March, 2005

Salient features:

 Focus on agriculture; irrigation; infrastructure; housing; education; and health.

 Government continues with the reform process.

 Sectors like telecom; real estate; insurance and airlines further opened to FDI.

 Banking sector proposals will result in financially stronger and more autonomous banks.

I. Macroeconomic Backdrop

i. Budget outlay fixed at Rs. 5,143 billion ($116 billion).

ii. Revenue deficit at Rs. 953.12 billion or 2.7 percent of GDP.

iii. Fiscal deficit pegged at Rs. 171.99 billion or 4.3 percent of GDP.

iv. Growth rate in 2004-05 estimated to be 6.9 per cent, with the manufacturing sector expected to grow at 8.9 per cent.

v. Inflation reined in; Investments in 2004-05 buoyant; non-food credit has increased by 21.2 per cent.

II Infrastructure

i. Road, ports, airports - A financial Special Purpose Vehicle (SPV) to be established to finance infrastructure projects in sectors like roads, ports, airports and tourism that are financially viable; SPV to lend funds, especially debt or longer term maturity directly to eligible, appraised projects to supplement other loans; limit for 2005-06 to be fixed at US $ 22.2 million. In addition to this, the budget has also provided for USD 33.3 million for ‘Viability Gap’ funding for infrastructure projects. This mechanism will also be used in conjunction with SPV funding mechanism.

Highlighting the Government’s focus on infrastructure development, the Finance Minister announced that the government would also use the country’s foreign exchange reserves to finance some of the crucial infrastructure projects. According to Reserve Bank of India data, India’s foreign exchange reserves currently stand at US $ 140 billion.

ii. Urban Infrastructure- To give facelift to urban infrastructure, the budget has proposed ‘National Urban Renewal Mission’. This project is designed to meet the challenges or rapid increase in urbanization and will cover seven mega cities and some other towns. Any outlay of US $ 1.22 billion has been provided for this.

iii. Highways - National Highway Development Project (NHDP) Part III to be launched in 2005-06 to target selected high-density highways; US $ 3.11 million budget to four-lane 4000 kms; a special package provided for the North Eastern region with allocation of US $ 100 million.

iv. Irrigation - As part of continuous emphasis on rural development and agriculture, the budgetary support for irrigation projects has increased, thus facilitating fast implementation of irrigation projects under Accelerated Irrigation Benefit Programme (AIBP). The budgetary support for AIBP increased to US $ 1.06 billion.

v. Rural Electrification - To cover 125 thousand villages in five years; focus to be on deficient States; creation of a rural electricity distribution backbone envisaged, with a 33/11 KV substation in each block and at least one distribution transformer in each village; US $ 244.4 million provided in 2005-06.

III Industry

i. Terminal dates for tax exemptions have been extended by two years to March 31, 2007 in three cases. These include:
 weighted deduction of 150 per cent expenditure on in-house research and development facilities of companies engaged in the business of biotechnology, pharmaceuticals, electronic, telecommunications, chemicals or any other notified product;
 deduction of profits of new industrial undertakings in Jammu and Kashmir; and
 hundred per cent deduction of profits of companies carrying on scientific research and development and approved by the Department of Scientific and Industrial Research.
ii. Manufacturing competitiveness programme to be launched to help small and medium enterprises. Small and Medium Enterprises Development Bill to be introduced.

iii. Pharmaceuticals and Biotechnology: Corpus for the research and development fund to be increased in phases.

iv. 108 items identified for dereservation from SSI sector.

v. Scheme for expansion of production and employment in unorganized sector under PURA.

vi. Proposal for more FDI in mining, trade, pension.

vii. Allocation of US $ 296.6 million for Technology Upgradation Fund (TUF); 10% capital subsidy scheme for textile sector proposed.

IV Taxation

i. To encourage technological up-gradation, withholding tax on technical services has been reduced to 10% from 20%. Credit to be allowed for the Minimum Alternate Tax.

ii. Corporate income tax for domestic companies reduced from 35% to 30%. However, surcharge has been increased from 2.5% to 10%. Hence, the effective tax rate works out to 33%. No change in taxation of foreign companies.

iii. Entire production and distribution chain to be governed by VAT from 1 April 2005.

iv. Customs duty structure to be brought closer to that of East Asian countries. Peak rate for non-agricultural products reduced from 20 per cent to 15 per cent.

v. To promote investment, customs duties on selected capital goods and parts thereof to be reduced to below 15%, to 10% in some case and to 5% in some others.

vi. Draft of a revised and simplified Income Tax Bill to be placed before Parliament, during the year ahead.

vii. Direct tax brackets have been altered. Threshold exemption level increased to Rs. 100,000; Rs. 125,000 for women and 150,000 for senior citizens. Income above Rs. 250,000 taxable at the highest rate of 30%.

viii. A controversial fringe benefit tax proposed at 30%; transport services for workers and staff and canteen services to be exempt.

V Capital Market:
i. One time exemption for stock exchanges on corporatisation.

ii. Definition of ‘securities’ under the Securities Contracts (Regulation) Act, 1956 to be amended so as to provide a legal framework for trading of securitized debt including mortgage backed debt.

iii. FIIs to be permitted to submit appropriate collateral, in cash or otherwise, as prescribed by SEBI, when trading in derivatives on the domestic market.

iv. Nominal increase in securities transaction tax from 0.015% to 0.020%.

v. A high level Expert Committee on corporate bonds and securitization to be appointed to look into the legal, regulatory, tax and market design issues in the development of the corporate bond market.

VI Banking and Finance

i. Amendments to be introduced to the Banking Regulation Act, 1949 as follows:

 to remove the lower and upper bounds to the statutory liquidity ratio (SLR) and provide flexibility to the Reserve Bank of India (RBI) to prescribe prudential norms;
 to allow banking companies to issue preference shares;
 to introduce specific provisions to enable the consolidated supervision of banks and their subsidiaries by RBI.

ii. Amendments to be introduced to the Reserve Bank of India Act, 1934:

 to remove the limits of the cash reserve ratio (CRR) to facilitate more flexible conduct of monetary policy; and
 to enable RBI to lend or borrow securities by way of repo, reverse repo or otherwise

iii. Proposal to allow banks to issue preferential shares.

VI Rural Development

i. Creation of 10 million jobs planned by bringing 10 million hectares of land under agriculture over next five years.

ii. Allocation for rural development to increase to US $ 4 billion.

iii. National horticulture mission to be launched in April to cover research, production, post-harvest management, processing and marketing in an integrated manner.

iv. National project for the repair, renovation and restoration of water bodies to be launched in March 2005.

v. Increase flow of agricultural credit by 30%.

vi. An initial provision of US $ 1.05 billion for agricultural research.

iv. To extend insurance scheme for 2 million handloom weavers

v. Over 66,000 villages to get telephone connections.

vi. Proposal to connect all villages with population of 1,000 (500 for hilly/
tribal areas) with road.

vii. Knowledge centers to be set up in every village by 2007.

VII. Others

i. To spend US $ 1.05 billion on water schemes in the next year as compared to in the current year.
i. Project to improve water bodies to be taken up at a cost of US $ 22.2
million.
iii. Allocation for Total Sanitation Campaign at US $ 140 million to cover the entire country.
iv Allocation for education sector to increase to US $ 4 billion in the next year.
v. Total allocation to health and family welfare to be increased to US $ 2.2 billion.
vi. Indian Institute of Science, Bangalore, to be made world class university for which one time grant of US $ 22.2 million proposed.