The Union Budget 1998-99 is a Brave Response to Challenging Circumstances

By HP Ranina

Summary

In this Forum of Free Enterprise booklet, based on a public talk delivered in Mumbai on 3 June 1998, the tax expert H. P. Ranina assesses the maiden Union Budget of the BJP-led government for 1998-99 as a ‘brave response to challenging circumstances.’ He opens by sketching the macro-economic backdrop as of April 1998: gross domestic savings at an all-time high of 26.1% of GDP and buoyant invisible receipts on the positive side, set against adverse trends — a fiscal deficit that overshot its target to reach 6.1% of GDP, a sharp deceleration of GDP growth to 5% in 1997-98, sluggish exports, a dormant capital market, and weak agricultural and consumer-goods output.

Turning to policy, Ranina reads the budget as sensitive to vulnerable groups (higher exemption limits, raised standard deduction, medical-allowance relief, and compensation for workers in closing public-sector units) and as adopting many recommendations of the Expert Group on a new Income-tax Law. He welcomes the firm fiscal stance, the boost to housing, infrastructure and software, the long-overdue abolition of the Gift-tax Act, financial-sector reform that should insulate Indian banks from the South-East Asian crisis, and the planned replacement of FERA by a Foreign Exchange Management Act. He is more critical of the higher customs duties, the MODVAT set-off restriction, the apologetic rather than bold opening of insurance to private and foreign capital, and the absence of measures to revive the capital market.

The bulk of the booklet is a detailed walk-through of corporate-sector provisions in the Finance (No. 2) Bill, 1998: tax-neutral treatment of business reorganisations (firm-to-company succession), depreciation extended to intangible assets, expanded Section 80-IA tax holidays for infrastructure, oil refining and power, deductions for new workmen, the new Section 145-A on inventory valuation and MODVAT, raised standard deduction and medical limits, and a voluntary tax-arrears settlement scheme covering both direct and indirect taxes including Gift-tax dues. He concludes that the budget continues existing benefits while adding incentives for Indian and foreign investors, and that Finance Minister Yashwant Sinha will deserve the nation’s gratitude if industrial growth returns to 8%, inflation stays within 6%, and the fiscal deficit is held to 5.5% of GDP. The booklet is bracketed by free-enterprise epigraphs from A. D. Shroff and Eugene Black, and carries the standard disclaimer that the views are the author’s, not the Forum’s.

Key points

• Ranina evaluates the first budget of the BJP-led government (1998-99) against the April 1998 macro-economic situation.

• Positives: record gross domestic savings (26.1% of GDP) and strong invisible/software-export receipts; net invisibles financed 74% of the trade deficit in 1996-97.

• Adverse trends: fiscal deficit overshot to 6.1% of GDP, GDP growth fell to 5%, exports and the capital market remained sluggish.

• He praises pro-poor measures, the boost to housing/infrastructure/software, abolition of the Gift-tax Act, and FERA’s replacement by a Foreign Exchange Management Act.

• He criticises higher customs duties, the MODVAT set-off restriction, and the timid opening of insurance to private and foreign capital.

• A long technical section details corporate-sector reforms: tax-neutral business reorganisations, depreciation on intangibles, expanded Section 80-IA holidays, and new Section 145-A on inventory valuation.

• A voluntary settlement scheme offers waiver of part of tax arrears and immunity from prosecution across direct and indirect taxes.

• He concludes Finance Minister Yashwant Sinha will deserve gratitude if growth reaches 8%, inflation stays under 6%, and the fiscal deficit is held to 5.5% of GDP.

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