent.
119. For primary and secondary metals,
I propose to reduce the customs duties from 15 per cent to 10
per cent. Similarly, industrial raw materials such as catalysts,
refractory raw materials, basic plastic materials, molasses and
industrial ethyl alcohol, which are key inputs to manufacture,
will now be liable to a reduced customs duty rate of 10 per
cent. On lead, I propose to reduce the duty to 5 per cent.
coal with high ash content attracts a duty of 15 per cent. I
propose to bring the rate down to 5 per cent.
Keeping in mind the crucial need to encourage the textile
sector, the customs duty rates on polyester and nylon chips,
textile fibres, yarns and intermediates, fabrics, and garments
are proposed to be reduced from 20 per cent to 15 per cent.
electronics and telecom sectors merit special attention. On 217
Information Technology Agreement (ITA) bound items, the duty is
required to be brought down to nil. Consequently, to provide a
level-playing field to the domestic industry, I propose to
remove the customs duty on specified capital goods and all
inputs required for the manufacture of ITA bound items.
However, I intend to take the power to impose a countervailing
duty (CVD) of 4 per cent on all imports to compensate for the
State level taxes, in particular the forthcoming State level VAT
that is proposed to be imposed on corresponding domestic goods.
For the present, I propose to levy a CVD of 4 per cent only on
the imports of ITA bound items and their inputs that attract nil
duty. Credit for the CVD will be available against payment of
excise duty. However, because we have a soft corner for these
wares, IT software will be exempt from the proposed CVD.
124. I do
not propose to make any changes in the customs duties applicable
to agricultural goods. In fact, I have decided to increase the
duty on cut flowers from 30 per cent to 60 per cent. However,
at the request of the trade, and since there is little domestic
production, I propose to reduce the duty rate on cloves to 35
order to encourage the import of technology to produce pure
drinking water, I propose to reduce the import duty on
atmospheric drinking water generators from 20 per cent to 5 per
126. I have
some proposals on the Excise side too. Government’s intention
is to bring as many goods as possible to the CENVAT rate of 16
per cent. Today, 5 items attract 24 per cent. Out of the 5, I
have picked out three — polyester filament yarn, tyres and air
conditioners — and I propose to reduce the excise duty on these
goods to 16 per cent. Manufacturers of motor cars and aerated
drinks, the other two items, would have to wait for some more
year, I took a big step forward to prepare the textile industry
to meet the challenges of the post-quota regime. I re-affirm
that the CENVAT exemption route for natural fibres will remain
in force. I now propose to give independent texturizers the
option to avail of the exemption route or pay 8 per cent excise
duty with CENVAT credit.
Imitation jewellery now attracts an excise duty of 16 per cent.
Since they are products predominantly consumed by the less
affluent sections, I propose to reduce the excise duty to 8 per
cent. At the same time, expensive and premium jewellery is now
manufactured and sold under alluring brand names. On such
branded jewellery, I propose to levy an excise duty of 2 per
cent. I may clarify that there is no levy on unbranded
jewellery, including unbranded gold jewellery.
order to remove certain distortions in the tax treatment of
comparable products, I propose to levy an excise duty on mosaic
tiles at 8 per cent and on road tractors for semi-trailers of
engine capacity exceeding 1800 cc at 16 per cent. I may clarify
that agricultural tractors will continue to remain exempt.
sectors deserve relief, since they produce goods for the common
citizen. Today, there is a surcharge of Re.1 per kg on tea. I
propose to abolish the surcharge. There is also an excise duty
of Re.1 per kg on refined edible oils and Rs.1.25 per kg on
vanaspati. I propose to abolish both levies and fully exempt
the two items.
while protecting the handmade sector that makes matches, it is
necessary to give some relief to the mechanized and
semi-mechanized sectors. Hence, I propose to reduce the excise
duty from 16 per cent to 12 per cent on matches made by these
two sectors. Hand-made matches are fully exempt from excise duty
and, therefore, will continue to enjoy adequate protection.
would like to provide some tax relief to the small scale
industry (SSI). Hence, I propose to raise the ceiling for SSI
exemption based on turnover from the level of Rs.3 crore per
year to Rs.4 crore per year. Further, SSI units will now have
only two options: either full exemption on the first clearance
of Rs.1 crore or normal duty on the first clearance of Rs.1
crore with CENVAT credit.
propose to restore the excise duty rate on iron and steel to the
normal level of 16 per cent. This should have little effect on
prices because the entire duty is modvatable by most categories
propose to increase the specific duty on molasses from Rs.500
per MT to Rs.1000 per MT to adjust partially for a hefty
increase in molasses prices. I also propose to increase the
specific duty on cement clinkers from Rs.250 per MT to Rs.350
per MT as an anti-avoidance measure.
National Highways Development Project requires very large
resources. In order to raise additional resources, I propose to
increase the cess on petrol and diesel by 50 paise per litre.
The additional resources will be earmarked exclusively for the
national highways, and a suitable amendment is being proposed to
the Central Road Fund Act, 2000.
136. The levy of an education cess has
been widely applauded. The health sector demands similar
treatment. What better way is there to fund health care than
tax those goods which are health hazards? I, therefore,
propose to raise some additional resources and allocate the
proceeds to finance the National Rural Health Mission.
Accordingly, I propose to increase the specific rate on
cigarettes by about 10 per cent and impose a surcharge of 10 per
cent on ad valorem duties on other tobacco products including
gutka, chewing tobacco, snuff and pan masala. However, biris
will not be subject to this levy.
Finally, there is the issue of taxes on petroleum products.
After examining the Lahiri committee’s report, I propose to make
major changes in the customs and excise duty rates. The customs
duty on crude petroleum will be reduced from 10 per cent to 5
138. On LPG
for domestic consumption and on subsidized kerosene, the customs
duty will be nil. On both products, the excise duty will also
other petroleum products, including motor spirit (MS) and diesel
(HSD), I propose to reduce the customs duty from the current
level of 20 or 15 per cent to 10 per cent. I also propose to
fix the excise duties on petrol and diesel as a combination of
ad valorem and specific duties.
140. The proposed changes are revenue
neutral, and I have been assured that there will be no increase
in the retail prices of these products as a result of the
changes in the duty structure.
141. Consequent upon the changes made
in customs and excise duties, the drawback rates for exported
goods will be reviewed and modifications, wherever necessary,
will be notified by April 30, 2005.
142. Hon’ble Members are aware that
many goods are chargeable to excise duty on a value with
reference to their maximum retail price (MRP), after allowing
suitable abatement. The system of quantifying the abatement
should be made transparent. There should also be a mechanism to
review the rate of abatement to reflect changed circumstances.
Hence, as a trade facilitation measure, I propose to set up an
advisory committee to advise the Government on the extent of
abatement for both excise duty and service tax.
143. The other indirect tax is service
tax. Since the services sector accounts for about 52 percent of
the GDP it is necessary to cast the net wide.
144. Last July, I raised the rate of
service tax to 10 per cent. I propose to maintain that rate.
145. I also propose to grant relief to
small service providers. Accordingly, I propose to exempt from
service tax those service providers whose gross turnover does
not exceed Rs.4 lakh per year. According to my calculation, 80
per cent of the present service tax payers will gain from the
146. I propose to include some
additional services in the service tax net. New services to be
covered include pipeline transport of goods; site formation,
demolition and like services; membership fees of clubs and
associations; packaging and specialized mailing services; survey
and map making services; dredging services in rivers and
harbours; cleaning services for commercial buildings and similar
premises; and construction of planned residential complexes,
with more than 12 dwelling units, developed by builders.
147. I also
propose to expand the coverage of certain services, but I shall
not burden you with the details.
shall now turn to my proposals on direct taxes.
July, as an interim measure, I made a provision under which a
person with a taxable income of Rs.100,000 would not be required
to pay any income tax. About 1.4 crore assessees got relief. I
promised to revisit the subject in this Budget.
part of a major overhaul of direct taxes, I propose to alter the
tax brackets after taking due note of the universal demand of
Members of Parliament and the need to provide stability in the
151. Accordingly, I propose that the new tax brackets and
the new rates will be as follows:
Up to Rs.1 lakh
Rs.1 lakh to Rs.1.5 lakh
Rs.1.5 lakh to Rs.2.5 lakh
.. 20 per
Above Rs.2.5 lakh
.. 30 per cent
level at which the surcharge of 10 per cent will apply will be
raised to Rs.10 lakh taxable income. Hon’ble members will be
happy to note that tax payers in every tax bracket will gain
from my proposal.
Besides, I propose to fix the threshold exemption level for
women at Rs.1.25 lakh and the exemption level for senior
citizens at Rs.1.5 lakh. These revised exemption levels will be
in lieu of the prevailing tax rebate provisions.
the higher exemption limits and the scaling up of tax brackets,
the need for a separate personal allowance does not exist.
Therefore, in conformity with growing international practice, I
propose to remove the standard deduction.
is now a plethora of exemptions, ostensibly intended to promote
savings. Some exemptions are based on the principle of
deduction from taxable income and some exemptions are based on
the principle of tax rebate. I believe the time is ripe to
clean up these exemptions. At the same time, it is necessary to
encourage savings, and tax relief is a method to induce people
to save. Further, I think that the State must be neutral
between one form of saving and another, and allow the tax payer
greater flexibility in making savings/investment decisions.
155. For all these reasons, in
addition to the basic exemption limits, I propose to allow every
tax payer a consolidated limit of Rs.1 lakh for savings which
will be deducted from the income before tax is calculated. All
prevailing sectoral caps will be removed. The rebate under
Section 88 is being eliminated and Section 80L is being omitted
to reflect the new regime.
156. In addition to the sum of Rs.1 lakh, the following six
deductions will continue to receive the same tax treatment as
interest paid on housing loan for self-occupied house property;
medical insurance premia;
specified expenditure on disabled dependant;
expenses for medical treatment for self or dependant or member
of a HUF;
deduction in respect of interest on loans for pursuing higher
vi) deduction to a person
treatment of savings is a complex issue but we can benefit from
the best international practices in this regard. We have
already introduced EET-based taxation in the defined
contribution pension scheme applicable to newly recruited
government servants. Before we fully migrate to the EET system
for all kinds of savings, it is necessary to resolve a number of
administrative issues. Hence, without making any change for the
present, I propose to set up a committee of experts that will
work out the road map for moving towards an EET system.
to popular demand, I propose to continue the exemption from tax
on interest earned on accounts maintained by Non Resident
the tax reliefs that I have given today should warm the hearts
of the tax payers, I have also an obligation to raise resources,
especially to meet the large requirements of NCMP-mandated
160. I have
looked into the present system of taxing perquisites and I have
found that many perquisites are disguised as fringe benefits,
and escape tax. Neither the employer nor the employee pays any
tax on these benefits which are certainly of considerable
material value. At present, where the benefits are fully
attributable to the employee they are taxed in the hands of the
employee; that position will continue. In addition, I now
propose that where the benefits are usually enjoyed collectively
by the employees and cannot be attributed to individual
employees, they shall be taxed in the hands of the employer.
However, transport services for workers and staff and canteen
services in an office or factory will be outside the tax net.
The tax is not a new tax, although I am obliged to call it by a
new name, namely, Fringe Benefits Tax. The rate will be 30 per
cent on an appropriately defined base.
believe I have given a large measure of relief to personal
income tax payers, and I hope all sections of the people and
all members of the House are happy. This leads me to corporate
corporate income tax rate, the surcharge thereon and the rates
of depreciation are inter-linked. Any reform would have to
address all three elements. The international best practice is
to provide for depreciation at rates that would enable the
investor to replace the asset before its economic life ends. In
India, in addition to the depreciation rate we have allowed an
initial depreciation in order to encourage new investment.
Hon’ble members may recall that, last July, I reduced the
condition relating to increase in installed capacity from 25 per
cent to 10 per cent.
163. I am
also obliged to keep in mind that a number of profit making
companies continue to pay low tax, even if well within the law,
by taking advantage of liberal depreciation rates and of
exemptions and incentives. Moreover, the current depreciation
rates lean towards employing capital rather than labour.
is also a demand that corporate tax rates should be aligned with
the highest marginal personal income tax rate.
careful consideration of the pros and cons, the interest of the
revenue and the need to give the corporate sector a measure of
relief, I propose the following tax structure.
domestic companies, the corporate income tax rate will be 30 per
cent. There will also be a surcharge of 10 percent. The rate
of depreciation will be 15 per cent for general machinery and
plant, but the initial depreciation rate will be increased to 20
corporate sector will find that the proposed tax structure is
fair, gives them relief of nearly 3 per cent in the tax rate,
encourages new investment and ensures equity among all sections
of corporate tax payers.
168. As a
further measure of relief, I propose to remove the requirement
of 10 per cent increase in installed capacity for availing of
the benefit of initial depreciation.
encourage technological upgradation, I propose to reduce the
withholding tax on technical services from 20 per cent to 10 per
also propose that credit will be allowed for the Minimum
Alternate Tax (MAT) paid under Section 115 JB of the Income Tax
171. I do
not propose to make any changes in the tax regime applicable to
July, I had indicated that I would review the terminal dates on
exemptions given for specific purposes. Accordingly, I propose
to extend the terminal date, in the following three cases, from
March 31, 2005 to March 31, 2007:
deduction of 150 per cent of expenditure on in-house research
and development facilities of companies engaged in the business
of biotechnology, pharmaceuticals, electronics,
telecommunication, chemicals or any other notified product;
Deduction of profits of new industrial undertakings in Jammu &
• 100 per cent
deduction of profits of companies carrying on scientific
research and development and approved by the Department of
Scientific and Industrial Research.
deference to the request from Air India and Indian Airlines, I
propose to extend up to September 30, 2005 the exemption from
tax on agreements to acquire aircraft or aircraft engines on
securities transaction tax (STT) has stabilized, but the rates
are widely perceived to be too low. I, therefore, propose to
make a very nominal increase in the rates for all categories of
transactions. Thus, a day trader who is liable to pay STT at
0.015 per cent will now be liable to pay at 0.02 per cent. This
small increase should not ruffle anyone’s feathers. This nominal
rate of increase will apply to all categories.
Hon’ble Members are aware, there have been significant
developments in the past decade in the capital market including
the introduction of trading in financial derivatives. We have
also established a transparent system of trading with adequate
safeguards for audit trail. Hence, I propose to amend the Income
Tax Act to provide that trading in derivatives in specified
stock exchanges will not be treated as “speculative
transactions” for the purposes of the Income Tax Act.
propose to amend the one-in-six criteria for filing income tax
returns. Mobile telephone will be removed. Instead, payment for
electricity of more than Rs.50,000 per year will be included as
a criterion for filing a return of income.
NCMP requires the Government to introduce special schemes to
unearth black money and assets. I am obliged to carry out the
mandate, but without giving undeserved relief or an amnesty. I
am concerned about large cash transactions, especially
withdrawals of cash, when there is no ostensible purpose to
withdraw such large amounts of cash. These cash withdrawals
leave no trail, and presumably become part of the black
economy. Therefore, I propose to introduce two anti tax-evasion
measures: Firstly, I propose to levy a tax on withdrawal of
cash on a single day of over Rs.10,000 or more from banks at the
rate of 0.1 per cent. Thus, a person withdrawing Rs.10,000 in
cash would have to pay a small sum of Rs.10. Secondly, I propose
to require banks to report to the Government all deposits which
are exempt from TDS on interest. I intend to observe the
results of these steps before I propose any further measures.
administrative reforms are underway in the Department of
Revenue. Among them are the tax information network (TIN) and
the on-line tax accounting system (OLTAS).
179. As a
measure of facilitation, I propose to follow international
practice and establish large taxpayer units (LTUs). To begin
with, these units will be set up in major cities. I would like
to invite large tax payers, whether of corporate tax or income
tax or excise duties or service tax, to participate in the
programme and avail of the single window service. For small
taxpayers, I propose to set up Help Centres in cooperation with
industry associations, professional bodies and NGOs.
180. I have
received many suggestions on amendments to the direct tax laws
and the indirect tax laws. I have decided to accept some
suggestions that require to be acted upon immediately, but I do
not propose to burden the Finance Bill with those changes.
Instead, I intend to introduce a separate Bill for that purpose
during this session. In due course, I intend to place before
Parliament a revised and simplified Income Tax Bill.
181. My tax
proposals on direct taxes are expected to yield a gain of
Rs.6,000 crore. On the indirect taxes side, they are broadly
182. One of
India’s proudest sons, Dr Amartya Sen, argues in his book
“Development as Freedom” that development is a process of
expanding the real freedoms that people enjoy. He says, “Growth
of GNP or of individual incomes can, of course, be very
important as means to expanding the freedoms enjoyed by
the members of the society. But freedoms depend also on other
determinants, such as social and economic arrangements (for
example, facilities for education and health care) as well as
political and civil rights.” The UPA Government accepts this
ethical dimension to the discussion of economic issues, and in
this Budget I have attempted to reflect that dimension. More or
less the same idea was articulated two thousand years ago by
Saint Tiruvalluvar who said:
“Pini Inmai Selvam Vilaivu Inbam Emam
Ani Enba Nattirkku Iv Iyndhu”
(Health, wealth, produce, the happiness that is the result,
These five, the learned say, are the ornaments of a polity)
Budget, Mr Speaker, is an attempt to lay down a path in which
growth and equity will reinforce each other and build a new
Sir, with these words, I commend the Budget to the House.