High Commission of India, London
Economic & Commercial

Highlights of Union Budget 2001-02

Finance Minister Yashwant Sinha presented the Union Budget for the year 2001-02 on 28 February 2001. The budget was widely welcomed as being well thought out and addressing structural issues on long term basis.

State of the economy

The Indian economy has continued to exhibit both growth and resilience that have characterised its performance in the past few years. Overall economic growth in the year 2000-01 is expected to be about 6 per cent despite a series of unexpected setbacks.

Since the initiation of economic reforms in 1991, the economy has grown at an average rate of 6.4 per cent per year since 1992-93 compared to the 5.8 per cent recorded in the 1980s. Poverty has fallen from 36 per cent in 1993-94 to 26 per cent or less now.

For the first time in many years, the fiscal deficit target fixed in the budget has indeed been achieved, and remains at 5.1 per cent in 2000-2001. The target of 3.6 per cent revenue deficit has also been achieved. The fiscal deficit target has been achieved despite pressures on public finances on account of deceleration in disinvestment programme, natural calamities and the relief to consumers of petroleum products.

The fiscal deficit target for the year 2001-02 is 4.7% of GDP. Finance Minister said that a lesser fiscal deficit could have been managed, but that would have been possible only at the cost of growth, which was unacceptable.

Subsidies have been specifically targeted - futures/forward trading in sugar will be introduced within the coming year, a step that is necessary before full decontrol; and the unit specific RPS will be replaced by a Group Concession Scheme for fertilisers, with the rate of concession for urea units based on naphtha/FO/LSHS becoming linked to international prices of these feed stocks.

The Fiscal Responsibility Bill introduced in 2000 seeks to reduce the fiscal deficit to 2 per cent and completely eliminate the revenue deficit over the next five years.

Privatization

The procedure for privatization of public sector enterprises has now been considerably streamlined. The Department of Disinvestment has been set up to accelerate the privatization process. To maximise returns to government, the approach has shifted from the disinvestment of small lots of shares to strategic sales of blocks of shares to strategic investors. The Government has already approved privatization of 27 companies in which the process of disinvestment is expected to be completed during the course of the year. These companies include among others VSNL, Air India, and Maruti Udyog Limited.

Given the advanced stage of the process of disinvestment in many of these companies, a receipt of Rs 12000 crore (£1.74 billion approximately) from disinvestment is expected during the next year. An amount of Rs 7000 crore (£1 billion approximately) out of this will be used for providing restructuring assistance to PSUs, safety net to workers and reduction of debt burden.

Finance and business restructuring plans of a number of PSUs including SAIL and HMT have been approved.

Government have decided to close down 8 non-viable PSUs.

To help accelerate the reform process in the power sector and to unify all existing central legislations in the sector, the Electricity Bill 2001 will be introduced in the current budget session of the Parliament.

The threshold for lay offs and closures by industrial establishments has been raised to establishments employing 1,000 workers from 100 workers. The severance compensation for the workers would be increased from 15 days to 45 days for every completed year of service.

Interest rates

Most administered interest rates will be reduced by 1.5% as of March 1^st, 2001.

The benefit of reduction in interest rates on small savings deposits will be fully passed on to the states.

Until about 10 years ago, all foreign exchange transactions were tightly controlled by the government and by the RBI. These controls have been progressively loosened and the current account has been made completely convertible. The capital account has been liberalised for certain purposes, and further measures announced were:

• Indian companies wishing to invest abroad may now invest up to US $50 million on an annual basis through the automatic route without being subject to the three year profitability condition.

• Companies which have issued ADRs/GDRs may henceforth make foreign investments up to 100 per cent of these proceeds; up from the current ceiling of 50 per cent.

• Companies with proven track record wishing to invest larger amounts may now get a block allocation in advance from the RBI for investments overseas.

• Indian companies that have issued ADRs/GDRs may acquire shares of foreign companies up to an amount of US $100 million or an amount equivalent to ten times of their exports in a year, whichever is higher.

• ADRs/GDRs will be provided two-way fungibility. Converted local shares may be reconverted to ADRs/GDRs while being subject to sectoral caps, wherever applicable.

• Indian companies will now be permitted to list in foreign stock exchanges by sponsoring ADR/GDR issues against block share holding. This facility would have to be offered to all categories of shareholders.

• Investments by Registered partnership firms and companies providing professional services have not, so far, been permitted to make overseas investments. This ban is now being removed. Similarly, Indian employees who have the benefit of ESOP schemes in foreign owned companies can now make investments abroad up to US $20,000 annually instead of in a block of 5 years.

(The Reserve Bank of India will be issuing these guidelines separately).

Debt market

Measures have been introduced to further develop a transparent and active debt market in general and the Government securities market in particular. These include the setting up of a Clearing Corporation with State Bank of India as its chief promoter, which is expected to be set up by June 2001, and which will also enable settlement of forex transactions; and introduction of comprehensive legislation on securitization.

Foreign portfolio investments

The 40% limit of investment in a company under the portfolio investment route by FIIs will be increased to 49%.

Foreign investors bringing in a minimum of US$50 million FDI in Non-Banking Financial Companies (NBFCs) no longer need to be accompanied with a divestment of minimum of 25% of their holdings in the domestic market.

With discontinuation of surcharge of 10%, peak level of customs duty will decline from 38.5% to 35%.

Basic customs duty on specified textile machines, including shuttle-less looms, has been reduced from 15% to 5%. Customs duty on silk waste, cotton waste and flax fibre has been reduced from 35% /25% to 15%.

Customs duty on cut and polished coloured gem stones has been reduced from 35% to 15%, and that on on specified equipment when imported by training institutes sponsored by the Gem and Jewellery Export Promotion Council have been reduced from 25% to 15%. The rate of customs duty on rough diamonds would now be 5%.

To give a fillip to food processing industry, food preparations based on fruits and vegetables have been exempted from excise duty.

The concessions available for infrastructure by way of a 10-year tax holiday will be available to the developers of Special Economic Zones on the same lines as developers of industrial parks. The income of investors making long term investment for the development of SEZs will also be exempt.

The presence of multinational enterprises in India and their ability to allocate profits in different jurisdictions by controlling prices in intra-group transactions has made the issue of transfer pricing a matter of serious concern. Necessary transfer-pricing legislative changes are being made in the Finance Bill.

There will be no increase in non-plan expenditure in 2001-2002.

User charges for services provided by government and its agencies will be revised keeping in view the increased cost of these services. A portion of this increase will be provided to enhance the maintenance and quality of these services.

All requirements of recruitment will be scrutinized to ensure that fresh recruitment is limited to 1 per cent of total civilian staff strength. As about 3 per cent of staff retire every year, this will reduce the manpower by 2 per cent per annum, achieving a reduction of 10 per cent in five years as announced by the Prime Minister.

Use of Information Technology in government activities with large public interface will be maximized to promote efficiency. For this purpose, operations like GPF, pension, pay and accounts offices, passports, income tax, customs, central excise, will be fully computerized by March 31, 2002. Public sector banks and insurance companies are also being asked to complete computerization of their operations within this period.

Small-scale sector

To enable further new investment and technology upgradation in some of the key export oriented areas in the small-scale sector, another 14 items related to leather goods, shoes and toys have been dereserved.

Technology education

Measures were announced to maintain and strengthen India’s competitiveness in the field of technology education, which included encouraging the role of the private sector and introduction of new scheme for computer studies in schools.

Summing-up

Finance Minister concluded his budget speech by stating that "this is a budget for carrying forward the second generation of economic reforms. This is a budget for growth. This is a budget for equity with efficiency. This is a budget for a new deal to the people of India in the new millennium".

HOME | COMMERCE INDEX