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Return to Main Page of Budget 2004-2005

Indian Budget 2004-05
Full Text of P. Chidambaram, Minister of Finance, Budget Speech(July 8, 2004)



69. Value-added tax is a tax that has been tested and tried, and found beneficial throughout the world. The country needs a modern and efficient trade tax system that incorporates the international best practices. At the June 18, 2004 meeting of the Empowered Committee of State Finance Ministers, to which all Finance Ministers were invited, and chaired by my distinguished friend Dr. Asim Das Gupta, there was a broad consensus among the States to implement VAT. April 1, 2005 has been set as the date for implementation. I welcome the decision and warmly congratulate the State Governments. I urge all States that have not yet passed the relevant VAT legislation to do so before the end of 2004. International experience, as well as the experience of the State of Haryana, suggests that VAT will lead to an increase in revenue and not a loss in revenue. Nevertheless, in order to give comfort to the States, I propose to evolve a formula for determining the compensation for the loss of revenue, if any. I have offered the States the services of a Technical Experts Committee. The Committee will work with the States closely, and help them move steadily towards the stage of implementation.

Pension Reform

70. A ‘defined contribution’ pension scheme has been introduced with effect from January 1, 2004 for the Central Government employees recruited on or after that date. A suitable legislation to provide a regulatory framework for the scheme will be introduced in Parliament. Export promotion

71. My colleague, the Minister of Commerce and Industry, will place before Parliament by the end of this month a new trade policy. Government is of the view that Special Economic Zones (SEZs) are growth engines that can boost manufacturing, exports and employment. The private sector has shown considerable interest in the development of SEZs. Five SEZs have started functioning. SEZs require a special fiscal and regulatory regime. The Commerce Minister will, shortly, introduce a Bill for regulating Special Economic Zones, and it is my belief that the passing of such a law would be a significant milestone in our quest to become a major hub for manufacturing and exports.

Securitisation Act

72. The constitutional validity of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 has been upheld by the Supreme Court, except Sub-Section (2) of Section 17. In the wake of this judgement, many banks have pointed out practical difficulties likely to arise in speeding up the recovery of non-performing assets. It is proposed to amend the relevant provisions of the Act to appropriately address the Supreme Court’s concerns regarding a fair deal to borrowers while, at the same time, ensuring that the recovery process is not delayed or hampered. Related amendments to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, if necessary, will also be made.

Interest Rates

73. The Central Government has saved considerably on interest on fresh borrowings because of moderate interest rates. The States were also able to borrow at lower rates and swap old high cost loans. Since 2002, States have benefited to the extent of nearly Rs.2500 crore through the debt swap scheme. While borrowers are benefited by moderate interest rates, there is a need to boost savings and to protect the savers. I am convinced that, in the larger interests of the country, we should maintain a benign interest rate regime that appropriately balances the legitimate claims of the savers and borrowers.

74. I believe that all interest rates should be aligned to the market, save for one or two exceptions. There is a need for a savings instrument that will give a return to senior citizens which is above the market-determined rate. There is also a need for an instrument that will provide a risk-free avenue for all citizens to save for a longer term, and such an instrument should bear a slightly higher rate of interest. Balancing these considerations, I do not propose to make any change in the existing rates of interest on small savings instruments. Consequently, PPF, GPF and the Special Deposit Scheme will attract 8 per cent interest this year. For senior citizens, I propose to introduce a new scheme called the Senior Citizens Savings Scheme offering an interest rate of 9 per cent per annum. For all other citizens, I propose to continue the Government Savings bond which will carry an interest rate of 8 per cent per annum. The Varishta Pension Bima Yojana may no longer be necessary since the new savings scheme will cover the senior citizens adequately.

Reform of Public Distribution System

75. In the Tenth Plan document, the Planning Commission had suggested that a system of distributing food stamps should be tested on a pilot basis. Every eligible family will be entitled to collect its monthly quota of food stamps from a designated distribution centre, and such stamps could then be used to buy foodgrains from any food shop. I propose to introduce a pilot scheme for distributing food stamps, instead of distributing food through fair price shops, in two or three contiguous districts in a selected State. I sincerely hope that one of the States will come forward to associate with the Central Government in this experiment.

Gender budgeting

76. Women’s groups have met me and urged me to consider gender budgeting. This means that the budget data should be presented in a manner that the gender sensitivities of the budgetary allocations are clearly highlighted. An expert group on "Classification System of Government Transactions" has submitted its report on July 6, 2004. It has recommended appropriate systems for data collection and representation in the budget. The group has also recommended introduction of periodic benefit-incidence analysis. Government will examine the recommendations, and I hope it will be possible for me to implement some of them in the Budget for 2005-06.


77. Seven years ago, I placed before Parliament the first paper on subsidies. The NCMP pledges that all subsidies will be targeted sharply at the poor and truly needy like small and marginal farmers, farm labour and the urban poor. I have asked the National Institute of Public Finance and Policy (NIPFP) to prepare a blue print to accomplish these objectives. I expect to place the report before the House in the next session of Parliament.

States’ Finances

78. In order to support the States, a substantial proportion of the taxes raised by the Central Government is transferred to the States. Besides, the Central Government extends loans to the States. In the light of the Budget Estimates for the current year, I am happy to report that the States’ share of Union taxes and duties will increase to Rs.82,227 crore from Rs.63,758 crore in BE 2003-04. We are helping the States in other ways too. One of them is the Debt Swap Scheme. I propose to extend the facility of debt swap by allowing States to raise fresh loans and repay their old high-cost loans to NABARD and some other agencies. I also propose to consult the States on allowing them to increase their open market borrowings and reduce their dependence on loans from the Central Government. I shall also consider passing on external loans to the States on a back-to-back basis.

79. We are moving in the direction of empowering the States through devolution of larger resources. It is my fervent hope that States will accept the obligation to observe fiscal prudence and financial discipline.

80. Loans given by the Central Government to States carried an interest rate of 12.5 per cent. In 2003-04, the rate was reduced to 10.5 per cent. I am happy to announce a further reduction. Loans to the States will now bear an interest rate of 9 per cent with effect from April 1, 2004. States are expected to benefit to the tune of Rs.375 crore this year alone.

Special Economic Packages

81. The NCMP promises that special economic packages for Bihar, Jammu & Kashmir and the North Eastern States, announced in the past, will be implemented expeditiously. Bihar, for example, has a number of projects pending for a long time, including projects in power, roads, drainage and rehabilitation of displaced persons. I would like to assure the House that Bihar will be assisted through the Rashtriya Sam Vikas Yojana. A provision of Rs.3225 crore has been made for the present and, if necessary, this sum will be augmented.

North Eastern Region (NER)

82. The Government is committed to the speedy development of the North-Eastern States and Sikkim. Accordingly, all Ministries and Departments have been mandated to allocate at least 10 per cent of their Plan budget for schemes and programmes in the NER. This amounts to an allocation of Rs.5823 crore to be spent in the NER. The amount remaining unspent from this 10 per cent allocation is transferred to a non-lapsable Central pool of resources for development of the NER. In the current year, Rs.650 crore have been provided from the Central pool of resources for specific projects and schemes in this region, up from Rs.550 crore in 2003-04.

Jammu & Kashmir

83. The Government will provide special assistance to the State of Jammu & Kashmir to have a reasonable Plan size. It will also provide financial support for the long pending Baglihar project. The Government has also agreed to provide a grant of Rs.300 crore to the State to ensure smooth switch-over from the current overdraft arrangement with the Bank of Jammu & Kashmir to the Ways & Means scheme of the RBI.

Backward States’ Commission

84. NCMP envisages the creation of a Backward States Grant Commission to be used for creating productive assets in such States. It also envisages that all non-statutory resource transfers from the Central Government will be weighed in favour of poor and backward States, but with performance parameters as well.

85. I am happy to announce that the Government will set up a Backward States Grant Fund with a corpus of Rs.25,000 crore to be provided over a period of five years. While the existing Backward Districts Initiative Scheme with an annual outlay of about Rs.1,800 crore will be merged into this Grant Fund, the balance amount required for the annual contribution of Rs.5,000 crore will be earmarked from out of the total Central support to the Plan. It is expected that this will enable taking up social and physical infrastructure programmes in the poorest and most backward districts in the country within a given time frame. The Fund will become operational from the financial year 2005-06. Further details will be worked out in consultation with the Planning Commission.

Defence modernization

86. As promised in the NCMP, the Government is determined to eliminate all delays in the modernization of the Defence Forces. Having regard to the trend of defence capital expenditure in recent years, it has become necessary to make a higher allocation this year. Accordingly, I propose to increase the allocation for Defence to Rs.77,000 crore (as against Rs.65,300 crore in BE 2003-04) which includes an allocation for capital expenditure of Rs.33,483 crore (as against Rs.20,953 crore in BE 2003-04).

Budget Estimates for 2004-2005... Read full text

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