Yashwanth Sinha – 2000 Budget

Finance Minister Yashwanth Sinha
Budget Year :2000

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Yashwanth Sinha

PART A

Sir,  I rise to present the first budget of this millennium.

2 . This budget for 2000-2001 has some other firsts to its credit also. It is the  first budget of the new Government which took office in October 1999 under the  visionary leadership of Shri Atal Bihari Vajpayee. It is also the first budget of the  second half century of our Republic and the first budget of the new century. I hope  it will add many more firsts to its credit as time goes by. I thank the Hon’ble Prime  Minister for entrusting me with this historic responsibility which I stand here to  discharge in all humility.

3 . The year 1999-2000 has been a year of many challenges: the 50 day war in  Kashmir, the super cyclone in Orissa, long months of political uncertainty before the  general elections, a somewhat weak monsoon, a near tripling of world oil prices and  the continued fragility in world economic recovery. Nevertheless, we have met these  challenges resolutely, accomplished a great deal and the nation is stronger as a  result.

4 . The economy’s performance is described in detail in the Economic Survey  I laid before the House yesterday. Let me just touch a few highlights. A broad-based  industrial recovery is under way. Despite lower growth of agriculture due to inclement  weather, overall economic growth this year is expected to be nearly 6%. The  infrastructure sector is performing much better. For the first time in 17 years the  inflation rate has stayed below 4% for 42 consecutive weeks. Even more remarkable,  the Consumer Price Index (Industrial Workers) in November 1999 showed zero  increase over the previous November. This is an enormous boon for the weakest  sections of our society. Public food stocks are at record levels. Exports have achieved  a remarkable turn around from negative growth last year to nearly 13% growth in  dollar terms in April-December, 1999. Our software exports are also booming.   Although surging international oil prices have increased our oil import bill by more  than $6 billion, our foreign exchange reserves have nevertheless attained new record  levels. With the return of investor confidence our stock markets have also soared to  new heights.

5 . In my last two budgets I have addressed the accumulated shortcomings in  our policies and freed our companies to compete globally. We have strengthened our  agricultural sector, energised our financial markets and laid the foundations of an  exciting new economy. With this, my third budget, I propose to put India on a  sustained, equitable and job-creating growth path of 7 to 8% per year in order to  banish the scourge of poverty from our land within a decade. The next 10 years will  be India’s decade of development. To achieve this objective our strategy must  encompass the following elements:  ♦ Strengthen the foundations of growth of our rural economy, especially  agriculture and allied activities.  ♦ Nurture the revolutionary potential of the new knowledge-based industries  such as infotech, biotechnology and pharmaceuticals.  ♦ Strengthen and modernise traditional industries such as textiles, leather,  agro processing and the SSI sector.  ♦ Mount a sustained assault on infrastructure bottlenecks in power, roads,  ports, telecom, railways and airways.  ♦ Accord the highest priority to human resource development through  programmes and policies in education, health and other social services,  with special emphasis on the poorest and weakest sections of society.  ♦ Strengthen our role in the world economy through rapid growth of exports,  higher foreign investment and prudent external debt management.  ♦ Establish a credible framework of fiscal discipline, without which the other  elements of our strategy can fail.

6 . In all these areas we must pursue thorough-going economic reforms to  unlock the creative energies of our people and thus reap the gains of productivity  growth. But our reforms must also be guided by compassion and justice. In his  Address to Parliament in October 1999 the President has set out the broad outlines  of our programme of second generation reforms. This budget carries forward the  process of implementation.

Fiscal Management

7 . Today, we must squarely confront and overcome the critical challenge posed  by a weakening fiscal situation. A long history of high fiscal deficits has left us with  a legacy of a huge public debt and an ever-growing bill of interest payments. This  year we have incurred unanticipated expenditure on national defence, elections and  the super cyclone in Orissa. The residual impact of the Fifth Pay Commission and  the need for special fiscal assistance to the States have added to our burden. All  this, combined with shortfalls in receipts from disinvestment and revenue, has raised  our net borrowing requirements (our fiscal deficit) to over Rs.1,00,000 crore. This  will add about Rs.10,000 crore to our interest bill next year. We must also find  additional resources for Plan, Defence and for additional transfers to States under  the interim award of the Eleventh Finance Commission. If we do not raise the resources    and instead take recourse to even higher borrowing next year, then we will jeopardise  our prospects for growth, reignite the flames of inflation, sow the seeds of another  balance of payments crisis and place an unfair burden on the next generation.

8 . We must put our fiscal house in order. This means hard decisions and  sacrifices. At the same time we must preserve the intrinsic dynamism of our economy,  which alone can deliver sustained growth with social justice. For this reason, despite  the severe fiscal strain, the budget support to the plan is being increased by Rs.11,100  crore to a level of Rs.88,100 crore compared to Rs.77,000 crore in B.E. 1999-2000.

9 . Similarly, there cannot be any compromise on Defence. Our forces have  once again demonstrated in Operation Vijay that they are second to none in the  world. Government is committed to enhance the quality of our defence preparedness  and to modernise our forces. In this budget I have made a provision of Rs.58,587  crore for defence, which is nearly Rs.13,000 crore more than in B.E. for the current  year. This represents the largest ever increase in the defence budget in any single  year. More will be provided whenever needed. We shall not shrink from making any  sacrifice to guard and protect every inch of our beloved motherland.

1 0 . Over the years the composition of Central Government expenditure has  become highly rigid and prone to large, pre-committed increases. More than half of  the annual budget outlays are transfer payments. Interest payments, Defence, Internal  Security, Major Subsidies, Salaries, Allowances and Pensions and non-plan grants  to States account for about 95% of non-plan expenditure and about 70% of total  expenditure. To curb built-in expenditure growth and bring about structural changes  in the composition of our expenditure, I am introducing the following initiatives.  ♦ All ongoing schemes will be subjected to rigorous zero base budgeting  scrutiny. I had announced this initiative last year and I am glad that this  exercise has been completed in 8 Departments. As a result 69 schemes  are to be discontinued or merged. This process will be completed in a  timebound manner in the remaining Departments.  ♦ The manpower requirements of Government departments will be reassessed  by reviewing the norms for creation of posts.  ♦ Fresh recruitment in Government departments and institutions will be  limited to minimum essential needs.  ♦ The scheme for redeployment of surplus staff will be made more effefctive  and will provide facilities for retraining. A VRS scheme will also be introduced  for staff in the surplus pool.  ♦ All subsidies will be reviewed with a view to bringing in cost-based user  charges wherever feasible.  ♦ No new autonomous institutions will be created without approval of Cabinet.  Budgetary support to autonomous institutions will be reviewed and they  will be encouraged to maximise generation of internal resources.  ♦ In order to align with the overall interest rate structure, the interest rate on  General Provident Funds is being reduced by 1% to 11% from 1.4.2000.  ♦ Excessive domestic borrowings to finance current expenditure has resulted  in debt service payments approaching unsustainable levels. To reduce  expenditure on this account, a portion of the disinvestment proceeds will  be earmarked for retiring Government debt. An initial provision of Rs.1,000  4  crore has been made in the budget for this purpose.  I will have something more to say on major subsidies a little later.

1 1 . These measures are necessary and are only a beginning. We shall pursue  resolutely the objective of downsizing Government and prepare a roadmap for the  purpose. For medium-term management of the fiscal deficit we also need the support  of a strong institutional mechanism embodied in a Fiscal Responsibility Act. This  had been suggested in the Agenda for Governance of the National Democratic Alliance.  I have set up a committee to examine this issue and make suitable recommendations.  I hope to bring the necessary legislative proposals to the House during the course of  the year.

1 2 . The challenge of fiscal management is not confined to the Central  Government. The financial position of the State Governments has deteriorated sharply  in the last few years. Revenue deficits have widened and borrowings are being  increasingly used to meet revenue expenditure. Fiscal reform at the State level has  acquired great urgency. While we have gone out of our way to help State Governments,  the determination shown by some States to deal with these issues has also helped  enormously. It will be my endeavour to take further collective measures in the next  year for promoting fiscal reforms in the States. The final report of the Eleventh  Finance Commission will provide valuable inputs for taking policy initiatives in this  regard.

Agriculture and Rural Development

1 3 . It is my firm belief that sustained and broad-based growth of agriculture is  essential for alleviating poverty, generating incomes and employment, assuring food  security and sustaining a buoyant domestic market for industry and services.

1 4 . We must take all necessary measures to strengthen the rural economy.  Credit flow to agriculture through institutional channels of commercial banks,  cooperative banks and Regional Rural Banks is estimated at about Rs.41,800 crore  this year. It is expected to increase by over 20 per cent to a level of Rs.51,500 crore  in 2000-2001. In my last two budgets we have launched a wide array of initiatives to  promote the flow of rural credit. In this budget I propose to strengthen the earlier  programmes and launch further initiatives:  ♦ The Rural Infrastructure Development Fund (RIDF) managed by NABARD  has emerged as a popular and effective scheme for financing rural  infrastructure projects. Last year I had announced an enhanced allocation  of Rs.3,500 crore from the banking sector for RIDF V and extended the  repayment period of loans to 7 years. The scope of RIDF was also widened  to allow lending to Gram Panchayats, Self Help Groups, NGOs and other  eligible organisations for implementing village level infrastructure projects.  This year the corpus of RIDF VI will be increased to Rs.4,500 crore and the  interest charged on this lending will be reduced by half a percent.  ♦ Micro finance has emerged as an effective tool for alleviating poverty in  many countries. In my last budget I had asked NABARD and SIDBI to  cover 50,000 Self Help Groups to develop micro enterprises. NABARD by  itself is likely to link 50,000 such Groups to banks during the current year.  NABARD and SIDBI will cover an additional one lakh Groups during 2000-  2001. To give a further boost to this programme a Micro Finance    Development Fund will be created in NABARD with a start up contribution  of Rs.100 crore from RBI, NABARD, banks and others. This Fund will provide  start up funds to micro finance institutions and infrastructure support for  training and systems management and data building. Special emphasis  will be placed on promotion of micro enterprises in rural areas set up by  vulnerable sections including women, Scheduled Castes, Scheduled Tribes  and Other Backward Classes.  ♦ The cooperative system is a crucial channel for credit in rural areas. However,  over time, problems have developed, mainly because of excessive  bureaucratization and the overlapping jurisdiction of State Governments  and NABARD. Some State Governments have already taken legislative action  to promote genuinely cooperative institutions. For rural credit, clear  delineation of the supervisory role of RBI/NABARD on banking matters is  also essential. To promote these two prerequisites for a more vibrant rural  cooperative credit system I propose to establish a Fund in NABARD. The  details will be worked out in the light of the forthcoming recommendations  of the Capoor Committee earlier constituted by Government. In the  meantime, RBI is advising the banks to accord priority to the credit needs  of those cooperatives which are entirely controlled by user-members and  managed by them prudently.  ♦ The programme of Kisan Credit Cards is progressing very well. Cooperative  Banks, Regional Rural Banks and Commercial Banks together have so far  issued more than 50 lakh cards and card-cum-pass books to the farmers.  I am asking NABARD and Commercial Banks to redouble their promotional  efforts so as to issue an additional 75 lakh Kisan Credit Cards by March  2001.  ♦ Due to our efforts at recapitalizing RRBs, 158 RRBs are posting operating  profits. Out of these, 48 RRBs have been able to wipe out their accumulated  losses. In view of the importance of the RRBs in rural financing, we will  continue with this programme of strengthening the RRBs.

1 5 . The Planning Commission and the Ministry of Agriculture have worked out  modalities to integrate 28 ongoing separate Centrally Sponsored Schemes of  agricultural development into one comprehensive programme. This will weed out  duplication, enhance the productivity of the support programme and accord greater  flexibility to State Governments to develop and pursue activities on the basis of  regional priorities. This is a major step forward towards the goals of convergence  and decentralisation that I had outlined in my budget last year.

1 6 . There is urgent need to review and coordinate our long-term strategy at the  National and the State levels on the pattern of land use in the country, development  of agriculture in relation to the agro-climatic conditions in the different regions and  preservation of our forest resources. We need to adopt an integrated approach to a  number of related subjects such as preservation and development of the forest wealth,  optimum utilisation of the wasteland, watershed development, safeguarding biodiversity  etc. In view of the complexity of the issues involved, a National Commission  on Land Use Policy comprising of experts in the relevant fields will be set up to  6  examine the various aspects and make appropriate recommendations to Government.

1 7 . Our Government stands fully committed to ensure that the fruits of economic  reforms are shared by all sections of society, especially those living in rural areas  and more particularly the Scheduled Castes, Scheduled Tribes and Other Backward  Classes. Five elements of social and economic infrastructure are critical to the quality  of life specially in rural areas: health, education, drinking water, housing and roads.  1 8 . Even after 52 years of Independence the provision of basic services in rural  areas remains very unsatisfactory. Forty per cent of our villages are without proper  roads;

1.8 lakh villages do not have a primary school within 1 km; 4.5 lakh villages  have drinking water problems; some estimates indicate a shortage of 140 lakh rural  dwelling units; rural health infrastructure suffers from large deficiencies. These large  gaps in basic services in rural areas are not acceptable and Government is committed  to removing them rapidly.

1 9 . Universalisation of elementary education is one of our key objectives. A  new Department of Elementary Education and Literacy has already been created  under the Ministry of Human Resources Development to give a new thrust and focus  to these efforts. Some new initiatives include a scheme for universalisation of  elementary education called “Sarva Shiksha Abhiyan” which would enable all children  to enroll by 2003 and expansion of the District Primary Education Programme to  cover the remaining districts in Uttar Pradesh, West Bengal, Orissa and Gujarat. On  the literacy front the National Literacy Mission would be revamped so that the literacy  rate can be raised to 75% by the year 2005. The plan allocation for elementary  education has been increased from Rs.2,931 crore to Rs.3,729 crore next year. A  new Department of Drinking Water Supply in the Ministry of Rural Development has  been set up to intensify the efforts and accelerate the pace of coverage. Our objective  is to provide drinking water facilities in all rural habitations in the next five years. It  is proposed to cover around 60,000 habitations and 30,000 schools in the next year.  The outlay of the Department is being enhanced to Rs.2,100 crore from Rs.1,807  crore this year. The Reproductive and Child Health programme will receive Rs.1,051  crore as against an allocation of Rs.695 crore in 1999-2000. For rural housing  schemes a provision of Rs.1,710 crore has been made.

2 0 . To impart greater momentum to these efforts I am announcing the launching  of a new scheme, the “Pradhan Mantri Gramodaya Yojana” with the objective of  undertaking time bound programmes to fulfill these critical needs of the rural people.  I am providing a sum of Rs.5,000 crore separately for this Scheme in the budget.  Out of this a sum of Rs.2,500 crore will be earmarked for launching a nationwide  programme of constructing rural roads and improving rural connectivity. Under the  Scheme, Central assistance will be provided to States for implementing specific  projects in these sectors. The concerned Ministries in the Central Government will  lay down the guidelines and monitor the implementation of these programmes. The  erstwhile Basic Minimum Services Scheme will be merged with the new Scheme.  Thus the overall provision in the budget for schemes concerning the five basic needs  of the rural population is more than Rs.13,000 crore.

Rural Housing

2 1 . “Housing for All” has been identified as a priority area in the Agenda for  Governance. For the coming financial year, a goal of providing 25 lakh dwelling  units in rural areas has been fixed. Schemes for meeting the needs of different  7  sections of society have been prepared.  (i) Under Indira Awas Yojana, it is proposed to provide more than 12 lakh  houses for the people below poverty line. For this purpose, an amount of  Rs.1,501 crore is being provided in the budget.  (ii) For families with an annual income of below Rs.32,000 per annum,  assistance will be provided for construction of 1 lakh houses under creditcum-  subsidy Scheme. An amount of Rs.92 crore is being provided in the  budget for this scheme.  (iii) The National Housing Bank will provide refinance to banks and housing  finance companies for construction of 1.5 lakh houses under Golden Jubilee  Rural Housing Finance Scheme.  (iv) To further improve the availability of housing finance in rural areas,  Government have decided to provide equity support of Rs.350 crore to  HUDCO during the Ninth Plan period. Of this, Rs.200 crore have already  been released and it is proposed to release a further amount of Rs.100  crore in the next year. With this enhanced equity support, HUDCO will be  able to leverage these funds and raise further resources to facilitate and  provide finance for the construction of about 9 lakh houses in the rural  areas in the coming financial year.  (v) The cooperative sector and voluntary agencies etc. will support the  construction of another 1.5 lakh houses.

Social Security for the Poor

2 2 . More than one third of our population still lives below the poverty line.  There is an imperative need to extend some social security cover to the poorest  sections of our society. I have decided to introduce a new scheme of group insurance,  “Janashree Bima Yojana”, under which beneficiaries will have insurance cover of  Rs.20,000 in case of natural death, Rs.50,000 in case of accidental death or total  permanent disability and Rs.25,000 for partial permanent disability due to accident.  Premia will be fixed on an actuarial basis. Below poverty line participants in this  Scheme will pay only half the premium, with the remainder being contributed from  earnings of LIC’s existing Social Security Fund, suitably augmented by Government.  On this basis, the monthly premium to be paid by the beneficiary is expected to be  Rs.10 or less. This scheme will lay a firm foundation for insurance cover to the  poorest in our country.

Empowerment of Women

2 3 . There is an urgent need for improving the access of women to national  resources and for ensuring their rightful place in the mainstream of economic  development. Towards this objective, the Government will set up a Task Force under  an eminent person to review all existing legislation and Government schemes  pertaining to the role of women in the national economy. This Task Force will help  us chalk out specific programmes for observing 2001 as “Women’s Empowerment  Year”.  Population, Health and Environment

2 4 . Government have recently announced a new National Population Policy a  key objective of which is to bring down total fertility rates to replacement levels by  2010. To operationalise this objective, the plan allocation of the Department of  Family Welfare has been increased from Rs.2,920 crore in B.E. 1999-2000 to Rs.3,520  8  crore next year.

2 5 . Recognising the role of the Indian systems of medicine and homeopathy in  our health care, the plan allocation for the concerned Department is being doubled.  Emphasis will be placed on drug standardisation, quality control, modernising the  colleges, drug testing laboratories and formulations. This will also help in boosting  exports of herbal formulations.

2 6 . We must preserve and nurture our forests and environment for future  generations. Funds are being provided for regeneration of mangroves and creation  of shelterbelts along the coastal line, bamboo regeneration and afforestation  programme, encouragement of medicinal plants and eco-tourism. Preservation of  the rural environment will raise the living standards of millions belonging to the  weakest sections of our society.

Small Scale Industry

2 7 . The SSI sector plays a vital role in industrial production, employment  generation and exports. In the context of growing domestic and international  competition, our strategy is to support this sector through promotional policies of  credit and technology. For improving credit flow to SSI units, I propose the following:  ♦ The requirement of providing collateral security is a major bottleneck to  the flow of bank credit to very small units. RBI has recently issued  instructions to dispense with the collateral requirement for loans up to  Rs.1 lakh. The limit is being further increased for the tiny sector from Rs.1  lakh to Rs.5 lakh.  ♦ The existing composite loan scheme of SIDBI and banks helps small  borrowers by providing working capital and term loans through a single  window. To promote credit flow to small borrowers, the composite loan  limit is being increased from Rs.5 lakh to Rs.10 lakh.  ♦ I am asking the public sector banks to accelerate their programme of SSI  branches to ensure that every district and SSI clusters within districts are  served by at least one specialised SSI bank branch. Furthermore, to improve  the quality of banking services, SSI branches are being asked to obtain ISO  certification.  ♦ Last year, I had announced that a credit guarantee scheme for SSI will be  launched. I am glad to inform the House that a new Central Scheme for  this purpose has been formulated and a provision for Rs.100 crore has  been made in the budget. The Scheme will be implemented through SIDBI  and will cover loans upto Rs.10 lakhs from the banking sector. The  guaranteed loans will be securitised and will be tradeable in the secondary  debt market.

2 8 . SIDBI operates the National Equity Fund Scheme under which equity  support is provided for projects up to Rs.15 lakh. To further help SSI entrepreneurs,  this limit will be raised from Rs.15 lakh to 25 lakh.

2 9 . SIDBI is presently administering the Technology Development Modernisation  Fund Scheme for assisting technology development and modernisation of SSI units.  The Scheme has certain concessional features including interest at prime lending  rate for direct assistance and refinancing at 2% below prime rate for indirect finance.  9  The operation of this scheme is being extended by another 3 years.

3 0 . The Khadi and Village Industries Commission (KVIC) has been playing a  very important role as an instrument to generate large scale employment in the  rural areas with low per capita investment. Government will continue to encourage  the Khadi and Village Industry Sector so that its products can become more  competitive. For intensifying marketing efforts, the KVIC will introduce a common  brand name for its products and also set up a professionally managed marketing  company for domestic as well as export marketing.  Industry and Capital Market

3 1 . In earlier millennia, India led the world on the basis of knowledge. Today  history is repeating itself. Young Indian entrepreneurs are at the forefront of the  infotech revolution, whether in Silicon Valley, Bangalore or Hyderabad. They have  shown us how ideas, knowledge, entrepreneurship and technology can combine to  yield unprecedented growth of incomes, employment and wealth. Companies  unknown 5 years ago have become world leaders. We must do everything possible to  promote this flowering of knowledge-based enterprise and job creation.

3 2 . A key ingredient for future success lies in Venture Capital Finance. After a  thorough review, I am proposing a major liberalisation of the tax treatment for venture  capital funds. I will describe the details later. To simplify the procedures, SEBI will  be the single point nodal agency for registration and regulation of both domestic and  overseas venture capital funds. Venture activity is not limited to dot.com companies!  Ideas and entrepreneurship, which merit venture finance, can be found in all sectors  of the economy. The tax laws and SEBI guidelines are being formulated accordingly.  I should add that this liberalisation will give a strong boost for Non Resident Indians  in Silicon Valley and elsewhere to invest some of their capital, knowledge and  enterprise in ventures in their motherland.

3 3 . In recent months stock markets have been buoyant all over the world,  including India. Experience has taught us that there can be hard times as well. It is  in such difficult times that institutions like investor protection funds of stock  exchanges become really important. I will have something to say on this in part B of  my speech.

3 4 . Thanks to our prudent macro-economic management and calibrated  approach to currency convertibility, we have successfully weathered the East Asian  crisis of the past two years. But we must not confuse caution with timidity. We must  encourage Indian firms and businesses to grow into strong, India-based  multinationals. To promote this trend, it is necessary to accord our firms increasing  flexibility to undertake capital account transactions, especially for acquisitions of  businesses abroad. Last month, Government had announced a policy to allow Indian  companies to raise funds for investments through issue of ADRs/GDRs without  prior Government approval. Up to 50% of these proceeds can be used by them to  acquire companies in overseas market. We had also announced on 27th December,  1999, a liberalized mechanism for acquisition of software companies in the overseas  market through stock swap options up to US$100 million on an automatic basis. I  plan to further liberalize this policy for acquisition of companies abroad to enable  Indian corporates, in knowledge-based sectors to grow rapidly and lay the foundation  for Indian multinationals in areas where we have comparative economic advantage.  10  For acquisition in other sectors too, I propose to increase the ceiling under the  automatic route from existing US$15 million to US$50 million for Indian corporates  and beyond this, through approval by the Committee on Overseas Investment.

3 5 . Under existing policy on portfolio investment, Foreign Institutional Investors  (FIIs) are permitted to invest in a company, upto an aggregate of 24% of equity  shares, which can be increased to 30% subject to approval by the Board of Directors  and a Special Resolution of the General Body of the Company. To give our best  companies greater access to foreign portfolio investment, I am increasing this limit  from 30% to 40%.

Science and Technology

3 6 . The sustained growth of our knowledge-based industries will ultimately  depend on the quality and extent of scientific and technological progress and training  in our society. We must harness our potential in science and technology to realise  the dream of modern India envisioned by the Prime Minister in his address to the  Indian Science Congress last month. For taking up relevant technology vision projects  and for increasing cooperation between our Universities and R&D institutions, I am  making an additional provision of Rs.50 crore in the budget of the Technology  Information Forecasting and Assessment Council under the Department of Science  and Technology. I am also making a provision of Rs.50 crore in the budget of the  Department of Scientific and Industrial Research for launching a New Millennium  Indian Technology Leadership Initiative. It will focus on areas which fulfil national  objectives and will be based on partnership between the Government and private  sector.

3 7 . To fully benefit from the new intellectual property rights regime, we need to  encourage our scientists and R&D institutions to maximise their patenting efforts.  Government have decided to allow Universities and Research Institutions to retain  the revenue generated from intellectual property rights through publicly funded  research and also share a part of the revenue with the inventor.

3 8 . Modernisation of the Patent Office and the Trade Mark Register is long  overdue. Government have sanctioned a modernisation project of Rs.75 crore for  the Patent Office and we will strive to remove all impediments for early implementation  of this project.

Banking and Finance

3 9 . The recent East Asian crisis has underlined the critical importance of  undertaking reforms to strengthen the banking sector. In recent years, RBI has  been prescribing prudential norms for banks broadly consistent with international  practice. To meet the minimum capital adequacy norms set by RBI and to enable the  banks to expand their operations, public sector banks will need more capital. With  the Government budget under severe strain, such capital has to be raised from the  public which will result in reduction in Government shareholding. To facilitate this  process, Government have decided to accept the recommendations of the Narasimham  Committee on Banking Sector Reforms for reducing the requirement of minimum  shareholding by Government in nationalised banks to 33%. This will be done without  changing the public sector character of banks and while ensuring that fresh issue of  shares is widely held by the public. The Committee had also expressed the view that  the Boards of the banks should have sufficient autonomy to take decisions on  11  corporate strategy and all aspects of business management and be responsible to  the stakeholders, that is, the shareholders, the customers, the employees and the  public at large. In particular, the interests of the employees of the nationalised Banks  will be fully safeguarded. It is proposed to bring about necessary changes in the  legislative provisions to accord necessary flexibility and autonomy to the Boards of  the banks.

4 0 . As Honourable Members are aware, the Report of the Working Group on  Restructuring Weak Public Sector Banks had suggested the constitution of a Financial  Restructuring Authority (FRA). It has been decided to have a modified version of the  FRA. Thus, in respect of any bank which is considered to be weak or potentially  weak, the statutes governing public sector banks would be amended to provide for  supersession of the Board of Directors on the basis of recommendations of the RBI  and constitution of a FRA for such a bank, comprising experts and professionals.  The amendments would also enable the FRA to exercise special powers including all  the powers of the Board of the bank.

4 1 . Government will not close down any public sector bank. As responsible  owner of the banks, Government have decided to consider recapitalisation of the  weak banks to achieve the prescribed capital adequacy norms, provided a viable  restructuring programme acceptable to the Government as the owner and the RBI  as the regulator is made available by the concerned banks.

4 2 . The high level of Non-Performing Assets (NPAs) in our public sector banks  is a cause for continued concern. Efficient and effective mechanisms for recovery of  bank dues are critically important for reducing NPAs. I am happy to inform the  House that comprehensive amendments have been carried out to the Recovery of  Debts Due to Banks and Financial Institutions Act, 1993 by issue of Ordinance. Five  more Debt Recovery Tribunals (DRT) and four more Debt Recovery Appellate Tribunals  have been set up or are in advanced stage of being set up. I further propose to set up  four more DRTs at Mumbai and one more DRT each at Calcutta, Delhi and Chennai  to facilitate expeditious adjudication and recovery of dues of banks and financial  institutions.

4 3 . The growth of fresh NPAs can also be curbed through better institutional  mechanisms for sharing of credit related information on borrowers and potential  borrowers among banks and financial institutions. A Working Group constituted by  RBI to examine modalities for setting up a Credit Information Bureau has recently  submitted its report. Based on its recommendation a Credit Information Bureau will  soon be established.

4 4 . In the fast changing world of modern finance it has become necessary to  accord greater operational flexibility to the RBI for conduct of monetary policy and  regulation of the financial system. Accordingly, I intend to bring to Parliament  proposals for amending the relevant legislation.

4 5 . Similarly, to facilitate development of the Government debt market the  legislative framework needs to be strengthened and modernised through a  Government Securities Act, which I propose to bring to replace the old Public Debt  Act, 1944.

4 6 . The Industrial Investment Bank of India is the only Calcutta-based  12  development financial institution. To enable it to improve its viability and profitability  by diversifying and extending its business, Government will subscribe to the  preference capital of the company.

4 7 . NBFCs perform a significant role as financial intermediaries and in  promoting growth of industry and services. Over the past 3 years RBI has taken a  number of measures for strengthening the regulation of this sector with a view to  ensuring that only financially sound and well run NBFCs are permitted to accept  public deposits. I propose to bring a new bill which will strengthen the hands of  depositors in situations of malafide or fraudulent actions of NBFCs.  Infrastructure

4 8 . Infrastructure services remain a key bottleneck to rapid and sustained  growth of our economy. We have made substantial progress in encouraging private  infrastructure service providers and in establishing independent regulatory  frameworks in most infrastructure sectors. We have also sought to give greater  operational and commercial autonomy to existing public entities in these sectors.  We will be moving ahead with programmes for corporatisation of public sector service  providers in the areas of telecommunications, ports and airports during the course  of the coming year.

4 9 . The Prime Minister has announced a major initiative for road development,  the National Highways Development Project (NHDP). The cost of the project is  estimated at around Rs.54,000 crore. In my earlier budgets, I had announced the  levy of cess of one rupee per litre on petrol and diesel and a substantial part of this  is expected to be available for funding the NHDP. To further augment resources, for  commercially viable components of this project, I shall have something more to say  in Part B of my speech.

5 0 . The plan outlay for the Central PSUs in the power sector has been increased  from Rs.7,626 crore to Rs.9,194 crore. Increased budgetary support has been provided  for the Tehri Hydro and the Nathpa Jakhari Hydro projects so that both these projects  can be commissioned by March 2002. For commissioning of high priority projects by  SEBs/State generating companies, a provision of Rs.300 crore has also been made  for subsidizing interest on loans from Power Finance Corporation.

5 1 . In order to give a fillip to the reform process in the power sector and for  undertaking investments on renovation and modernisation of old and inefficient  plants and for strengthening the distribution system, a new scheme for providing  assistance to State utilities will be introduced. Under this scheme, additional Central  Plan assistance of Rs.1,000 crore will be provided to State and Union Territory  Governments.

5 2 . The State Electricity Boards have large overdues to the Central Sector Power  and Coal utilities. A Scheme for securitisation of these dues with the support of  Central Government has been finalized to assist the SEBs to clear these dues. Central  Government support will be linked to reforms in the operation of SEBs.

5 3 . Hon’ble members are aware that the Sethu Samudram Ship Canal Project  has the potential of providing a shorter route between the East and West Coast

Ports. I am glad to inform that Government have approved the undertaking of a  detailed feasibility study and environmental impact assessment of the project at a  total cost of Rs.4.8 crore. I have made necessary provision for this in the budget.  Disinvestment/Privatisation/Public Sector Restructuring

5 4 . Government’s policy towards the public sector is clear and unambiguous.  Its main elements are :-  ♦ Restructure and revive potentialy viable PSUs;  ♦ Close down PSUs which cannot be revived;  ♦ Bring down Government equity in all non-strategic PSUs to 26% or lower, if  necessary; and  ♦ Fully protect the interests of workers.

5 5 . In line with this policy during the last two years financial restructuring of  20 PSUs has been approved by Government. As a result, many PSUs have been able  to restructure their operations, improve productivity and achieve a turn around in  performance. Hon’ble members are aware that Government have recently approved  a comprehensive package for restructuring of SAIL, one of our Navaratna PSUs.

5 6 . There are many PSUs which are sick and not capable of being revived. The  only remaining option is to close down these undertakings after providing an  acceptable safety net for the employees and workers. Resources under the National  Renewal Fund have not been sufficient to meet the cost of Voluntary Separation  Scheme (VSS) for such PSUs. At the same time, these PSUs have assets, which if  unbundled and realised, can be used for funding VSS. Government will put in place  mechanisms to raise resources from the market against the security of these assets  and use these funds to provide an adequate safety-net to workers and employees.

5 7 . Government have recently established a new Department for Disinvestment  to establish a systematic policy approach to disinvestment and privatisation and to  give a fresh impetus to this programme, which will emphasize increasingly on strategic  sales of identified PSUs. Government equity in all non-strategic PSUs will be reduced  to 26% or less and the interests of the workers will be fully protected. The entire  receipt from disinvestment and privatisation will be used for meeting expenditure in  social sectors, restructuring of PSUs and retiring public debt.

The North-East Region

5 8 . Government is committed to the speedy economic development of the North-  Eastern States and Sikkim. Priority is being given for development of infrastructure,  specially airports, railways, power and national highways so as to remove the sense  of isolation perceived in many parts of the North-East. To provide more facilities for  vocational education, 50 more Industrial Training Institutes and 446 Computer  Information Centres would be established in the North-Eastern States within the  next two years.

5 9 . For realizing the potential for agricultural and horticultural development  in the North-East, schemes for minor irrigation and horticulture will be encouraged.  A Technology Mission for horticultural development in the North-Eastern States will  14  also be launched.  Scheduled Castes and Scheduled Tribes

6 0 . To promote literacy and to improve the education standards of persons  belonging to Scheduled Castes, a new thrust will be given to the Post-Matric  Scholarship Scheme. The budgetary provision for this Scheme is being increased  from Rs.72 crore to Rs.130 crore. Emphasis under this Scheme will be on female  literacy. Our Prime Minister has announced that it will be our national goal to liberate  and rehabilitate around 6 lakh Scavengers in the country. A new strategy will be  devised under which Scavengers will be organized into self-help cooperatives and  provided assistance from the Government and the concerned Finance Development  Corporations. To give a greater focus to the welfare of Scheduled Tribes, a new  Ministry of Tribal Affairs has been set up. The plan allocation of Tribal welfare has  been substantially stepped up from Rs.684 crore to Rs.810 crore.  Revised Estimates for 1999-2000

6 1 . This has been a difficult year for the budget marked by expenditure overruns  and some deceleration in tax collection. The increase in budgeted expenditure  has been 7% whereas shortfall in budgeted tax collection is estimated to be 4%. The  non-plan expenditure has increased by Rs.17,461 crore (8.4% over budget estimate  of Rs.2,06,882 crore) and the plan expenditure by Rs.2,395 crore (3.1% over budget  estimate of Rs.77,000 crore). Major increases in non-plan expenditure are on account  of pension payments (Rs.4,173 crore), interest payments (Rs.3,425 crore), Extended  Ways and Means Advances to States (Rs.3,000 crore), Defence (Rs.2,810 crore),  Interest subsidies (Rs.1,304 crore), food subsidy (Rs.1,000 crore), postal deficit (Rs.848  crore) and assistance to States from the National Calamity Relief Fund (Rs.1,064  crore). On the plan side, main increases are on account of National Highway  Development (Rs.1,900 crore), State roads (Rs.1,000 crore), Railway safety ( Rs.200  crore), special assistance to Jammu and Kashmir and enhanced assistance to States  for externally aided projects. About Rs.500 crore are expected to be released for  projects/schemes in the North Eastern Region and Sikkim out of the savings from  the budget of different Central Ministries.

6 2 . Net tax revenues for the Centre are estimated at Rs.1,26,469 crore against  Rs.1,32,365 crore budgeted, reflecting a shortfall of about Rs.5,900 crore. The shortfall  is mainly due to lower customs revenue because of very low growth in the dollar  value of non-oil imports and lower excise revenue resulting from low inflation in  manufactured products for most of the year. Disinvestment receipts are expected to  be Rs.2,600 crore against Rs.10,000 crore budgeted.

6 3 . The fiscal deficit is thus likely to increase to 5.6% of GDP from the budget  target of 4.0%.  Budget Estimates for 2000-2001

6 4 . In the budget estimates for 2000-2001, the total expenditure is estimated  at Rs.3,38,487 crore, of which Rs.88,100 crore is for plan and Rs.2,50,387 crore for  non-plan.

Plan Expenditure

6 5 . The budget support for Central, State and UT Plans has been placed at  Rs.88,100 crore, marking an increase of Rs.8,705 crore over revised estimates   1999-2000. Gross budgetary support for the Central Plan is being enhanced from  Rs.43,661 crore in the revised estimates 1999-2000 to Rs.51,276 crore. Total Central  Plan outlay at Rs.1,17,334 crore will be more by Rs.21,024 crore from the last year’s  level of Rs.96,310 crore, a hefty 22% increase. The plan for 2000-2001 focuses on  basic infrastructure with energy, transport and communications accounting for 60%  of total Central Plan Outlay. The Outlay for Social Services marks an increase of  21.5% over 1999-2000 R.E.

6 6 . Central Plan assistance to States and Union Territories in 2000-2001 is  placed at Rs.36,824 crore as compared to Rs.35,735 crore in the revised estimates  1999-2000.

Non Plan Expenditure

6 7 . Non-plan expenditure in 2000-2001 is estimated to be Rs.2,50,387 crore  compared to Rs.2,24,343 crore in Revised estimates for 1999-2000, showing an  increase of Rs.26,044 crore. The increase in non-plan expenditure is mainly in  defence (Rs.10,083 crore), interest payments (Rs.9,841 crore) and in grants to States  (Rs.9,392 crore). However, this increase is sought to be partially offset by reduction  in outgo on account of food and fertiliser subsidies.

6 8 . Major subsidies, on food and fertilizer, constitute a significant portion of  our non-plan expenditure. The rate at which these subsidy payments are growing is  not sustainable. We need to target the subsidies to those who are poor and needy,  whereas others should pay for what they consume. Indeed, we want to expand the  access to subsidised food by Below Poverty Line (BPL) families so that they can meet  their basic nutritional needs. Accordingly, from next year, we are doubling the  allocation of foodgrains to BPL families, under the Targetted PDS, from 10 Kg. to 20  kg. This will result in an enormous gain in food security for our poorest families. The  issue price of foodgrains of BPL families is being fixed at 50% of economic cost in line  with the decision taken by Government in December, 1996. The net effect of these  measures will be to improve the monetary food budget of BPL families and vastly  enhance their food security. This achievement is possible only by simultaneously  fixing the PDS issue price for APL families at the economic cost. In respect of sugar,  no allocation will be made under PDS for income tax assessees. For others, keeping  in view the increase in the levy price of sugar, the issue price under PDS is being  fixed at Rs.13 per kg. As a result of these measures I expect to keep the expenditure  on food and sugar subsidy at Rs.8,210 crore in 2000-2001.

6 9 . In the case of Fertilizer Subsidy, Members are aware that our present  Retention Price Scheme suffers from many shortcomings. Much of the subsidy goes  to producers and not to farmers. To encourage greater efficiency of our fertilizer  units, some rationalisation of the Retention Price Scheme, including capping of capital  related charges, will be implemented from next year. The Ministry of Chemicals and  Fertilizers will also bring out soon a road map for phasing out the Retention Price  Scheme in the medium-term. Separately, to take into account the rising cost of  inputs, the maximum retail price of Urea is being raised by 15%. The rate of concession  in the case of decontrolled fertilizer is also being reduced. However, to moderate the  impact on prices the MRP of DAP and MOP is being raised only by 7% and 15%  respectively. I expect that, because of these changes and some rationalisation of  16  Retention Price Scheme, the expenditure on fertilizer subsidy will be Rs.12,651 crore  in 2000-2001.

7 0 . The Eleventh Finance Commission has since submitted its interim report  for making provisional arrangements of tax devolution and grants to States for 2000-  2001. Government have accepted the devolution formula and quantum of grants to  States, as recommended by the Commission in its interim report. I have made  provisions in the budget accordingly.

PART B

71 . Sir, I now present my tax proposals. I take up indirect taxes first.

7 2 . Hon’ble Members are aware that both the Centre and the States depend  heavily on indirect taxes. While I did carry out a major restructuring of the excise  rates last year, the process needs to be taken further. We need to overhaul the rate  structure, rationalise and simplify the procedures to reduce the compliance cost for  the tax payer. We must ensure that we concentrate on increasing production and  absorbing new technologies rather than frittering away our energies on tax disputes.

7 3 . Sir, my proposals in excise intend to establish a single rate Central Value  Added Tax (CENVAT) at the Centre. I am convinced that nothing short of this can  provide long term stability, remove uncertainties in the mind of industry, and  eliminate disputes of classification. This will also encourage the States to implement  their agreed programme for converting their sales taxes into VAT by 1.4.2001.

7 4 . The House may recall that in my last budget, I had introduced three advalorem  rates of basic excise duty, viz., 8%, 16% and 24%. I propose to converge  these three ad-valorem rates to a single rate of 16% CENVAT.

7 5 . The 8% excise rate is therefore being abolished and most of the items at  this rate are being moved to 16%. However, certain items, essentially covering medicare  and items of use by the common man, are being exempted from the excise duty.  These are:  Medical Items:  ♦ Medicinal grade oxygen  ♦ Medicinal grade hydrogen peroxide  ♦ Anaesthetics  ♦ Potassium iodate  ♦ Medical and surgical gloves; and  Items of common use -  ♦ Cutlery and knives  ♦ House hold glassware, including glassware produced by mouth blown  process  ♦ Electric bulbs of MRP up to Rs.20 per bulb  17  ♦ Clocks and watches of MRP up to Rs.500 per piece  ♦ Tooth powder  ♦ Sanitary towels, napkins for babies, etc, and  ♦ Soap for distribution through PDS

7 6 . I am including roasted chicory in the list of exempted items as coffee itself  is free from excise duty.

7 7 . I have also decided to exempt specified cold chain equipment, which had  been provided a low rate of 8% in the last budget, from excise duty in the larger  public interest.

7 8 . Some items, on account of their exceptional nature and sensitivity to price  increases, deserve special treatment, at least for the present. These are Kerosene,  LPG, Laundry soap, Cotton yarn, including cotton sewing thread, and some other  varieties of yarns and Diesel engines up to 10 HP. The rate structure for these is,  therefore, being so designed that there is no increase in the incidence of excise from  the current level of 8%, and thus there will be no price increase on this account.

7 9 . I have not made any change in the list of items that are currently charged  to 16% excise duty.

8 0 . In addition to the 16% CENVAT rate, I propose to have three rates of  special excise of 8%, 16% and 24%. Unlike the CENVAT rate, the special excise  duties will not generally be modvatable, that is, users will not be able to avail of  MODVAT credit of these duties.

8 1 . For the items that are mainly in the nature of raw materials or intermediates,  the 16% CENVAT rate is appropriate. I, therefore, propose to include items like  plastic materials, films and sheets of plastic, tread rubber, cellular rubber, articles  of rubber, nylon filament yarn, transmission and conveyor belts of textile materials,  and sacks and bags made of synthetic textile materials in the list of 16% CENVAT,  from the current level of 24%. I am also including tyres for OE supplies and parts of  air conditioning and refrigerating machinery in the list of 16% CENVAT, without  subjecting them to any special excise duty, since they are intermediate goods in the  chain of production.

8 2 . In addition, I am reducing the duty burden on a few other products that  are also currently charged to 24% duty. These items are sterile contact lens solution,  shikakai powder without additives, and cars for physically handicapped persons. I  feel that these items should not be loaded with a duty burden of more than 16%  CENVAT.

8 3 . Ambulances purchased by registered hospitals are currently charged to a  concessional rate of excise duty of 16%. I am extending the same treatment to  ambulances purchased by Indian Red Cross Society.

8 4 . The other items that are currently charged to 24% duty shall continue to  bear the same incidence, comprising 16% CENVAT and 8% special excise duty.

8 5 . In my new design of excise duty structure, the items that are now charged  18  to a total duty of 30% would be subjected to a total duty of 32%, composed of 16%  CENVAT and 16% special excise duty. This is only a marginal increase of 2%, which,  I am sure, the consumers of these commodities can afford to bear.

8 6 . Items presently charged to a total duty of 40% will now be composed of  16% CENVAT and 24% special excise duty. However, soft drink concentrate supplied  to bottlers will be charged to CENVAT at 16% only, being modvatable.

8 7 . Let me now take up the MODVAT scheme and the changes that I plan to  bring about. MODVAT scheme shall now be known as CENVAT scheme.

8 8 . Over the years, disputes between the department and assessees on the  interpretation of MODVAT rules and procedures have plagued the system. I propose  to put an end to this situation. With effect from 1st April 2000, the plethora of  existing rules will be replaced by a small set of simple and transparent rules, which,  I am sure , shall reduce disputes to a minimum.

8 9 . I also propose to expand and rationalize the scope of the MODVAT scheme.  All inputs and all capital goods are now included in the eligible list of MODVAT  scheme. The only exception will be High Speed Diesel Oil and Petrol. However, I  propose that the availability of MODVAT credit on capital goods will be spread over a  period of two years, with effect from 1st April 2000.

9 0 . My proposals include full extension of MODVAT scheme to cigarettes for  the first time, which should cheer the industry. However, the good news for the  cigarette manufacturers ends here. I propose to enhance the rates of excise duty on  all categories of cigarettes by 5 %.

9 1 . At present, MODVAT credit of CVD paid on project imports is restricted to  the extent of 75%. This has been an irritant. This credit shall now be available for  100% of the CVD. I have also decided to do away with the condition of installation as  a pre-requisite for taking credit on capital goods.

9 2 . Now I shall deal with some sector specific proposals. I take up steel first.

9 3 . Mr. Speaker, Sir, an ad-valorem structure of taxation is largely free from  distortions, equitable and automatically buoyant. For the present, I propose to  restore ad-valorem excise duty structure on steel produced by re-rollers and also to  steel produced by induction furnaces. These goods would be subjected to CENVAT  of 16%, with MODVAT benefit, from 1st April 2000. I may add that capacity based  tax applicable to re-rollers and induction furnaces has created more problems than  it has solved.

9 4 . Under the existing law, excise duty on goods sold from the depots is charged  on the basis of depot price and not the factory gate price. I have received  representations that this has caused distortion in the marketability and distribution  of steel. Deliveries of steel by integrated steel plants, whether from the plant or  stockyard, will henceforth be assessed to duty at the factory gate price.  9 5 . Sir, now I turn to the textile industry.

9 6 . I had introduced a compounded levy scheme for independent textile  processors in December 1998. This has not worked as well as expected and has led  to leakages and revenue losses; still, I do not wish to disturb the scheme abruptly.  However, to rectify the situation, I propose to raise the rates of compounded levy  from the existing Rs.1.5 lakhs per chamber per month to Rs.2 lakhs per chamber  per month and from Rs.2 lakhs per chamber per month to Rs.2.5 lakhs per chamber  per month. My proposals also include some modifications in the scheme in order to  plug the loopholes.

9 7 . Units engaged in the texturising of duty paid polyester yarn would henceforth  pay specific rate of excise duty. This should reduce the valution disputes in respect  of these units.

9 8 . Small scale units enjoy duty free exemption on clearances up to Rs.50  lakhs a year. I am unable to raise this limit. However, with effect from 1st April  2000, I propose to rationalize the special schemes prevalent for cosmetics and toilet  preparations, air-conditioning and refrigerating machinery and their parts, tread  rubber and articles of plastics to fall in line with the general scheme of exemption for  small scale units.

9 9 . Sir, I now come to the next part of my proposals which relate to streamlining  and simplification of the system. These are aimed at unshackling the excise procedures  from the slavery of complexities and rigidities, and making them simple and userfriendly.  I may add that like my rate-related proposals, these also go much beyond  minor adjustments and mark a fundamental and even a dramatic departure from  the current practices.

100. With effect from 1st July 2000, all statutory records in excise would be  dispensed with. Excise department would rely upon the manufacturer’s records.  This completes the process initiated by me in my last budget in this regard.

101. From 1st April 2000, excise assessees would be allowed to pay the excise  dues in fortnightly instalments. With this proposal I am putting an end to the ageold  practice of day-to-day payment system of excise duties. For the small scale  sector, the monthly payment scheme, that I had introduced last year, would continue.

102. Next, I want to make the valuation mechanism simple, user-friendly and  along commercially acceptable lines. From 1st July, 2000, I propose to replace the  existing section 4 of Central Excise Act which is based on the concept of “normal  price” by a new section based on “transaction value” for assessment. This is a path  breaking departure from the traditional approach.

103. The House is aware that several items are assessed to excise duty on the  basis of Maximum Retail Price. This system is largely free from disputes and has  been generally welcomed by the industry. I propose to extend MRP based assessment  to about two dozen new items. I also propose to extend this scheme to more items  during the course of the year.

104. I also propose to rationalize the rates of duties applicable to medicines and  toilet preparations under the Medicinal and Toilet Preparations (Excise Duties) Act.  20  The MRP-based assessment provisions are also being extended for assessment under  this Act. These measures would considerably simplify the collection of excise duty  by the States and improve their revenues from these duties. These changes will  come into force from a notified date.

105. In addition to the above I am rationalizing the provisions relating to payment  of interest and penalty on default. The details are contained in the Finance Bill.  106. This completes my package of restructuring and rationalisation on the excise  side. Trade and Industry should now breathe easy.

107. I shall now deal with my proposals relating to customs duties.

108. I am conscious that in this area, I face serious constraints. We have to  maintain a judicious balance between the need for providing adequate protection  and growth impulses to the domestic industry and calibrating tariffs to international  levels. We also need to carry the reform and rationalization process further.

109. Taking all factors into consideration, I propose to reduce the peak rate of  basic customs duty from 40% to 35%, thereby reducing the total number of customs  duty rates from 5 to 4, i.e. 35%, 25%, 15% and 5%.

110. The surcharge of 10%, which I am constrained to continue on revenue  considerations, will also apply to the new peak rate of 35%. Crude oil and petroleum  products, certain WTO bound items and gold and silver would continue to be exempt.

111. The House may recall that I had imposed a special additional duty (SAD) of  customs in my budget proposals for 1998-99. This had made manufacturerimporters  quite sad. But traders were glad because they were exempted. I am  correcting the discrimination by withdrawing this exemption. Now all importers  would pay this duty. SAD would, however, not apply to petroleum products.

112. Consequent to our international trade treaty obligations, several hundred  items will be placed on the free list for imports effective 1.4.2000. Most of these are  consumer goods and a number of them are agricultural products. To accord adequate  tariff protection for these items, they are being placed at the peak rate (35% plus  surcharge), except for a few items like capital goods. A number of agricultural and  horticultural products placed on the free list of import in earlier years are also being  brought to the peak rate to ensure adequate protection to our farmers.

113. Furthermore, for a handful of sensitive agricultural products (wheat, rice,  sugar and edible oils), in which our experience with supply management has  underlined the importance of occasional tariff adjustments, I am making suitable  enabling provisions to fix the statutory tariff rates at appropriately high levels. This  will give the necessary flexibility for adjusting the applied rates.

114. Customs is not all about raising revenues. It is also a powerful tool for  building our industrial capabilities and improving our international competitiveness.  I propose to take several measures in this regard, picking up three sectors for special  attention. These are integral parts of the “convergence revolution” which is fast  becoming a reality.

115. First, and foremost, the Information Technology (IT) sector, which leads  the current excitement. I propose to reduce the customs duty on several items for  21  the IT sector. These include:  ♦ Computers, from 20% to 15%;  ♦ Mother boards, from 20% to 15%;  ♦ Floppy diskettes, from 20% to 15%;  ♦ Specified capital goods for manufacture of semi conductors and ICs, from  15% to 5%.  ♦ Microprocessor for computers, from 5% to Nil;  ♦ Memory storage devices, from 5% to Nil;  ♦ CD ROMs, from 5% to Nil;  ♦ Integrated circuits and microassemblies from 5% to Nil; and  ♦ Data graphic display tubes for colour monitors for computers from 5% to  Nil.  116. Telecommunications is equally important. To become an economic  superpower we must get connected, domestically and globally. I, therefore, propose  to reduce the basic customs duty on specified raw materials for manufacture of  optical fibres from 15% to 5%. I also propose to reduce the duty on cellular phones  from 25% to 5% to improve their availability through proper channels and to curb  the menace of the grey market, and on their battery packs from 40% to 15%. I am  extending the concessional rate of 5% basic duty applicable to specified telecom  equipment to internet service providers also.

117. The third is the entertainment industry, which is also an area of great  promise. To reduce the cost of cinematography for the film industry and provide  access to the latest technology, I propose to reduce duty on cinematographic cameras,  and other related equipment from 40% to 25%. I also propose to reduce the basic  customs duty on colour positive films in jumbo rolls and colour negative films in  rolls of certain sizes from 15% to 5%. They shall also be exempt from CVD.

118. I would like to cover one more sector in this context.  119. India can be a world leader in jewellery exports, as it is for gems. I propose  to reduce the basic customs duty on platinum and non-industrial diamonds from  40% to 15% in order to encourage production of quality jewellery and to provide a  fillip to jewellery exports.

120. To give effect to our agreements with the European Union and the United  States, I propose to adjust the customs duties on fibres, yarns, textile fabrics and  garments. As a result, several varieties of fabrics and garments would henceforth be  subjected to the higher of ad-valorem or specific rates of duties prescribed for them.

121. As far as petroleum sector is concerned, the international prices of crude  oil and petroleum products prevalent over some time now have been putting  considerable strain on our refineries and distorting the oil pool account. This is  accentuated by the fact that prices of petroleum products have not been fully  decontrolled so far. I, therefore, propose to reduce the basic customs duty on crude  oil from 20% to 15% and on petroleum products from 30% to 25%, except on kerosene  for parallel marketing, the basic duty on which is being raised to 35%, from 30%.

122. In several cases the bound rates are to be reduced as part of our international  commitment. I do not wish to take the time of the House by going into details. But  they do have some revenue implications.

123. Mr. Speaker Sir, last year, I had proposed the abolition of Finance Minister’s  discretionery power to grant ad hoc exemptions of customs and excise duties except  for goods of strategic nature, or for charitable purposes. I am pleased to inform the  House that this self-denying rule has helped the Government save about Rs.500  crore this year.

124. I shall now mention a few small, but significant, measures for procedural  improvements and redressal of the problems of taxpayers. To curtail the so called  “show cause notice Raj ” in customs and central excise, I have decided that henceforth,  show cause notices involving duty amount of more than Rs.1 crore would be issued  only with the approval of the Chief Commissioner of Customs and Central Excise.  Other show cause notices would require approval of the Commissioner of Customs  and Central Excise.

125. It cannot be disputed that the tax due from a defaulter should flow to the  exchequer at the earliest in public interest. At present, penalty equal to 100% of the  duty evaded is payable, and this is mandatory, even if someone makes the payment  immediately after the adjudication order is passed. With a view to encouraging  payment of tax due, I have now proposed that if the amount of tax evaded is paid  along with interest within 30 days of the communication of the order, a penalty  equal to only 25% of the duty evaded would be payable. I hope this carrot will be  found preferable to the stick, which is bound to follow if tax is not paid in time.

126. Service tax is emerging as an area of promise as well as problems. Many  experts advise me that the best way to deal with this tax is to make it applicable to  all services in one go. However, some others have suggested basic changes in the  very structure of the service tax. I have decided not to make any changes for the  present. I am setting up an Expert Group to go into all aspects of the matter, review  the experience so far, and give me its considered advice.

127. My proposals on the excise side are estimated to result in revenue gain of  Rs.3,252 crore in a year. On the customs side, my proposals are estimated to result  in a revenue loss of Rs.1,428 crore.

128. Copies of the notifications issued to give effect to the changes in excise and  customs duties shall be laid on the Table of the House in due course.

129. I now turn to my Direct Tax proposals.

130. Mr. Speaker, Sir, my edifice of Direct Tax proposals rests on four pillars of  stability, economic growth, rationalisation and simplification.

131. Our existing rates of personal taxation at 10%, 20% and 30% are only  three in number and quite moderate. Although the basic exemption limit is Rs.50,000,  the real exemption limit goes much higher when the other exemptions and deductions  are taken into account. For example, salaried persons start paying tax only on crossing  Rs.75,000 per year because of the standard deduction. If the tax rebates and   deductions available for savings are taken into account, the effective limit of exemption  gets close to Rs.1 lakh. Thus I feel that the present rates of taxation as well as the  exemption limit are reasonable. I, therefore, propose to maintain them at the same  levels.

132. Although the 10% surcharge imposed last year was meant to be temporary,  I am constrained to continue with it, in view of the heavy and unexpected expenditure  burden, mainly on account of defence requirements and transfer to states mandated  by the Finance Commission.

133. Having restrained myself from imposing any additional taxes during the  course of the year when there was much talk of a Kargil tax, I now propose increasing  the surcharge moderately from 10% to 15% on non-corporate tax payers having  total taxable income above Rs.1,50,000 per year. This will slightly increase their  marginal rate from 33% to 34.5%. I trust that these relatively better-off sections of  society would bear this additional burden cheerfully.

134. Lest it is felt that I am being discriminatory in not increasing the surcharge  on corporates, let me clarify that they would also get their opportunity to contribute  to the national effort in other ways a little later.

135. Despite the financial constraints, I would like to propose some positive  measures on personal taxation.

136. As an expression of our gratitude to the contribution made by senior citizens  during their active years and taking into account the possible hardships that they  face in the advanced years of their life, I propose to raise the tax rebate available to  them from Rs.10,000 to Rs.15,000. At the marginal tax rate of 30%, this translates  into an exemption of an additional Rs.15,000 from their gross income, or substitutes  the need to save an additional Rs.25,000 to avail of a similar exemption under  section 88.

137. I have always maintained that despite all challenges, my job as Finance  Minister in making a budget is easier than that of an average house-wife struggling  to balance the family budget. As a token of appreciation and recognition of women  as productive contributors to the economy, I propose an additional rebate of Rs.5,000  for women tax-payers from their tax liability. This would be subject to the overall  ceiling of Rs.15,000 if they also happen to be senior citizens.

138. With a view to acknowledging the services rendered by the members of  defence forces and in token of our gratitude for their exceptional courage and valour,  I had provided exemption from tax for the pension and family pension of gallantry  award winners of these services. I now propose to extend similar benefits to gallantry  award winners of para military forces and other forces engaged in national and civil  defence.

139. I now turn to the role of taxation as a facilitator of economic growth.  Knowledge-based industries are fast emerging as the front-runners of the Indian  24  economy. To accelerate their growth, and encourage investment in them as mentioned  in Part A of my speech, I propose to introduce a new regime for venture capital  funds. The highlights of this would be:  (i) No approval of Venture Capital Funds by tax authorities would be required.  (ii) The principle of “pass through” would be applied in tax treatment of Venture  Capital Funds, whose income would be free of tax, except when not  distributed within the period that may be prescribed in the guidelines of  SEBI. Income in the hands of its investors, which would otherwise be taxable,  would also be kept tax free, and there would only be a one-time payment of  tax by the Venture Capital Fund at the rate of 20%, when the Fund  distributes its income to the investors. The same rate would apply to  undistributed incomes also.

140. I hope these incentives will facilitate the coming together of Saraswati (i.e.  knowledge) and Laxmi (i.e. wealth) to bless entrepreneurs and investors.

141. Various tax benefits are already available for the infrastructure sector. I  propose to extend these benefits to two additional and essential sectors of urban  infrastructure, viz. water treatment and solid waste management. I also propose to  include investments in public companies providing long term finance for urban  infrastructure as approved investments for charitable trusts. This will enable more  investment in projects for development of urban infrastructure.

142. To provide a more focussed incentive for infrastructure development, I  propose to delete the existing provisions 54EA and 54EB and replace them with a  new provision, whereby tax exemption from capital gains would be available only if  investment is made in bonds to be issued by National Bank for Agriculture and  Rural Development (NABARD) and the National Highways Authority of India (NHAI).  These bonds will have a lock-in period of five years and their proceeds will be used  for providing finance to the agricultural sector and for the National Highway  Development Project (NHDP).

143. I propose to continue the thrust given to the housing sector last year and  extend the benefits already available for two more years, i.e. for houses or projects  which are completed by 31st March 2003. I hope this will sustain and accelerate  house construction activity.  144. To supplement the package of incentives of this sector, I also propose that  the 20% rebate of tax under section 88 of the Income-tax Act would now be available  for repayment of housing loans up to Rs. 20,000 per year as against Rs.10,000  earlier.

145. Presently, the exemption from tax on long-term capital gains is not available  if the capital gain from transfer of capital assets is invested in a house, if one house  is already owned. I am removing this restriction. Even if they own one house, taxpayers  can make an investment in a new house and claim exemption from capital gains tax  on sale of capital assets.

146. Last year I had provided for 100% exemption on export profits to the  entertainment industry. However, this benefit was limited to corporate entities only.  I propose to extend the benefits available to corporates to non-corporate assessees  as well with effect from Financial Year 1999-2000. This will remove the perceived  discrimination to the non-corporate film makers, but I do hope that this industry  will move towards corporatisation and modernization rapidly which is possible without  in any way curbing individual creativity.

147. To address a long-standing demand of the entertainment industry and with  a view to streamlining the procedures, I also propose to increase the limit of reporting  of payments made by a film producer, during production of a film, to the tax authorities  to Rs.50, 000 from the present level of Rs.25,000.

148. I hope these concessions combined with what I have already done on the  indirect tax side, will reassure the entertainment industry that “Hum Saath Saath  Hain”.

149. Shipping provides the transportation sinews to our international trade,  and has a strategic relevance also. To enable the Indian Shipping Industry, which is  facing serious challenges, to generate resources for strengthening and modernising  its fleet, I propose to allow deduction of their entire profits, against 50% as at present,  if these are kept in a reserve to be used for purchase of new ships. This 100%  deduction would be available for five years beginning from the next year.

150. Investment in human resources is an essential precursor for sustainable  economic development. To enable meritorious students, especially those from not  so affluent backgrounds, to avail of opportunities for higher education, I propose to  increase the maximum amount of repayment of loan for higher education from  Rs.25,000 to Rs.40,000 as an allowable deduction. This would translate into loan  amounts exceeding Rs. 3 lakhs, which would help such students to defray the  increasing cost of higher education, especially in management and professional  courses.

151. Availability of vocational training can go a long way in mitigating the problem  of unemployment. It can also bridge the paradoxical mismatch between wide spread  unemployment on the one hand and a shortage of properly trained manpower on the  other. In order to remedy the situation I propose to allow 100% deduction of payments  made for the establishment and running of institutions for vocational education and  training by the private sector in rural areas and small towns.

152. Barring some significant but scattered achievements, we are not a major  force in the international sports arena. Like many other activities, modern sports  and athletics need money and infrastructure for their development. While some  sports have access to abundant funding, most others suffer for want of adequate  support. To rectify this situation, I propose that 100% deduction would be available  for donations made by corporate entities to the Indian Olympic Association for the  development of infrastructure and for the sponsorship of games and sports. I hope  that with this concession, IOC would be better equipped to promote sports in the   country.

153. Last year, my proposals on corporate restructuring were widely welcomed  by Indian industry. However, there have been persistent demands to clarify and  rationalise some of the provisions. I, therefore, propose to remove ambiguities in  this regard by making suitable changes in the provisions of the Income- tax Act. I  also propose that resulting companies as a consequence of splitting of statutory  bodies like SEBs will enjoy the benefits of demerger if they fulfil the conditions notified  by the Central Government.

154. Last year, I had dispensed with the condition of continuity of the same  business for carry forward and set off of loss. I propose to liberalise the provisions  relating to carry forward and set off of unabsorbed depreciation on the same lines.  The condition of continuity of same business will be dispensed with and unabsorbed  depreciation may be carried forward and set-off even if the same business is not  continued.

155. To give greater restructuring flexibility and freedom to the corporates,  including PSUs, I propose to make the conditions for tax exemption of voluntary  retirement benefits of employees more liberal and to simplify the procedure for tax  exemption of benefits given to employees of Public companies and Co-operative  Societies. It will not be necessary any longer to obtain the approval of the tax  authorities for their voluntary retirement schemes if these are formulated in  accordance with the prescribed guidelines.

156. The various exemptions currently available while calculating Minimum  Alternate Tax (MAT) and the credit system has undermined the efficacy of the existing  provision and has also led to legal complications. To address these issues, I propose  that the Minimum Alternate Tax be now levied at the revised rate of 7.5% of the  “book profits” as determined under the Companies Act instead of the existing effective  rate of 10.5%. However, this will now be uniformly applied – barring one exception  that I will mention later. There will also be no credit for Minimum Alternate Tax  paid. This should bring all zero tax companies within the tax-net, which is also the  basic purpose of this tax. The new system has the virtue of a lowered rate of tax, a  simple method of computation, and an equitable spread.

157. To promote industrialization in less developed areas, I propose to extend  the tax holiday available for new units set up in industrially backward States and  industrially backward Districts for another two years. Similarly, I also propose to  extend the existing tax benefit for new Small Scale industrial units for another two  years, i.e., till 31st March, 2002.

158. To strengthen our capital market, I propose to provide 100% exemption to  the income of Investor Protection Funds of Stock Exchanges to give them incentives  for setting up of such funds.

159. At present, no tax is payable in the hands of shareholders on the dividend  income received from a domestic company, only the company pays additional income27  tax at the rate of 10% on the amount of dividends distributed by them. The large gap  in the tax treatment of dividend income and interest income has been widely criticized.  To reduce this anomaly, I propose to increase the rate of tax on dividends distributed  by domestic companies from 10% to 20%. I would clarify that dividend income in the  hands of share holders will continue to remain tax free.

160. In a similar vein, to reduce the distortions arising out of the differing tax  treatment for interest incomes from mutual funds and other instruments, like bank  deposits and corporate deposits, I propose to increase the rate of tax on income  distributed by debt oriented Mutual Funds and UTI from 10% to 20%. However, I  would like to clarify that the income distributed under the US-64 and other openended  equity oriented schemes of UTI and Mutual Funds will continue to be exempt  from this tax, as at present.

161. Currently, banks and financial institutions pay an interest tax of 2%, which  adds to their cost. To remove this impediment to financial transactions, I propose to  abolish this tax. This is a significant measure which will benefit the financial sector,  and consequently the depositors and users of the products and services of the banks  and financial institutions.

162. The life insurance sector is now opened up and would no longer remain a  public sector monopoly. It is currently taxed at a special rate which is likely to need  a revision in the altered scenario. I would like to undertake such revision on the  basis of expert advice and in the light of international practice. I propose to constitute  an Expert Committee for this purpose and I hope to bring necessary amendments  based on its recommendations during the course of the year.

163. One of the major initiatives towards better tax compliance has been the  introduction of the one-by-six scheme. This, along with other measures, has  contributed substantially to increasing the number of tax-payers, which had  languished at the level of just over a crore till 1996-1997, but has now crossed the  two crore mark, with the biggest boost coming over the last two years. The momentum  generated by this and other measures to widen the tax base needs to be sustained.  I, therefore, propose to extend the one-by-six scheme from the existing 54 cities to  an additional 79 cities in the country. With this, all the cities having a population of  two lakh and more on the basis of the 1991 Census would stand covered.

164. In keeping with international practice, it is proposed to promote a common  Business Identification Number to be used by different agencies and departments.  In our context, the Permanent Account Number of income-tax would be that  instrument. To begin with, the CBEC and DGFT will use PAN for their assessees,  importers and exporters. I hope that in near future, the PAN card will replace the  ration card as the primary identification document for a sizeable number of people.

165. With a view to intensifying the drive for PAN allotment, I propose to open  special counters in all cities where the one-by-six scheme will be in operation  (including 79 cities where the scheme is being extended) to issue PAN cards to the  taxpayers within 30 days of their filing the application. This facility will become  28  operational with effect from the 1st of July, 2000.

166. A large number of farmhouses have come up in the vicinity of metropolitan  and big cities. Many of these generate commercial income from being hired out for  residential accommodation and for holding functions and events. No tax is paid on  this income, which is mis-declared as agricultural. This blatant and visible misuse  of an exemption originally intended only for genuine farmers cannot be condoned or  allowed to continue. I, therefore, propose to make suitable changes in the law to  ensure that the income from farmhouse from anything other than genuine agricultural  operations will be brought in the tax net.

167. It is my earnest desire to make the system of tax collection as user friendly  and efficient as possible. The tax payer should be able to pay taxes with speed,  convenience and dignity. With this in view, I propose to expand and revamp the  presently available facilities of tax collection to provide that taxpayers would be able  to pay their tax in any branch of nationalised banks where they maintain an account.  This facility would be available in all towns and cities covered under the one-by-six  scheme with effect from 1st August, 2000. For operational reasons, this facility would  initially be offered in computerised branches only, but would be expanded  continuously.

168. I also propose to further streamline the system of refunds. While the present  practice of sending the refund cheques to the tax payers under advice to their banks  would continue, the Tax Department would also offer the facility of issuing refunds  directly on the bank accounts of assessees if the tax payers so desire. For operational  reasons, this facility would also initially be started from computerised branches of  banks, with continuous expansion as the banks get progressively computerised.

169. With almost every sector of the economy expecting a special treatment, our  Income-tax Act has become a vast compilation of exemptions. Income is income and  should be taxed. There should be no permanent exemptions. With this in view, I  want to make a beginning towards rationalising the existing system of concessions  and exemptions. Export earnings of various kinds presently enjoy exemptions from  income-tax ranging from 50% to 100% of income. I have, therefore, decided to phase  out these concessions over a period of five years. To begin with, I am withdrawing  these concessions by 20% from the financial year 2000-2001, and by 20% each  subsequent year till they reach a zero level. I would add that exporters would continue  to enjoy exemption from MAT till the full phase out. The revenues garnered from this  rationalization measure will help to finance universalization of primary education  and other investments in human resources.

170. My rationalisation measures also include the following:  ♦ Trusts running educational institutions and hospitals will not be denied  exemption even if their trustees avail medical and educational facilities  from them. Such benefit alone will be taxed.  ♦ Investments made by trusts in public sector companies will continue to be  eligible investments for a certain period, even after they cease to be PSUs  following disinvestment.  29  ♦ Interest for delayed payment of dividend tax and tax on distributed profits  by mutual funds and UTI will be reduced from 2% per month to 1.5% per  month.  ♦ Exemption of allowances received by employees will be raised in conformity  with the recommendations of the Fifth Pay Commission.  ♦ Limit of gross receipts for compulsory maintenance of books by professionals  will be enhanced from Rs.60,000 to Rs.1,50,000.  ♦ Advisory limit for disposal of departmental appeals by Appellate Tribunal  will be provided for in law.

171. To sum up, Mr. Speaker, Sir, as a result of various proposals made in this  budget on the direct taxes, the estimated revenue in 2000-2001 would be Rs.72,105  crore, including the component of additional resource mobilisation of Rs.5,080 crore.

172. Mr. Speaker, Sir, with these proposals I estimate total tax revenue receipts  for the Centre at Rs.1,46,209 crore and the fiscal deficit at Rs.1,11,275 crore or  5.1% of GDP. I could have sought a deeper cut in the fiscal deficit, but a substantially  higher level of revenue mobilization would have hurt the industrial recovery under  way at present. Thus, in the short-run, I had to carefully balance the need for fiscal  consolidation with the need to nurture the recovery phase of a growth cycle. I hope  this august House will support the balance I have struck in this budget.

173. Growth is not just an end in itself. It is the critical vehicle for increasing  employment and raising the living standards of our people, especially of the poorest.  Sustained, broad-based growth, combined with all our programmes for accelerating  rural development, building roads, promoting housing, boosting knowledge-based  industries and enhancing the quality of human resources, will impart a strong impetus  to employment expansion. There can be no better cure for the problem of poverty  than this in our country.

174. Sir, the millennium has heralded the arrival of the Indian economy on the  global stage. In two short years, we have shown that Indian talent and Indian effort  is second to none. In two short years we have ensured that “made in India” is a  compliment for any product or service. In two short years we have sent notice to the  world that India will be an economic superpower in the 21st century. The world’s  eyes are now upon us, and we will deliver.

175. Mr. Speaker, Sir, with these words, I commend the budget to this august  House.

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