Budget 2005-2006

Speech of

P. Chidambaram
Minister of Finance

February 28, 2005

PART A

Mr. Speaker, Sir,

I rise to present the Budget for the year 2005-06.

2. Last year, while presenting the Budget, I had suggested that the
vote in Elections 2004 was a vote for change. It was, I believe, a vote in
favour of a new leadership; a new Government; new policies; and a new
focus on the common citizen who is at the centre of all politics and
governance.

3. I reaffirm my belief, and I also declare my conviction that the UPA

Government under Prime Minister Dr. Manmohan Singh has charted a new
path that is more acceptable to the people of the country and that will bring
the greatest good to the greatest number.

4. Before I turn to the business of the day, I wish to record

Governments deep sorrow on the loss of lives, property and livelihood
caused by the tsunami tragedy. So far, Government has approved relief
packages amounting to Rs.3,644 crore. The Planning Commission, which is
coordinating the Tsunami Reconstruction and Rehabilitation Programme,
has drawn up a programme at an estimated cost of Rs.10,216 crore. I wish
to assure the House, and the affected people, that the Government will
provide the necessary funds for the purpose and ensure that every affected
family is fully rehabilitated.
I. THE MACROECONOMIC BACKDROP

The Immediate Past: Where We Were in 2003-04

5. In May 2004, the UPA Government inherited an economy that had,

as we now know, registered a growth rate of 8.5 per cent in 2003-04 on the
back of a poor 4 per cent in the previous year. While growth was indeed
broad-based, the impressive growth rate was due largely to the restoration
of output in the agriculture and allied sector. I had then commented that
my immediate predecessor was a very lucky man, even while his
predecessor was not! Notwithstanding the high growth rate, there were
several disturbing trends which came to notice in May 2004. The first was
the liquidity overhang at the end of 2003-04 which had spilled over into
2004-05. The second was the definite buildup of inflationary pressures as a
result of a sharp rise in global petroleum prices. The third was an
unanticipated 13 per cent deficiency in the south-west monsoon. The
fourth was an apparent decline in business confidence that had led to a
sharp downturn in new investment, and also showed up as current account
surpluses. By any standard, these were formidable challenges, but the UPA
Government was prepared to face these challenges.

The Present: Where We Are in 2004-05

6. The National Common Minimum Programme (NCMP) mandated the

Government to maintain a growth rate of 7 - 8 per cent a year, to promote
investment, to generate employment, to accelerate fiscal consolidation, to
ensure a higher fiscal devolution, and to focus on agriculture,
manufacturing and infrastructure. The NCMP also mandated the
Government to provide universal access to education and health care and to
assure one hundred days of employment to one person in each family. I
believe that, in the space of 9 months, we have risen to the challenge and
carved out many successes.

According to the Central Statistical Organization, the growth rate

in the current year is estimated to be 6.9 per cent, with the manufacturing
sector expected to grow at 8.9 per cent.

Inflation which touched a high of 8.7 per cent on August 28,

2004 has been reined in. As on February 12, 2005, the rate of inflation was
5.01 per cent which is more than one percentage point lower than what it
was in the same week in the previous year. Inflation based on CPI for
industrial workers was lower, and stood at 3.8 per cent in December, 2004.

Business confidence has been restored and investments in 2004-

05 have been buoyant. Non-food credit has increased by 21.2 per cent.

As the year draws to a close, we can predict confidently that all the engines
of the economy are running at nearly full speed.

7. We have also fulfilled many of our promises to the common citizen.

Last year, I had promised that agricultural credit will be increased by 30 per
cent, and I am happy to inform the House that, against the announced
target of Rs.105,000 crore, we are likely to achieve a disbursement of
Rs.108,500 crore. Public sector banks and regional rural banks have added
so far 58.20 lakh new farmers to their portfolio of borrowers. I had
promised that education loans would be given liberally to students. As
against 1,08,000 loans amounting to Rs.1,983 crore given in 2003-04,
1,40,000 loans amounting to Rs.2,249 crore have been given up to
December 31, 2004. I had promised that the number of families covered
under the Antyodaya Anna Yojana will be increased from 1.5 crore families
to 2 crore families, and that promise has been kept. I had promised that a
redesigned Food for Work Programme will be launched in 150 districts.
That was done on November 14, 2004. I had promised that a National Rural
Employment Guarantee Bill will be introduced. That has been done. I had
promised that we would promote the concept of Self-Help Groups
vigorously. In the current year, against the target of 1.85 lakh SHGs, we
have already credit-linked 2.26 lakh SHGs, and we have disbursed credit to
the tune of Rs.1,197 crore. Honble Members will note that in each of these
areas the focus of the Governments attention has been the common citizen
be it farmer, student, self-employed woman or labourer in search of work
and food.

The Year Ahead: Where We Want To Be in 2005-06

8. Growth, stability and equity are mutually reinforcing objectives. The

NCMP leans towards decisive intervention by the State in favour of the
poor. Given the resilience of the Indian economy, it is possible to mobilize
the resources and launch a direct assault on poverty and unemployment.
That is the only way to bring immediate relief to the aam admi.

The Big Picture

9. Let me first give the big picture. In 2004-05, Gross Budgetary

Support (GBS) for the Plan was Rs.145,590 crore to which we added
Rs.2,000 crore subsequently. As I shall explain later, the pattern of funding
has changed consequent to the recommendations of the Twelfth Finance
Commission (TFC). On a like-to-like basis, GBS for the Plan in 2005-06,
works out to Rs.172,500 crore. This represents an increase of 16.9 per
cent. Support for the Central Plan in BE 2004-05 was Rs.87,886 crore and in
BE 2005-06 this has been enhanced to Rs.110,385 crore, representing a
very substantial increase of 25.6 per cent. On priority sectors and flagship
programmes falling under the NCMP, I propose to provide an additional
sum of Rs.25,000 crore in the next year.

10. For example, the allocation for education in 2005-06 will be

Rs.18,337 crore. Next only to education, the plan allocation for rural
development will be Rs.18,334 crore. On subsidy for fertilizers, the estimate
is Rs.16,254 crore. The estimated expenditure on health and family welfare
is Rs.10,280 crore.

II. ASSAULT ON POVERTY AND UNEMPLOYMENT

Empowering the People

11. India is not a poor country, yet a significant proportion of our people
are poor. Poverty is not only income poverty. Other indicators of poverty
are illiteracy, disease, infant mortality, malnutrition, absence of skills and
unemployment. The whole purpose of democratic government is to
eliminate poverty and give to every citizen the opportunity to be educated,
to learn a skill and to be gainfully employed. The Government holds that it
is its sacred duty to empower the poor and eliminate the scourge of poverty.

Employment

12. In the last Budget, I had rejected the idea of jobless growth. As I
unfold the vision of the UPA Government, Honble Members will note that
the central theme that runs through the various schemes and programmes
is creation of jobs. Assured irrigation facilities to an additional 1 crore
hectares of land over a period of five years will generate employment for an
additional 1 crore people at the rate 1 person per hectare. The food
processing industry is growing at a rate which generates 2.5 lakh jobs every
year. The textile sector alone has the potential to create 1.2 crore jobs over
the next 5 years. The information technology (IT) industry is expected to
offer an additional 70 lakh jobs by 2009. Construction industry is also
expected to throw up lakhs of jobs. Sectors with potential for generating
employment will receive the highest attention of the Government.

National Rural Employment Guarantee Scheme

13. After the National Food for Work programme was launched in
November 2004, provision was made for the cash component and the
foodgrain component. In overall terms, the expenditure in the current year
is estimated at Rs.4,020 crore. For 2005-06, a provision of Rs.5,400 crore
for the cash component and 50 lakh MT of foodgrains have been made and,
in overall terms, the allocation will increase to Rs.11,000 crore. It is
Governments intention to convert this programme into the National Rural
Employment Guarantee Scheme. When fully rolled out, the scheme will
provide livelihood security for crores of poor families, and I promise to find
the money for the programme.

National Rural Health Mission

14. The National Rural Health Mission (NRHM) will be launched in the
next fiscal. Its focus will be strengthening primary health care through
grass root level public health interventions based on community ownership.
The total allocation for the Department of Health and the Department of
Family Welfare will increase from Rs.8,420 crore in the current year to
Rs.10,280 crore in the next year. The increase will finance the NRHM and
its components like training of health volunteers, providing more medicines
and strengthening the primary and community health centre system.

15. I am also happy to announce that work on the six AIIMS-like

institutions will start next year to augment medical education in deficient
States.
Antyodaya Anna Yojana

16. The Antyodaya Anna Yojana now covers 2 crore Below Poverty Line
(BPL) families. The number will be increased to 2.5 crore families in 2005-
06.

ICDS

17. The universalization of the Integrated Child Development Services

(ICDS) scheme is overdue. It is my intention to ensure that, in every
settlement, there is a functional anganwadi that provides full coverage for
all children. As on date there are 6,49,000 anganwadi centres. I propose to
expand the ICDS scheme and create 1,88,168 additional centres that are
required as per the existing population norms. Forty seven per cent of
children in the age group 0-3 are reportedly underweight. Supplementary
nutrition is an integral part of the ICDS scheme. I propose to double the
supplementary nutrition norms and share one-half of the States costs for
this purpose. I also propose to increase the allocation for ICDS from
Rs.1,623 crore in BE 2004-05 to Rs.3,142 crore in BE 2005-06.

Mid-day Meal Scheme

18. The Mid-day Meal Scheme for children has made a promising start
throughout the country. 11 crore children are covered today. The Central
Government is now providing the cost of food grains as well as the
conversion cost at the rate of Re.1 per child. The allocation in BE 2004-05
was Rs.1,675 crore. I propose to increase the allocation for the next year to
Rs.3,010 crore.

Sarva Shiksha Abhiyan

19. The Sarva Shiksha Abhiyan programme is the cornerstone of the

Governments intervention in basic education for all children. Sarva Shiksha
Abhiyan was allocated Rs.3,057 crore in the Budget Estimates for 2004-05.
During the course of the year, I enhanced the allocation to Rs.4,754 crore.
A non-lapsable fund called Prarambhik Shiksha Kosh has been created for
funding this programme. I propose to increase the allocation to Rs.7,156
crore in 2005-06.

Drinking Water and Sanitation

20. All drinking water schemes have now been brought under the Rajiv
Gandhi National Drinking Water Mission. In the current year, so far, 31,355
uncovered rural habitations have been provided drinking water facilities.
During 2005-06 the emphasis will be on covering more habitations.
Emphasis will also be laid on tackling water quality in about 2.16 lakh
habitations in Andhra Pradesh, Gujarat, Karnataka, Rajasthan, West Bengal
and some other States. I propose to increase the outlay for the Mission
from Rs.3,300 crore in the current year to Rs.4,750 crore in the next year.
21. Sanitation, however, remains critically deficient. Only about 30 per
cent of the rural households have access to safe sanitation facilities. The
Total Sanitation Campaign (TSC) now operates in 452 districts. Government
intends to extend the TSC to all districts, and I propose to allocate Rs.630
crore for the next year.

Scheduled Castes and Scheduled Tribes

22. I wish to restate my commitment to inclusive economic growth. It is

important to bring scheduled castes and scheduled tribes into the
development process. For the first time, you will find in the Budget papers
a separate statement on schemes for the development of SCs and STs. The
allocation for the programmes is Rs.6,253 crore.

23. The key to empowering the scheduled castes and scheduled tribes is
to provide top class education opportunities to meritorious students. The
three on-going scholarship schemes for SC/ST students under the Central
Plan pre-Matric, post-Matric, and merit-based will continue. To provide
an added incentive, I propose a new window: a short list of institutes of
excellence will be notified, and any SC/ST student who secures admission in
one of those institutes will be awarded a larger scholarship that will meet
the requirements for tuition fees, living expenses, books and a computer.
The details of the scheme will be announced by the ministry concerned.

24. Government will also introduce the Rajiv Gandhi National Fellowship
for SC and ST students for pursuing M. Phil and Ph.D. courses in selected
universities. I propose to provide funds for 2000 Fellowships per year to be
awarded from 2005-06 on the pattern of UGC Fellowships.

Women and Children

25. Last July, I promised to consider gender budgeting. Honble

Members will be happy to note that I have included in the Budget
documents a separate statement highlighting the gender sensitivities of the
budgetary allocations under 10 demands for grants. The total amount in BE
2005-06, according to the statement, is Rs.14,379 crore. Although this is
another first in budget-making in India, it is only a beginning and, in course
of time, all Departments will be required to present gender budgets as well
as make benefit-incidence analyses.

Minorities

26. Minorities would have to be brought more into the development

process. I propose to increase the equity support, as may be required, for
the National Minorities Development and Finance Corporation.

27. A certain percentage of new schools that will be opened under the
Sarva Shiksha Abhiyan as well as the Kasturba Balika Vidyalaya Scheme will
be located in districts or blocks having a substantial minority population.
Likewise, a certain proportion of new anganwadi centres will be located in
blocks or villages which have a substantial concentration of minorities.
28. Urdu is the mother tongue of a large number of people in Uttar
Pradesh and Bihar, but there is very little provision for teaching Urdu. I
propose to provide central assistance for recruitment and posting of Urdu
language teachers in primary and upper-primary schools that serve a
population in which at least one fourth belong to that language group.

29. The Ministry of Social Justice and Empowerment and the Ministry of
Human Resource Development implement a number of schemes for pre-
examination coaching of candidates belonging to the minority communities.
These schemes are confined to Government institutions, and the results
have not been encouraging. Hence, I propose to expand these schemes to
include reputed private coaching institutes which have a track record of
showing good results in competitive examinations. I propose to provide
funds to pay the fees on behalf of meritorious candidates from minority
communities who enroll in these selected private institutes.

Backward Regions Grant Fund

30. Since the announcement in the last Budget of a Grant Fund for
backward districts, a lot of thought has gone into the proposal. An Inter-
Ministerial Group (IMG) has identified 170 backward districts based on
certain socio-economic variables. The IMG has also proposed that resources
under the new facility will be conditional on Panchayati Raj institutions
being properly empowered, including devolution of functionaries and funds.
I propose to accept the recommendations of the IMG, and I am happy to
announce the establishment of a Backward Regions Grant Fund. An
allocation of Rs.5,000 crore has been made in the Plan for 2005-06, and an
equal amount will be allocated every year in the next four years.
Consequent upon the establishment of the Fund, the existing Rashtriya Sam
Vikas Yojana (RSVY), envisaged to end in 2006-07, will be wound up with
suitable transition arrangements that will protect every district now covered
under RSVY.

Bihar

31. The NCMP refers to special economic packages for Bihar, Jammu &
Kashmir and the North Eastern Region. Till now, Bihar received special
assistance through the RSVY. The transition arrangements under RSVY will
continue until 2006-07. Meanwhile, the backward districts of Bihar will
begin to receive assistance from the Backward Regions Grant Fund. I may
also point out that, recognizing the needs of Bihar, the TFC has made
substantial grants amounting to Rs.7,975 crore for the period 2005-10.
Bihar has also been identified as one of the few States requiring special
grants for the health and education sectors.

Jammu & Kashmir

32. The Government will provide special plan assistance to Jammu and
Kashmir under a recently-approved Reconstruction Plan, in addition to the
normal State Plan. As against the current years State Plan of Rs.3,008
crore, the size of the State Plan for 2005-06 has been fixed at Rs.4,200
crore. The Baglihar project was allocated Rs.300 crore this year and will be
provided adequate funds next year too. The UdhampurBaramulla rail line
will be implemented as a project of national importance.

North Eastern Region

33. All Ministries and Departments are required to allocate at least 10

per cent of their plan budget for schemes and programmes in the North
Eastern Region (NER). For 2005-06, this would amount to Rs.9,308 crore.
The KumarghatAgartala and LumdingSilcharJiribamImphal projects
will be supported with additional funds outside the railway budget as
projects of national importance. A special package for highway development
in the NER has also been approved, and I have allocated Rs.450 crore in this
behalf.

Rural Infrastructure

34. Government will focus on providing basic infrastructure to the poor,

especially those in rural India and in urban slums. The Rural Infrastructure
Development Fund which was revived last July will, as in the current year,
be provided a corpus of Rs.8,000 crore in 2005-06 also.

III. BHARAT NIRMAN

35. In his address to Parliament, the President outlined an overarching

vision to build India, and called it Bharat Nirman. Bharat Nirman has been
conceived as a business plan, to be implemented over a period of four years,
for building infrastructure, especially in rural India. It will have six
components, namely, irrigation, roads, water supply, housing, rural
electrification and rural telecom connectivity. In each of these areas, we
must dare to be bold and set for ourselves high targets to be achieved by
the year 2009.

The UPA Governments goals are:

to bring an additional one crore hectares under assured

irrigation;

to connect all villages that have a population of 1000 (or 500 in

hilly/tribal areas) with a
road;

to construct 60 lakh additional houses for the poor;

to provide drinking water to the remaining 74,000 habitations

that are uncovered;

to reach electricity to the remaining 1,25,000 villages and offer

electricity connection
to 2.3 crore households; and
 to give telephone connectivity to the remaining 66,822 villages.

Bharat Nirman will require huge resources. Government believes that

Bharat Nirman is an achievable project, and it is our intention to give rural
India a new deal fully involving the Panchayati Raj Institutions in the
planning and implementation.

IV. INVESTMENT

36. I now turn to investment which is the paramount requirement to

consolidate the growth process. In agriculture, we shall enhance public and
private investment in the infrastructure required to support expansion,
diversification and value addition. In the industrial sector, both the public
sector and the private sector will be allowed the space to grow and compete
with each other. Government will play the leading role in providing and
facilitating investment in public goods such as roads, railways, power,
seaports and airports. In the services sector, Government will recognize
the leading role played by the private sector, and provide a supportive
policy environment and stable tax policies.

37. I am happy to announce that in 2005-06, the Government will

provide equity support of Rs.14,040 crore and loans of Rs.3,554 crore to
Central Public Sector Enterprises (including Railways).

38. Success, however, will ultimately depend upon our ability to finance
the growth. Government will, therefore, through a mix of right policies and
prudent taxes, promote savings and devise ways and means to channel
these savings into productive investment. The capital market, banks,
insurance companies, pension funds and superannuation funds would have
a crucial role in mobilizing and disbursing the financial resources required
to sustain high investment.

V. AGRICULTURE

39. With about two thirds of the population dependent on agriculture,

and the sector producing only 21 per cent of GDP in 2003-04, it is
imperative that we address the problems of our farmers with a sense of
urgency. Agriculture being a State subject, the bulk of public investment in
agriculture takes place at the State level, and the Central Governments
support to States acts as a catalyst.

Roadmap for Agricultural Diversification

40. Indian agriculture has indeed diversified from food grains to other
crops, but more needs to be done. The Ministry of Agriculture will prepare a
roadmap for agricultural diversification. The road map will focus on fruits,
vegetables, flowers, dairy, poultry, fisheries, pulses and oilseeds.

National Horticulture Mission

41. The National Horticulture Mission, announced in the last Budget, will
be launched on April 1, 2005. I propose to allocate Rs.630 crore in 2005-06
for the Mission. The Mission will ensure an end-to-end approach having
backward and forward linkages covering research, production, post-harvest
management, processing and marketing, under one umbrella, in an
integrated manner. As the Mission gathers pace, more funds will be
provided.

Plantation Sector

42. I am aware of the difficulties that the plantation sector has faced for
some years now. While the prices of commodities such as tea and coffee
have shown some improvement, the sector still faces difficulties. The Price
Stabilization Fund has not proved very effective or popular. Therefore,
Government has set up an expert committee to suggest improvements to
the Fund and its operation. In the case of tea, our comparative advantage
has been eroded largely because of the declining productivity of tea.
Government will examine ways and means of introducing a programme for
massive replantation and rejuvenation.

Agricultural Marketing Infrastructure

43. Government proposes to introduce a new scheme called

Development/Strengthening of Agricultural Marketing Infrastructure,
Grading and Standardization. The goal of this scheme is to induce large
investments from the private and cooperative sectors for setting up
agricultural markets, marketing infrastructure and support services such as
grading, standardization and quality certification. Assistance will be
available in the form of credit-linked, back-ended subsidy. It is proposed to
implement the scheme through the National Bank for Agriculture and Rural
Development (NABARD) and the National Cooperative Development
Corporation (NCDC) in those States which amend their Agricultural Produce
Marketing Committee (APMC) Acts. I propose to allocate Rs.72 crore for the
new scheme.

Water Resources, Flood Management and Erosion Control

44. The National Project, announced by me last July, for the repair,
renovation and restoration of water bodies will be launched in the month of
March 2005. The pilot project is planned for 16 districts in 9 States and will
cover nearly
700 water bodies, and 20,000 hectares of additional land will come under
irrigation. The allocation for the pilot project has been increased to Rs.100
crore in 2005-06.
45. Uttar Pradesh, especially its eastern part, Bihar, West Bengal,
Orissa, Assam and the North Eastern States are regularly affected by floods
in the Ganga basin and in the Brahmaputra and Barak valleys. A Task Force
constituted to recommend measures for flood management and erosion
control has submitted its report. The Plan outlay in 2005-06 to implement
the report will be Rs.180 crore. Besides, a sum of Rs.52 crore has been
allocated for the Farakka Barrage Project.

46. The Accelerated Irrigation Benefit Programme (AIBP) has been

reviewed and the focus turned to early completion of truly last mile
projects. In BE 2004-05, I had provided a sum of Rs.2,800 crore. Having
regard to the improvement in the pace of implementation, the outlay has
been increased to Rs.4,800 crore for the next year.

Micro Irrigation

47. Water-use efficiency in Indian agriculture is one of the lowest in the

world. Government will promote micro-irrigation technology, comprising
drip and sprinkler irrigation, on a large scale. About 1.2 million hectares
have been covered under micro-irrigation so far, and the plan is to increase
the coverage to 3 million hectares by the end of the Tenth Plan and to 14
million hectares by the end of the Eleventh Plan. Accordingly, I have
provided Rs.400 crore for promoting micro-irrigation in 2005-06.

Rural Credit and Indebtedness

48. Government intends to continue with its effort to turn the focus of
commercial banks, regional rural banks (RRBs) and cooperative banks
towards providing credit, especially production credit, to rural households
and farm households. Particularly in agricultural credit, innovations are
possible. I propose to request the Reserve Bank of India (RBI) to examine
the issue of allowing banks to adopt the agency model, by using the
infrastructure of civil society organizations, rural kiosks and village
knowledge centres, to provide credit support to rural and farm sectors.

49. In June 2004, I had announced my intention to double the flow of

agricultural credit in three years. I had also announced an indicative target
of Rs.105,000 crore. Notwithstanding a below par performance by co-
operative banks, together, all three arms will disburse Rs.108,500 crore in
the current year. Continuing on the same path, I propose to ask commercial
banks, RRBs and cooperative banks to increase the flow of credit by another
30 per cent in 2005-06. Further, the public sector banks would be asked to
increase the number of borrowers by another 50 lakh.

50. Cooperative banks in India, with few exceptions, are in a shambles.

Six State Central Cooperative Banks and 140 District Central Cooperative
Banks do not comply with Section 11 of the Banking Regulation Act, 1949.
They also have difficulty in accessing refinance for agricultural credit.
Alarmed by the gravity of the situation, I had appointed a Task Force to
examine the reforms required in the cooperative banking system. The Task
Force has submitted its report. The recommendations include:
 Special financial assistance to wipe out accumulated losses and
strengthen the
capital base of co-operative credit institutions;

Institutional restructuring to ensure democratic institutions; and

Changes in the legal framework to empower RBI to enforce

prudent financial
management.

I propose to accept the report in principle. I also propose to call State

Governments for consultation and begin the process of implementing the
recommendations in the States that show willingness to accept the
recommendations.

Farm Insurance

51. The National Agricultural Insurance Scheme (NAIS) has been in

operation since rabi 1999-2000. I have received the recommendations
made by the joint group constituted by the Ministry of Agriculture to
suggest an improved farmer-friendly crop insurance scheme. Further
consultation with all the stakeholders would be required. I, therefore,
propose to continue the NAIS in its present form for kharif and rabi 2005-
06.

Micro Finance

52. The programme of linking Self Help Groups (SHGs) with the banking
system has emerged as the major micro-finance programme in the country.
560 banks including 48 commercial banks, 196 RRBs and 316 cooperative
banks are now actively involved in the programme. I propose to enhance
the target for credit-linking in the next fiscal from 2 lakh SHGs to 2.5 lakh
SHGs.

53. At present, micro finance institutions (MFIs) obtain finance from

banks according to guidelines issued by RBI. MFIs seek to provide small
scale credit and other financial services to low income households and small
informal businesses. Government intends to promote MFIs in a big way.
The way forward, I believe, is to identify MFIs, classify and rate such
institutions, and empower them to intermediate between the lending banks
and the beneficiaries. Commercial banks may appoint MFIs as banking
correspondents to provide transaction services on their behalf. Since MFIs
require infusion of new capital, I propose to re-designate the existing
Rs.100 crore Micro Finance Development Fund as the Micro Finance
Development and Equity Fund, and increase the corpus to Rs.200 crore.
The fund will be managed by a Board consisting of representatives of
NABARD, commercial banks and professionals with domain knowledge. The
Board will be asked to suggest suitable legislation, and I expect to introduce
a draft Bill in the next fiscal year.
54. I propose to request RBI to open a window to enable qualified NGOs
engaged in micro-finance activities to use the External Commercial
Borrowing (ECB) window. Detailed guidelines containing necessary
safeguards will be issued by RBI.

Micro Insurance

55. The benefits of opening the insurance sector are now visible by way
of vast improvement in insurance penetration and insurance density, and
the availability of a wide variety of products. Government would like to see
these benefits percolate to rural India and to the vulnerable sections of the
population. Micro insurance is a distinct product. Its design and delivery
are specialized functions. The Insurance Regulatory Development Authority
(IRDA) has published draft Regulations for micro insurance. NGOs, SHGs,
cooperatives and MFIs will be invited to become micro insurance agents.
Government will extend full support to the effort of IRDA to promote micro
insurance.

A Knowledge Centre in Every Village

56. The National Commission on Farmers has recommended the

establishment of Rural Knowledge Centres all over the country using
modern information and communication technology (ICT). Mission 2007 is
a national initiative launched by an alliance comprising nearly 80
organizations including civil society organizations. Their goal is to set up a
Knowledge Centre in every village by the 60th anniversary of Independence
Day. Government supports the goal, and I am glad to announce that
Government has decided to join the alliance and route its support through
NABARD. I propose to allow NABARD to provide Rs.100 crore out of RIDF.

Agricultural Research

57. Agricultural Research has a vital role to play in the strategy for
reviving and encouraging diversification. Our agricultural universities and
research institutions have done good work in the past and now need to be
strengthened and modernized. A Task Force headed by Dr. M S
Swaminathan has recommended the creation of a National Fund for
Strategic Agricultural Research. I am happy to announce an initial provision
of Rs.50 crore for operationalizing this Fund.

VI. MANUFACTURING

58. India should build on its manufacturing capacities and scale them up
to global standards. Both the Investment Commission and the National
Manufacturing Competitiveness Council have started work in right earnest. I
believe we shall reap the first successes of their work in the next financial
year.

59. Worldwide, it is manufacturing that has driven growth. In order to

revive the manufacturing sector, particularly small and medium enterprises,
and to enable them to adjust to the competitive pressures caused by
liberalization and moderation of tariff rates, I propose to launch a new
scheme that will help them strengthen their operations and sharpen their
competitiveness. The scheme will be called the Manufacturing
Competitiveness Programme. The design of the scheme will be worked out
by the National Manufacturing Competitiveness Council in consultation with
the industry.

Textiles

60. In the last Budget, I made a beginning in addressing the tax-induced

rigidities in the textile sector in order to prepare the sector for the post-
quota regime. There is a new vigour in the sector, especially in the
handloom and powerloom segments. Government will continue to nurture
the textile sector which has huge potential for employment and exports.
The estimate of investment made in 2004-05 is Rs.20,000 crore. The
estimate for the next year is Rs.30,000 crore. The Technology Upgradation
Fund (TUF) scheme is being continued with an enhanced allocation of
Rs.435 crore. I propose to introduce a 10 per cent capital subsidy scheme
for the textile processing sector in addition to the normal benefits available
under the TUF Scheme.

61. I think it is necessary to lend further help to the handloom sector.

The Government proposes to adopt the cluster development approach for
the production and marketing of handloom products. The Ministry of
Textiles will take up 20 clusters in the first phase at a cost of Rs.40 crore,
and the amount will be provided during the course of the year.

62. The Government is implementing a life insurance scheme for

handloom weavers which provides insurance cover up to Rs.50,000. At
present, only 2 lakh weavers are covered. I propose to enlarge the
coverage of the scheme to 20 lakh weavers in two years which will cost
Rs.30 crore per year when fully rolled out. The Government is also
implementing a health insurance package for weavers. Here too, the
coverage is now only for 25,000 weavers. I propose to increase the
coverage to 2 lakh weavers at a recurring cost of Rs.30 crore per year.
Once the two new and enlarged schemes are approved, I propose to provide
the required funds.

Sugar Industry

63. The sugar industry has been under financial stress since 2001. The
position became worse due to two successive droughts in certain parts of
the country. The Tuteja Committee appointed by the Government has
submitted its report. After a careful examination of the report, and after
consulting RBI and NABARD, I propose the following financial package for
the revitalization of the sugar industry:

Sugar factories that were operational in 2002-03 sugar season

will be assisted to restructure. NABARD, in consultation with State
Governments, RBI, banks and financial institutions will work out a scheme
for providing a financial package with a moratorium of two years, on both
principal and interest, and a schedule of payment having regard to the
commercial viability of each unit.

Government has already reduced the rate of interest on loans

from the Sugar Development Fund to 2 percentage points below the bank
rate. I propose to make the same rate applicable to outstanding loans as on
October 21, 2004.

Indian Banks Association (IBA) and NABARD will be asked to

work out a scheme under which individual sugar factories may renegotiate
the rate of interest on their past high interest loans.

Pharmaceuticals and Biotechnology

64. Our human resource base gives us an exceptional advantage in

pharmaceuticals and biotechnology. The Indian pharmaceutical industry
has declared its preparedness to produce drugs under the new patent
regime. Government has already set up a Rs.150 crore research and
development corpus fund for the industry. The corpus deserves to be
increased, and I propose to do so in phases beginning next year. India has
also the potential to become an attractive destination for outsourcing in
drug discovery and clinical research, and for co-development of drugs and
manufacturing. In biotechnology, the industry has the potential to be a
global leader supplying novel technologies and products to the health and
agriculture sectors. Government will provide a stable policy environment
and necessary incentives to help the two industries become world leaders.

Small and Medium Enterprises

65. In recent years, our approach to small scale industry has evolved,
and now we are inclined to treat the sector as the small and medium
enterprises sector. Continuing the process initiated a few years ago, after
consulting stakeholders and on the recommendation of the Advisory
Committee, the Ministry of Small Scale Industries has identified 108 items
for de-reservation. Among them, I would like to mention 30 items in the
category of textile products, including hosiery, which is a sector poised
for rapid growth.

66. In the last Budget, I had significantly liberalized the capital subsidy
scheme, and a provision of Rs.135 crore was made for Promotion of SSI
Schemes. That provision is being enhanced to Rs.173 crore in 2005-06.
Small Industries Development Bank of India (SIDBI) has established this
year a SME Growth Fund with a corpus of Rs.500 crore. Small and medium
units in knowledge-based industries such as pharma, biotech, and IT will be
provided equity support through this fund.

67. There is a need for new legislation that will provide a supportive
environment for small and medium enterprises. I am glad to inform the
House that my colleague, the Minister of Small Scale Industries, will
introduce in this session the Small and Medium Enterprises Development
Bill.
Skills Training

68. Skills development, especially for youth who have only minimal
formal education, is an area which can no longer be ignored. Last July, I
had proposed a programme to upgrade 500 Industrial Training Institutes
(ITIs). I am happy to inform the House that in the current year 100 ITIs
have been identified. Out of them, 67 ITIs in 15 States/Union Territories
have been linked with industry and will be upgraded at a cost of Rs.1.6
crore each.

69. There is a demand for specific skills of a high order which is often
unmet. I, therefore, propose a Public-Private Partnership between
Government and industry that will take up the skills development
programme under the name Skills Development Initiative or SDI. Details of
the scheme will be worked out and announced shortly.

Foreign Trade

70. We shall build on the growing external strengths of the economy.

Government has delivered on the promise to accelerate foreign trade. In
April-January 2004-05 exports and imports have grown by 25.55 per cent
and 34.72 per cent, respectively, in US dollar terms. Government has fixed
an ambitious target of US$ 150 billion for exports by the year 2008-09 in
order to double Indias share in world exports to 1.5 per cent. We intend to
further liberalize trade policy and extend full support to the efforts of our
exporters.

Foreign Direct Investment

71. On foreign direct investment (FDI), I would urge Honble Members

to take a pragmatic view. At the recent meeting of the Finance Ministers of
G-7 countries, to which India and China were invited, the Finance Minister
of China looked in my direction and told the gathering that China had
received US$ 500 billion worth of foreign investment since China opened its
economy in 1980. Of this, nearly US$ 60 billion came in calendar 2004. Our
own experience has been that the automobile, software, telecommunication
and electronics sectors have benefited from FDI and have assimilated
themselves into the global production chain. I believe that there are
opportunities in other sectors as well, such as mining, trade and pensions.
Government will, after due consultation, come forward with suitable
proposals.

VII. INFRASTRUCTURE

Telecommunications

72. Telecommunication is the best way to provide connectivity in urban

and rural India. By the end of January 2005, we had achieved a tele-density
of 8.75 per cent. However, we are concerned with the low tele-density in
rural areas. So far, Government has released Rs.1,700 crore to the
Universal Service Obligation (USO) Fund, which has been fully utilized. A
provision of Rs.1,200 crore has been made for 2005-06. 1,687 subdivisions
will get support under the USO Fund for rural household telephones. 5.20
lakh village public telephones (VPTs) have been installed so far, and BSNL
has undertaken to provide VPTs in the next three years to the remaining
66,822 revenue villages

National Highway Development Project

73. The National Highway Development Programme (NHDP) has made

steady progress, and 5,172 kms of National Highways have been four-laned
till January 2005 under NHDP I and NHDP II. To be launched in the next
fiscal, NHDP III will target selected high density highways not forming part
of the Golden Quadrilateral or the North-South and East-West corridors. I
have provided Rs.1,400 crore for this purpose in 2005-06 to four-lane 4000
kms. A special package for the North Eastern region has also been
approved, and I have allocated Rs.450 crore in this behalf. In overall terms,
the outlay for National Highway development will be increased from
Rs.6,514 crore in BE 2004-05 to Rs.9,320 crore in 2005-06.

Rural Electrification

74. A massive programme for rural electrification will begin in 2005-06

with the objective of covering 1.25 lakh villages in five years. The focus will
be on deficient States. The programme envisages creation of a rural
electricity distribution backbone, with a 33/11 KV substation in each block
and at least one distribution transformer in each village. I have provided
Rs.1,100 crore for this programme in the next year.

Indira Awas Yojana

75. Indira Awas Yojana is the flagship rural housing scheme for weaker
sections. The allocation is being increased from Rs.2,500 crore in the
current year to Rs.2,750 crore in BE 2005-06. About 15 lakh houses will be
constructed during the next year.

Special Purpose Vehicle

76. The importance of infrastructure for rapid economic development

cannot be overstated. The most glaring deficit in India is the infrastructure
deficit. Investment in infrastructure will continue to be funded through the
Budget. However, there are many infrastructure projects that are
financially viable but, in the current situation, face difficulties in raising
resources. I propose that such projects may be funded through a financial
Special Purpose Vehicle (SPV). When large infrastructure projects are
implemented, the foreign exchange resources could be drawn for financing
necessary imports. Accordingly, I propose to establish an SPV to finance
infrastructure projects in specified sectors. Roads, ports, airports and
tourism would be sectors that can benefit most from the SPV. The projects
will be appraised by an Inter-Institutional Group of banks and financial
institutions. The SPV will lend funds, especially debt of longer term
maturity, directly to the eligible projects to supplement other loans from
banks and financial institutions Government will communicate the
borrowing limit to the SPV at the beginning of each fiscal year. For 2005-
06, I propose to fix the borrowing limit at Rs.10,000 crore.

77. I have also made a provision of Rs.1500 crore for viability gap
funding for infrastructure projects. That mechanism will be used also in
conjunction with the funding mechanism through the SPV.

PURA Clusters

78. The unorganized or informal sector accounts for 92 per cent of the
employment and absorbs the bulk of the annual accretion to the labour
force. PURA or Provision of Urban Amenities in Rural Areas is an idea that
contains within itself possible solutions to a number of problems that afflict
rural India such as unemployment, isolation from markets, lack of
connectivity and migration to cities. The National Commission on
Enterprises in the Unorganized/ Informal Sector has proposed pilot projects
for growth poles applying the PURA principles. The objectives are to
expand production and employment in the unorganized enterprises around
existing clusters of industrial activities and services as well as encourage
the formation of new clusters. Once the proposals are firmed up,
Government will take up the creation of a few growth poles, as pilot
projects, in 2005-06.

National Urban Renewal Mission

79. The demographic trends in the country indicate a rapid increase in

urbanization. India needs urban facilities of satisfactory standards to cope
with the challenge. If our cities are not renewed, they will die. The
National Urban Renewal Mission is designed to meet this challenge. It will
cover the seven mega cities, all cities with a population of over a million,
and some other towns. I propose to make an outlay of Rs.5,500 crore in
2005-06, including a grant component of Rs.1,650 crore for the Mission.

80. The Mumbai Metro Rail Project, the Mumbai Trans Harbour Link, the
Mumbai Western Expressway Sealink and the Bangalore Metro Rail Project
are examples of projects which could be supported through the Mission.

VIII. FINANCIAL SECTOR

81. The incipient investment boom in infrastructure, industry (including

housing), and services needs to be nurtured through further reforms in the
financial sector including reforms in bank finance and debt and equity
markets.

Banking

82. The banking sector presents a picture of paradoxes. There are many
banks in India but none among the top twenty in the world. Our largest
bank, the State Bank of India, ranks 82 in terms of business. It is
universally acknowledged that the key drivers of the banking sector in the
future will be Competition, Consolidation and Convergence. RBI has
prepared a road map for banking sector reforms and will unveil the same.
While most proposals will be implemented by the RBI on its own authority,
some legislative changes would be required to be made.

83. I had promised that a comprehensive Bill to amend the Banking

Regulation Act, 1949 will be introduced in the Budget Session. In
consultation with the RBI, I propose to introduce amendments to the Act
to remove the lower and upper bounds to the statutory liquidity
ratio (SLR) and provide flexibility to RBI to prescribe prudential norms;

to allow banking companies to issue preference shares, since

preference share capital can be treated as regulatory capital under specified
circumstances as per Basel norms;

to introduce specific provisions to enable the consolidated

supervision of banks and their subsidiaries by RBI in consonance with the
international best practices in this regard;

I also propose to introduce amendments to the Reserve Bank of India Act,

1934-

to remove the limits of the cash reserve ratio (CRR) to facilitate

more flexible conduct of monetary policy; and

to enable RBI to lend or borrow securities by way of repo,

reverse repo or otherwise.

PFRDA

84. With increasing longevity, the problem of old-age income security

can no longer be ignored. Government had announced a defined
contribution pension scheme for newly recruited Central Government
employees which would also be extended to the unorganized sector. I am
happy to inform the House that seven State Governments Andhra Pradesh,
Chhattisgarh, Himachal Pradesh, Jharkhand, Manipur, Rajasthan and Tamil
Nadu have introduced similar schemes for their employees. Other States
have also evinced interest. An Ordinance was promulgated on December 29,
2004 to set up a Pension Fund Regulatory and Development Authority
(PFRDA). I propose to introduce a Bill to replace the Ordinance during this
session.

85. Through the new scheme, it is proposed to offer a menu of

investment choices to the subscriber and to provide a strong regulatory
mechanism to ensure that the interests of subscribers are protected. I
appeal to workers all over the country to join the new pension system.

Capital Market

86. The capital market has emerged as a major vehicle for converting
savings into investment. It is also the preferred investment destination of
foreign savings. The steps announced by me last July, and implemented,
have strengthened the capital market. It is time for more measures and,
hence, I propose to

authorize Securities and Exchange Board of India (SEBI) to set

up a National Institute of Securities Markets for teaching and training
intermediaries in the securities markets and promoting research; and

permit FIIs to submit appropriate collateral, in cash or

otherwise, as prescribed by SEBI, when trading in derivatives on the
domestic market.

While Indias equity market has made progress, the corporate bond market
still lags behind. In order to address this gap, I propose to

amend the definition of securities under the Securities

Contracts (Regulation) Act, 1956 so as to provide a legal framework for
trading of securitized debt including mortgage backed debt; and

appoint a high level Expert Committee on corporate bonds and

securitization to look into the legal, regulatory, tax and market design
issues in the development of the corporate bond market.

Over the Counter (OTC) Derivatives

87. Over the counter (OTC) derivatives play a crucial role in mitigating
the risks of corporates, banks and other financial entities. There is,
however, some ambiguity regarding the legality of OTC derivative contracts
which has inhibited their growth. I, therefore, propose to take measures to
provide for clear legal validity of such contracts.

Stamp duty on Stock Exchange Corporatization

88. The Securities Contracts (Regulation) Act, 1956, as amended

recently, requires all stock exchanges to be corporatized and de-mutualized.
Three stock exchanges are not yet corporatized. In order to facilitate their
corporatization, I propose to grant a one-time exemption to them from
stamp duty on the notional transfer of assets.

Stamp Duty on Commercial Paper

89. In order to create a level playing field for banks and non-bank
entities to issue commercial paper, and to bring the Indian commercial
paper market closer to international standard, I propose to rationalize the
stamp duty so that it applies uniformly regardless of the issuing entity.

Mumbai A Regional Financial Centre

90. When I look at the map of the world, I am struck by the strategic
location of Mumbai. It lies almost midway between London and Tokyo, two
nerve centres of world finance. Mumbai is also home to the National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE) which now rank
no.3 and no.5 among the stock exchanges of the world by the number of
trades per year. In the last decade, we have built world class institutions
on the securities markets and we now compare with the best in terms of
technological sophistication, risk management and sound governance. I
believe the time has come to begin work on making Mumbai a regional hub
for finance. In consultation with the RBI, I propose to appoint a high
powered Expert Committee to advise the Government on how to make
Mumbai a regional financial centre.

Gold Units

91. Ten years ago we embarked on the process of ensuring that gold
inflows are through the official channels alone. I believe that we are now in
a position to introduce gold units and create a market for such units. I
propose to ask SEBI to permit, in consultation with RBI, mutual funds to
introduce Gold Exchange Traded Funds (GETFs) with gold as the underlying
asset, in order to enable any household to buy and sell gold in units for as
little as Rs.100. Such units could be traded in the same manner as units of
mutual funds.

IX. OTHER PROPOSALS

Institutions of Excellence

92. On January 6, 2005, the Prime Minister spoke about his intention to
set up a Knowledge Commission to look into the issue of building quality
human capital. Government believes that investments in institutions of
higher education and Research and Development organizations are as
important as investments in physical capital and physical infrastructure.
What we need are world class universities, and we must make a beginning
with one institution. We must have a university that will be ranked
alongside Oxford and Cambridge or Harvard and Stanford. I am happy to
inform the House that we have selected the Indian Institute of Science
(IISc), Bangalore, which enjoys a high reputation as a centre of excellence
in research and development. We shall work to make IISc, in a few years, a
world class university. I propose to provide an additional sum of Rs.100
crore as a grant for this purpose.

VAT

93. In a remarkable display of the spirit of cooperative federalism, the

States are poised to undertake the most important tax reform ever
attempted in this country. All States have agreed to introduce the value
added tax (VAT) with effect from April 1, 2005. VAT is a modern, simple
and transparent tax system that will replace the existing sales tax and
eliminate the cascading effect of sales tax. It is in force in more than 130
countries ranging from Sri Lanka to China. India too has a VAT at the
Central level (CENVAT), but only for goods.
94. In the medium to long term, it is my goal that the entire production
distribution chain should be covered by a national VAT, or even better, a
goods and services tax, encompassing both the Centre and the States.

95. The Empowered Committee of State Finance Ministers, with the solid
support of the Chief Ministers, has laboured through the last 7 years to
arrive at a framework acceptable to all States. The Central Government has
promised its full support and has also agreed to compensate the States,
according to an agreed formula, in the event of any revenue loss. I take this
opportunity to pay tribute to the Empowered Committee, and wish the
States success on the introduction and implementation of VAT.

Twelfth Finance Commission

96. On February 26, 2005 I laid before Parliament the recommendations

made by the Twelfth Finance Commission (TFC). TFCs recommendations
cover tax devolution, grants to States, debt relief, financing of relief
expenditure and related matters. States stand to gain considerably by the
award.

97. However, the implementation of the TFC recommendations will put a

large burden on Central finances through the period 2005-10, and especially
in the first year, 2005-06, when the change to the new pattern will take
place. Consolidation and rescheduling of Central loans, reduction in the
interest rate and specific grants under different heads will affect both
capital and revenue receipts of the Central Government. The total impact on
the Central budget for 2005-06 will be approximately Rs.26,000 crore or an
addition of three-quarters of a percentage point as a proportion of GDP.
Needless to say, this will have an impact on Governments capacity to abide
by the Fiscal Responsibility and Budget Management Act (FRBM) in 2005-
06.

Defence Expenditure

98. Last July, in order to catch up with the backlog of expenditure that
had not been provided for, I had increased the allocation for Defence to
Rs.77,000 crore. I am happy to inform the House that, after a gap, defence
expenditure in 2004-05 has matched the Budget Estimates. I propose to
increase the allocation for Defence in 2005-06 to Rs.83,000 crore, which will
include an allocation of Rs.34,375 crore for capital expenditure.

X. FISCAL CONSOLIDATION

99. The current phase of high growth provides us an opportunity that

should not be frittered away. We must use this opportunity to improve the
fiscal health of the country. We must increase our revenues and reorient
expenditure to pay for more outlays on education, health and
infrastructure.

Outlays versus Outcomes

100. At the same time, I must caution that outlays do not necessarily
mean outcomes. The people of the country are concerned with outcomes.
The Prime Minister has repeatedly emphasized the need to improve the
quality of implementation and enhance the efficiency and accountability of
the delivery mechanism. During the course of the year, together with the
Planning Commission, we shall put in place a mechanism to measure the
development outcomes of all major programmes. We shall also ensure that
programmes and schemes are not allowed to continue indefinitely from one
Plan period to the next without an independent and in-depth evaluation.
Civil society should also engage Government in a healthy debate on the
efficiency of the delivery mechanism.

Subsidies

101. Following my announcement last July, I placed before Parliament a

report on Central Government subsidies. There are three main products
that involve large explicit subsidies from the Budget and otherwise. These
are food, fertilizer and petroleum. Subsidies provide a measure of protection
for the poor and we shall continue to provide subsidies. However, we must
now take up the task of restructuring the subsidy regime in a cautious
manner and after a thorough discussion.

102. The Ministry of Agriculture intends to make procurement of food

grains more cost effective through decentralized procurement, especially in
the non-traditional States, without impairing the present MSP-based
procurement. A Working Group constituted by the Department of Fertilizers
is now examining several issues for implementing the next stage of the New
Pricing Scheme for fertilizers commencing from April 1, 2006. The fertilizer
subsidy bill could be pruned if naphtha and FO/LSHS, now used as
feedstock, are replaced by natural gas. As far as petroleum products are
concerned, the Government has received the recommendations of the Lahiri
Committee, and appropriate decisions have been taken, to which I shall
refer in Part B of my speech.

103. What gives me satisfaction is that, while faithfully attempting to

implement the mandate of the NCMP, I have been able to remain on the
path of fiscal consolidation. According to the revised estimates for 2003-04,
the revenue deficit was 3.6 percent and the fiscal deficit was 4.8 per cent of
GDP. The FRBM Act requires a reduction in the two ratios, respectively, of
0.5 per cent and 0.3 per cent every year. I am happy to inform the House
that we will achieve this degree of fiscal correction in 2004-05, and the year
is expected to end with a revenue deficit of 2.7 per cent and a fiscal deficit
of 4.5 per cent of GDP.

XI. BUDGET ESTIMATES FOR 2005-06

104. Now I turn to the Budget Estimates for the next fiscal.

Plan Expenditure
105. Plan expenditure for 2005-06 is estimated, on a like-to-like basis, at
Rs.172,500 crore. However, the Budget shows Plan expenditure at
Rs.143,497 crore, and the balance amount of Rs.29,003 crore will be raised
as loans by the State Governments directly, in accordance with the
recommendations of the TFC.

Non-Plan Expenditure

106. Non-Plan expenditure in 2005-06 is estimated to be Rs.370,847

crore, the increase being mainly due to enhanced grants to the States as
recommended by TFC.

Revenue Deficit and Fiscal Deficit

107. Mr. Speaker, Sir, in the Budget Estimates for 2005-06, the total
expenditure is estimated at Rs.514,344 crore. I estimate total revenue
receipts of the Central Government at Rs.351,200 crore and the revenue
expenditure at Rs.446,512 crore. Consequently, the revenue deficit is
estimated at Rs.95,312 crore which is equal to 2.7 per cent of the estimated
GDP. The fiscal deficit is estimated at Rs.151,144 crore, which is 4.3 per
cent of the estimated GDP.

108. Consequent to accepting the recommendations of the Twelfth

Finance Commission and the drastically changed pattern of devolution and
funding, there has been a considerable strain in making the Budget for
2005-06. I was left with no option but to press the pause button vis-a-vis
the FRBM Act. I am relieved that we have not been forced to go in the
opposite direction. I may add that we are perilously close to the limits of
fiscal prudence and there is no more room for spending beyond our means.
I am confident that we can resume the process of fiscal correction with
effect from 2006-07 and achieve the FRBM goals by 2008-09.

PART B

XII. TAX PROPOSALS

109. Mr. Speaker, Sir, I shall now present my tax proposals.

110. I had articulated the UPA Governments principles and our approach
to taxation in my Budget speech in July 2004, and, hence, there is no need
to repeat them. While adhering to those principles, it is Governments
intention, as announced by the Prime Minister, to undertake major tax
reforms to improve the tax to GDP ratio, expand the tax payer base,
increase tax compliance and make tax administration more efficient.

Indirect Taxes

111. I shall begin with my proposals on indirect taxes. First, customs

duties.
112. I intend to advance the Governments declared policy of making the
customs duty structure closer to that of our East Asian neighbours.
Therefore, I propose to reduce the peak rate for non-agricultural products
from 20 per cent to 15 per cent.

113. Consistent with the peak duty rate, I propose to bring down the
customs duty rates on capital goods and raw materials as well as correct
any inverted duty structures.

114. In order to promote investment, I propose to reduce the customs

duties on selected capital goods and parts thereof to below 15 per cent, to
10 per cent in some cases and to 5 per cent in some others.

115. For most textile machinery, I propose to reduce the duty from 20 per
cent to 10 per cent, in order to help the textile industry acquire a
competitive edge in the post-quota regime. Similarly, to encourage the food
processing industry, I propose to reduce the duty on refrigerated vans from
20 per cent to 10 per cent.

116. To give a leg-up to the leather and footwear industry, I propose to

reduce the customs duties on seven specified machinery from 20 per cent to
5 per cent. The duty on ethyl vinyl acetate (EVA), an input for the footwear
industry, is also proposed to be reduced from 20 per cent to 10 per cent.

117. Pharmaceuticals and biotechnology are sunrise sectors. I propose to

reduce the customs duty on nine specified machinery used in these two
sectors to 5 per cent.

118. I also propose to reduce the customs duties on specified parts of

battery-operated road vehicles and for printing presses from 20 per cent to
10 per cent.

119. For primary and secondary metals, I propose to reduce the customs
duties from 15 per cent to 10 per cent. Similarly, industrial raw materials
such as catalysts, refractory raw materials, basic plastic materials, molasses
and industrial ethyl alcohol, which are key inputs to manufacture, will now
be liable to a reduced customs duty rate of 10 per cent. On lead, I propose
to reduce the duty to 5 per cent.

120. Coking coal with high ash content attracts a duty of 15 per cent. I
propose to bring the rate down to 5 per cent.

121. Keeping in mind the crucial need to encourage the textile sector, the
customs duty rates on polyester and nylon chips, textile fibres, yarns and
intermediates, fabrics, and garments are proposed to be reduced from 20
per cent to 15 per cent.

122. The electronics and telecom sectors merit special attention. On 217
Information Technology Agreement (ITA) bound items, the duty is required
to be brought down to nil. Consequently, to provide a level-playing field to
the domestic industry, I propose to remove the customs duty on specified
capital goods and all inputs required for the manufacture of ITA bound
items.

123. However, I intend to take the power to impose a countervailing duty

(CVD) of 4 per cent on all imports to compensate for the State level taxes, in
particular the forthcoming State level VAT that is proposed to be imposed
on corresponding domestic goods. For the present, I propose to levy a CVD
of 4 per cent only on the imports of ITA bound items and their inputs that
attract nil duty. Credit for the CVD will be available against payment of
excise duty. However, because we have a soft corner for these wares, IT
software will be exempt from the proposed CVD.

124. I do not propose to make any changes in the customs duties

applicable to agricultural goods. In fact, I have decided to increase the duty
on cut flowers from 30 per cent to 60 per cent. However, at the request of
the trade, and since there is little domestic production, I propose to reduce
the duty rate on cloves to 35 per cent.

125. In order to encourage the import of technology to produce pure

drinking water, I propose to reduce the import duty on atmospheric
drinking water generators from 20 per cent to 5 per cent.

126. I have some proposals on the Excise side too. Governments

intention is to bring as many goods as possible to the CENVAT rate of 16 per
cent. Today, 5 items attract 24 per cent. Out of the 5, I have picked out
three polyester filament yarn, tyres and air conditioners and I propose
to reduce the excise duty on these goods to 16 per cent. Manufacturers of
motor cars and aerated drinks, the other two items, would have to wait for
some more time.

127. Last year, I took a big step forward to prepare the textile industry to
meet the challenges of the post-quota regime. I re-affirm that the CENVAT
exemption route for natural fibres will remain in force. I now propose to
give independent texturizers the option to avail of the exemption route or
pay 8 per cent excise duty with CENVAT credit.

128. Imitation jewellery now attracts an excise duty of 16 per cent. Since
they are products predominantly consumed by the less affluent sections, I
propose to reduce the excise duty to 8 per cent. At the same time,
expensive and premium jewellery is now manufactured and sold under
alluring brand names. On such branded jewellery, I propose to levy an
excise duty of 2 per cent. I may clarify that there is no levy on unbranded
jewellery, including unbranded gold jewellery.

129. In order to remove certain distortions in the tax treatment of

comparable products, I propose to levy an excise duty on mosaic tiles at 8
per cent and on road tractors for semi-trailers of engine capacity exceeding
1800 cc at 16 per cent. I may clarify that agricultural tractors will continue
to remain exempt.

130. Some sectors deserve relief, since they produce goods for the
common citizen. Today, there is a surcharge of Re.1 per kg on tea. I
propose to abolish the surcharge. There is also an excise duty of Re.1 per
kg on refined edible oils and Rs.1.25 per kg on vanaspati. I propose to
abolish both levies and fully exempt the two items.

131. Even while protecting the handmade sector that makes matches, it is
necessary to give some relief to the mechanized and semi-mechanized
sectors. Hence, I propose to reduce the excise duty from 16 per cent to 12
per cent on matches made by these two sectors. Hand-made matches are
fully exempt from excise duty and, therefore, will continue to enjoy
adequate protection.

132. I would like to provide some tax relief to the small scale industry
(SSI). Hence, I propose to raise the ceiling for SSI exemption based on
turnover from the level of Rs.3 crore per year to Rs.4 crore per year.
Further, SSI units will now have only two options: either full exemption on
the first clearance of Rs.1 crore or normal duty on the first clearance of Rs.1
crore with CENVAT credit.

133. I propose to restore the excise duty rate on iron and steel to the
normal level of 16 per cent. This should have little effect on prices because
the entire duty is modvatable by most categories of consumers.

134. I propose to increase the specific duty on molasses from Rs.500 per
MT to Rs.1000 per MT to adjust partially for a hefty increase in molasses
prices. I also propose to increase the specific duty on cement clinkers from
Rs.250 per MT to Rs.350 per MT as an anti-avoidance measure.

135. The National Highways Development Project requires very large

resources. In order to raise additional resources, I propose to increase the
cess on petrol and diesel by 50 paise per litre. The additional resources will
be earmarked exclusively for the national highways, and a suitable
amendment is being proposed to the Central Road Fund Act, 2000.

136. The levy of an education cess has been widely applauded. The
health sector demands similar treatment. What better way is there to fund
health care than tax those goods which are health hazards? I, therefore,
propose to raise some additional resources and allocate the proceeds to
finance the National Rural Health Mission. Accordingly, I propose to
increase the specific rate on cigarettes by about 10 per cent and impose a
surcharge of 10 per cent on ad valorem duties on other tobacco products
including gutka, chewing tobacco, snuff and pan masala. However, biris will
not be subject to this levy.

137. Finally, there is the issue of taxes on petroleum products. After

examining the Lahiri committees report, I propose to make major changes
in the customs and excise duty rates. The customs duty on crude petroleum
will be reduced from 10 per cent to 5 per cent.

138. On LPG for domestic consumption and on subsidized kerosene, the

customs duty will be nil. On both products, the excise duty will also be nil.
139. On other petroleum products, including motor spirit (MS) and diesel
(HSD), I propose to reduce the customs duty from the current level of 20 or
15 per cent to 10 per cent. I also propose to fix the excise duties on petrol
and diesel as a combination of ad valorem and specific duties.

140. The proposed changes are revenue neutral, and I have been assured
that there will be no increase in the retail prices of these products as a
result of the changes in the duty structure.

141. Consequent upon the changes made in customs and excise duties,
the drawback rates for exported goods will be reviewed and modifications,
wherever necessary, will be notified by April 30, 2005.

142. Honble Members are aware that many goods are chargeable to
excise duty on a value with reference to their maximum retail price (MRP),
after allowing suitable abatement. The system of quantifying the
abatement should be made transparent. There should also be a mechanism
to review the rate of abatement to reflect changed circumstances. Hence,
as a trade facilitation measure, I propose to set up an advisory committee
to advise the Government on the extent of abatement for both excise duty
and service tax.

143. The other indirect tax is service tax. Since the services sector
accounts for about 52 percent of the GDP it is necessary to cast the net
wide.

144. Last July, I raised the rate of service tax to 10 per cent. I propose to
maintain that rate.

145. I also propose to grant relief to small service providers. Accordingly,

I propose to exempt from service tax those service providers whose gross
turnover does not exceed Rs.4 lakh per year. According to my calculation,
80 per cent of the present service tax payers will gain from the exemption.

146. I propose to include some additional services in the service tax net.
New services to be covered include pipeline transport of goods; site
formation, demolition and like services; membership fees of clubs and
associations; packaging and specialized mailing services; survey and map
making services; dredging services in rivers and harbours; cleaning services
for commercial buildings and similar premises; and construction of planned
residential complexes, with more than 12 dwelling units, developed by
builders.

147. I also propose to expand the coverage of certain services, but I shall
not burden you with the details.

Direct Taxes
148. I shall now turn to my proposals on direct taxes.

149. Last July, as an interim measure, I made a provision under which a

person with a taxable income of Rs.100,000 would not be required to pay
any income tax. About 1.4 crore assessees got relief. I promised to revisit
the subject in this Budget.

150. As part of a major overhaul of direct taxes, I propose to alter the tax
brackets after taking due note of the universal demand of Members of
Parliament and the need to provide stability in the medium term.

151. Accordingly, I propose that the new tax brackets and the new rates
will be as follows:

Up to Rs.1 lakh .. nil

Rs.1 lakh to Rs.1.5 lakh .. 10 per cent

Rs.1.5 lakh to Rs.2.5 lakh .. 20 per cent

Above Rs.2.5 lakh .. 30 per cent

Further, the level at which the surcharge of 10 per cent will apply will be
raised to Rs.10 lakh taxable income. Honble members will be happy to note
that tax payers in every tax bracket will gain from my proposal.

152. Besides, I propose to fix the threshold exemption level for women at
Rs.1.25 lakh and the exemption level for senior citizens at Rs.1.5 lakh.
These revised exemption levels will be in lieu of the prevailing tax rebate
provisions.

153. Given the higher exemption limits and the scaling up of tax brackets,
the need for a separate personal allowance does not exist. Therefore, in
conformity with growing international practice, I propose to remove the
standard deduction.

154. There is now a plethora of exemptions, ostensibly intended to

promote savings. Some exemptions are based on the principle of deduction
from taxable income and some exemptions are based on the principle of tax
rebate. I believe the time is ripe to clean up these exemptions. At the same
time, it is necessary to encourage savings, and tax relief is a method to
induce people to save. Further, I think that the State must be neutral
between one form of saving and another, and allow the tax payer greater
flexibility in making savings/investment decisions.

155. For all these reasons, in addition to the basic exemption limits, I
propose to allow every tax payer a consolidated limit of Rs.1 lakh for
savings which will be deducted from the income before tax is calculated. All
prevailing sectoral caps will be removed. The rebate under Section 88 is
being eliminated and Section 80L is being omitted to reflect the new regime.
156. In addition to the sum of Rs.1 lakh, the following six deductions will
continue to receive the same tax treatment as prevails today:

i) interest paid on housing loan for self-occupied house property;

ii) medical insurance premia;

iii) specified expenditure on disabled dependant;

iv) expenses for medical treatment for self or dependant or member

of a HUF;

v) deduction in respect of interest on loans for pursuing higher

studies; and

vi) deduction to a person with disability.

157. Tax treatment of savings is a complex issue but we can benefit from
the best international practices in this regard. We have already introduced
EET-based taxation in the defined contribution pension scheme applicable to
newly recruited government servants. Before we fully migrate to the EET
system for all kinds of savings, it is necessary to resolve a number of
administrative issues. Hence, without making any change for the present, I
propose to set up a committee of experts that will work out the road map
for moving towards an EET system.

158. Bowing to popular demand, I propose to continue the exemption

from tax on interest earned on accounts maintained by Non Resident
Indians.

159. While the tax reliefs that I have given today should warm the hearts
of the tax payers, I have also an obligation to raise resources, especially to
meet the large requirements of NCMP-mandated programmes.

160. I have looked into the present system of taxing perquisites and I
have found that many perquisites are disguised as fringe benefits, and
escape tax. Neither the employer nor the employee pays any tax on these
benefits which are certainly of considerable material value. At present,
where the benefits are fully attributable to the employee they are taxed in
the hands of the employee; that position will continue. In addition, I now
propose that where the benefits are usually enjoyed collectively by the
employees and cannot be attributed to individual employees, they shall be
taxed in the hands of the employer. However, transport services for
workers and staff and canteen services in an office or factory will be outside
the tax net. The tax is not a new tax, although I am obliged to call it by a
new name, namely, Fringe Benefits Tax. The rate will be 30 per cent on an
appropriately defined base.

161. I believe I have given a large measure of relief to personal income

tax payers, and I hope all sections of the people and all members of the
House are happy. This leads me to corporate income tax.
162. The corporate income tax rate, the surcharge thereon and the rates
of depreciation are inter-linked. Any reform would have to address all three
elements. The international best practice is to provide for depreciation at
rates that would enable the investor to replace the asset before its
economic life ends. In India, in addition to the depreciation rate we have
allowed an initial depreciation in order to encourage new investment.
Honble members may recall that, last July, I reduced the condition relating
to increase in installed capacity from 25 per cent to 10 per cent.

163. I am also obliged to keep in mind that a number of profit making

companies continue to pay low tax, even if well within the law, by taking
advantage of liberal depreciation rates and of exemptions and incentives.
Moreover, the current depreciation rates lean towards employing capital
rather than labour.

164. There is also a demand that corporate tax rates should be aligned
with the highest marginal personal income tax rate.

165. After careful consideration of the pros and cons, the interest of the
revenue and the need to give the corporate sector a measure of relief, I
propose the following tax structure.

166. For domestic companies, the corporate income tax rate will be 30
per cent. There will also be a surcharge of 10 percent. The rate of
depreciation will be 15 per cent for general machinery and plant, but the
initial depreciation rate will be increased to 20 per cent.

167. The corporate sector will find that the proposed tax structure is fair,
gives them relief of nearly 3 per cent in the tax rate, encourages new
investment and ensures equity among all sections of corporate tax payers.

168. As a further measure of relief, I propose to remove the requirement

of 10 per cent increase in installed capacity for availing of the benefit of
initial depreciation.

169. To encourage technological upgradation, I propose to reduce the

withholding tax on technical services from 20 per cent to 10 per cent.

170. I also propose that credit will be allowed for the Minimum Alternate
Tax (MAT) paid under Section 115 JB of the Income Tax Act.

171. I do not propose to make any changes in the tax regime applicable
to foreign companies.

172. Last July, I had indicated that I would review the terminal dates on
exemptions given for specific purposes. Accordingly, I propose to extend
the terminal date, in the following three cases, from March 31, 2005 to
March 31, 2007:

Weighted deduction of 150 per cent of expenditure on in-house

research and development facilities of companies engaged in the business
of biotechnology, pharmaceuticals, electronics, telecommunication,
chemicals or any other notified product;

Deduction of profits of new industrial undertakings in Jammu &

Kashmir;
100 per cent deduction of profits of companies carrying on
scientific research and development and approved by the Department of
Scientific and Industrial Research.

173. In deference to the request from Air India and Indian Airlines, I
propose to extend up to September 30, 2005 the exemption from tax on
agreements to acquire aircraft or aircraft engines on lease.

174. The securities transaction tax (STT) has stabilized, but the rates are
widely perceived to be too low. I, therefore, propose to make a very
nominal increase in the rates for all categories of transactions. Thus, a day
trader who is liable to pay STT at 0.015 per cent will now be liable to pay at
0.02 per cent. This small increase should not ruffle anyones feathers. This
nominal rate of increase will apply to all categories.

175. As Honble Members are aware, there have been significant

developments in the past decade in the capital market including the
introduction of trading in financial derivatives. We have also established a
transparent system of trading with adequate safeguards for audit trail.
Hence, I propose to amend the Income Tax Act to provide that trading in
derivatives in specified stock exchanges will not be treated as speculative
transactions for the purposes of the Income Tax Act.

176. I propose to amend the one-in-six criteria for filing income tax
returns. Mobile telephone will be removed. Instead, payment for electricity
of more than Rs.50,000 per year will be included as a criterion for filing a
return of income.

177. The NCMP requires the Government to introduce special schemes to

unearth black money and assets. I am obliged to carry out the mandate,
but without giving undeserved relief or an amnesty. I am concerned about
large cash transactions, especially withdrawals of cash, when there is no
ostensible purpose to withdraw such large amounts of cash. These cash
withdrawals leave no trail, and presumably become part of the black
economy. Therefore, I propose to introduce two anti tax-evasion
measures: Firstly, I propose to levy a tax on withdrawal of cash on a single
day of over Rs.10,000 or more from banks at the rate of 0.1 per cent. Thus,
a person withdrawing Rs.10,000 in cash would have to pay a small sum of
Rs.10. Secondly, I propose to require banks to report to the Government all
deposits which are exempt from TDS on interest. I intend to observe the
results of these steps before I propose any further measures.

178. Many administrative reforms are underway in the Department of

Revenue. Among them are the tax information network (TIN) and the on-
line tax accounting system (OLTAS).
179. As a measure of facilitation, I propose to follow international
practice and establish large taxpayer units (LTUs). To begin with, these
units will be set up in major cities. I would like to invite large tax payers,
whether of corporate tax or income tax or excise duties or service tax, to
participate in the programme and avail of the single window service. For
small taxpayers, I propose to set up Help Centres in cooperation with
industry associations, professional bodies and NGOs.

180. I have received many suggestions on amendments to the direct tax

laws and the indirect tax laws. I have decided to accept some suggestions
that require to be acted upon immediately, but I do not propose to burden
the Finance Bill with those changes. Instead, I intend to introduce a
separate Bill for that purpose during this session. In due course, I intend to
place before Parliament a revised and simplified Income Tax Bill.

181. My tax proposals on direct taxes are expected to yield a gain of

Rs.6,000 crore. On the indirect taxes side, they are broadly revenue
neutral.

XIII. CONCLUSION

Mr. Speaker, Sir,

182. One of Indias proudest sons, Dr Amartya Sen, argues in his book
Development as Freedom that development is a process of expanding the
real freedoms that people enjoy. He says, Growth of GNP or of individual
incomes can, of course, be very important as means to expanding the
freedoms enjoyed by the members of the society. But freedoms depend
also on other determinants, such as social and economic arrangements (for
example, facilities for education and health care) as well as political and
civil rights. The UPA Government accepts this ethical dimension to the
discussion of economic issues, and in this Budget I have attempted to
reflect that dimension. More or less the same idea was articulated two
thousand years ago by Saint Tiruvalluvar who said:

Pini Inmai Selvam Vilaivu Inbam Emam

Ani Enba Nattirkku Iv Iyndhu

(Health, wealth, produce, the happiness that is the result, and

security
These five, the learned say, are the ornaments of a polity)

183. This Budget, Mr Speaker, is an attempt to lay down a path in which

growth and equity will reinforce each other and build a new India.

184. Sir, with these words, I commend the Budget to the House.