SPEECH OF SHRI PRANAB MUKHERJEE, MINISTER OF FINANCE INTRODUCING THE

BUDGET FOR THE YEAR 2010-2011

I rise to present the Union Budget for 2010-11.

In 2009, when I presented the interim Budget in February and the regular Budget
in July in this august House, the Indian economy was facing grave uncertainties.
Growth had started decelerating and the business sentiment was weak. The
economy's capacity to sustain high growth was under serious threat from the
widespread economic slowdown in the developed world.

2. It was not clear to us, as also to the policy makers in many other countries, how
this crisis would eventually unfold. What would be its impact on the growth
momentum of the Indian economy? How soon will we be able to turnaround the
fortunes of our economy? The short term global outlook was bleak and the
consensus was that year 2009 would face the brunt of this crisis across the world.

3. At home, there was added uncertainty on account of the delayed and sub-normal
south-west monsoon, which had undermined the kharif crop in the country. There
were concerns about production and prices of food items and its possible
repercussions on the growth of rural demand.

4. Today, as I stand before you, I can say with confidence that we have weathered
these crises well. Indian economy now is in a far better position than it was a year
ago. That is not to say that the challenges today are any less than what they were
nine months ago when UPA under the leadership of Mrs Sonia Gandhi was elected
back to power and Prime Minister Dr. Manmohan Singh formed the Government
for the second term.

5. The three challenges and the medium term perspective that I had outlined in my
last Budget Speech remain relevant, even today. These would continue to engage
the Indian policy-planners for the next few years.
6. The first challenge before us is to quickly revert to the high GDP growth path of
9 per cent and then find the means to cross the 'double digit growth barrier'. This
calls for imparting a fresh momentum to the impressive recovery in growth
witnessed in the past few months. In this endeavour, I seek Lord Indra's help to
make the recovery more broad-based in the coming months.

7. Growth is only as important as what it enables us to do and be. Therefore, the

second challenge is to harness economic growth to consolidate the recent gains in
making development more inclusive. The thrust imparted to the development of
infrastructure in rural areas has to be pursued to achieve the desired objectives
within a fixed time frame.

8. We have to strengthen food security, improve education opportunities and

provide health facilities at the level of households, both in rural and urban areas.
These are issues that require significant resources, and we have to find those
resources.

9. The third challenge relates to the weaknesses in government systems, structures

and institutions at different levels of governance. Indeed, in the coming years, if
there is one factor that can hold us back in realising our potential as a modern
nation, it is the bottleneck of our public delivery mechanisms. There have been
many initiatives in this regard, in different sectors, at different points of time.
Some of them have been effective in reforming the way the Government works in
those areas. But we have a long way to go before we can rest on this count.

10. The Union Budget cannot be a mere statement of Government accounts. It has
to reflect the Government's vision and signal the policies to come in future.

11. With development and economic reforms, the focus of economic activity has
shifted towards the non-governmental actors, bringing into sharper focus the role
of Government as an enabler.
12. An enabling Government does not try to deliver directly to the citizens
everything that they need. Instead it creates an enabling ethos so that individual
enterprise and creativity can flourish. Government concentrates on supporting and
delivering services to the disadvantaged sections of the society.

13. It is this broad conceptualisation of the Budget that informs my speech today. I
would now begin by presenting a brief overview of the economy.

Overview of the Economy

14. Yesterday, I laid on the table of the House the Economic Survey, which gives a
detailed analysis of the economic situation of the country over the past twelve
months. I intend to highlight only a few salient features that form the backdrop of
this Budget.

15. The fiscal year 2009-10 was a challenging year for the Indian economy. The
significant deceleration in the second half of 2008-09, brought the real GDP
growth down to 6.7 per cent, from an average of over 9 per cent in the preceding
three years. We were among the first few countries in the world to implement a
broad-based counter-cyclic policy package to respond to the negative fallout of the
global slowdown. It included a substantial fiscal expansion along with liberal
monetary policy support.

16. The effectiveness of these policy measures became evident with fast paced
recovery. The economy stabilised in the first quarter of 2009-10 itself, when it
clocked a GDP growth of 6.1 per cent, as against 5.8 per cent in the fourth quarter
of the preceding year. It registered a strong rebound in the second quarter, when
the growth rate rose to 7.9 per cent. With the Advance Estimates placing the likely
growth for 2009-10 at 7.2 per cent, we are indeed vindicated in our policy stand.
The final figure may well turn out to be higher when the third and fourth quarter
GDP estimates for 2009-10 become available.

17. This recovery is very encouraging for it has come about despite a negative
growth in the agriculture sector. More importantly, it is the result of a renewed
momentum in the manufacturing sector and marks the rise of this sector as the
growth driver of the economy. The growth rate in manufacturing in December
2009 was 18.5 per cent— the highest in the past two decades. There are also signs
of a turnaround in the merchandise exports with a positive growth in November
and December 2009 after a decline of about twelve successive months. Export
figures for January are also encouraging. Significant private investment can now
be expected to provide the engine for sustaining a growth of 9 per cent per annum.
With some luck, I hope to breach the 10 per cent mark in not-too-distant a future.

18. A major concern during the second half of 2009-10 has been the emergence of
double digit food inflation. There was a momentum in food prices since the flare-
up of global commodity prices preceding the financial crisis in 2008, but it was
expected that the agriculture season beginning June 2009 would help in moderating
the food inflation. However, the erratic monsoons and drought like conditions in
large parts of the country reinforced the supply side bottlenecks in some of the
essential commodities. This set in motion inflationary expectations. Since
December 2009, there have been indications of these high food prices, together
with the gradual hardening of the fuel product prices, getting transmitted to other
non-food items as well. The inflation data for January seems to have confirmed
this trend.

19. Government is acutely conscious of this situation and has set in motion steps,
in consultation with the State chief ministers, which should bring down the
inflation in the next few months and ensure that there is better management of food
security in the country.

Consolidating growth

20. Managing a complex economy is a difficult task, more so when it is a growing

economy in a globalised world. And yet, choices have to be made and they have to
be well-timed.
21. After successfully managing the effects of the global slowdown, we need to
strengthen the domestic macroeconomic environment to help consolidate the
rebound in growth and sustain it over the medium term. We need to review the
stimulus imparted to the economy and move towards the preferred path of fiscal
consolidation that facilitated the remarkable growth in the pre-crisis five year
period. We need to make growth more broad-based and ensure that supply-demand
imbalances are better managed.

Fiscal Consolidation

22. The success of the fiscal stimulus in supporting domestic demand could be
traced to its composition. The approach of the Government was to increase the
disposable income in the hands of the people by effecting reductions in indirect
taxes and by expanding public expenditure on programmes like the Mahatma
Gandhi National Rural Employment Guarantee Scheme and rural infrastructure.
Now that the recovery has taken root, there is a need to review public spending,
mobilise resources and gear them towards building the productivity of the
economy.

23. In shaping the fiscal policy for 2010-11, I have acted on the recommendations
of the Thirteenth Finance Commission. It has recommended a calibrated exit
strategy from the expansionary fiscal stance of last two years. The Commission has
recommended a capping of the combined debt of the Centre and the States at 68
per cent of the GDP to be achieved by 2014-15.

24. As a part of the fiscal consolidation process, it would be for the first time that
the Government would target an explicit reduction in its domestic public debt-GDP
ratio. I intend to bring out, within six months, a status paper giving a detailed
analysis of the situation and a road map for curtailing the overall public debt. This
would be followed by an annual report on the subject.

Tax reforms
25. I am happy to inform the Honourable Members that the process for building a
simple tax system with minimum exemptions and low rates designed to promote
voluntary compliance, is now nearing completion. On the Direct Tax Code the
wide-ranging discussions with stakeholders have been concluded. I am confident
that the Government will be in a position to implement the Direct Tax Code from
April 1, 2011.

26. On Goods and Services Tax, we have been focusing on generating a wide
consensus on its design. In November, 2009 the Empowered Committee of the
State Finance Ministers placed the first discussion paper on GST in the public
domain. The Thirteenth Finance Commission has also made a number of
significant recommendations relating to GST, which will contribute to the ongoing
discussions. We are actively engaged with the Empowered Committee to finalise
the structure of GST as well as the modalities of its expeditious implementation. It
will be my earnest endeavour to introduce GST along with the DTC in April, 2011.

People's ownership of PSUs

27. While presenting the Budget for 2009-10, I invited people to participate in
Government's disinvestment programme to share in the wealth and prosperity of
the Central Public Sector Undertakings.

28. Since then, ownership has been broad based in Oil India Limited, NHPC,
NTPC and Rural Electrification Corporation while the process is on for National
Mineral Development Corporation and Satluj Jal Vidyut Nigam. The Government
will raise about Rs.25,000 crore during the current year. Through this process, I
propose to raise a higher amount during the year 2010-11. The proceeds will be
utilised to meet the capital expenditure requirements of social sector schemes for
creating new assets.

29. Listing of Central Public Sector Undertakings improves corporate governance,

besides unlocking the value for all stakeholders—the government, the company
and the shareholders. Market capitalization of five companies which have been
listed since October, 2004 has increased by 3.8 times from the book value of
Rs.78,841 crore to Rs.2,98,929 crore.

30. The effective management of public expenditure by bringing it in line with the
Government's objectives is a part of the fiscal consolidation process. This calls for
proper targeting of subsidies and expenditure adjustment.

Fertiliser subsidy

31. I had announced the intent of the Government for the fertiliser sector in my
Budget Speech of 2009. A Nutrient Based Subsidy policy for the fertiliser sector
has since been approved by the Government and will become effective from April
1, 2010. This policy is expected to promote balanced fertilization through new
fortified products and focus on extension services by the fertiliser industry. This
will lead to an increase in agricultural productivity and consequently better returns
for the farmers. Over time, the policy is expected to reduce volatility in the demand
for fertiliser subsidy in addition to containing the subsidy bill. Government will
ensure that nutrient based fertiliser prices for transition year 2010-11, will remain
around MRPs currently prevailing. The new system will move towards direct
transfer of subsidies to the farmers.

Petroleum and Diesel pricing policy

32. In the last Budget, the constitution of an Expert Group, to advise the
Government on a viable and sustainable system of pricing of petroleum products,
was announced. The Group headed by Shri Kirit Parikh has submitted its
recommendations to the Government. Decision on these recommendations will be
taken by my colleague, the Minister of Petroleum & Natural Gas, in due course.

33. I am very happy to inform the Honourable Members that we have not only
adhered to the fiscal roadmap that I had presented as a part of the Budget
documents last year, but we have improved upon it. Except for meeting the
liabilities of the year 2008-09, we have not issued oil or fertiliser bonds. I shall
come to the numbers when I refer to the budget estimates a little later.
Improving Investment Environment
Foreign Direct Investment

34. Foreign Direct Investment (FDI) inflows during the year have been steady in
spite of the decline in global capital flows. India received FDI equity inflows of
US$ 20.9 billion during April-December, 2009 compared to US$ 21.1 billion
during the same period last year.

35. Government has taken a number of steps to simplify the FDI regime to make it
easily comprehensible to foreign investors. For the first time, both ownership and
control have been recognised as central to the FDI policy, and methodology for
calculation of indirect foreign investment in Indian companies has been clearly
defined. A consistent policy on downstream investment has also been formulated.
Another major initiative has been the complete liberalization of pricing and
payment of technology transfer fee, trademark, brand name and royalty payments.
These payments can now be made under the automatic route.

36. Government also intends to make the FDI policy user-friendly by consolidating
all prior regulations and guidelines into one comprehensive document. This would
enhance clarity and predictability of our FDI policy to foreign investors.

Financial Stability and Development Council

37. The financial crisis of 2008-09 has fundamentally changed the structure of
banking and financial markets the world over. With a view to strengthen and
institutionalise the mechanism for maintaining financial stability, Government has
decided to setup an apex-level Financial Stability and Development Council.
Without prejudice to the autonomy of regulators, this Council would monitor
macro prudential supervision of the economy, including the functioning of large
financial conglomerates, and address inter-regulatory coordination issues. It will
also focus on financial literacy and financial inclusion.

Banking Licences
38. The Indian banking system has emerged unscathed from the crisis. We need to
ensure that the banking system grows in size and sophistication to meet the needs
of a modern economy. Besides, there is a need to extend the geographic coverage
of banks and improve access to banking services. In this context, I am happy to
inform the Honourable Members that the RBI is considering giving some
additional banking licenses to private sector players. Non Banking Financial
Companies could also be considered, if they meet the RBI's eligibility criteria.

Public Sector Bank Capitalisation

39. During 2008-09, the Government infused Rs.1900 crore as Tier-I capital in
four public sector banks to maintain a comfortable level of Capital to Risk
Weighted Asset Ratio. An additional sum of Rs.1200 crore is being infused now.
For the year 2010-11, I propose to provide a sum of Rs.16,500 crore to ensure that
the Public Sector Banks are able to attain a minimum 8 per cent Tier-I capital by
March 31, 2011.

Recapitalisation of Regional Rural Banks

40. Regional Rural Banks (RRBs) play an important role in providing credit to
rural economy. The capital of these banks is shared by the Central Government,
sponsor banks and State Governments. The banks were last capitalised in

2006-07. I propose to provide further capital to strengthen the RRBs so that they
have adequate capital base to support increased lending to the rural economy.

Corporate Governance

41. Improvement in corporate governance and regulation is an important part of the

overall investment environment in the country. Government has introduced the
Companies Bill, 2009 in the Parliament, which will replace the existing Companies
Act, 1956. The proposed new bill will address issues related to regulation in
corporate sector in the context of the changing business environment.

Exports
42. Government has provided interest subvention of 2 per cent on pre-shipment
export credit up to March 31, 2010 for exports in certain sectors. I propose to
extend the interest subvention of 2 per cent for one more year for exports covering
handicrafts, carpets, handlooms and small and medium enterprises.

Special Economic Zones (SEZs)

43. The SEZs have attracted significant flows of domestic and foreign investments.
In first three quarters of 2009-10 exports from SEZs recorded a growth of 127 per
cent over the corresponding period last year. Government is committed to ensuring
continued growth of SEZs to draw investments and boost exports and employment.

Agriculture Growth

44. The agriculture sector occupies centre-stage in our resolve to promote inclusive
growth, enhance rural incomes and sustain food security. To spur the growth in this
sector, the Government intends to follow a four-pronged strategy covering (a)
agricultural production; (b) reduction in wastage of produce;

(c) credit support to farmers; and (d) a thrust to the food processing sector.

45. The first element of the strategy is to extend the green revolution to the eastern
region of the country comprising Bihar, Chattisgarh, Jharkhand, Eastern UP, West
Bengal and Orissa, with the active involvement of Gram Sabhas and the farming
families. For the year 2010-11, I propose to provide Rs.400 crore for this initiative.

46. In the 60th year of the Republic, it is proposed to organise 60,000 "pulses and
oil seed villages" in rain-fed areas during 2010-11 and provide an integrated
intervention for water harvesting, watershed management and soil health, to
enhance the productivity of the dry land farming areas. I propose to provide Rs.300
crore for this purpose. This initiative will be an integral part of the Rashtriya Krishi
Vikas Yojana.
47. The gains already made in the green revolution areas have to be sustained
through conservation farming, which involves concurrent attention to soil health,
water conservation and preservation of biodiversity. I propose an allocation of
Rs.200 crore for launching this climate resilient agriculture initiative.

48. The second element of the strategy relates to reduction of significant wastages
in storage as well as in the operations of the existing food supply chains in the
country. This needs to be addressed. As the Prime Minister has said recently, "We
need greater competition and therefore need to take a firm view on opening up of
the retail trade." It will help in bringing down the considerable difference between
the farm gate prices, wholesale prices and retail prices.

49. There is wastage of grain procured for buffer stocks and public distribution
system due to acute shortage of storage capacity in the Food Corporation of India.
This deficit in the storage capacity is met through an ongoing scheme for private
sector participation where the FCI has been hiring godowns from private parties
for a guaranteed period of 5 years. This period is now being extended to 7 years.

50. The third element of the strategy relates to improving the availability of credit
to farmers. I am happy to inform the honourable Members that banks have been
consistently meeting the targets set for agriculture credit flow in the past few years.
For the year 2010-11, the target has been raised to Rs.3,75,000 crore from
Rs.3,25,000 crore in the current year.

51. The Debt Waiver and Debt Relief Scheme for Farmers was a major initiative of
the UPA Government. In view of the recent drought in some States and the severe
floods in some other parts of the country, I propose to extend by six months the
period for repayment of the loan amount by farmers from December 31, 2009 to
June 30, 2010.

52. In the last budget, I had provided an additional one per cent interest subvention
as an incentive to those farmers who repay their short-term crop loans as per
schedule. I propose to raise this subvention for timely repayment of crop loans
from one per cent to two per cent for 2010-11. Thus, the effective rate of interest
for such farmers will now be five per cent per annum. Necessary provision in the
Budget has been made.

53. The fourth element of the strategy aims at lending a further impetus to the
development of food processing sector by providing state-of-the art infrastructure.
In addition to the ten mega food park projects already being set up, the
Government has decided to set up five more such parks.

54. As a part of the farm to market initiative, External Commercial Borrowings

will henceforth be available for cold storage or cold room facility, including for
farm level pre-cooling, for preservation or storage of agricultural and allied
produce, marine products and meat. Changes in the definition of infrastructure
under the ECB policy are being made.

Infrastructure

55. Accelerated development of high quality physical infrastructure, such as roads,

ports, airports and railways is essential to sustain economic growth. While
addressing the policy gaps in this sector, I propose to maintain the thrust for
upgrading infrastructure in both rural and urban areas. In the Budget for 2010-11, I
have provided Rs.1,73,552 crore, which accounts for over 46 per cent of the total
plan allocations, for infrastructure development in the country.

56. To make a visible impact in the road sector, Government has targeted
construction of national highways (NHs) at the pace of 20 km per day. To push the
pace of implementation, changes have been made in the policy framework,
especially in respect of projects being executed through public private partnerships
(PPPs). For the year 2010-11, I propose to raise the allocation of road transport by
over 13 per cent from Rs.17,520 crore to Rs.19,894 crore.

57. Honourable Members have already heard from the Railway Minister about the
large investments required to modernise and expand the network. I have provided
Rs.16,752 crore in the Budget for 2010-11 for Railways to lend her a helping hand.
This is about Rs.950 crore more than last year, when a substantial increase was
made in the budgetary support for Railways.

58. To complement the dedicated freight corridor, the Delhi-Mumbai Industrial

Corridor project has been taken up for integrated regional development.
Preparatory activities have been completed for creation of six industrial investment
nodes with eco-friendly world class infrastructure.

India Infrastructure Finance Company Limited

59. Government established the India Infrastructure Finance Company Limited

(IIFCL) to provide long term financial assistance to infrastructure projects. Its
disbursements are expected to touch Rs.9,000 crore by end March 2010 and reach
around Rs.20,000 crore by March 2011. IIFCL has also been authorised to
refinance bank lending to infrastructure projects. It has refinanced Rs.3,000 crore
during the current year and is expected to more than double that amount in 2010-
11. The take-out financing scheme announced in the last Budget is expected to
initially provide finance for about Rs.25,000 crore in the next three years.

Energy

60. Government accords the highest priority to capacity addition in the power
sector. The framework for induction of super critical technology in large capacity
power plants of National Thermal Power Corporation is now in place. The Mega
Power Policy has been modified and is now consistent with the National Electricity
Policy, 2005 and Tariff Policy, 2006. It will help in lowering the cost of generation
and the cost of power purchased by distribution utilities. I have more than doubled
the plan allocation for power sector from Rs.2,230 crore in 2009-10 to Rs.5,130
crore in 2010-11. This does not include allocations for RGGVY, which is a part of
Bharat Nirman.

61. Coal is the mainstay of India's energy sector and 75 per cent of the power
generation is currently coal based. It is proposed to introduce a competitive bidding
process for allocating coal blocks for captive mining to ensure greater transparency
and increased participation in production from these blocks.

62. Government proposes to take steps to set up a "Coal Regulatory Authority" to

create a level playing field in the coal sector. This would facilitate resolution of
issues like economic pricing of coal and benchmarking of standards of
performance.

63. The Jawaharlal Nehru National Solar Mission envisages establishing India as a
global leader in solar energy. An ambitious target of 20,000 MW of solar power by
the year 2022 has been set under the mission. I propose to increase the plan outlay
for the Ministry of New and Renewable Energy by 61 per cent from Rs.620 crore
in 2009-10 to Rs.1,000 crore in 2010-11.

64. The Ladakh region of Jammu and Kashmir faces an extremely harsh climate
and suffers from energy deficiency. To address this problem, it is proposed to set
up solar, small hydro and micro power projects at a cost of about Rs.500 crore.

Environment and Climate change

65. To ameliorate the negative environmental consequences and increased

pollution levels associated with industrialisation and urbanisation, I propose to take
a number of proactive steps in the Budget 2010-11.

National Clean Energy Fund (NCEF)

66. There are many areas of the country where pollution levels have reached
alarming proportions. While we must ensure that the principle of "polluter pays"
remains the basic guiding criteria for pollution management, we must also give a
positive thrust to development of clean energy. I propose to establish a National
Clean Energy Fund for funding research and innovative projects in clean energy
technologies. I shall outline the mode of funding for this initiative in Part B of my
speech.

Effluent Treatment Plant, Tirupur

67. The textile cluster for knitwear in Tirupur in Tamil Nadu is a major contributor
to the country's hosiery exports. I propose to provide a one-time grant of Rs.200
crore to the Government of Tamil Nadu towards the cost of installation of a zero
liquid discharge system at Tirupur to sustain this industry, which provides
livelihood to lakhs of persons, without undermining the environment.

Special Golden Jubilee Package for Goa

68. I propose to provide a sum of Rs.200 crore as a Special Golden Jubilee package
for Goa to preserve the natural resources of the State by restoring Goa's beaches
which are prone to erosion, and increasing its green cover through sustainable
forestry.

National Ganga River Basin Authority (NGRBA)

69. The "Mission Clean Ganga 2020" under the National Ganga River Basin
Authority (NGRBA) with the objective that no untreated municipal sewage or
industrial effluent will be discharged into the national river has already been
initiated. I propose to double the allocation for NGRBA in 2010-11 to Rs.500
crore.

70. I am happy to inform the Honourable Members that schemes on bank

protection works along river Bhagirathi and river Ganga-Padma in parts of
Murshidabad and Nadia district of West Bengal have been included in the
Centrally Sponsored Flood Management Programme. I also propose to provide
budgetary support for drainage scheme of Kaliaghai-Kapaleswari Baghai basin in
the district of Purba and Paschim Midnapore, and Master Plan of Kandi sub-
division in Murshidabad, West Bengal.

71. Recognising the need for developing an alternate port facility in West Bengal,
it is proposed to develop a project at Sagar Island. Necessary funds will be
provided in due course.

Inclusive development
72. For the UPA Government, inclusive development is an act of faith. In the last
five years, our Government has created entitlements backed by legal guarantees for
an individual's right to information and her right to work. This has been followed-
up with the enactment of the right to education in 2009-10. As the next step, we are
now ready with the draft Food Security Bill which will be placed in the public
domain very soon. To fulfil these commitments the spending on social sector has
been gradually increased to Rs.1,37,674 crore which now stands at 37 per cent of
the total plan outlay in 2010-11. Another 25 per cent of the plan allocations are
devoted to the development of rural infrastructure. With growth and the
opportunities that it generates, we hope to further strengthen the process of
inclusive development.

Education

73. The Right of Children to Free and Compulsory Education Act, 2009 creates a
framework for legal entitlements for all children in the age group of 6 to 14 years
to education of good quality, based on principles of equity and

non-discrimination. In recent years, Sarva Shiksha Abhiyan (SSA) has made

significant contribution in improving enrolment and infrastructure for elementary
education. About 98 per cent of habitations are now covered by primary schools. I
propose to increase the plan allocation for school education from Rs.26,800 crore
in 2009-10 to Rs.31,036 crore in 2010-11. In addition, States will have access to
Rs.3,675 crore for elementary education under the Thirteenth Finance Commission
grants for 2010-11.

Health

74. An Annual Health Survey to prepare the District Health Profile of all Districts
shall be conducted in 2010-11. The findings of the Survey should be of immense
benefit to major public health initiatives particularly the National Rural Health
Mission, which has successfully addressed the gaps in the delivery of critical
health services in rural areas.
75. I propose to increase the plan allocation for the Ministry of Health and Family
Welfare, from Rs.19,534 crore to Rs.22,300 crore for 2010-11.

Financial Inclusion
76. To reach the benefits of banking services to the 'Aam Aadmi', the Reserve
Bank of India had set up a High Level Committee on the Lead Bank Scheme. After
careful assessment of the recommendations of this Committee, and in further
consultation with the RBI, it has been decided to provide appropriate Banking
facilities to habitations having population in excess of 2000 by March, 2012. It is
also proposed to extend insurance and other services to the targeted beneficiaries.
These services will be provided using the Business Correspondent and other
models with appropriate technology back up. By this arrangement, it is proposed to
cover 60,000 habitations.
Financial Inclusion Fund (FIF) and the Financial Inclusion Technology Fund

77. In 2007-08 the Government had set up a Financial Inclusion Fund and a
Financial Inclusion Technology Fund in NABARD, to reach banking services to
the unbanked areas. To give momentum to the pace of financial inclusion, I
propose an augmentation of Rs.100 crore for each of these funds, which shall be
contributed by Government of India, RBI and NABARD.

Rural Development

78. In the words of Mahatma Gandhi "Just as the universe is contained in the self,
so is India contained in the villages". For UPA Government, development of rural
infrastructure remains a high priority area. For the year 2010-11, I propose to
provide Rs.66,100 crore for Rural Development.

79. Mahatma Gandhi National Rural Employment Guarantee Scheme has

completed four years of implementation during which it has been extended to all
districts covering more than 4.5 crore households. The allocation for NREGA has
been stepped up to Rs.40,100 crore in 2010-11. Bharat Nirman has made a
substantial contribution to the upgradation of rural infrastructure through its
various programmes. For the year 2010-11, I propose to allocate an amount of
Rs.48,000 crore for these programmes.

80. Indira Awas Yojana is a popular rural housing scheme for weaker sections.
Taking note of the increase in the cost of construction, I propose to raise the unit
cost under this scheme to Rs.45,000 in the plain areas and to Rs.48,500 in the hilly
areas. For the year 2010-11, the allocation for this scheme is being increased to
Rs.10,000 crore.

81. As a part of the strategy to bridge the infrastructure gap in backward districts of
the country, the Backward Region Grant Fund has proved to be an effective
instrument. I propose to enhance the allocation to this fund by 26 per cent from
Rs.5,800 crore in 2009-10 to Rs.7,300 crore in 2010-11. I have also provided an
additional central assistance of Rs.1,200 crore for drought mitigation in the
Bundelkhand region in the Budget.

Urban Development and Housing

82. "Swarna Jayanti Shahari Rozgar Yojana" designed to provide employment

opportunities in urban areas, has been strengthened with focus on community
participation, skill development and self employment support structures. For the
year 2010-11, I propose to increase the allocation for urban development by more
than 75 per cent from Rs.3,060 crore to Rs.5,400 crore. In addition, the allocation
for Housing and Urban Poverty Alleviation is also being raised from Rs.850 crore
to Rs.1,000 crore in 2010-11.

83. While presenting the Union Budget for the year 2009-10, I had announced a
Scheme of one per cent interest subvention on housing loans up to Rs.10 lakhs
where the cost of the house does not exceed Rs.20 lakhs. I propose to extend this
Scheme up to March 31, 2011. Accordingly, I propose to provide a sum of Rs.700
crore for this Scheme for the year 2010-11.

84. The Rajiv Awas Yojana (RAY) for slum dwellers and urban poor was
announced last year to extend support to States that are willing to provide property
rights to slum dwellers. This scheme is now ready to take off. I propose to allocate
Rs.1,270 crore for 2010-11 as compared to Rs.150 crore last year. This marks an
increase of over 700 per cent. The Government's efforts in the implementation of
RAY would be to encourage the States to create a slum free India at the earliest.

Micro, Small & Medium Enterprises

85. Micro, Small and Medium Enterprises (MSMEs) contribute 8 per cent of the
country's GDP, 45 per cent of the manufactured output and 40 per cent of our
exports. They provide employment to about 6 crore persons through 2.6 crore
enterprises. To resolve a number of issues which affect the growth of this sector,
Prime Minister constituted a High-Level Task Force which held detailed
discussions with all stake holders and drew up an agenda for action. A High Level
Council on Micro and Small Enterprises will monitor the implementation of the
recommendations and the agenda for action. I propose to raise the allocation for
this sector from Rs.1,794 crore to Rs.2,400 crore for the year 2010-11.

86. A loan agreement for US $ 150 million has been signed between the
Government of India and the Asian Development Bank on 22nd December, 2009
for implementing the comprehensive Khadi Reforms Programme. This programme
will cover 300 selected Khadi institutions.

Micro Finance

87. The programme for linking Self Help Groups (SHGs) with the banking system
has emerged as the major micro-finance initiative in the country. It was re-
designated as the 'Micro-Finance Development and Equity Fund' in 2005-06 with a
corpus of Rs.200 crore. The fund corpus is being doubled to Rs.400 crore in 2010-
11.

Unorganised Sector
National Social Security Fund for unorganised sector workers
88. Recognising the need for providing social security to the workers in the
unorganised sector, and as a follow up to the Unorganised Sector Workers Social
Security Act, 2008, it has been decided to set up a National Social Security Fund
for unorganised sector workers with an initial allocation of Rs.1,000 crore. This
fund will support schemes for weavers, toddy tappers, rickshaw pullers, bidi
workers etc.

89. The Government had launched Rashtriya Swasthya Bima Yojana on October 1,
2007 to provide health insurance cover to below poverty line workers and their
families. It became operational on April 1, 2008 and so far more than 1 crore smart
cards have been issued under this scheme. In view of the success of the scheme, it
is now proposed to extend its benefits to all such Mahatma Gandhi NREGA
beneficiaries who have worked for more than 15 days during the preceding
financial year.

90. To encourage the people from the unorganised sector to voluntarily save for
their retirement and to lower the cost of operations of the New Pension Scheme
(NPS) for such subscribers, Government will contribute Rs.1,000 per year to each
NPS account opened in the year 2010-11. This initiative, "Swavalamban" will be
available for persons who join NPS, with a minimum contribution of Rs.1,000 and
a maximum contribution of Rs.12,000 per annum during the financial year 2010-
11. The scheme will be available for another three years. Accordingly, I am
making an allocation of Rs.100 crore for the year 2010-11. It will benefit about 10
lakh NPS subscribers of the unorganised sector. The scheme will be managed by
the interim Pension Fund Regulatory and Development Authority.

91. I also appeal to the State Governments to contribute a similar amount to the
scheme and participate in providing social security to the vulnerable sections of the
society.

Skill development
92. Prime Minister's Council on National Skill Development has laid down the
core governing principles for operating strategies for skill development. The
Council has a mission of creating 50 crore skilled people by 2022. Of these, the
target for the National Skill Development Corporation, which has started
functioning from October, 2009, is 15 crore. It has completed a comprehensive
skill gap study of 21 high growth sectors and approved three projects worth about
Rs.45 crore to create 10 lakh skilled manpower at the rate of one lakh per annum.
Other projects are in advanced stages of consideration.

93. It is proposed to launch an extensive skill development programme in the

textile and garment sector by leveraging the strength of existing institutions and
instruments of the Textile Ministry. The resources of the private sector will also be
harnessed by incentivising training through an outcome - based approach. Through
these instruments, the Ministry of Textiles has set an ambitious target of training
30 lakh persons over 5 years.

Social Welfare

94. I propose to step up the plan outlay for Women and Child Development by
almost 50 per cent. Several new initiatives that were launched in 2009-10 are now
ready for implementation. A mission for empowerment of women is being set up.
The ICDS platform is being expanded for effective implementation of the Rajiv
Gandhi Scheme for Adolescent Girls.

95. To further improve female literacy rate, the Government has recast the earlier
National Literacy Mission as a new programme "Saakshar Bharat". It was launched
in September, 2009 with a target of 7 crore non-literate adults which includes 6
crore women.

96. A Mahila Kisan Sashaktikaran Pariyojana to meet the specific needs of women
farmers is being launched. I have provided Rs.100 crore for this initiative as a sub-
component of the National Rural Livelihood Mission.
97. I am happy to inform the Honourable Members that I propose to enhance the
plan outlay of the Ministry of Social Justice and Empowerment to Rs.4500 crore.
This amounts to an increase of 80 per cent as compared to 2009-10. This will
support the programmes being implemented for the target population groups
covering the Scheduled Castes, Other Backward Classes, persons with disabilities,
senior citizens and victims of alcoholism and substance abuse. With this
enhancement, the Ministry will be able to revise rates of scholarship under its post-
matric scholarship schemes for SCs and OBC students, which is long overdue.

98. The allocation will also assist in establishing an Indian Sign Language
Research and Training Centre for the benefit of the hearing impaired. District
Disability Rehabilitation Centres are being set up in 50 additional districts along
with two composite regional centres for persons with disabilities.

99. I also propose to raise the plan allocation for the Ministry of Minority Affairs
from Rs.1,740 crore to Rs.2,600 crore for the year 2010-11. This marks an increase
of nearly 50 per cent. I am happy to inform the Honourable Members that we are
close to achieving the target of 15 per cent priority sector lending to minorities in
the current year. This will be maintained for the next three years.

Strengthening transparency and public accountabilty

100. The UPA Government has made a serious attempt to create an environment
that supports transparency and accountability in the working of the public
institutions in the country. As Honourable Members are aware, a number of
legislative and administrative measures have been taken in this regard.

Financial Sector Legislative Reforms Commission

101. Most of our legislations governing the financial sector are very old. Large
number of amendments to these Acts made at different points of time has also
increased ambiguity and complexity. The Government proposes to set up a
Financial Sector Legislative Reforms Commission to rewrite and clean up the
financial sector laws to bring them in line with the requirements of the sector.
Administrative Reforms Commission

102. The Administrative Reforms Commission constituted by the UPA

Government in its first term has submitted 15 reports, of which 10 reports have
been examined by the Government. Out of the 800 identified recommendations for
implementation so far, 350 recommendations have been implemented and 450 are
under implementation.

Unique Identification Authority of India (UIDAI)

103. In my last Budget Speech, I had announced the constitution of the Unique
Identification Authority of India, its broad working principles and the timelines for
delivery of the first UID numbers. I am happy to report that the Authority has been
constituted and it will be able to meet its commitments of issuing the first set of
UID numbers in the coming year. It would provide an effective platform for
financial inclusion and targeted subsidy payments. Since the UIDAI will now get
into the operational phase, I am allocating Rs.1,900 crore to the Authority for
2010-11.

Technology Advisory Group for Unique Projects (TAGUP)

104. An effective tax administration and financial governance system calls for
creation of IT projects which are reliable, secure and efficient. IT projects like Tax
Information Network, New Pension Scheme, National Treasury Management
Agency, Expenditure Information Network, Goods and Service Tax, are in
different stages of roll out. To look into various technological and systemic issues,
I propose to set up a Technology Advisory Group for Unique Projects under the
Chairmanship of Shri Nandan Nilekani.

Independent Evaluation Office (IEO)

105. The Government had announced the setting-up of an Independent Evaluation

Office to undertake impartial and objective assessments of the various public
programmes and improve the effectiveness of the public interventions. It has been
decided that it would be an independent entity under a Governing board chaired by
the Deputy Chairman, Planning Commission. The IEO would evaluate the impact
of flagship programmes and place the findings in the public domain. It would be
funded by the Planning Commission.

Symbol for Indian Rupee

106. In the ensuing year, we intend to formalise a symbol for the Indian Rupee,
which reflects and captures the Indian ethos and culture. With this, Indian Rupee
will join the select club of currencies such as the US Dollar, British Pound
Sterling, Euro and Japanese Yen that have a clear distinguishing identity.

Security and Justice

107. Secure borders and security of life and property fosters development. I
propose to increase the allocation for Defence to Rs.1,47,344 crore. This would
include Rs.60,000 crore for capital expenditure. Needless to say, any additional
requirement for the security of the nation will be provided for.

108. In 2009-10, the overall internal security and law and order situation in the
country remained largely under control. Several new measures were taken by the
Government to strengthen the security apparatus of the country. These include
operationalisation of the National Investigation Agency (NIA), establishment of
four NSG Hubs, augmentation of the Intelligence Bureau and its Multi-Agency
Centre.

109. There was decline in violence in Jammu and Kashmir in the year 2009. We
have taken a number of confidence building measures. As one more such measure,
Government proposes to recruit about 2,000 youth as constables in five Central
Para Military Forces in the year 2010.

110. To address the development problems of the thirty three left wing extremism
affected districts, a Task Force headed by the Cabinet Secretary was formed for
promoting coordinated efforts across a range of development and security
measures. It has been decided that Planning Commission will prepare an integrated
action plan for the affected areas. Adequate funds will be made available to
support the action plan. I appeal to the misguided elements to eschew violence and
join the development process.

National Mission for Delivery of Justice and Legal Reforms

111. To provide timely delivery of justice to all, the Government has approved the
setting up of the National Mission for Delivery of Justice and Legal Reforms. The
objective of the mission is to help reduce legal backlog in courts from an average
of 15 years at present to 3 years by 2012. It would also help in improving the legal
environment for business. The Thirteenth Finance Commission has provided grants
amounting to Rs.5,000 crore for the States to improve the delivery of justice,
including strengthening of alternate dispute resolution mechanisms.

Budget Estimates 2010-11

I now turn to the Budget Estimates for 2010-11.

112. The Gross Tax Receipts are estimated at Rs.7,46,651 crore. The Non Tax
Revenue Receipts are estimated at Rs.1,48,118 crore. The net tax revenue to the
Centre as well as the expenditure provisions in 2010-11 have been estimated with
reference to the recommendations of the Thirteenth Finance Commission.

113. The total expenditure proposed in the Budget Estimates for 2010-11 is
Rs.11,08,749 crore, which is an increase of 8.6 per cent over the total expenditure
in BE 2009-10. The Plan and Non Plan expenditures in BE 2010-11 are estimated
at Rs.3,73,092 crore and Rs.7,35,657 crore, respectively. While there is a 15 per
cent increase in Plan expenditure, the increase in Non Plan expenditure is only 6
per cent over the BE of previous year. With this level of Plan expenditure, I am
confident that the total Plan expenditure would be very close to 100 per cent of the
expenditure envisaged in the Eleventh Five Year Plan.
114. Honourable Members will agree that fiscal policy has to be guided by the
required framework for fiscal prudence. In the Medium Term Fiscal Policy
Statement presented along with Budget 2009-10, I had laid down a road map for
fiscal deficit. I am happy to report that in keeping with my commitment, I have
been able to present the Budget for 2010-11 with a fiscal deficit of 5.5 per cent. In
the Medium Term Fiscal Policy Statement being presented to the House today,
along with other Budget documents, the rolling targets for fiscal deficit are pegged
at 4.8 per cent and 4.1 per cent for 2011-12 and 2012-13, respectively. These
projections improve upon the recommendations of the Thirteenth Finance
Commission.

115. While presenting the Budget for 2009-10, I had expressed my concern about
the high level of fiscal deficit. I had also stated that the Government will address
this issue in right earnest to come back to the path of fiscal consolidation at the
earliest. I am happy to report that against a fiscal deficit of 7.8 per cent in 2008-09,
inclusive of oil and fertiliser bonds, the comparable fiscal deficit is 6.9 per cent as
per the Revised Estimates for 2009-10. Both these deficit figures are based on the
revised GDP numbers published by the Central Statistical Organisation and include
what were earlier referred to as below the line items. This marks an improvement
of about one per cent in fiscal deficit during the current year. I have made a
conscious effort to avoid issuing bonds to oil and fertiliser companies. I would like
to continue with this practice of extending Government subsidy in cash, thereby
bringing all subsidy related liabilities into our fiscal accounting.

116.The fiscal deficit of 5.5 per cent of GDP in 2010-11 works out to Rs.3,81,408
crore. Taking into account the various other financing items for fiscal deficit, the
actual net market borrowing of the Government in 2010-11 would be of the order
of Rs.3,45,010 crore. There will be enough space to meet the credit needs of the
private sector. The Government will plan the borrowing programme in consultation
with the RBI.

PART - B
Madam Speaker,

I shall now present my tax proposals.

117. While formulating them, I have been guided by the principles of sound tax
administration as embodied in the following words of Kautilya:

"Thus, a wise Collector General shall conduct the work of revenue collection.... in
a manner that production and consumption should not be injuriously affected....
financial prosperity depends on public prosperity, abundance of harvest and
prosperity of commerce among other things."

118. I had stated last year that tax reform is a process and not an event. The process
I had outlined in the area of direct taxes was to release a draft Direct Taxes Code
along with a Discussion Paper. In the area of indirect taxes, the reform initiative
was the introduction of a Goods and Services Tax. I have presented the
developments in both reform initiatives in Part 'A' of my Speech.

119. We have continued on the path of computerisation in core areas of service

delivery in the administration of direct taxes. This will reduce the physical
interface between taxpayers and tax administration and speed up procedures and
processes. The Centralised Processing Centre at Bengaluru is now fully functional
and is processing around 20,000 returns daily. This initiative will be taken forward
by setting up two more Centres during the year.

120. As a part of Government's initiative to move towards citizen centric

governance, the income tax department has introduced "Sevottam", a pilot project
at Pune, Kochi and Chandigarh through Aayakar Seva Kendras. These provide a
single window system for registration of all applications including those for
redressal of grievances as well as paper returns. This year the scheme will be
extended to four more cities.

121. To achieve the roll-out of GST by April 2011, the indirect tax administrations
at the Centre and the States need to revamp their internal work processes based on
the use of Information Technology. I am happy to inform Honorable Members that
project ACES - Automation of Central Excise & Service Tax, has already been
rolled out throughout the country this year. This will impart greater transparency in
tax administration and improve the delivery of taxpayer services. Similarly, a
Mission Mode Project for computerisation of Commercial Taxes in States has been
approved recently. With an outlay of Rs.1133 crore of which the Centre's share is
Rs.800 crore, the project will lay the foundation for the launch of GST.

122. I mentioned last year, that the income tax return forms should be simple and
user friendly. The income tax department is now ready to notify SARAL-II form
for individual salaried taxpayers for the coming assessment year. This form will
enable individuals to enter relevant details in a simple format in only two pages.

123. To expeditiously resolve disputes with taxpayers I propose to expand the

scope of cases which may be admitted by the Settlement Commission to include
proceedings related to search and seizure cases pending for assessment. I also
propose to expand the scope of Settlement Commission in respect of Central
Excise and Customs so that certain categories of cases that hitherto fell outside its
jurisdiction may be admitted.

124. Last year, amendments to the statute enabled Government to enter into tax
treaties with specified territories besides sovereign states. We have commenced bi-
lateral discussions to enhance the exchange of bank related and other information
to effectively track tax evasion and identify undisclosed assets of resident Indians
lying abroad.

Direct Taxes

I shall now deal with direct taxes.

125. Last year I provided relief to individual taxpayers by enhancing the exemption
limit for all taxpayers and withdrawing the surcharge on personal income tax.
Taxpayers have responded positively to these concessions by contributing a higher
level of taxes. There is a persuasive case for further relief by broadening the
current tax slabs which I propose as follows:

Income upto Rs.1.6 lakh Nil

Income above Rs.1.6 lakh and upto Rs.5 lakh10 per cent

Income above Rs.5 lakh and upto Rs.8 lakh 20 per cent

Income above Rs.8 lakh30 per cent

126. The proposed broadening of tax slabs will provide substantial relief to a large
number of taxpayers.

127. To promote savings as well as to ensure their utilisation for the thrust area of
infrastructure, I propose to allow a deduction of an additional amount of Rs.20,000
for investment in long-term infrastructure bonds as notified by the Central
Government. This would be over and above the existing limit of Rs.1 lakh on tax
savings. I am sure that these reliefs will put more money in the hands of individual
taxpayers for both consumption as well as saving.

128. Besides contributions to health insurance schemes which is currently allowed

as a deduction under the Income-tax Act, I propose to allow contributions to the
Central Government Health Scheme also as a deduction under the same provision.

129. Taking forward my initiative of phasing out surcharge, I propose to reduce the
current surcharge of 10 per cent on domestic companies to 7.5 per cent. At the
same time, I propose to increase the rate of Minimum Alternate Tax (MAT) from
the current rate of 15 per cent to 18 per cent of book profits. This will further
promote inter-se equity among corporate taxpayers.

130. The President, in her address to the Parliament in June 2009, had declared this
decade as the Decade of Innovation. Last year, I extended the scope of weighted
deduction on expenditure incurred on in-house research and development (R&D)
to all manufacturing businesses except for a small negative list. To further
encourage R&D across all sectors of the economy, I now propose to enhance the
weighted deduction on expenditure incurred on in-house R&D from 150 per cent
to 200 per cent. I also propose to enhance the weighted deduction on payments
made to National Laboratories, research associations, colleges, universities and
other institutions, for scientific research from 125 per cent to 175 per cent.

131. Currently, any payment made to an approved scientific research association is

eligible for weighted deduction. The income of the approved scientific research
association is exempt from tax. I propose that payments made to approved
associations engaged in research in social sciences or statistical research would be
allowed a weighted deduction of 125 per cent. The income of such approved
research associations shall be exempt from tax.

132. In my Budget Speech last year, I stated that profit linked deductions are
inherently inefficient and liable to misuse. To incentivise businesses in priority
sectors, I introduced investment linked deduction as an alternative to profit linked
deduction. To give a boost to investment in the tourism sector which has high
employment potential, I propose to extend the benefit of investment linked
deduction under the Act to new hotels of two-star category and above anywhere in
India.

133. To provide one time interim relief to the housing and real estate sector which
was impacted by the global recession, I propose to allow pending projects to be
completed within a period of five years instead of four years for claiming a
deduction on their profits. I also propose to relax the norms for built-up area of
shops and other commercial establishments in housing projects to enable basic
facilities for their residents.

134. All businesses with a turnover exceeding Rs.40 lakh are currently required to
have their accounts audited. A similar provision also applies to all professions
whose receipts exceed Rs.10 lakh. I, as Finance Minister, had introduced these
limits in my budget of 1984. It is high time to reduce the compliance burden on
small taxpayers. I, therefore, propose to enhance these limits to Rs.60 lakh in the
case of businesses and Rs.15 lakh in the case of professions.

135. To facilitate the business operations of small taxpayers, I had extended the
scope of presumptive taxation to all small businesses with a turnover of up to
Rs.40 lakh. To further reduce the compliance burden on small taxpayers, I now
propose to enhance this limit to Rs.60 lakh.

136. The threshold limits of payments below which tax is not deductible at source
have remained unchanged for a long time. I propose to rationalise these thresholds.

137. Relaxing the current provisions on disallowance of expenditure, I propose to

allow deduction of such expenditure, if tax has been deducted at any time during
the financial year and paid before the due date of filing the return. This will allow
most deductors additional time up to September of the next financial year. At the
same time, I propose to increase the interest charged on tax deducted but not
deposited by the specified date, from 12 per cent to 18 per cent per annum.

138. Last year, I had provided for the taxation of the newly introduced Limited
Liability Partnership (LLP) on the same lines as exists for a general partnership
firm. To facilitate the conversion of small companies into LLPs, I propose that this
will not be subject to capital gains tax.

139. Under the current provisions of the Act, "the advancement of any other object
of general public utility" cannot be considered as "charitable purpose" if it involves
carrying on of any activity in the nature of trade, commerce or business. I have
received representations from many organisations seeking some relaxation in this
restriction. I propose that this restriction would not be applicable if the receipts
from such activities do not exceed Rs.10 lakh in the year.

140. My proposals on direct taxes are estimated to result in a revenue loss of

Rs.26,000 crore for the year.

Indirect Taxes
141. The major objectives that have guided me in the formulation of my proposals
on indirect taxes are the need to achieve some degree of fiscal consolidation
without impairing the recovery process and moving forward on the road to GST.

142. Unlike the time I presented the last Budget, symptoms of economic recovery
are more widespread and clear-cut now. The three fiscal stimulus packages that the
Government introduced in quick succession have helped the process of recovery
significantly. The improvement in our economic performance encourages a course
of fiscal correction even as the global situation warrants caution. Therefore, I
propose to partially roll back the rate reduction in Central Excise duties and
enhance the standard rate on all non-petroleum products from 8 per cent to 10 per
cent ad valorem. The specific rates of duty applicable to portland cement and
cement clinker are also being adjusted upwards proportionately. Similarly, the ad
valorem component of excise duty on large cars, multi-utility vehicles and sports-
utility vehicles which was reduced as part of the first stimulus package, is being
increased by 2 percentage points to 22 per cent.

143. In the wake of spiralling petroleum prices, Government provided full

exemption from basic customs duty to crude petroleum and proportionately
reduced the basic duty on refined petroleum products in June, 2008. Compared to
the international price of the Indian crude basket of US$ 112 per barrel at that time,
the prices are much softer at present. In view of the pressing need to move back to
a fiscal consolidation path, I propose to restore the basic duty of 5 per cent on
crude petroleum; 7.5 per cent on diesel and petrol and 10 per cent on other refined
products. I also propose to enhance the Central Excise duty on petrol and diesel by
Re.1 per litre each.

144. Since I quit smoking many years ago, I would urge others to also follow suit,
as smoking is injurious to health. To this end, I am making some structural changes
in the excise duty on cigarettes, cigars and cigarillos coupled with some increase in
rates. I also propose to enhance excise duty on all non-smoking tobacco such as
scented tobacco, snuff, chewing tobacco etc. In addition, I propose to introduce a
compounded levy scheme for chewing tobacco and branded unmanufactured
tobacco based on the capacity of pouch packing machines.

145. Let me now turn to some much-needed incentives in thrust areas for
sustainable growth and development.

Agriculture & Related Sectors

146. In supporting the strategy outlined for development of agriculture earlier in

my speech, I propose to address a few key areas that call for focused attention.
These are:

(i)A strong supply chain for perishable farm produce to reach consumption and
processing centres promptly;

(ii) Infrastructure and technology to convert such produce into value-added

products; and

(iii)Infusion of technology to augment agricultural production.

147. Similar attention needs to be paid to related sectors such as apiary,

horticulture, dairy, poultry, meat, marine and aquaculture.

148. For achieving these objectives, I propose to provide:

• project import status with a concessional import duty of 5 per cent for the setting
up of mechanised handling systems and pallet racking systems in 'mandis' or
warehouses for food grains and sugar as well as full exemption from service tax for
the installation and commissioning of such equipment.

• project import status at a concessional customs duty of 5 per cent with full
exemption from service tax to the initial setting up and expansion of

» Cold storage, cold room including farm pre-coolers for preservation or storage of
agriculture and related sectors produce ; and
» Processing units for such produce.

• full exemption from customs duty to refrigeration units required for the
manufacture of refrigerated vans or trucks.

149. I also propose to provide:

• concessional customs duty of 5 per cent to specified agricultural machinery not

manufactured in India;

• central excise exemption to specified equipment for preservation, storage and

processing of agriculture and related sectors and exemption from service tax to the
storage and warehousing of their produce; and

• full exemption from excise duty to trailers and semi-trailers used in agriculture.

150. Concessional import duty was provided to specified machinery for use in the
plantation sector in the year 2003. This exemption is to lapse in July 2010. The
modernization of this labour-intensive sector is yet to reach the expected level. I
propose therefore, to extend it up to March 31, 2011 along with a CVD exemption.
I hope this will provide sufficient time for the sector to achieve the desired
objective.

151. One of the prerequisites for agricultural productivity is access to good quality
and disease-resistant seeds. I propose to exempt the testing and certification of
agricultural seeds from service tax.

152. I also propose to exempt the transportation by road of cereals and pulses from
service tax. Their transportation by rail would remain exempt.

153. I propose two measures under the Central Excise law to ease the cash flow
position for small-scale manufacturers hard hit by the economic slowdown. First,
they would be permitted to take full credit of Central Excise duty paid on capital
goods in a single installment in the year of their receipt. Secondly, they would be
permitted to pay Central Excise duty on a quarterly, rather than monthly basis.
These measures that come into effect on the April 1, 2010 should provide them
considerable relief.

Environment

154. Harnessing renewable energy sources to reduce dependence on fossil fuels is

now recognised as a credible strategy for combating global warming and climate
change. To build the corpus of the National Clean Energy Fund announced earlier,
I propose to levy a clean energy cess on coal produced in India at a nominal rate of
Rs.50 per tonne. This cess will also apply to imported coal.

155. In pursuance of Government's resolve to implement the National Solar

Mission, I propose to provide a concessional customs duty of 5 per cent to
machinery, instruments, equipment and appliances etc. required for the initial
setting up of photovoltaic and solar thermal power generating units. I also propose
to exempt them from Central Excise duty. Similarly, ground source heat pumps
used to tap geo-thermal energy would be exempt from basic customs duty and
special additional duty.

156. Wind energy has shown promising growth in the country in recent years. As a
measure of further relief, I propose to exempt a few more specified inputs required
for the manufacture of rotor blades for wind energy generators from Central Excise
duty.

157. LED lights are staging a debut as a highly energy-efficient source of lighting
for streets, homes and offices. Central Excise duty on these is being reduced from
8 per cent to 4 per cent at par with Compact Fluorescent Lamps.

158. Full exemption from Central Excise duty was provided to electric cars and
vehicles that offer an eco-friendly alternative to petrol or diesel vehicles. The
manufacturers of such vehicles have expressed difficulty in neutralising the duty
paid on their inputs and components. I propose to remedy this by imposing a
nominal duty of 4 per cent on such vehicles. I also propose to exempt some critical
parts or sub-assemblies of such vehicles from basic customs duty and special
additional duty subject to actual user condition. These parts would also enjoy a
concessional CVD of 4 per cent.

159. The humble cycle rickshaw is now being acclaimed as an environment-

friendly means of transport. CSIR has developed an innovative product called
'soleckshaw' to replace manually-operated rickshaws. It runs on batteries which are
charged by solar power. I propose to provide a concessional excise duty of 4 per
cent to this product. Its key parts and components are also being exempted from
customs duty.

160. To encourage the use of bio-degradable materials, I propose to exempt the

import of compostable polymer from basic customs duty.

Infrastructure

161. Strengthening the public transport system is another means of reducing

dependence on fossil fuels. I propose to grant project import status to 'Monorail
projects for urban transport' at a concessional basic duty of 5 per cent.

162. Full exemption from import duty is available to specified machinery for road
construction projects on the condition that the machinery shall not be sold or
disposed of for a minimum period of five years. In view of representations that this
leads to idling of machinery, I propose to allow resale of such machinery on
payment of import duty at depreciated value. It is also being clarified that the
importer is free to relocate such machinery to other eligible road construction
projects.

163. With the subscriber base growing at 14 million per month, India is one of the
fastest growing markets for mobile phone connections in the world. Domestic
production of mobile phones is now picking up in view of exemptions from basic,
CVD and special additional duties granted to their parts, components and
accessories. To encourage the domestic manufacture of accessories, these
exemptions are now being extended to parts of battery chargers and hands-free
headphones. Also, the validity of the exemption from special additional duty is
being extended till March 31, 2011.

Medical Sector

164. Medical equipment, instruments and appliances are subjected to a very

complex import duty regime based on several long lists that describe individual
items. Multiple rates coupled with descriptions not aligned with tariff lines, result
in disputes and at times prevent state-of-art equipment from getting the benefit of
exemption. I propose to prescribe a uniform, concessional basic duty of 5 per cent,
CVD of 4 per cent with full exemption from special additional duty on all medical
equipment. A concessional basic duty of 5 per cent is being prescribed on parts and
accessories for the manufacture of such equipment while they would be exempt
from CVD and special additional duty. Full exemption currently available to
medical equipment and devices such as assistive devices, rehabilitation aids etc. is
being retained. The concession available to Government hospitals or hospitals set
up under a statute is also being retained.

165. The manufacturers of orthopaedic implants have represented that their inputs
attract a higher rate of duty than the finished product. I propose to exempt specified
inputs for the manufacture of such implants from import duty.

Infotainment

166. India is a nation of movie-goers. The film industry has been experiencing
difficulties in importing digital masters of films for duplication or distribution
loaded on electronic medium vis-a-vis those imported on cinematographic film,
owing to a differential customs duty structure. I propose to rationalise this by
charging customs duty only on the value of the carrier medium. The same
dispensation would apply to music and gaming software imported for duplication.
In keeping with the tradition of Indian cinema, however, I shall provide a surprise
ending. In all such cases the value representing the transfer of intellectual rights
would be subjected to service tax.
167. Cable transmission of infotainment is undergoing a transformation with the
adoption of digital technology. The multi-service operators need to invest in
"Digital Head End" equipment. To enable this, I propose to provide project import
status at a concessional customs duty of 5 per cent with full exemption from
special additional duty to the initial setting up of such projects.

Precious Metals

168. The prices of precious metals continue to rise. Since the customs duty is
levied on these at specific rates, I propose to index the rates as follows:

• On gold and platinum from Rs.200 per 10 grams to Rs.300 per 10 grams.

• On silver from Rs.1,000 per kg to Rs.1,500 per kg.

169. Gems and jewellery is a traditional item in our export basket. Rhodium - a
precious metal used for polishing jewellery attracts a basic customs duty of 10 per
cent. This is being reduced to 2 per cent.

170. To encourage domestic refining capacity for gold, I propose to reduce the
basic customs duty on gold ore and concentrates from 2 per cent ad valorem to a
specific duty of Rs.140 per 10 grams of gold content with full exemption from
special additional duty. Further, the excise duty on refined gold made from such
ore or concentrate is being reduced from 8 per cent to a specific duty of Rs.280 per
10 grams.

Other Proposals

171. Full exemption from import duty is available to specified inputs or raw
materials required for the manufacture of sports goods which are assuming
importance as an item of export. This is being expanded to cover a few more items.

172. In order to incentivise the domestic production of microwave ovens, I propose

to reduce the basic customs duty on one of its key components, namely magnetrons
from 10 per cent to 5 per cent.
173. Presently, there is a value limit of Rs.1 lakh per annum on duty-free import of
commercial samples as personal baggage. I propose to enhance this limit to Rs.3
lakh per annum.

174. Industry has represented that the exemption from special additional duty of 4
per cent based on refunds leads to substantial blockage of funds. To ease this
difficulty, I propose to provide an outright exemption from special additional duty
to goods imported in a pre-packaged form for retail sale. This would also cover
mobile phones, watches and ready-made garments even when they are not
imported in pre-packaged form. The refund-based exemption is also being retained
for cases not covered by the new dispensation.

175. Toy balloons are a source of joy to millions of children. To bring a smile to
their mothers' faces, I propose to fully exempt them from Central Excise duty.

176. Some of the other relief measures that I propose are as under:

• Reduction in basic customs duty on long pepper from 70 per cent to 30 per cent;

• Reduction in basic customs duty on asafoetida from 30 per cent to 20 per cent;

• Reduction in central excise duty on replaceable kits for household type water
filters other than those based on RO technology to 4 per cent;

• Reduction in central excise duty on corrugated boxes and cartons from 8 per cent
to 4 per cent;

• Reduction in central excise duty on latex rubber thread from 8 per cent to 4 per
cent; and

• Reduction in excise duty on goods covered under the Medicinal and Toilet
Preparations Act from 16 per cent to 10 per cent.
177. My proposals relating to customs and central excise are estimated to result in
a net revenue gain of Rs.43,500 crore for the year.

Service Tax

178. The service sector contributes nearly 60 per cent of the GDP. The service tax
to GDP ratio however, is only around 1 per cent. This sector thus, has significant
potential to augment revenue.

179. To bridge this gap, I had the option to raise the rate of service tax to 12 per
cent as it was before I introduced the third stimulus package. I am not resorting to
this option to maintain the growth momentum and also to bring about a
convergence in the rates of tax on goods and services. I, therefore, propose to
retain the rate of tax on services at 10 per cent to pave the way forward for GST.

180. I had another option - to bring all services under service tax. I am not opting
for this either at this stage. I propose, however, to bring certain services, hitherto
untaxed, within the purview of the service tax levy. These are being notified
separately.

181. I am also proposing certain legislative changes to plug revenue leakages, to

remove distortions and to clarify certain doubts that have arisen over a period of
time. I do not want to waste the precious time of the House elaborating the details,
as they are available in the Finance Bill and other Budget documents.

182. Export of services, especially in the area of Information Technology and

Business Process Outsourcing, generates substantial employment and brings in
foreign exchange. I propose to ease the process of refund of accumulated credit to
exporters of services by making necessary changes in the definition of export of
services and procedures.

183. Accredited news agencies which provide news feed online attract service tax.
Acknowledging the yeoman services of such news agencies in disseminating news,
I propose to exempt such news agencies that meet certain criteria, from service tax.
184. My proposals relating to service tax are estimated to result in a net revenue
gain of Rs.3,000 crore for the year.

185. Copies of notifications giving effect to the changes in customs, central excise
and service tax will be laid on the Table of the House in due course.

186. My proposals on Direct Taxes are estimated to result in a revenue loss of

Rs.26,000 crore for the year. Proposals relating to Indirect Taxes are estimated to
result in a net revenue gain of Rs.46,500 crore for the year. Taking into account the
concessions being given in my tax proposals and measures taken to mobilise
additional resources, the net revenue gain is estimated to be Rs.20,500 crore for the
year.

187. We have emerged from the global slowdown faster than any other nation. I
did not hesitate in exercising my judgement on the course of action last year and I
have no hesitation in my mind now. Our actions today will determine our
tomorrow.

188. This Budget belongs to Aam Aadmi. It belongs to the farmer, the agriculturist,
the entrepreneur and the investor. The opportunity is great. The time is right. I have
placed my faith in the hands of the people who, I know, can be depended upon to
rise to any occasion in national interest. I have placed my faith in the collective
conscience of the nation that can be touched to scale undreamt of heights in the
coming years.

189. Madam Speaker, with these words I commend the Budget to the House.
SPEECH OF SHREE PRANAB MUKHERJEE, MINISTER OF FINANCE INTRODUCING THE
BUDGET FOR THE YEAR 2009-2010

I rise to present the Budget for 2009-10.

2. Just 140 days back, I had the privilege to present the Interim Budget for 2009-10. It is a rare
honour that I have been called upon to present the regular budget after the new Government assumed
office.

3. The Congress-led UPA Government has come back to power with a renewed mandate. As Prime
Minister, Dr. Manmohan Singh, said recently “It is a mandate for continuity, stability and prosperity. It is
a mandate for inclusive growth and equitable development.” It is a mandate that we accept with humility
and a firm resolve to do all that we can for the welfare of this nation.

4. I am deeply conscious of the faith reposed by the people in our government and the
responsibilities that come with it. I am sensitive to the great challenge of rising expectations of a young
India . It reflects a population that is restless, yet engaged and is ready to seize the opportunities that it is
presented with. There are new and powerful reasons for us to create, facilitate and sustain those
opportunities.

5. In the Interim Budget for 2009-10, I had stated that the new Government would need to anchor its
policies for 2009-10, in a medium term perspective that would have to:
(a) sustain a growth rate of at least 9 per cent per annum over an extended period of time;
(b) strengthen the mechanisms for inclusive growth for creating about 12 million new work
opportunities per year;
(c) reduce the proportion of people living below poverty line to less than half from current
levels by 2014;
(d) ensure that Indian agriculture continues to grow at an annual rate of 4 per cent;
(e) increase the investment in infrastructure to more than 9 per cent of GDP by 2014;
(f) support Indian industry to meet the challenge of global competition and sustain the growth
momentum in exports;
(g) strengthen and improve the economic regulatory framework in the country;
(h) expand the range and reach of social safety nets by providing direct assistance to
vulnerable sections;
(i) strengthen the delivery mechanism for primary health care facilities with a view to
improve the preventive and curative health care in the country;
(j) create a competitive, progressive and well regulated education system of global standards
that meets the aspiration of all segments of the society; and
(k) move towards providing energy security by pursuing an Integrated Energy Policy.
6. The Government recognizes the challenges that this task entails, particularly at a time when the
world is still struggling with an unprecedented financial crisis and an economic slowdown that has also
affected India . While we are determined to convert our words into deeds, Members would appreciate that
a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do
so. Yet, it is an important means to share the vision of the Government, particularly as we begin a new
term. I propose to do just that for the next hour or so, as I dwell on the challenges and outline the
approach of the government in the short term and medium term perspectives.

7. The first challenge is to lead the economy back to the high GDP growth rate of 9 per cent per
annum at the earliest. Growth of income is important in itself, but it is as important for the resources that
it brings in. These resources provide us with the means to bridge the critical gaps that remain in our
development efforts, particularly with regard to the welfare of the vulnerable segments of our population.

8. The second challenge is to deepen and broaden the agenda for inclusive development; and to
ensure that no individual, community or region is denied the opportunity to participate in and benefit from
the development process.

9. The third challenge is to re-energize government and improve delivery mechanisms. Our
institutions must provide high quality public services, security and the rule of law to all citizens with
transparency and accountability.
Overview of the Economy

10. Madam Speaker, at the time of the presentation of the Interim Budget, I had given a detailed
analysis of the economic situation. Without repeating myself, I would like to highlight that the
development course charted by the UPA Government in the last five years has been possible due to a step
up in the growth rate of the economy and improved revenue buoyancy. The principal growth driver in this
period has been private investment, which has been predominantly funded by domestic resources. During
the year 2008-09, there has been a dip in the growth rate of GDP from an average of over 9 per cent in the
previous three fiscal years to 6.7 per cent. It has affected the pace of job creation in certain sectors of the
economy and the investment sentiments of the business community. It has also resulted in considerably
lower revenue growth for the government. Another feature of the year 2008-09 was a sharp rise in the
wholesale price index to nearly 13% in August 2008 and an equally sharp fall close to 0% in March 2009.
While a detailed analysis of the developments has been presented in the Economic Survey-2008-09,
tabled in both houses of Parliament last Thursday, I draw your attention to a few aspects.

11. The structure of India ’s economy has changed rapidly in the last ten years. External trade and
external capital flows are an important part of the economy and so is the contribution of the services
sector to the GDP at well over 50 per cent. The share of merchandise trade (exports plus imports) as a
proportion of GDP has more than doubled over the past decade to 38.9 per cent in 2008-09. Similarly,
trade in goods and services taken together has also doubled to 47 per cent during this period. Gross capital
flows rose to a peak of over 9 per cent of GDP in 2007-08 before falling in the wake of the global
financial crisis. The significant increase in the inflow of foreign capital is important, not so much for
bridging the domestic savings-investment gap, but for facilitating the intermediation of financial
resources to meet the growing needs of the economy.
12. This growing integration of the Indian economy with the rest of the world has brought new
opportunities and also new challenges. It has made the task of sustaining high growth more complex.
Over the past month, we have critically evaluated Government’s efforts at both short term economic
recovery as well as medium term economic growth. The economic recovery and growth is a cooperative
effort of the Central and State Governments. That is why, for the first time, I held a meeting with Finance
Ministers of States as part of the preparations for this Budget. I intend to make this an annual feature.
TOWARDS ECONOMIC REVIVAL

Short-term measures

13. To counter the negative fallout of the global slowdown on the Indian economy, the Government
responded by providing three focused fiscal stimulus packages in the form of tax relief to boost demand
and increased expenditure on public projects to create employment and public assets. The RBI took a
number of monetary easing and liquidity enhancing measures to facilitate flow of funds from the financial
system to meet the needs of productive sectors.

14. This fiscal accommodation led to an increase in fiscal deficit from 2.7 per cent in 2007-08 to 6.2
per cent of GDP in 2008-09. The difference between the actuals of 2007-08 and 2008-09 constituted the
total fiscal stimulus. This fiscal stimulus at 3.5% of GDP at current market prices for 2008-09 amounts to
Rs.1,86,000 crore.

15. These measures were effective in arresting the fall in growth rate of GDP in 2008-09 and we
achieved a growth of 6.7 per cent. There are signs of revival in the domestic industry and the foreign
investors have also returned to the Indian market in the last couple of months. It is possible that the two
worst quarters since the global financial meltdown in September 2008 are behind us. While the global
financial conditions have shown improvement over the recent months, uncertainties relating to the revival
of the global economy remain. We cannot, therefore, afford to drop our guard. We have to continue our
efforts to provide further stimulus to the economy.

16. Madam Speaker, what I unfold now are only the ‘First steps’. It will be my endeavour to make the
process of budget formulation more participatory and a continuous exercise.
Infrastructure Development

17. To stimulate public investment in infrastructure, we had set up the India Infrastructure Finance
Company Limited (IIFCL) as a special purpose vehicle for providing long term financial assistance to
infrastructure projects. We will ensure that IIFCL is given greater flexibility to aggressively fulfil its
mandate.

18. ‘Takeout financing’ is an accepted international practice of releasing long term funds for financing
infrastructure projects. It can be used to effectively address the asset liability mismatch of commercial
banks arising out of financing infrastructure projects and also to free up capital for financing new
projects. IIFCL would, in consultation with banks, evolve a ‘takeout financing’ scheme which could
facilitate incremental lending to the infrastructure sector.
19. Government has had some success in attracting private investment in a wide range of
infrastructure sectors such as telecommunications, power generation, airports, ports, roads and even in
railways through public private partnerships ( PPP ). To ensure that infrastructure projects do not face
financing difficulties arising from the current downturn, as I indicated in my Interim Budget Speech, the
Government has decided that IIFCL will refinance 60 per cent of commercial bank loans for PPP projects
in critical sectors over the next fifteen to eighteen months. The IIFCL and Banks are now in a position to
support projects involving a total investment of Rs.100 thousand crore in infrastructure. Combined with
the steps we are taking to increase public investment in infrastructure, this will provide a big boost to such
investment.

20. The investment in infrastructure for the growth of economy is critical. I have urged my colleagues
in the Central and State Governments to remove policy, regulatory and institutional bottlenecks for
speedy implementation of infrastructure projects. I, on my part, will ensure that sufficient funds are made
available for this sector.

Highway and Railways

21. The allocation during the current year to National Highways Authority of India (NHAI) for the
National Highways Development Programme (NHDP) is being stepped up by 23 per cent over the 2008-
09 (BE). I have also increased the allocation for the Railways from Rs.10,800 crore made in the Interim
Budget for 2009-10 to Rs.15,800 crore.

Urban Infrastructure

22. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has been an important
instrument for refocusing the attention of the State governments on the importance of urban
infrastructure. In recognition of the role of JNNURM, the allocation for this scheme is being stepped up
by 87 per cent to Rs.12,887 crore in the current budget. To improve the lot of the urban poor, I propose to
enhance the allocation for housing and provision of basic amenities to urban poor to Rs.3,973 crore in the
current year’s budget. This includes the provision for Rajiv Awas Yojana (RAY), a new scheme
announced in the address of the President of India. This scheme, the parameters of which are being
worked out, is intended to make the country slum free in the five year period.

Brihan Mumbai Storm Water Drainage Project (BRIMSTOWA)

23. To address the problem of flooding in Mumbai, Brihan Mumbai Storm Water Drainage Project
(BRIMSTOWA) was initiated in 2007. The entire estimated cost of the project at Rs.1,200 crore is being
funded through Central assistance. A sum of Rs.500 crore has been released for this project upto
2008-09. I have enhanced the provision for this project from Rs.200 crore in Interim BE to Rs.500 crore
to expedite the completion of the project.
Power

24. The Accelerated Power Development and Reform Programme (APDRP) is an important scheme
for reducing the gap between power demand and supply. I propose to increase the allocation for this
scheme to Rs.2,080 crore, a steep increase of 160 per cent above the allocation in the BE of 2008-09.

Gas

25. With the recent find of natural gas in the KG Basin on the Eastern offshore of the country, the
indigenous production of Natural Gas is set to double with natural gas emerging as an important source of
energy. LNG infrastructure in the country is also being expanded. Government proposes to develop a
blueprint for long distance gas highways leading to a National Gas Grid. This would facilitate
transportation of gas across the length and breadth of the country.

Assam Gas Cracker Project

26. The Assam Gas Cracker Project sanctioned in April 2006 is being executed at a cost of Rs.5,461
crore. The capital subsidy of Rs.2,138 crore for the project is to be provided by the Central
Government. The outlay for this project is being stepped up suitably.
Agricultural Development

I now turn to Agricultural development.

27. Agriculture has been the mainstay of our economy with 60 per cent of our population deriving
their sustenance from it. In the recent past, the sector has recorded a growth of about 4 per cent per
annum with substantial increase in plan allocations and capital formation in the sector. Agriculture credit
flow was Rs.2,87,000 crore in 2008-09. The target for agriculture credit flow for the year 2009-10 is
being set at Rs.3,25,000 crore. To achieve this, I propose to continue the interest subvention scheme for
short term crop loans to farmers for loans upto Rs.3 lakh per farmer at the interest rate of 7 per cent per
annum. I am also happy to announce that, for this year, the Government shall pay an additional
subvention of 1 per cent as an incentive to those farmers who repay their short term crop loans on
schedule. Thus, the interest rate for these farmers will come down to 6 per cent per annum. For this, I am
making an additional Budget provision of Rs.411 crore over Interim BE.

Debt Relief for farmers

28. The one-time bank loan waiver of nearly Rs.71,000 crore to cover an estimated 40 million farmers
was one of the major highlights of the last Budget. Under the Agricultural Debt Waiver and Debt Relief
Scheme (2008), farmers having more than two hectares of land were given time upto 30th June, 2009 to
pay 75% of their overdues. Due to the late arrival of monsoon, I propose to extend this period by six
months upto 31st December, 2009 .

29. It is learnt that in some regions of Maharashtra , a large number of farmers had taken loans from
private money lenders and the loan waiver scheme did not cover them. The matter requires special
attention. To examine the matter in greater detail and suggest the future course of action, I propose to set
up a Taskforce.
Accelerated Irrigation Benefit Programme

30. I propose to provide an additional Rs.1,000 crore over Interim BE for the Accelerated Irrigation
Benefit Programme (AIBP), marking an increase of 75 per cent over the allocation in 2008-09(BE). The
allocation for the Rashtriya Krishi Vikas Yojna (RKVY) is also being stepped up by 30 per cent over
Budget Estimates of 2008-09.

Restoring Export Growth

31. Our exporters by virtue of their close links to the external sector have borne the brunt of the global
economic crisis. It is, therefore, appropriate that we continue to provide all possible assistance to our
exporters to help them overcome the short term disadvantages. More specifically:
(a) An adjustment assistance scheme to provide enhanced Export Credit and Guarantee
Corporation (ECGC) cover at 95 per cent to badly hit sectors had been initiated in
December 2008 to mitigate the difficulties faced by the exporters. In view of the
continuing contraction in exports, I propose to extend the benefits of this scheme up to
March 2010.
(b) The Market Development Assistance Scheme provides support to exporters in developing
new markets. With many traditional markets still under financial stress, greater effort is
required to identify and develop new markets. I propose to enhance the allocation for this
scheme by 148% over BE 2008-09 to Rs.124 crore.
(c) With a view to insulating the employment - oriented export sectors from the global
meltdown, Government had provided an interest subvention of 2 per cent on pre-shipment
credit for seven such sectors. These sectors are textiles including handlooms, handicrafts,
carpets, leather, gems and jewellery, marine products and small and medium exporters. I
propose to extend the interest subvention beyond the current deadline of September 30,
2009 to March 31, 2010 .
(d) Micro, Small and Medium Enterprises (MSMEs) have been affected by the slowdown in
exports and the indirect effect of the global crisis on domestic demand. To support this
sector, I propose to facilitate the flow of credit at reasonable rates, by providing a special
fund out of Rural Infrastructure Development Fund (RIDF) to Small Industries
Development Bank (SIDBI). This fund of Rs.4,000 crore will incentivise Banks and State
Finance Corporations (SFCs) to lend to Micro and Small Enterprises (MSEs) by
refinancing 50 per cent of incremental lending to MSEs during the current financial year.
(e) In February, 2009 the Print Media was given a stimulus package comprising waiver of
15% agency commission on DAVP advertisements and a 10% increase in the DAVP rates
to be paid as a ‘special relief’ subject to documentary proof of loss of revenue in non-
governmental advertisements. Since Print Media is still passing through difficult times, I
have decided to extend the stimulus package for another six months from 30th June, 2009
to 31st December, 2009 .
Medium-term sustainability

32. The short term fiscal stimulus has to be balanced against long term prudence and fiscal
sustainability objectives. To quote Kautilya, “In the interest of the prosperity of the country, a King shall
be diligent in foreseeing the possibility of calamities, try to avert them before they arise, overcome those
which happen, remove all obstructions to economic activity and prevent loss of revenue to the state”. I
intend to take Kautilya’s advice and return to the FRBM target for fiscal deficit at the earliest and as soon
as the negative effects of the global crisis on the Indian economy have been overcome. On the medium
term fiscal perspective, I await the recommendations of the 13th Finance Commission.

33. To bring the fiscal deficit under control, we have to initiate institutional reform measures during
the current year itself. This is essential for maintaining a stable balance of payments, moderate interest
rates and steady flow of external capital for corporate investment. These measures have to encompass all
aspects of the budget such as subsidies, taxes, expenditure and disinvestment.

Fertilizer subsidy

34. In the context of the nation’s food security, the declining response of agricultural productivity to
increased fertilizer usage in the country is a matter of concern. To ensure balanced application of
fertilizers, the Government intends to move towards a nutrient based subsidy regime instead of the current
product pricing regime. It will lead to availability of innovative fertilizer products in the market at
reasonable prices. This unshackling of the fertilizer manufacturing sector is expected to attract fresh
investments in this sector. In due course it is also intended to move to a system of direct transfer of
subsidy to the farmers.

Petroleum and Diesel pricing policy

35. Madam Speaker, Honourable Members are aware that global prices of oil and petroleum products
had shot up to unprecedented levels in 2008-09. Most oil importing countries, including our neighbours,
adjusted their domestic prices to reflect these global changes. Though prices have declined since then,
they are already about double of the lows reached in the wake of the global financial crisis. It is important
to recognise that, with almost three-quarters of our oil consumption met through imports, domestic prices
of petrol and diesel have to be broadly in sync with global prices of these items. Government will set up
an expert group to advise on a viable and sustainable system of pricing petroleum products. Details will
be announced by my colleague, the Minister of Petroleum and Natural Gas.

Taxation

36. It is time that we complete the process that was started in 1991 for building a trust based, simple,
neutral, tax system with almost no exemptions and low rates designed to promote voluntary compliance.
The Income Tax Return Forms should be simple and user-friendly. I have asked the Department to work
on SARAL-II forms for early introduction. We need a tax system which generates revenues on a
sustained basis without use of coercive tax collection methods at the end of each year to meet targets. It is
my intention to make a modest start in this direction in the current year and ensure that the process is
completed in the next four years. At the end of this process, I hope the Finance Minister can credibly say
that our tax collectors are like honey bees collecting nectar from the flowers without disturbing them, but
spreading their pollen so that all flowers can thrive and bear fruit.

People’s ownership of PSUs

37. The Public Sector Undertakings are the wealth of the nation, and part of this wealth should rest in
the hands of the people. While retaining at least 51 per cent Government equity in our enterprises, I
propose to encourage people’s participation in our disinvestment programme. Here, I must state clearly
that public sector enterprises such as banks and insurance companies will remain in the public sector and
will be given all support, including capital infusion, to grow and remain competitive.

Financial sector

38. The financial sector is the life blood of any economy. Our Government’s approach to the banking
and financial sector has been to ensure robust oversight and regulation while expanding financial access
and deepening markets. The merit of this balanced approach has been borne out in the recent experience,
as the turbulence in the world financial markets has left the Indian banking and financial sector relatively
unaffected. Never before has Indira Gandhi’s bold decision to nationalise our banking system exactly 40
years ago - on 14th of July, 1969 - appeared as wise and visionary as it has over the past few months. Her
approach continues to be our inspiration even as we introduce competition and new technology in this
sector.

39. The average public float in Indian listed companies is less than 15 per cent. Deep non-
manipulable markets require larger and diversified public shareholdings. This requirement should be
uniformly applied to the private sector as well as listed public sector companies. I propose to raise, in a
phased manner, the threshold for non-promoter public shareholding for all listed companies.

40. For a country like ours, with significant sections of unbanked population and regions, financial
inclusion is vital for sustaining long term equitable development. As part of the financial inclusion drive,
scheduled commercial banks have been opening ‘no frills’ accounts either with ‘nil’ or very low
minimum balances. So far, these banks have opened 3.3 crore such accounts. The RBI has announced a
further relaxation in its Branch Authorisation Policy. Scheduled Commercial Banks are now allowed to
set up off-site ATMs without prior approval, subject to reporting.

41. Despite the expansion of banking network in the country, there are still some areas that remain
under-banked or unbanked. A sub-committee of State Level Bankers Committee ( SLB C) will identify
such areas and formulate an action plan for providing banking facilities to all these areas in the next 3
years. I propose to set aside Rs.100 crore during the current year as one-time grant-in-aid to ensure
provision of at least one centre/Point of Sales (POS) for banking services in each of the unbanked blocks
in the country.

42. The Government has established Competition Commission of India, an autonomous regulatory
body to promote and sustain competition in markets, protect interests of consumers and to prevent
practices having adverse effect on competition. An Appellate body headed by a retired judge of the
Supreme Court has also been constituted.
43. The benefits of competition should now come to more sectors and their users and consumers. Now
is the time for us to work on these aspects to eliminate supply bottlenecks, enhance productivity, reduce
costs and improve quality of goods and services supplied to consumers.

Investment environment

44. Private sector investment has been affected by the global macro economic conditions. Our
Government is committed to creating a facilitating environment in which a competitive private sector can
thrive and play its rightful role in nation’s economic development. India ’s high growth of 8.5% per
annum from 2004 to 2008 was fuelled in very large part by private investment. I look forward to working
closely with industry and our vibrant entrepreneurial community to address their outstanding concerns.
TOWARDS INCLUSIVE DEVELOPMENT

45. Madam Speaker, the UPA government has gone for a paradigm shift for making the development
process more inclusive. It involves creating entitlements backed by legal guarantee to provide basic
amenities and opportunities for livelihood to vulnerable sections. ‘Aam Admi’ is now the focus of all our
programmes and schemes.

National Rural Employment Guarantee Scheme (NREGS)

46. (i) It is widely acknowledged that the National Rural Employment Guarantee Act, (NREGA)
first implemented in February 2006, has been a magnificent success. During 2008-09, NREGA provided
employment opportunities for more than 4.47 crore households as against 3.39 crore households covered
in 2007-08. We are committed to providing a real wage of Rs.100 a day as an entitlement under the
NREGA. To increase the productivity of assets and resources under NREGA, convergence with other
schemes relating to agriculture, forests, water resources, land resources and rural roads is being initiated.
In the first stage, a total of 115 pilot districts have been selected for such convergence. Details of these
measures and convergence guidelines will be announced by my colleague, the Minister of Rural
Development. I propose an allocation of Rs.39,100 crore for the year 2009-10 for NREGA which marks
an increase of 144% over 2008-09 Budget Estimates.

National Food Security Act (NFSA)

(ii) I am happy to announce that the work on National Food Security Act has begun in right
earnest. This will ensure that every family living below the poverty line in rural or urban areas will be
entitled by law to 25 kilos of rice or wheat per month at Rs.3 a kilo. The Government proposes to put the
draft Food Security Bill on the website of the Department of Food and Public Distribution for public
debate and consultations very soon.

Bharat Nirman

(iii) Bharat Nirman with its six schemes is an important initiative for bridging the gap between
the rural and urban areas and improving the quality of life of people, particularly the poor, in the rural
areas. I propose to step up the allocations for Bharat Nirman by 45 per cent in 2009-10 over the BE of
2008-09. The Pradhan Mantri Gram Sadak Yojana (PMGSY) is one of the most successful programmes
under Bharat Nirman. I propose to step up the allocation for this programme by 59% over BE 2008-09 to
Rs.12,000 crore. I also propose to allocate Rs.7,000 crore to Rajiv Gandhi Grameen Viduytikaran Yojana
(RGGVY) which represents a 27 per cent increase over 2008-09 (BE).

(iv) The allocation for the Indira Awaas Yojana ( IAY) is proposed to be increased by 63 per
cent to Rs.8,800 crore in Budget Estimates 2009-10. To broaden the pace of rural housing, I propose to
allocate, from the shortfall in the priority sector lending of commercial banks, a sum of Rs.2,000 crore for
Rural Housing Fund in the National Housing Bank (NHB). This will boost the resource base of NHB for
their refinance operations in rural housing sector.

Pradhan Mantri Adarsh Gram Yojana (PMAGY)

(v) There are about 44,000 villages in which the population of Scheduled castes is above 50
per cent. A new scheme called Pradhan Mantri Adarsh Gram Yojana (PMAGY) is being launched this
year on a pilot basis, for the integrated development of 1000 such villages. I propose an allocation of
Rs.100 crore for this scheme. Each village would be able to avail gap funding of Rs.10 lakh over and
above the allocations under Rural Development and Poverty Alleviation Schemes. On successful
implementation of the pilot phase, the Yojana would be extended in coming years.

Empowerment of Weaker Sections

47. The Swarna Jayanti Gram Swarozgar Yojna (SGSY) is being restructured as the National Rural
Livelihood Mission to make it universal in application, focused in approach and time bound for poverty
eradication by 2014-15. Stress will be laid on the formation of women Self Help Groups (SHGs). Apart
from providing capital subsidy at an enhanced rate, it is also proposed to provide interest subsidy to poor
households for loans upto Rs. one lakh from banks.

48. The Women’s Self Help Group movement is bringing about a profound transformation in rural
areas. There are today over 22 lakh such groups linked with banks. Our objective is to enrol at least 50%
of all rural women in India as members of SHGs over the next five years and link these SHGs to banks.

49. The Rashtriya Mahila Kosh has been working towards the facilitation of credit support or micro
finance to poor women and has developed a number of innovative schemes for their benefit. In
recognition of its role as an instrument of socio-economic change and development, the corpus of the
Kosh, which at present is Rs.100 crore, would be raised to Rs.500 crore, over the next few years.

Female literacy

50. The low level of female literacy continues to be a matter of grave concern. It has, therefore, been
decided to launch a National Mission for Female Literacy, with focus on minorities, SC, ST and other
marginalised groups. The aim will be to reduce by half, the current level of female illiteracy, in three
years.
Integrated Child Development Services

51. Government is committed to universalisation of the Integrated Child Development Services

(ICDS) Scheme in the country. By March 2012, all services under ICDS would be extended, with
quality, to every child under the age of six.

Student Loans to Weaker Sections

52. To enable students from economically weaker sections to access higher education, it is proposed
to introduce a scheme to provide them full interest subsidy during the period of moratorium. It will cover
loans taken by such students from scheduled banks to pursue any of the approved courses of study, in
technical and professional streams, from recognised institutions in India . It is estimated that over 5 lakh
students would avail of this benefit.

Welfare of Minorities

53. The Plan outlay of Ministry of Minority Affairs has been enhanced from Rs.1,000 crore in BE
2008-09 to Rs.1,740 crore in 2009-10, registering an increase of 74%. This includes Rs.990 crore for
Multi-Sectoral Development Programme for Minorities in selected minority concentration districts,
Grants-in-aid to Maulana Azad Education Foundation which is almost doubled, and provisions for
National Minorities Development and Finance Corporation and Pre-Matric and Post-Matric Scholarships
for Minorities. Allocations have also been made for the new schemes of National Fellowship for Students
from the Minority Community and Grants-in-aid to Central Wakf Council for computerization of records
of State Wakf Boards.

54. Aligarh Muslim University has decided to establish its campuses at Murshidabad in West Bengal
and Malappuram in Kerala. I propose to make an allocation of Rs.25 crore each for these two campuses.

Welfare of workers in the unorganised sector

55. The unorganised or informal sector of our economy accounts for 92% of the employment and
absorbs bulk of the annual increase in our labour force. The Unorganised Workers Social Security Bill,
2007 has now been passed by both Houses of Parliament. I have already initiated action to ensure that
social security schemes for occupations like weavers, fishermen and women, toddy tappers, leather and
handicraft workers, plantation labour, construction labour, mine workers, bidi workers, and rikshaw
pullers are implemented at the earliest. Necessary financial allocations will be made for these schemes.

Employment Exchanges

56. I propose to launch a new project for modernisation of the Employment Exchanges in public
private partnership so that a job seeker can register on-line from anywhere and approach any employment
exchange. Under the project, a national web portal with common software will be developed. This will
contain all the data regarding availability of skilled persons on the one hand and requirements of skilled
persons by the industry on the other. It will help youth get placed and enable industry to procure required
skills on real time basis.
Handlooms

57. In the last Budget two mega handloom clusters at Varanasi and Sibsagar and two mega
powerloom clusters at Erode and Bhiwandi were approved. They are under successful implementation. I
propose to add one handloom mega cluster each in West Bengal and Tamil Nadu and one powerloom
mega cluster in Rajasthan. These will help preserve the magnificent textile traditions in West Bengal and
Tamil Nadu and generate thousands of jobs in Rajasthan. In addition, I propose to add new mega clusters
for Carpets in Srinagar (J&K) and Mirzapur (UP).

Health

58. The National Rural Health Mission is an essential instrument for achieving our goal of Health for
all. I propose an increase of Rs.2,057 crore over and above Rs.12,070 crore provided in the Interim
Budget.

59. Rashtriya Swasthya Bima Yojana (RSBY) was operationalised last year. The initial response has
been very good. More than 46 lakh BPL families in eighteen States and UTs have been issued biometric
smart cards. This scheme empowers poor families by giving them freedom of choice for using health care
services from an extensive list of hospitals including private hospitals. Government proposes to bring all
BPL families under this scheme. An amount of Rs.350 crore, marking 40% increase over the previous
allocation, is being provided in 2009-10 Budget Estimates.

Environment and Climate Change

60. The National Action Plan on Climate Change unveiled last year, outlines our strategy to adapt to
Climate Change and enhance the ecological sustainability of our development path. Following this,
eight national missions representing a multi-pronged, long term and integrated approach are being
launched. I propose to provide necessary funds for these missions.

61. Our government has already set up a ‘National Ganga River Basin Authority’ (NGRBA). I
propose increasing the budgetary outlay for the National River and Lake Conservation Plans to Rs.562
crore in 2009-10 from Rs.335 crore in 2008-09.

62. I propose to make a special one-time grant of Rs.100 crore to the Indian Council of Forestry
Research and Education, Dehradun in recognition of its excellence in the field of research, education and
extension. I also propose an allocation of Rs.15 crore each for the Botanical Survey of India
and Zoological Survey of India. An additional amount of Rs.15 crore is being allocated to Geological
Survey of India.
TOWARDS BUILDING ACCOUNTABLE INSTITUTIONS

Improving delivery of public services

63. As substantial resources, both public and private, are mobilized to fuel the growth of the economy
and make it more inclusive in character, efficiency of delivery must become the focus of government
programmes. The enactment of the Right to Information Act at the Centre and in many states has been an
important and successful step in this direction, ushering in greater transparency and accountability in the
public decision-making process.

64. The setting up of the Unique Identification Authority of India (UIDAI) is a major step in
improving governance with regard to delivery of public services. This project is very close to my heart. I
am happy to note that this project also marks the beginning of an era where the top private sector talent in
India steps forward to take the responsibility for implementing projects of vital national importance. The
UIDAI will set up an online data base with identity and biometric details of Indian residents and provide
enrolment and verification services across the country. The first set of unique identity numbers will be
rolled out in 12 to 18 months. I have proposed a provision of Rs.120 crore for this project.

National Security

65. For modernisation of Police force in the States, an additional amount of Rs.430 crore is being
proposed, over and above the provisions in the Interim Budget. The Government has also sanctioned
special risk/hardship allowances to the personnel of Para Military Forces at par with Defence forces.
Provisions for payment of these allowances are also being proposed in the Budget.

66. For strengthening Border Management, an additional amount of Rs.2,284 crore, over and above
the provision in the Interim Budget, is being provided for construction of fences, roads, flood-lights on
the international borders.

67. Significant augmentation in the strength of para-military forces is being done. This calls for more
investment in creating the necessary infrastructure, particularly in the area of housing. The Government,
therefore, proposes to launch a massive programme of housing to create 1 lakh dwelling units for Central
Para-Military Forces personnel. This will not only contribute to the morale of the forces, but will also
enable leveraging of government’s annual budgetary resources and create an innovative financing model.

One Rank One Pension for Ex-Servicemen (OROP)

68. Our country owes a deep debt of gratitude to our valiant ex-Servicemen. The Committee headed
by the Cabinet Secretary on OROP has submitted its report and the recommendations of the Committee
have been accepted. On the basis of these recommendations, the Government has decided to substantially
improve the pension of pre 1.1.2006 defence pensioners below officer rank (PBOR) and bring pre
10.10.1997 pensioners on par with post 10.10.1997 pensioners. Both these decisions will be implemented
from 1st July 2009 resulting in enhanced pension for more than 12 lakh jawans and JCOs. These
measures will cost the exchequer more than Rs.2,100 crore annually. Certain pension benefits being
extended to war wounded and other disabled pensioners are also being liberalised.

Education

69. The demographic advantage India has in terms of a large percentage of young population needs to
be converted into a dynamic economic advantage by providing them the right education and skills. The
provision for the scheme, ‘ Mission in Education through ICT,’ has been substantially increased to
Rs.900 crore. Similarly, the provision for setting up and up-gradation of Polytechnics under the Skill
Development Mission has been increased to Rs.495 crore. The government shall take forward its intent
of having one Central University in each uncovered State and for this purpose I am allocating Rs.827
crore. I am also allocating Rs.2,113 crore for IITs and NITs, which includes a provision of Rs.450 crore
for new IITs and NITs. The overall Plan budget for higher education is proposed to be increased by
Rs.2,000 crore over Interim BE.

70. Union Territory of Chandigarh is the capital of Punjab and Haryana. The facilities at Punjab
University , Chandigarh , need to be improved. I, therefore, propose to make an allocation of Rs.50 crore
for this university. To enable the Union Territory Administration to provide better infrastructure to the
people, I propose to suitably enhance the Plan allocation for Chandigarh during the current financial year.

Commonwealth Games 2010

71. The Commonwealth Games present the country with an opportunity to showcase our potential as
an emerging Asian Power. I propose to substantially enhance the allocations for the Commonwealth
Games from Rs.2,112 crore in the Interim Budget to Rs.3,472 crore in the Budget for 2009-10.

72. Madam Speaker, the Government is committed to ensure that Sri Lankan Tamils enjoy their rights
and legitimate aspirations within the territorial sovereignty and framework of Sri Lanka ’s Constitution.
The Ministry of External Affairs is working closely with the Sri Lankan Government in this regard. I
propose to allocate Rs.500 crore for the rehabilitation of the internally displaced persons and
reconstruction of the northern and eastern areas of Sri Lanka .

73. As Honourable Members are aware, Cyclone Aila struck the coast of West Bengal in the last week
of May 2009. Extensive damage was caused to roads, houses and infrastructure. While immediate interim
relief has been provided from the Calamity Relief Fund (CRF), it is proposed to draw up a programme for
rebuilding the damaged infrastructure. For this purpose, I propose to allocate Rs.1,000 crore.

BUDGET ESTIMATES 2009-10

Madam Speaker, now I turn to the Budget Estimates for 2009-10.

74. The Budget Estimates 2009-10 provide for a total expenditure of Rs.10,20,838 crore consisting of
Rs.6,95,689 crore towards Non Plan and Rs.3,25,149 crore towards Plan expenditure. The increase in
Non Plan expenditure over BE 2008-09 is 37% whereas the increase in Plan expenditure is 34%. The total
increase in expenditure in 2009-10 over BE 2008-09 is 36%.

75. The increase in Non Plan expenditure is mainly on account of the implementation of the Sixth
Central Pay Commission recommendations, increased food subsidy and higher interest payment arising
out of the larger fiscal deficit in 2008-09. Interest payments are estimated at Rs.2,25,511 crore
constituting about 36% of Non Plan revenue expenditure in BE 2009-10. The total provision for subsidies
are up from Rs.71,431 crore in BE 2008-09 to Rs.1,11,276 crore in BE 2009-10. The outlay on Defence
has gone up from Rs.1,05,600 crore in BE 2008-09 to Rs.1,41,703 crore in BE 2009-10.

76. Honourable Members may recall that while presenting the Interim Budget 2009-10, I had stated
that the Plan expenditure for 2009-10 may have to be increased further as a part of counter-cyclical
measures to minimise the impact of global recession and economic slowdown. Against the backdrop of
limited fiscal space because of reduction in CENVAT and Service Tax rates, Government have taken a
conscious and bold decision to enhance the Gross Budgetary Support (GBS) for the Annual Plan 2009-10
by Rs.40,000 crore over Interim Budget 2009-10. Bulk of this enhanced GBS is directed towards public
investment in infrastructure with special emphasis on rural infrastructure, raising growth potential and
leading to income generation. Besides, the State Governments will be permitted to borrow additional
0.5% of their GSDP by relaxing the fiscal deficit target under FRBM from 3.5% to 4% of their GSDP.
This will enable the State Governments to raise additional open market loans of about Rs.21,000 crore in
the current year. In other words, the total additionality in Plan expenditure by Centre and the States put
together would be Rs.61,000 crore over Interim Budget. I do believe that this fiscal expansion will go a
long way in reversing the impact of economic slowdown and accelerate our growth revival in the medium
term.

77. Madam Speaker, given the possibility of the economic downturn persisting in the current year, the
gross tax receipts are budgeted at Rs.6,41,079 crore in BE 2009-10, compared to Rs.6,87,715 crore in
BE 2008-09. The non tax revenue receipts are, however, likely to be better and are estimated at
Rs.1,40,279 crore in BE 2009-10 compared to Rs.95,785 crore in BE 2008-09. The revenue deficit as a
percentage of GDP is projected at 4.8% compared to 1% in BE 2008-09 and 4.6% as per provisional
accounts of 2008-09. The fiscal deficit as a percentage of GDP is projected at 6.8% compared to 2.5% in
BE 2008-09 and 6.2% as per provisional accounts 2008-09. This level of deficit is a matter of concern and
Government will address this issue in right earnest to come back to the path of fiscal consolidation at the
earliest.

78. Madam Speaker, before I turn to my tax proposals, I cannot resist the temptation of re-visiting
Kautilya. He said and I quote, “Just as one plucks fruits from a garden as they ripen, so shall a King have
revenue collected as it becomes due. Just as one does not collect unripe fruits, he shall avoid taking
wealth that is not due because that will make the people angry and spoil the very sources of revenue.”
PART - B

TAX PROPOSALS

79. Madam Speaker, I shall now present my tax proposals.

80. As the House is aware, the thrust of reforms over the last few years, including the previous term of
this Government, has been to improve the efficiency and equity of our tax system. This is sought to be
achieved by eliminating distortions in the tax structure, introducing moderate levels of taxation and
expanding the base. These policy changes have been accompanied by requisite re-engineering of key
business processes coupled with automation, both for direct and indirect taxes. On the direct tax side, a
recent initiative for further improving efficiency is the setting up of a Centralized Processing Centre
(CPC) at Bengaluru where all electronically filed returns, and paper returns filed in entire Karnataka, will
be processed.

81. These tax reform initiatives have produced impressive results. The Centre’s Tax- GDP ratio has
increased to 11.5 per cent in 2008-09 from a low of 9.2 per cent in 2003-04. The healthy growth in tax
revenues over the last five years is essentially attributable to growth in direct taxes. Further, the share of
direct taxes in the Centre’s tax revenues has increased to 56 per cent in 2008-09 from 41 per cent in 2003-
04, reflecting a sharp improvement in the equity of our tax system. The Government is committed to
furthering this process of tax reform.

82. In the course of preparation of this budget, I have had the opportunity to interact with large
number of stakeholders and receive valuable inputs. Most suggestions were for structural changes in the
tax system. Tax reform, like all reforms, is a process and not an event. Therefore, I propose to pursue
structural changes in direct taxes by releasing the new Direct Taxes Code within the next 45 days and in
indirect taxes by accelerating the process for the smooth introduction of the Goods and Services Tax
(GST) with effect from 1st April, 2010 .

83. The Direct Taxes Code, along with a Discussion Paper, will be released to the public for
debate. Based on the inputs received, the Government will finalise the Direct Taxes Code Bill for
introduction in this House sometime during the Winter Session.

84. To further enhance efficiency in tax administration, I intend to merge the two Authorities for
Advance Rulings on Direct and Indirect Taxes by amending the relevant Acts. This will enable the
Authority for Advance Rulings set up under Section 245-O of the Income Tax Act, 1961 to also function
as the Authority for Advance Rulings for Indirect Taxes.

85. I have been informed that the Empowered Committee of State Finance Ministers has made
considerable progress in preparing the roadmap and the design of the GST. Officials from the Central
Government have also been associated in this exercise. I am glad to inform the House that, through their
collaborative efforts, they have reached an agreement on the basic structure in keeping with the principles
of fiscal federalism enshrined in the Constitution. I compliment the Empowered Committee of State
Finance Ministers for their untiring efforts. The broad contour of the GST Model is that it will be a dual
GST comprising of a Central GST and a State GST. The Centre and the States will each legislate, levy
and administer the Central GST and State GST, respectively. I will reinforce the Central Government’s
catalytic role to facilitate the introduction of GST by 1st April, 2010 after due consultations with all
stakeholders.

DIRECT TAXES

86. I shall now deal with direct taxes.

87. Madam Speaker, there have been demands by the corporate sector for reduction in tax
rates. However, tax rates are determined by the size of the tax base; if the tax base is higher, the tax rates
can be lower. The Income Tax Act is riddled with a plethora of tax exemptions which substantially erode
the tax base. The extent of this erosion is presented to this House in the form of a Revenue Foregone
Statement. The growth in the direct tax revenue foregone is relatively higher than the growth in the direct
tax revenues. Accordingly, I do not propose to make any change in the Corporate Tax rates.

88. With a view to providing interim relief to small and marginal taxpayers and senior citizens, I
propose to increase the personal income tax exemption limit by Rs.15,000 from Rs.2.25 lakh to Rs.2.40
lakh for senior citizens. Similarly I also propose to raise the exemption limit by Rs.10,000 from Rs.1.80
lakh to Rs.1.90 lakh for women tax payers and by Rs.10,000 from Rs.1.50 lakh to Rs.1.60 lakh for all
other categories of individual taxpayers. Further, I also propose to increase the deduction under section
80-DD in respect of maintenance, including medical treatment, of a dependent who is a person with
severe disability to Rs.1 lakh from the present limit of Rs.75,000.

89. In the past, surcharges on direct taxes have generally been levied to meet the revenue needs
arising from natural calamities. The Government has set up the National Calamity Contingency Fund to
build up resources to meet emergency situations. As a corollary, surcharge on direct taxes should be
removed. However, this has to be balanced with the revenue needs of the Government. Therefore, in the
first instance, I propose to phase out the surcharge on various direct taxes by eliminating the surcharge of
10 per cent on personal income tax.

90. Deduction in respect of export profits is available under sections 10A and 10B of the Income-tax
Act. The deduction under these sections would not be available beyond the financial year 2009-2010. In
order to tide over the slowdown in exports, I propose to extend the sun-set clauses for these tax holidays
by one more year i.e. for the financial year 2010-11.
91. The Finance Act, 2005 introduced the Fringe Benefit Tax on the value of certain fringe benefits
provided by employers to their employees. This tax has been perceived as imposing considerable
compliance burden. Empathising with these sentiments, I propose to abolish the Fringe Benefit Tax.

92. The competitive ability of an economy rests on its progress in the area of Research and
Development (R&D). In order to incentivise the corporate sector to undertake R&D work, I propose to
extend the scope of the current provision of weighted deduction of 150% on expenditure incurred on in-
house R&D to all manufacturing businesses except for a small negative list.

93. Under the present scheme of the Income Tax Act, tax exemptions are largely profit-linked. Such
incentives are inherently inefficient and liable to misuse. Therefore, it is proposed to incentivise
businesses by providing investment-linked tax exemptions. To begin with, I propose to extend
investment- linked tax incentives to the businesses of setting up and operating ‘cold chain’, warehousing
facilities for storing agricultural produce and the business of laying and operating cross country natural
gas or crude or petroleum oil pipeline network for distribution on common carrier principle. Under this
method, all capital expenditure, other than expenditure on land, goodwill and financial instruments will be
fully allowable as deduction.

94. Minimum Alternate Tax (MAT) was introduced to address inequity in taxation of corporate
taxpayers. In the quest for greater equity, I propose to increase the rate of MAT to 15 per cent of book
profits from the present rate of 10 per cent. However, to grant relief to corporate taxpayers, I also propose
to extend the period allowed to carry forward the tax credit under MAT from seven years to ten years.

95. The New Pension System (NPS) is an important milestone in the development of a sustainable,
efficient, voluntary and defined contribution pension system in India . While the NPS will continue to be
subjected to the Exempt-Exempt-Taxed (EET) method of tax treatment of savings, it is proposed to
provide necessary fiscal support to the NPS for the establishment of this much needed social security
system. Accordingly, I propose to exempt the income of the NPS Trust from income tax and any dividend
paid to this Trust from Dividend Distribution Tax. Similarly, all purchase and sale of equity shares and
derivatives by the NPS Trust will also be exempt from the Securities Transaction Tax. I also propose to
enable self employed persons to participate in the NPS and avail of the tax benefits available thereto.

96. In order to further improve the investment climate in the country, we need to facilitate the
resolution of tax disputes faced by foreign companies within a reasonable time frame. This is particularly
relevant for such companies in the Information Technology (IT) sector. I, therefore, propose to create an
alternative dispute resolution mechanism within the Income Tax Department for the resolution of transfer
pricing disputes. To reduce the impact of judgemental errors in determining transfer price in international
transactions, it is proposed to empower the Central Board of Direct Taxes (CBDT) to formulate ‘safe
harbour’ rules.
97. The Finance Act, 2008 introduced the Commodity Transaction Tax (CTT) to be levied on taxable
commodities transactions entered in a recognized association. The Prime Minister’s Economic Advisory
Council has recommended abolition of the CTT. I, therefore, propose to abolish the Commodity
Transaction Tax.

98. The House will agree that it is desirable to bring about transparency in the funding of political
parties in the country. With a view to reforming the system of funding of political parties, I propose to
provide that donations to electoral trusts shall be allowed as a 100 per cent deduction in the computation
of the income of the donor. For this purpose, Electoral Trusts will be such trusts as are set up as pass-
through vehicles for routing the donations to political parties and are approved by CBDT.

99. Section 80E of the Income-tax Act provides for a deduction in respect of interest on loans taken
for pursuing higher education in specified fields of study. I propose to extend the scope of this provision
to cover all fields of study, including vocational studies, pursued after completion of schooling.

100. Anonymous donations to charitable institutions are presently liable to tax so as to prevent
unaccounted money being routed to such entities in the garb of anonymous donations. However, some
organisations are facing genuine problems in complying with the procedural requirements. In order to
mitigate the practical difficulties being faced by such charitable organisations, I propose to grant relief to
such organisations by not taxing anonymous donations received to the extent of 5 per cent of their total
income or a sum of Rs.1 lakh, whichever is higher.

101. To facilitate the business operations of all small taxpayers and reduce their compliance burden, I
propose to expand the scope of presumptive taxation to all small businesses with a turnover upto Rs.40
lakh. All such taxpayers will have the option to declare their income from business at the rate of 8 per
cent of their turnover and simultaneously enjoy exemption from the compliance burden of maintaining
books of accounts. As a procedural simplification, I also propose to allow them to pay their entire tax
liability from business at the time of filing their return by exempting them from paying advance tax. This
new scheme will come into effect from the financial year 2010-11.

102. Madam Speaker, in the context of the geo-political environment, it is necessary for us to create our
own facilities for energy security. Accordingly, I propose to extend the tax holiday under section 80-
IB(9) of the Income Tax Act, which was hitherto available in respect of profits arising from the
commercial production or refining of mineral oil, also to natural gas. This tax benefit will be available to
undertakings in respect of profits derived from the commercial production of mineral oil and natural gas
from oil and gas blocks which are awarded under the New Exploration Licensing Policy-VIII round of
bidding. Further, I also propose to retrospectively amend the provisions of the said section to provide that
“undertaking” for the purposes of section 80-IB(9) will mean all blocks awarded in any single contract.
103. Under the present provisions of section 2 (15) of the Income Tax Act, “charitable purpose”
includes relief of the poor, education, medical relief, and the “advancement of any other object of general
public utility”. However, the “advancement of any other object of general public utility” cannot involve
the carrying on of any activity in the nature of trade, commerce or business. I propose to provide the
same tax treatment to trusts engaged in preserving and improving our environment (including watersheds,
forests and wildlife) and preserving our monuments or places or objects of artistic or historic interest, as is
available to trusts engaged in providing relief of the poor, education and medical relief.

INDIRECT TAXES

104. Madam Speaker, I turn to my main proposals on indirect taxes.

105. I will first take up customs duties.

106. Although our domestic industry has weathered the impact of the global financial crisis and the
resultant slowdown with resilience, it is yet to fully find its feet. Manufacturing growth, which had turned
negative in October 2008 on a year-on-year basis and remained in that zone till March this year, appears
to be barely turning the corner. However, the global scenario remains worrisome and it is my view that
the paramount need is to provide industry with a stable framework. My proposals on indirect taxes seek to
achieve this by maintaining the overall rate structure for customs and central excise duties as well as
service tax. I must hasten to add that I have not hesitated to act where distortions provide a compelling
reason or where relief would provide a healing touch.

107. Full exemption from basic customs duty was provided to Set Top Boxes in 2006 to enable their
free import for the smooth introduction of the Conditional Access System (CAS). Now that production
capacity has come up in the country, I propose to impose a nominal basic customs duty of 5 per cent on
such Set Top Boxes to encourage domestic value addition.

108. The electronic hardware industry has a strong potential for creating employment especially in the
SME sector. I intend to reduce the basic customs duty on LCD panels from 10 per cent to 5 per cent to
support indigenous production of LCD televisions.

109. Full exemption from CVD of 4 per cent was available to accessories, parts and components
imported for the manufacture of mobile phones till the 30th of June, 2009 . I propose to reintroduce this
exemption for another year.

110. For reasons that are apparent, industry sectors having an export-orientation have been adversely
impacted by the demand compression in global markets. Presently, exporters of leather products, textile
garments, footwear as well as sports goods are permitted to import raw materials, consumables etc. upto 3
per cent of the fob value of their exports free of duty. I propose to add a few more items to these lists. Full
exemption from basic customs duty is being provided to rough corals for encouraging value-addition and
export.

111. It is imperative that the contribution of new and renewable energy sources of power is enhanced if
we have to successfully combat the phenomena of global warming and climate change. I am reducing the
basic customs duty on permanent magnets - a critical component for Wind Operated Electricity
Generators - from 7.5 per cent to 5 per cent.

112. On influenza vaccine and nine specified life saving drugs used for the treatment of breast cancer,
hepatitis-B, rheumatic arthritis etc. and on bulk drugs used for the manufacture of such drugs, I propose to
reduce the customs duty from 10 per cent to 5 per cent. They will also be totally exempt from excise duty
and countervailing duty.

113. Customs duty will also be reduced from 7.5 per cent to 5 per cent on two specified life saving
devices used in treatment of heart conditions. These devices will be fully exempt from excise duty and
CVD also.

114. Gold bars currently attract customs duty at the specific rate of Rs.100 per ten grams while other
forms of gold (excluding jewellery) are chargeable to a duty of Rs.250 per ten grams. These rates were
fixed in 2004 and have not been reviewed even as the price of gold has increased manifold. I propose to
partially restore the incidence by increasing these rates to Rs.200 per ten grams and Rs.500 per ten grams
respectively. Along the same lines, the customs duty on silver (excluding jewellery) will be increased
from Rs.500 per kg to Rs.1,000 per kg. These revised rates would also apply to gold and silver, including
ornaments that are not studded, when imported by a bona fide passenger as baggage.

115. I will now come to central excise duties.

116. Hon’ble Members are aware that the Government announced a series of fiscal stimulus packages,
one of the key elements of which was the sharp reduction in the ad valorem rates of Central Excise duty
for non-petroleum products by 4 percentage points across the board on 7th of December 2008 and by
another 2 percentage points in the mean CENVAT rate on the 24th of February, 2009.

117. One of the consequences of these cuts was that pure cotton textiles came to be fully exempted
from excise duty. We have received representations that full exemption prevents manufacturers from
availing of export rebate of the duty paid from CENVAT credit. I propose to rectify this situation by
restoring the erstwhile optional rate of 4 per cent for cotton textiles beyond the fibre stage.

118. Ever since the revamp of the excise duty structure on textiles by my distinguished predecessor in
the 2004 budget, a differential in rates has been maintained between the cotton sector and the manmade
sector. In keeping with the integrity of the earlier structure, I propose to restore the rate of 8 per cent
Central Excise duty on manmade fibre and yarn on a mandatory basis and on stages beyond fibre and yarn
at that rate on optional basis. These changes, together with duty changes on intermediates, would imply
that the duty on all types of manmade fibre and yarn and their intermediates would be the same, easing
the problem of credit accumulation.

119. Wool waste and cotton waste are chargeable to basic customs duty of 15 per cent. These are used
in the manufacture of cheaper varieties of textile articles such as blankets and rugs. As a measure of relief
to this sector, I propose to reduce the basic customs duty on these items to 10 per cent.

120. With the Government’s proclaimed objective of introducing a Goods and Services Tax (GST)
both at the national and State level, some more steps in that direction are necessary. One measure that
would facilitate the process is the further convergence of central excise duty rates to a mean rate -
currently 8 per cent. I have reviewed the list of items currently attracting the rate of 4 per cent, the only
rate below the mean rate. There is a case for enhancing the rate on many items appearing in this list to 8
per cent, which I propose to do, with the following major exceptions:

• food items; and

• drugs, pharmaceuticals and medical equipment.

Some of the other items on which I propose to retain the rate of 4 per cent are:

• paper, paperboard & their articles;

• items of mass consumption such as pressure cookers, cheaper electric bulbs, low-priced footwear,
water filters/purifiers, CFL etc.;

• power driven pumps for handling water; and

• paraxylene.

The details are available in the relevant notifications.

121. Bio-diesel, obtained from vegetable oils and used for blending with petro-diesel, is currently
exempt from excise duty. I now propose to fully exempt petro-diesel blended with bio-diesel from excise
duty.

122. In order to encourage the use of this environment friendly fuel and augment its availability in the
country, I also propose to reduce basic customs duty on bio-diesel from 7.5 per cent to 2.5 per cent - at
par with petro-diesel. With these proposals I hope to see a smile on the faces of the green brigade!

123. My other proposals on central excise duties seek to address distortions that the manufacturing
industry has been complaining about.
124. The IT industry has pointed out that it is facing difficulties in the assessment of software which
involves transfer of the right to use after the levy of service tax on IT software service. To resolve the
matter, I propose to exempt the value attributable to the transfer of the right to use packaged software
from excise duty and CVD.

125. The construction industry has represented that they are facing difficulties on account of
withdrawal of exemption on goods manufactured at site. I propose to restore full exemption to such
goods, including pre-fabricated concrete slabs or blocks, when used for further construction at site.

126. A specific component was added to the ad valorem duty of 24 per cent applicable to large cars and
utility vehicles in June last year. In the case of vehicles of engine capacity below 2000 cc, this
component was Rs.15,000/- per unit while for vehicles of higher engine capacity it was Rs.20,000/- per
unit. These rates are now being unified at the lower level of Rs.15,000/- per unit.

127. Petrol driven trucks provide a useful means of transport within cities and across short distances.
These are chargeable to excise duty of 20 per cent. I propose to reduce excise duty on these trucks to 8
per cent to equate the duty with similar vehicles run on diesel.

128. Madam Speaker, I fear that my proposals relating to gold and silver on the customs side would
somewhat dent my popularity with women. I propose to salvage this by fully exempting branded
jewellery from excise duty.

129. I now turn to my proposals on service tax.

130. It is an international practice to zero-rate exports. To achieve this objective, a scheme was
announced in 2007, granting refund of service tax paid on certain taxable services used after the clearance
of export goods from the factory. For some time now, the exporting community has been expressing
dissatisfaction over the difficulties faced in obtaining such refunds. Several procedural simplifications
attempted in the past have also not yielded satisfactory results. The solution seems to lie in placing greater
trust on the claims filed by the exporters. Keeping this in view, I propose to make the following changes
in the scheme:

• Services received by exporters from goods transport agents and commission agents, where the
liability to pay service tax is ab initio on the exporter, would be exempted from service tax. Thus, there
would be no need for the exporter to first pay the tax and later claim refund.

• For other services received by exporters, the exemption would be operated through the existing
refund mechanism based on self-certification of the documents where such refund is below 0.25 per cent
of fob value, and certification of documents by a Chartered Accountant for value of refund exceeding the
above limit.
131. The Export Promotion Councils and the Federation of Indian Export Organizations (FIEO)
provide a valuable service in augmenting our export effort. I propose to exempt them from the levy of
service tax on the membership and other fees collected by them till 31st March, 2010 .

132. In the goods transport sector, service tax is currently levied on transport of goods by road, by air,
through pipelines and in containers. However, goods carried by Indian railways or those carried as
coastal cargo or through inland waterways are not charged to service tax. In order to provide a level
playing field in the goods transport sector, I propose to extend the levy of service tax to these modes of
goods transport. The new levy is not likely to impact the prices of essential commodities or goods for
mass consumption, as suitable exemptions would be provided.

133. As the Hon’ble Members are aware, services provided by chartered accountants, cost accountants,
and company secretaries as well as by engineering and management consultants are presently charged to
service tax. Although there is a school of thought that legal consultants do not provide any service to
their client, I hold my distinguished predecessor in high esteem and disagree! As such, I propose to
extend service tax on advice, consultancy or technical assistance provided in the field of law. This tax
would not be applicable in case the service provider or the service receiver is an individual.

134. Vehicles having ‘Stage Carriage Permits’ and run by State undertakings are exempted from
service tax. However, transportation of passengers undertaken by private enterprises in vehicles having
‘Contract Carriage Permits’ is, subjected to service tax. In order to bring parity in tax treatment, I
propose to exempt such transportation also from the levy of service tax.

135. In July, 2008 goods transport agents (GTA) went on strike with several demands. One of the
demands that was accepted by the government was to exempt certain services, such as packing, cargo
handling and warehousing, provided to GTAs en route, from service tax. For this purpose an exemption
notification was issued. It was also demanded by goods transport agents that the proceedings already
initiated against such service providers should be dropped. The Government has accepted this genuine
demand. Therefore, I propose to make certain legislative changes required to fulfill this promise.

136. Copies of notifications giving effect to the changes in customs, central excise and service tax will
be laid on the Table of the House in due course.

137. My tax proposals on direct taxes are revenue neutral. On indirect taxes, they are estimated to yield
a net gain of Rs.2,000 crore for a full year.

CONCLUSION

138. As we begin this five year journey, the road ahead will not be easy. We will have to manage
uncertainties and there will be as many problems as there would be solutions. Mahatma Gandhi said and
I quote, “Democracy is the art and science of mobilizing the entire physical, economic and spiritual
resources of various sections of the people in the service of the common good of all.” This is precisely
what we will have to do. With strong hearts, enlightened minds and willing hands, we will have to
overcome all odds and remove all obstacles to create a brave new India of our dreams.

139. Madam Speaker, with these words I commend the budget to the House.
SPEECH OF SHREE PRANAB MUKHERJEE, MINISTER OF FINANCE INTRODUCING THE
INTERIM BUDGET FOR THE YEAR 2009-2010

I rise to present the Interim Budget for 2009-10.

2. Five years ago the people of India had voted for change. In the words of our Prime Minister, Dr.
Manmohan Singh, people had sought “a change in the manner in which this country is run, a change in
the national priorities and a change in the processes and focus of the Government”. The Common
Minimum Programme of the United Progressive Alliance, built around ‘Aam Aadmi’, was a response to
this call for change. As indicated by Shri P. Chidambaram in July 2004, this programme spelt out seven
clear economic objectives:

(i) maintaining a growth rate of 7-8 per cent per year for a sustained period;

(ii) providing universal access to quality basic education and health;

(iii) generating gainful employment and promoting investment;

(iv) assuring hundred days of employment to the breadwinner in each family at the minimum wage;

(v) focusing on agriculture, rural development and infrastructure;

(vi) accelerating fiscal consolidation and reform; and

(vii) ensuring higher and more efficient fiscal devolution.

3. As I present the sixth budget of the Government of the United Progressive Alliance which
completes its tenure in a couple of months, I can say with confidence that every effort has been made by
the government to deliver on the commitments made.

4. For the first four years of the UPA government, our policies ensured a dream run for the economy
with Gross Domestic Product (GDP) recording increase of 7.5 per cent, 9.5 per cent, 9.7 per cent and 9
per cent from fiscal year 2004-05 to 2007-08. For the first time, the Indian economy showed sustained
growth of over 9 per cent for three consecutive years. With per capita income growing at 7.4 per cent per
annum, this represented the fastest ever improvement in living standards over a four year period.

5. During this period, the fiscal deficit came down from 4.5 per cent in 2003-04 to 2.7 per cent in
2007-08 and the revenue deficit declined from 3.6 per cent to 1.1 per cent.

6. Investment and savings showed significant improvement. The domestic investment rate as a
proportion of GDP increased from 27.6 per cent in 2003-04 to over 39 per cent in 2007-08. The gross
domestic savings rate shot up from 29.8 per cent to 37.7 per cent during this period. The gross capital
formation in agriculture as a proportion of agriculture GDP improved from 11.1 per cent in 2003-04 to
14.2 per cent in 2007-08.

7. The buoyant growth of Government revenues facilitated fiscal consolidation as mandated in the
FRBM Act. The tax to GDP ratio increased from 9.2 per cent in 2003-04 to 12.5 per cent in 2007-08
bringing us within striking distance of the target for fiscal correction. This also enhanced our capacity to
raise resources internally to finance our growth at the rate of 9 per cent per annum during the Eleventh
Five Year Plan.

8. All this would not have been possible without the guidance
of UPA Chairperson, Smt. Sonia Gandhi, the inspiring leadership of Prime Minister, Dr. Manmohan
Singh and the hard work put in by my predecessor, Shri P. Chidambaram.

Mr. Speaker, Sir,

9. The growth drivers for this period were agriculture, services, manufacturing along with trade and
construction. Hon’ble Members will agree with me that the real heroes of India’s success story were our
farmers. Through their hard work, they ensured “food security” for the country. With record
procurement of 22.7 million tonnes of wheat and 28.5 million tonnes of rice for our Public Distribution
System in 2008, our granaries are full. During this four year period, the annual growth rate of agriculture
rose to 3.7 per cent. The production of foodgrains increased by about 10 million tonnes each year to
reach an all time high of over 230 million tonnes in 2007-08. Despite a high base, the outlook for 2008-
09 is encouraging with the country receiving normal rainfall during the agricultural
season. Manufacturing, registered as well as unregistered, recorded a growth of 9.5 per cent per annum in
the period 2004-05 to 2007-08. Similarly, communication and construction sectors grew at the rate of 26
per cent and 13.5 per cent per annum, respectively.

10. Though our growth is based largely on domestic efforts, foreign trade and capital inflows played
a catalytic role. India’s exports grew at an annual average growth rate of 26.4 per cent in US dollar terms
during this period. Foreign trade increased from 23.7 per cent of GDP in 2003-04 to 35.5 per cent in
2007-08. The conscious policy to gradually integrate the Indian economy with the world, opened new
opportunities for Indian corporates to build world scale plants and aim at global competitiveness.

11. In order to maintain a high GDP growth rate on a sustained basis with price stability, the Indian
economy had to face two inter-related macro-economic challenges. These relate to capital inflows and
global inflation. Profitable investment opportunities generated by high GDP growth attract foreign
capital. In 2007-08, capital inflows spurted to an unprecedented 9 per cent of GDP, far in excess of
current account financing requirements leading to large accumulation of reserves and build up of pressure
on prices.

12. During 2008-09, international prices of many essential commodities particularly fuel oils, food
and edible oils and metals rose to alarming levels. To cite just one example, the price of crude oil which
was US $ 28 per barrel in 2003-04 shot up to US $ 147 per barrel in 2008. The sharp rise in global
inflation, even with a moderated pass-through, put pressure on domestic prices. The WPI headline
inflation shot up to nearly 13 per cent in the first week of August 2008. To ease supply side constraints,
Government took a series of fiscal and administrative measures, in concert with monetary policy
measures by the Reserve Bank of India. RBI raised the interest rates to mop up excess liquidity. This, in
turn, had implications for the growth rate from the demand as well as supply side. These, along with
easing of global price pressures, led to a decline in domestic prices with inflation rate falling to 4.4 per
cent on January 31, 2009. We have weathered the crisis, but there is no room for complacency.
Outlook for the year 2008-09

Mr. Speaker, Sir, I now turn to the outlook for the current year and the events that have impacted
its prospects.

13. The global financial crisis which began in 2007 took a turn for the worse in September 2008 with
the collapse of several international financial institutions, including investment banks, mortgage lenders
and insurance companies. There has been a severe choking of credit since then and a global crash in
stock markets. The slowdown intensified with the US, Europe and Japan sliding into recession. Current
indications of the global situation are not encouraging. Forecasts indicate that the World economy in 2009
may fare worse than in 2008.

14. A crisis of such magnitude in developed countries is bound to have an impact around the world.
Most emerging market economies have slowed down significantly. India too has been affected. For the
first nine months of the current year, the growth rate of exports has come down to 17.1 per
cent. According to the latest figures available, the industrial production has fallen by 2 per cent year-on-
year basis in December 2008. In these difficult times, when most economies are struggling to stay afloat,
a healthy 7.1 per cent rate of GDP growth still makes India the second fastest growing economy in the
world.

15. To counter the negative fallout of the global slowdown on the Indian economy, our Government
took prompt action by providing substantial fiscal stimulus. The two packages announced on December
7, 2008 and January 2, 2009, provide tax relief to boost demand and aim at increasing expenditure on
public projects to create employment and public assets. In this context, the Government renewed its
efforts to increase infrastructure investments. In the period from August 2008 to January 2009 alone, the
Government accorded approval for 37 infrastructure projects worth Rs.70 thousand crore.

16. In addition to expanding public sector investment in infrastructure, our Government has also
taken steps to encourage private investment in infrastructure through Public Private Partnership (PPP). I
am happy to say that the Government of India has been successful in attracting private investment in
infrastructure sectors such as telecommunications, power generation, airports, ports, roads and
railways. Under the PPP mode, 54 Central Sector infrastructure projects with a total project cost of Rs.67
thousand seven hundred crore have been given in-principle or final approval by the PPP Appraisal
Committee and 23 projects amounting to Rs.27 thousand nine hundred crore have been approved for
viability gap funding in 2008-09.

17. To ensure that such projects do not face financing difficulties arising from the current downturn,
we have taken a new initiative for providing refinance to the banks for long term credit extended to these
projects. Accordingly, the Government has decided that India Infrastructure Finance Company Ltd.
(IIFCL) will refinance 60 per cent of commercial bank loans for PPP projects in critical sectors over the
next eighteen months or so. For this purpose, IIFCL has been authorized to raise Rs.10 thousand crore in
the market by the end of March 2009. An additional Rs.30 thousand crore can be raised if required. With
this, IIFCL and banks will be able to support projects involving a total investment of Rs.100 thousand
crore in infrastructure. Combined with the steps we are taking to increase public investment in
infrastructure, this will provide a big boost to such investment.
18. The RBI took a number of monetary easing and liquidity enhancing measures including reduction
in cash reserve ratio, statutory liquidity ratio and key policy rates. The objective was to facilitate flow of
funds from the financial system to meet the needs of productive sectors. Our Government has also
announced specific measures to address the impact of global slowdown on India’s exports. These include
extension of export credit for labour intensive exports, improving the pre and post shipment credit
availability, additional allocations for refund of Terminal Excise Duty/CST and export incentive
schemes, and removal of export duty and export ban on certain items. A Committee of Secretaries has
been set up to address, on continuing basis, procedural problems being faced by exporters.

Mr. Speaker, Sir,

19. The favorable economic environment created by the reforms of 1990’s gradually inspired the
confidence of foreign investors in our economy, leading to rise in capital inflows. India has evolved a
liberal and transparent policy for Foreign Direct Investment (FDI). Except for a small negative list, FDI is
allowed mostly on the automatic route. During 2007-08, we received a record US $ 32.4 billion of FDI.
In spite of global financial crisis, inward FDI flows during April-November 2008 were US$ 23.3 billion,
representing a growth of 45 per cent over the same period in 2007. Latest figures show a slow down. To
provide an impetus to foreign investment in India, guidelines are being further simplified and made
homogenous and consistent across various sectors.

20. Extraordinary economic circumstances merit extraordinary measures. Now is the time for such
measures. Our Government decided to relax the FRBM targets, in order to provide much needed demand
boost to counter the situation created by the global financial meltdown. Indeed, depending on the
response of the domestic economy and the revival of the global economy, there may be a need to consider
additional fiscal measures when the regular budget is presented by the new Government after the
elections. However, the medium term objective must be to revert to the path of fiscal consolidation at the
earliest. The Thirteenth Finance Commission has been asked to lay down the roadmap in this regard. The
new Government will have to address it in the light of future developments in the domestic and
international economic environment.

21. The recent developments have also brought out the need for accelerating the pace of policy
reforms, including in the financial sector, to make the economy more competitive. The economic
regulatory and oversight systems have to be made more efficient and effective to bring the economy back
to the 9 per cent growth path at the earliest.

22. We also have to take note of Prof. Amartya Sen’s observation and I quote “along with old slogan
of ‘growth with equity’, we also need a new commitment towards ‘down turn with security’, given the
fact that occasional downturns are common - possibly inescapable - in market economies”
unquote. Employment generation schemes have to be expanded and social security nets have to be
strengthened to protect the vulnerable sections of our society.

Mr. Speaker, Sir,

23. Let me now briefly review the progress in some important areas.
Initiatives and Achievements

24. UPA Chairperson, Smt. Sonia Gandhi had said “To be equitable, economic growth has to be
sustainable. To be sustainable, economic growth has in turn to be all inclusive. All inclusive is no longer
the greatest good of the greatest number. It is actually Sarvoday or the rise of all”. In pursuance of that
vision, the UPA Government in the National Common Minimum Programme had declared its intention to
make growth more inclusive. The Eleventh Five Year Plan provides a comprehensive framework and
strategy for making growth both faster and more inclusive. Impressive growth rates and buoyant
revenues gave us the head room to fund ambitious programmes to achieve these objectives.

Agriculture

25. Never losing sight of our commitment to the welfare of Aam Aadmi and recognizing that 60 per
cent of our population lives in villages, focused attention has been given by our Government to the
agriculture sector:

(i) In the period between 2003-04 and 2008-09, our Government increased the plan allocation for
agriculture by 300 per cent.

(ii) The Rashtriya Krishi Vikas Yojana was launched in 2007-08 with an outlay of Rs.25 thousand
crore, to increase growth rate of agriculture and allied sector to four per cent per annum during the
Eleventh Plan period. The scheme has encouraged State Governments to take initiatives to develop the
agricultural sector.

(iii) On June 18, 2004 our Government had announced a package for doubling the flow of credit to
agriculture. The credit disbursements have already gone up from Rs.87 thousand crore in 2003-04 to
about Rs.2.5 lakh crore in 2007-08 marking a three fold increase. To strengthen the short-term co-
operative credit structure, the Government is implementing a revival package in 25 States involving a
financial assistance of around Rs.13 thousand five hundred crore. Government will continue to provide
interest subvention in 2009-10 to ensure that farmers get short term crop loans upto Rs.3 lakhs at 7 per
cent per annum.

(iv) The Agricultural Debt Waiver and Debt Relief Scheme for farmers, announced in the last budget
speech, was implemented by June 30, 2008 as scheduled. The Scheme has been able to restore
institutional credit to indebted farmers. As per early reports, the total debt waiver and debt relief so far,
amounts to Rs.65 thousand three hundred crore covering 3.6 crore farmers.

(v) Our Government is committed to ensuring “food security” in the country and meeting the food
requirement of the poor under the Targeted Public Distribution System (TPDS). In spite of higher
procurement costs and higher international prices during the last five years, the central issue prices under
the TPDS have been maintained at the level of July 2000 in case of Below Poverty Line (BPL) and
Antyodaya Anna Yojana (AAY) categories and at July 2002 levels for Above Poverty Line (APL)
category.
(vi) Our Government has ensured remunerative prices for the farmers for their crops. Since 2003-04,
Minimum Support Price (MSP) for the common variety of paddy was increased from Rs.550 to Rs.900
per quintal for the crop year 2008-09. In case of wheat the increase was from Rs.630 in 2003-04 to
Rs.1,080 per quintal for the year 2009.

Rural Development

26. Our Government has accorded highest priority to rural development. A number of programmes
have been designed to help improve the living conditions of rural population.

(i) The Rural Infrastructure Development Fund (RIDF) is the main instrument to channelize bank
funds for financing rural infrastructure. It is popular among State Governments. The corpus of RIDF was
increased from Rs.5,500 crore in 2003-04 to Rs.14 thousand crore for the year 2008-09 ensuring greater
availability of funds for its activities. A separate window for rural roads was created under RIDF with a
corpus of Rs.4 thousand crore for each of the last three years.

(ii) Given the importance accorded to housing for the weaker sections in rural areas, 60 lakh houses
were to be constructed under the Indira Awaas Yojana by 2008-09. In the period between 2005-06 and
December 2008, 60.12 lakh houses have already been constructed.

(iii) Panchayat Empowerment and Accountability Scheme (PEAIS) is an existing scheme under the
central sector plan which has been recognized as a powerful instrument to incentivise States to empower
the Panchayats and put in place accountability systems to make their functioning transparent and efficient.
Acknowledging the need to build in incentives for encouraging States to devolve funds, functions and
functionaries and set up an institutional framework for such devolution, the Government proposes to
substantially expand the scheme by making suitable allocations.

(iv) The Department of Posts has launched “Project Arrow” to revitalize its core operations and to
provide new technology enabled service to the common man. So far this has been successfully
implemented in 500 post offices in the country. This Project will receive full government support as it
will enhance the services offered to masses and would also lay the foundation for a vibrant delivery
mechanism for many social sector schemes such as pension and National Rural Employment Guarantee
Scheme (NREGS).

Mr. Speaker, Sir,

Education

27. It has been said that literacy levels are a measure of a nation’s degree of commitment to social
justice. A literate environment is essential for ensuring universal elementary education, reducing child
mortality, curbing population growth, ensuring gender equality and acquiring essential livelihood skills:

(i) The year 2008-09 was a momentous year for secondary education when several major initiatives,
including a new Centrally Sponsored Scheme to universalise education at secondary stage was launched.
(ii) Higher education is of vital importance for the country in consolidating its comparative advantage
in skill and knowledge intensive services and in building a knowledge based society. Our Government
has taken a decisive initiative in this direction. The outlay on Higher Education has been increased 900
per cent in the Eleventh Five Year Plan. An Ordinance has been promulgated for establishing 15 Central
Universities. Six new Indian Institutes of Technology (IIT) have started functioning in Bihar, Andhra
Pradesh, Rajasthan, Orissa, Punjab and Gujarat during 2008-09. Two more IITs in Madhya Pradesh and
Himachal Pradesh are expected to commence their academic sessions in 2009-10. With the
commencement of academic sessions in the Indian Institutes of Science Education and Research (IISERs)
at Bhopal and Thiruvananthapuram, all 5 IISERs announced earlier are now functional. Two new schools
of Planning and Architecture at Vijayawada and Bhopal have already started functioning. Teaching is
expected to commence in four of the six new Indian Institutes of Management, proposed for the Eleventh
Plan period, from the academic year 2009-10. These are in Haryana, Rajasthan, Jharkhand and Tamil
Nadu.

(iii) The UPA Government has revised the Educational Loan Scheme, as a result of which the number
of loan accounts has increased by more than four times during the period March 31, 2004 to September
30, 2008 from 3.19 lakhs to 14.09 lakhs. The loan outstanding during this period has increased from Rs.4
thousand five hundred crore as on March 31, 2004 to Rs.24 thousand two hundred and sixty crore as on
September 30, 2008.

(iv) Following our announcement in 2004-05, nearly 500 ITIs have been upgraded into centres of
excellence. As an integral part of the coordinated action plan for skill development, the Government
created the National Skill Development Corporation in July 2008 with an initial corpus of Rs.1 thousand
crore to stimulate and coordinate private sector participation in skill development.

Mr. Speaker, Sir,

28. I now turn to the social sector.

Social Sector

29. The UPA Government has launched many new schemes to provide steady monetary assistance to
weak and downtrodden people of our society. Emphasis has also been given to the empowerment of
women which has been an abiding objective of the UPA Government. I give some details of the important
schemes:

(i) To further strengthen social and economic inclusion of minority communities, the new Ministry of
Minority Affairs has been set up. Our Government has announced the Prime Minister's 15-point
programme for the welfare of the minorities. Adequate allocations are being made to support this
initiative.

(ii) The Scheduled Tribes and other Traditional Forest Dwellers (Recognition of Forest Rights) Act
2006, which was notified for operation with effect from December 31, 2007, has been widely welcomed
by Scheduled Tribes and other traditional forest dwellers who now have legal rights on forest land which
they have been cultivating or using over generations for eking out their livelihood.
(iii) The National Safai Karamchari Finance and Development Corporation (NSKFDC) has been
mandated to provide loans at concessional rates for economic development of persons engaged in unclean
occupations. The authorized capital of this organization is being raised from Rs.200 crore to Rs.300
crore to enable it to effectively carry out its mandate. The scope of the pre-matric scholarship for children
of those engaged in unclean occupations has been expanded and the rates of scholarships have been
doubled in 2008-09. The annual ad hoc grant has also been substantially increased by almost 50 per cent
as compared to the earlier rates.

(iv) Efforts of our Government and the financing institutions have led to a rapid growth of credit
linked Women Self Help Groups which are now over 29 lakh in number. In this context, the Rashtriya
Mahila Kosh will be strengthened by enhancing its authorized capital.

(v) In December 2008, ‘Priyadarshini Project’, which is a rural women’s empowerment and livelihood
programme, was launched in U.P. with the assistance of IFAD. The project will be implemented as a pilot
in the district of Madhubani and Sitamarhi in Bihar and Shravasti, Bahraich, Rai Bareli and Sultanpur in
U.P.

(vi) A revised and modified scheme named ‘Indira Gandhi National Old Age Pension Scheme’ was
launched on November 19, 2007. This scheme covers all persons aged 65 years and above belonging to
BPL households. So far 146 lakh persons have benefited from this scheme during the current financial
year.

(vii) Two new schemes - Indira Gandhi National Widow Pension Scheme and Indira Gandhi National
Disability Pension Scheme - are being launched in the current year. The Indira Gandhi National Widow
Pension Scheme will provide pension of Rs.200 to widows between the age groups of 40-64 years. The
Indira Gandhi National Disability Pension Scheme aims to provide pension to severely disabled persons.

(viii) In order to empower young widows in the age group 18-40 and equip them to stand on their own
feet, I propose to give them priority in admissions to ITIs, Women ITIs and National/Regional ITIs for
Women. Government will bear the cost of their training and provide stipend of Rs.500 per month.

(ix) The Government launched Rashtriya Swasthya Bima Yojana for BPL families in the unorganized
sector on October 1, 2007. Up to January 15, 2009, 22 States and Union Territories have initiated the
process to implement the scheme. The Government of India also launched the Aam Aadmi Bima Yojana
(AABY) on October 2, 2007. The AABY is a Scheme for death and disability cover of rural landless in
the country in conjunction with the State Governments. Upto December 31, 2008, the Scheme has
covered 60.32 lakh lives.

Mr. Speaker, Sir,

Public Sector Enterprises

30. We have created a strong public sector which has evolved in response to the nation’s needs and
provided stability to our development efforts. When the UPA Government took charge, the turnover of
Central Public Sector Enterprises (CPSEs) in 2003-04 was Rs.5 lakh 87 thousand crore which has grown
by 84 per cent to Rs.10 lakh 81 thousand crore in 2007-08. During the same period, profits of CPSEs
have increased by 72 per cent from Rs.53 thousand crore to Rs.91 thousand crore and their contribution to
the Central Exchequer by way of dividend, interest and taxes and duties has recorded an increase of 86
per cent. The number of loss making enterprises has come down from 73 in 2003-04 to 55 in 2007-08 and
the number of profit making enterprises has gone up from 143 to 158 during the same period.

31. In order to maintain ethics and probity in the functioning of CPSEs, the Government approved the
implementation of Guidelines on Corporate Governance in CPSEs in June, 2007.

32. In November 2007, Government constituted the National Investment Fund into which the
proceeds from disinvestment of Government equity in Central Public Sector Enterprises (CPSEs) are
deposited. Three-quarters of annual income of the Fund will be used to finance select social sector
schemes which promote education, health and employment. The residual 25 per cent annual income of the
Fund will be used to meet the capital investment requirements of profitable and revivable CPSEs. As on
December 31, 2008, the corpus of the Fund was about Rs.1815 crore.

Financial Sector Reforms

33. Over past years, technological, institutional and legal reforms in the financial sector have resulted
in Public Sector Banks achieving significant improvement in their financial health. The asset quality has
improved and NPAs have declined considerably from 7.8 per cent on March 31, 2004 to 2.3 per cent on
March 31, 2008.

34. In the case of Regional Rural Banks (RRBs), a process of amalgamation and recapitalization of
those with negative networth has been initiated. Over the last four years, 196 RRBs have been merged
into 85 RRBs. The Central Government has contributed Rs.652 crore for the capitalization of RRBs upto
December 31, 2008.

35. The UPA Government has undertaken a number of reforms in the last four years to deepen and
widen the Securities markets and strengthen the regulatory mechanisms for these markets. The initiatives
include reforms in the corporate bond market, participation of foreign institutional investors, foreign
investment in stock exchanges, setting up of a dedicated training and research institute in the securities
market, making PAN the sole identification number, streamlining the process and grading of initial public
offering etc. Systems and practices have been put in place to promote a safe, transparent and efficient
market and to protect market integrity.

36. The Government undertook a comprehensive revision of the Companies Act, 1956 to make it a
compact law that, while responding to the changes in the business environment, would enable adoption of
internationally accepted best practices. The Companies Bill, 2008 based on this exercise, has been
introduced in Parliament.

Mr. Speaker, Sir,

Tax effort

37. In the days of financial stress, tax rates must fall and our ability to pay taxes must rise. Therefore,
our Government undertook comprehensive reforms of the tax system, both the direct and the indirect tax
system, with a view to improving its efficiency and equity. Distortions within the tax structure have been
reduced by expanding the tax base and moderating the tax rates. The personal income-tax rates have been
rationalized by increasing the threshold limit and adjusting the tax slabs to provide relief to taxpayers.
Similarly, Customs Duty rates have been steadily reduced to eliminate the bias against the export sector
and promote competition and efficiency in the manufacturing sector. The rates of Union Excise Duties
and Service Tax have also been rationalized to enable eventual shift to the Goods and Services Tax on
April 1, 2010. The Government also facilitated the introduction of the State level VAT in April 2005.

38. These structural changes were also supported by undertaking modernisation of the business
processes of the tax administration through extensive use of information technology, viz., e-filing of
returns, e-payment of taxes, issue of refunds through ECS and refund bankers, computer assisted selection
of returns for scrutiny, establishing taxpayer information system and a computerised tax payment
reporting system. These measures have enabled the tax administration to enhance its functional efficiency
and provide better taxpayer service leading to increased compliance levels. To prevent movement of
contraband goods across the country’s sea borders, the Government has sanctioned acquisition of 109
marine vessels for the Customs Department.

Administrative Reforms

39. The Government set up the second Administrative Reforms Commission in August 2005 with a
mandate to suggest measures to achieve a proactive, responsive, accountable, sustainable and efficient
administration for the country at all levels of the government. The Commission has brought out number
of reports with practical recommendations, providing a starting point for improving efficiency in the
delivery of public services. The enactment of the Right to Information Act in 2005 at the Centre and in
many States has bridged a critical gap in the public decision-making process, ushering in greater
accountability of the public servants.

40. The Sixth Central Pay Commission submitted its recommendations in March, 2008. Government
considered and improved upon the recommendations of the Sixth Central Pay Commission. This has
benefited over 45 lakh Central Government employees including Defence Forces and Para Military forces
and over 38 lakh pensioners. It is my hope that this will not only improve the quality of administration
but will also help the economy by supporting demand.

Revised Estimates 2008-09

41. Mr. Speaker, Sir, I shall now briefly go over the Revised Estimates for 2008-09.

42. The Budget Estimate for 2008-09 had placed the total expenditure at Rs.7,50,884 crore. This has
now been revised to Rs.900,953 crore, showing an increase of Rs.1,50,069 crore.

43. Plan Expenditure for 2008-09 was placed at Rs.2,43,386 crore in the Budget Estimate. It has now
gone up to Rs.2,82,957 crore in the Revised Estimate. The additional plan spending of Rs.39,571 crore is
on account of an increase in Central Plan by Rs.24,174 crore and an increase of Rs.15,397 crore in the
Central Assistance to State and UT Plans. The Central Plan expenditure has increased for Rural
Development, Atomic Energy, Telecommunications, Textiles, Urban Development, Youth Affairs and
Sports and Railways. The increase in Central Assistance for State and UT Plans is on account of
additional Central Assistance for Externally Aided Projects, Accelerated Irrigation Benefit Programme,
Roads and Bridges, National Social Assistance Programme, Jawaharlal Nehru National Urban Renewal
Mission and Tsunami Rehabilitation.

44. On the Non-Plan side, the additionality of Rs.1,10,498 crore in the Revised Estimates is
accounted for by an increase in the expenditure of Rs.44,863 crore on fertilizer subsidy, Rs.10,960 crore
on food subsidy, Rs.15,000 crore on Agricultural Debt Waiver and Debt Relief Scheme, Rs.7,605 crore
on Pensions, and Rs.5,149 crore on Police. An additional amount of Rs.9,000 crore has also been
provided for Defence expenditure.

45. Non-Tax Revenues constitute an important component of our receipts. As against the Budget
Estimates of Rs.95,785 crore for 2008-09, the Revised Estimates for the Non-Tax Revenues are
Rs.96,203 crore.

46. In keeping with the recent trend, the actual tax collections during
2007-08 exceeded the Revised Estimates for 2007-08, both for Direct and Indirect Taxes. However, for
2008-09, the RE of tax collection is projected at Rs.6,27,949 crore as against the BE of Rs.6,87,715
crore. This shortfall is primarily on account of the Government's pro-active fiscal measures initiated to
counter the impact of global slowdown on the Indian economy. A substantial relief of about Rs.40,000
crore has been extended through tax cuts, including a fairly steep across the board reduction in Central
Excise rates in December, 2008. Despite this, it is expected that the tax collection in 2008-09 would
exceed last year’s collection.

47. Taking into account the variations in receipts and expenditure, the current year is expected to end
with a Revenue Deficit of Rs.2,41,273 crore as against the budgeted figure of Rs.55,184 crore.
Accordingly, the revised Revenue Deficit stands at 4.4 per cent of GDP instead of 1.0 per cent in the
Budget Estimates. Similarly, the fiscal deficit for 2008-09 has gone up from Rs.1,33,287 crore in the BE
to Rs.3,26,515 crore in the RE. The revised fiscal deficit is estimated at 6 per cent of the GDP as against
the budgeted figure of 2.5 per cent.

48. Constitutional propriety requires that new Government formulates the tax and expenditure policies
for 2009-10. These policies, in the medium term perspective, would have to:

(a) pursue macro economic policies to sustain a growth rate of at least 9 per cent per annum over an
extended period of time;

(b) strengthen the mechanisms for inclusive growth for creating about 12 million new work
opportunities per annum;

(c) reduce the proportion of people living below poverty line to less than half from current levels by
2014;

(d) ensure that Indian agriculture continues to grow at annual rate of at least 4 per cent;

(e) bridge the infrastructure gap by increasing the investment in infrastructure to more than 9 per cent
of GDP by 2014;
(f) support Indian industry to meet the challenge of global competition and sustain the growth
momentum in exports;

(g) strengthen and improve the economic regulatory framework in the country;

(h) expand the range and reach of social safety nets by providing direct assistance to vulnerable
sections and insulate them from dislocative effects of slowdown in economy;

(i) strengthen the delivery mechanism for primary health care facilities with a view to improve
qualitatively the preventive and curative health care in the country;

(j) create a competitive, progressive and well regulated education system of global standards that
meets the aspiration of all segments of the society; and

(k) move towards providing energy security to all by pursuing an Integrated Energy Policy.

49. The term of the UPA Government comes to an end in a few months. Therefore, I am presenting
an Interim Budget for the purpose of Vote on Account to enable the Government to meet expenditure
during the first four months of the next financial year.

Mr. Speaker, Sir,

50. Let me now turn to the Estimates for the Interim Budget 2009-10.

Budget Estimates 2009-10

51. I am proposing the total expenditure for fiscal 2009-10 at Rs.9,53,231 crore. This includes a
provision of Rs.2,85,149 crore under plan and Rs.6,68,082 crore under non plan.

52. The plan allocation under various heads provided at this stage is limited to the provision at the BE
stage last year, plus additional amounts on account of the two stimulus packages, which has been
reflected in the Revised Estimates for 2008-09. It also reflects a modest increase in Central Assistance to
the States to enable the States to complement their budgetary resources. The total Gross Budgetary
Support (GBS) for the Plan at Rs.2,85,149 crore, is 17.16 per cent higher in nominal terms than the GBS
Plan for BE 2008-09.

53. The budgetary support to the Plan for 2009-10, in comparison to BE 2008-09 has been increased
for Department of Rural Development, Department of Road Transport and Highways, Railways, Ministry
of Power, Department of Industrial Policy and Promotion and Department of Information Technology
with a view to maintain the fiscal tempo to address the economic slowdown and meet the requirements of
rural and infrastructure development. In addition, enhanced Plan allocations have been provided for
Ministry of Youth Affairs and Sports and Ministry of Culture to ensure availability of adequate resources
for the preparation towards hosting of the Commonwealth Games next year. I have ensured adequate
allocations to our flagship programmes which directly impact Aam Aadmi:

(i) National Rural Employment Guarantee Scheme was launched in February 2006 and has now been
extended to all the districts of the country. During the year 2008-09, employment of 138.76 crore person
days, covering 3.51 crore households, has already been generated. The implementation of this
programme has resulted in increased wage employment, enhanced wage earnings, improved equity with
significant benefits flowing to SC/ST and women. This has also led to increased demand for and
consumption of wage goods. I propose an allocation of Rs.30,100 crore for this Scheme for the year
2009-10.

(ii) Sarva Shiksha Abhiyan has made significant contribution in providing access to and infrastructure
for elementary education. About 98 per cent of our habitations have been covered by primary schools and
the focus now is to improve the quality of elementary education. Between 2003-04 and 2008-09, the
allocation for this programme has been increased by 571 per cent. For the year 2009-10, I propose an
allocation of Rs.13,100 crore for this programme.

(iii) The national programme of Mid-day Meals in schools is the world’s largest school feeding
programme and has contributed to enhancement of school participation, reduction in class room hunger,
and fostering of social and gender parity. I propose an allocation of Rs.8,000 crore to this Scheme for the
year 2009-10.

(iv) In our Government’s efforts to universalize the Integrated Child Development Scheme (ICDS) in
the country, it was expanded twice in the last five years to cover the hitherto uncovered habitations across
the country. In our commitment to reduce the malnutrition levels in the country, the UPA Government has
recently adopted the New WHO Child Growth Standards for monitoring growth of children under ICDS.
I propose an allocation of Rs.6,705 crore for this Scheme for the year 2009-10.

(v) Jawaharlal Nehru National Urban Renewal Mission was launched to give focused attention to
integrated development for urban infrastructure and services in mission mode, in identified cities. A major
achievement of the UPA Government is development and extension of Mass Rapid Transport System
(MRTS) in major cities like Bengaluru, Chennai, Delhi, Hyderabad, Kolkata and Mumbai. Under
Jawaharlal National Urban Renewal Mission, 386 projects amounting to Rs.39,000 crore have been
sanctioned as of December 31, 2008. For the year 2009-10, I propose an allocation of Rs.11,842 crore for
this programme.

(vi) Rajiv Gandhi Rural Drinking Water Mission is envisaged to supply safe drinking water to
uncovered habitations and slipped back habitations. I propose an allocation of Rs.7,400 crore for this
programme for the year 2009-10.

(vii) Total Rural Sanitation Programme is a continuous process. I propose an allocation of Rs.1,200
crore for this programme for the year 2009-10.

(viii) National Rural Health Mission aims to bring about uniformity in quality of preventive and curative
healthcare in rural areas across the country. I propose an allocation of Rs.12,070 crore for this programme
during the year 2009-10.

(ix) Bharat Nirman is a time bound plan for building rural infrastructure. It has six components
namely, rural roads, telephony, irrigation, drinking water supply, housing and electrification. There has
been all round progress in the implementation of this programme. During 2005-2009, the allocation to
this programme has been increased by 261 per cent. For the year 2009-10, I propose an allocation of
Rs.40,900 crore for this programme.

54. The UPA Government has been working on improving arrangements to ensure that development
deliverables reach the intended beneficiaries. In order to do so efficiently, effectively and economically, a
comprehensive system of Unique Identity for the resident population of the country has been worked
out. The Unique Identification Authority of India is being established under the aegis of Planning
Commission for which a notification has been issued in January 2009. A provision of Rs.100 crore has
been made in the Annual Plan 2009-10 for this.

55. To ensure continuity in financing of rural infrastructure projects, I propose RIDF-XV with a
corpus of Rs.14,000 crore and continuation of the separate window for rural roads with a corpus of
Rs.4,000 crore.

56. To counter the negative impact on exports due to the global financial crisis, I propose to extend
the interest subvention of 2 per cent on pre and post shipment credit for certain employment oriented
sectors i.e. Textiles (including handloom & handicrafts), Carpets, Leather, Gem and Jewellery, Marine
products and SMEs beyond March 31, 2009 till September 30, 2009. This is expected to involve an
additional financial outgo of Rs.500 crore during Financial Year 2009-10.

57. Government would recapitalize the public sector banks over next two years to enable them to
maintain Capital to Risk Weighted Assets Ratio (CRAR) of 12 per cent and to ensure that credit growth
continues to sustain economic growth.

58. While the proposed provisions are appropriate for a Vote-on-Account, I would like to point out
that Plan expenditure for 2009-10 may have to be increased substantially at the time of the presentation of
the regular Budget, if we are to give the economy the stimulus it needs to cope with the global recession
that is likely to continue through the year. In the current environment, there is a clear need for contra-
cyclical policy and it calls for a substantial increase in expenditure in infrastructure development where
we have a large gap and in rural development where the programs such as Bharat Nirman and NREGS are
playing a vital social role. Since the scope for revenue mobilization is bound to be limited in a period of
economic slowdown, any increase in plan expenditure will increase the fiscal deficit. Indeed, we may
have to consider additional plan expenditure of anything from 0.5 per cent to 1.0 per cent of the GDP and
gear up our systems accordingly.

Mr. Speaker, Sir,

59. We are going through tough times. The Mumbai terror attacks have given an entirely new
dimension to cross-border terrorism. A threshold has been crossed. Our security environment has
deteriorated considerably. In this context, I propose to increase the allocation for Defence, which is a part
of non plan expenditure to Rs.1,41,703 crore. This will include Rs.54,824 crore for capital expenditure.
Needless to say, any additional requirement for the security of the nation will be provided for.

60. I am also making a provision of Rs.95,579 crore for major subsidies including food, fertilizer and
petroleum.
61. For the fiscal 2009-10, Gross Tax Revenue receipts at the existing rates of taxation are estimated
at Rs.6,71,293 crore and Centre’s net tax revenue at Rs.5,00,096 crore. With revenue expenditure
estimated at Rs.8,48,085 crore, the revenue deficit amounts to 4.0 per cent of GDP. Fiscal Deficit is
estimated at Rs.3,32,835 crore which is 5.5 per cent of GDP. This would be lower than in 2008-09, but
higher than would be appropriate under normal circumstances. However, conditions in the year ahead are
not likely to be normal and, therefore, the high fiscal deficit is inevitable. We will return to FRBM targets
once the economy is restored to its recent trend growth path.

62. Honourable members are aware that the ceiling of fiscal deficit that the States can incur in 2008-
09, in terms of the Debt Consolidation and Relief Facility set up under the Twelfth Finance Commission
award has been increased by 0.5 per cent of the GSDP to 3.5 per cent. This may have to be reviewed in
view of the response of the economy in the coming months.

Conclusion

63. India has arrived on the international economic scene. In the last five years, the Indian economy
has grown at an impressive 8.6 per cent which is much faster than ever before. This growth has been
more inclusive providing people expanded opportunities for livelihood. The creative energies of our
farmers, entrepreneurs, businessmen, scientists, engineers and workers have been unleashed.

64. Increased global competitiveness of Indian enterprise, its resilience to global shocks, and a
positive economic outlook has contributed to a marked change in the way the Indian economy is being
viewed, within and outside the country.

65. The successful launch of Chandrayaan and the historic feat of placing the Indian tri-colour on
Moon’s surface has made us members of a very select club of countries who have well developed space
programmes.

66. India has made determined progress in finding its rightful place in the Comity of Nations with a
credible voice that matters in the deliberations of the global political and economic order. We have
succeeded in dismantling the nuclear apartheid that India was subjected to for more than three
decades. This has opened up new opportunities for civil nuclear cooperation and cleared the pathways for
rapid industrialization of our country.

67. For all this and more, I would like to express my deep gratitude to UPA partners and supporters
who walked the extra mile with us in this journey.

68. Mr. Speaker, Sir, our people will soon be called upon to exercise their democratic right to choose
the next Government. The Indian people have repeatedly shown that they can be relied upon to make
sound decisions to secure the nation’s future. They have seen how the ‘Aam Aadmi’ has become the focus
of the development process. They have also seen how our Government has successfully steered the
country through difficult times. They have experienced the joy of being citizens of a proud nation
moving ahead with confidence. I have no doubt that when the time comes, our people will recognize the
hand that made it all possible. The hand that alone can help our nation on the road to peace and
prosperity.

69. Sir, with these words, I commend the Interim Budget to the House.
 SPEECH OF SHREE SHRI P. CHIDAMBARAM, MINISTER OF FINANCE INTRODUCING
THE BUDGET FOR THE YEAR 2008-2009

I rise to present the Budget for 2008-09. This House and the United Progressive Alliance
Government have bestowed upon me the honour of presenting all five Budgets on behalf of a Government
- a rare honour that I have the privilege to share with only one of my distinguished predecessors, Dr.
Manmohan Singh.

2. Honourable Members! The India growth story, so far, has been an absorbing and inspiring tale.
Beginning January 1, 2005, the economy has recorded a growth rate of over 8 per cent in 12 successive
quarters up to December 31, 2007. In the first three years of the UPA Government, the Gross Domestic
Product (GDP) increased by 7.5 per cent, 9.4 per cent and 9.6 per cent, resulting in an unprecedented
average growth rate of 8.8 per cent. In the current year too, according to the Advance Estimates by the
Central Statistical Organisation (CSO), the growth rate will be 8.7 per cent - although I am confident that
we will maintain the average of 8.8 per cent. The drivers of growth continue to be "services" and
"manufacturing", which are estimated to grow at 10.7 per cent and 9.4 per cent, respectively.

3. Nevertheless, 2007-08 has been the most challenging of the last four years. At the beginning of the
year, the outlook for the global economy was benign. Our economy, thanks to our own policies as well as
globalisation, was poised to record another year of high growth: in fact, the first half of 2007-08 returned
a growth of 9.1 per cent. However, since August 2007, the financial markets in the developed countries
have witnessed considerable turbulence that has not yet abated. The consequences for developing
countries are also not yet clear.

4. Moreover, agriculture has struck a disappointing note. Despite a fine start in the first half of 2007-08,
the growth rate for the whole year in agriculture is estimated at only 2.6 per cent.

5. There are other downside risks too. World prices of crude oil, commodities and food grains have risen
sharply in the period April 2007 to January 2008. The position of crude oil is well known to this House.
Among commodities, the prices of iron ore, copper, lead, tin, urea etc are elevated. The prices of wheat
and rice have increased in the world market by 88 per cent and 15 per cent, respectively. All these trends
are inflationary, and there is pressure on domestic prices, especially on the prices of food articles.
Consequently, the management of the supply side of food articles will be the most crucial task in the
ensuing year.

6. We have also witnessed capital inflows that are far in excess of the current account deficit. This poses a
challenge to monetary management. The solution lies in increasing the absorptive capacity of the
economy in the medium term. In the short term, it is our responsibility to manage the flows more actively.
Government will, in consultation with the RBI, continue to monitor the situation closely and take such
temporary measures as may be necessary to moderate the capital flows consistent with the objective of
monetary and financial stability.

7. Keeping inflation under check is one of the cornerstones of our policy. Recently, the Prime Minister
declared, "I think no Government in our country can be oblivious to the objective of ensuring reasonable
price stability without hurting the growth process." There can be no clearer enunciation of policy.
However, since the downside risks have increased worldwide, we must be vigilant and prepared to make
swift adjustments in our policies to achieve the goal of growth with price stability.
8. Let me first deal with agriculture, briefly for the present, and at some length later. The Ministry of
Agriculture has estimated that the total output of food grains in 2007-08 will be 219.32 million tonnes and
that will be an all time record. In particular, production of rice is estimated at 94.08 million tonnes; maize
at 16.78 million tonnes; soya bean at 9.45 million tonnes; and cotton at 23.38 million bales (of 170 kg
each) - and each of these will be an all time record. Government is conscious that while a lot has been
done, a lot more needs to be done. Since the last Budget, Government has formulated and announced the
National Policy for Farmers. Besides, Government has launched the Rashtriya Krishi Vikas Yojana with
an outlay of Rs.25,000 crore and the National Food Security Mission with an outlay of Rs.4,882 crore.
Both schemes will be implemented during the Eleventh Five Year Plan period. We are determined to
become self-sufficient in food grains. Presently, I shall place before this House a number of new
initiatives in the agriculture sector.

The Growth Story: Faster and more inclusive

9. To return to the India growth story, I am of the firm belief that we owe our sustained progress to the
policy of economic reforms first ushered in by a Congress Government and now carried forward by the
UPA Government.

10. If 1984 and 1991 were turning points in the history of India's economy, 2004 was another turning
point. Confident that high growth was sustainable, the UPA Government had declared in the National
Common Minimum Programme its intention to make growth more inclusive. Sir, I ask this House,
respectfully, to judge our record on inclusive growth from the following sample of facts:

• agricultural credit doubled in the first two years of this Government and is poised to reach a level of
Rs.240,000 crore by March 2008.

• the National Rural Employment Guarantee Scheme has proved to be a historic measure of
empowerment of Scheduled Castes and Scheduled Tribes and, especially, of women.

• the Mid Day Meal Scheme is the largest school lunch programme in the world covering 11.4 crore
children.

• the National Rural Health Mission has taken improved health care to rural India by strengthening the
primary health centres of which 8,756 have been made 24 x 7.

• the Kasturba Gandhi Balika Vidyalaya Scheme has enrolled 182,000 girls in residential schools, thus
helping to bridge the gender gap in education.

Bharat Nirman

11. Bharat Nirman has made impressive progress in 2007-08. This ambitious programme is now over
1,000 days old. At the current pace, on each day of the year 290 habitations are provided with drinking
water and 17 habitations are connected through an all weather road. On each day of the year 52 villages
are provided with telephones and 42 villages are electrified. On each day of the year 4,113 rural houses
are completed.

12. Mr. Speaker, just as I sat down to write this speech, I received a slim volume titled "Indira Gandhi -
Selected Sayings". Within minutes, I found this gem and I quote, "The more one does, the more one
attempts, the more one is capable of doing". What I have narrated so far is indeed proof of more inclusive
growth, but if you ask me "can we do better?", my answer would be "we can and we should." Budget
2008-09 is about raising our sights and doing more and doing better.

II. THE ELEVENTH FIVE YEAR PLAN:

THE CRUCIAL SECOND YEAR

13. The Eleventh Plan has started on a note of robust growth. Never before did we start a Plan with a first
year growth rate of 8.7 per cent. Government regards the second year of the Plan as extremely critical to
the success of the Plan. 2008-09 should be a year of consolidation; of securing the ongoing programmes
on firm financial foundations; of close monitoring of implementation and enforcing accountability; and of
measuring the outcomes in terms of the targets achieved as well as their quality. The Plan documents
assumed that the Gross Budgetary Support (GBS) in the second year would be Rs.228,725 crore. In our
view, that will not be enough. Hence, I propose to increase the GBS to Rs.243,386 crore, which will
represent an increase of Rs.38,286 crore over the allocation in 2007-08.

14. Out of the GBS, the allocation for the Central Plan will be Rs.179,954 crore, marking an increase of
16 per cent over 2007-08.

15. Let me assure the House that all ongoing programmes will receive ample funds.

16. For Bharat Nirman, I propose to provide Rs.31,280 crore [including the North Eastern Region (NER)
component] as against Rs.24,603 crore in 2007-08.

Education: Sarva Shiksha Abhiyan

17. Education and health are the twin pillars on which rests the edifice of social sector reforms. The total
allocation for the education sector (including NER) will be increased by 20 per cent from Rs.28,674 crore
in 2007-08 to Rs.34,400 crore in 2008-09.

18. Of this, Sarva Shiksha Abhiyan (SSA) will be provided Rs.13,100 crore; the Mid-day Meal Scheme
will be provided Rs.8,000 crore; and secondary education will be provided Rs.4,554 crore.

19. The focus of SSA will shift from access and infrastructure at the primary level to enhancing retention;
improving quality of learning; and ensuring access to upper primary classes.

20. A Model School programme, with the aim of establishing 6,000 high quality model schools, will be
started in 2008-09. I propose to provide Rs.650 crore for the new scheme.

Jawahar Navodaya Vidyalaya

21. Jawahar Navodaya Vidyalayas are quality schools. In order to make such schools more accessible to
SC and ST students, Government plans to establish Navodaya Vidyalayas in 20 districts that have a large
concentration of Scheduled Castes and Scheduled Tribes. I propose to set apart Rs.130 crore in 2008-09
for this purpose.
Kasturba Gandhi Balika Vidyalaya

22. Kasturba Gandhi Balika Vidyalayas were set up to address the issue of equity in the education of girls
belonging to SC, ST, OBC and minority communities. So far, 1,754 vidyalayas have been started, and I
propose to allocate funds (as part of SSA) to set up an additional 410 vidyalayas in educationally
backward blocks. I also propose to provide a sum of Rs.80 crore to set up new or upgrade existing hostels
attached to the Balika Vidyalayas.

National Means-cum-Merit Scholarship

23. Last year, I had announced the National Means-cum-Merit Scholarship Scheme to enable students to
continue their education beyond class VIII and up to class XII. I had provided Rs.750 crore with the
promise to add a like amount every year for three more years. The Scheme will be implemented by award
of 100,000 scholarships beginning 2008-09. I intend to keep my promise and earmark another sum of
Rs.750 crore so that a corpus of Rs.3,000 crore will be built up in four years.

Nehru Yuva Kendra

24. 123 districts do not have a Nehru Yuva Kendra. I propose to allocate Rs.10 crore in 2008-09 to set up
a Kendra in each of these districts and to cover the recurring expenditure in the first year.

Mid-day Meal Scheme

25. The Mid-day Meal Scheme has been extended to upper primary classes in 3,479 educationally
backward blocks. The scheme will now be extended to upper primary classes in Government and
Government-aided schools in all blocks in the country. This will benefit an additional 2.5 crore children,
taking the total number of children covered under the Scheme to 13.9 crore.

Institutes of Higher Education

26. Knowledge is power. It is knowledge that will drive success in the 21st century. India has the
opportunity to become a knowledge society. Following the Prime Minister's announcement, an IIM at
Shillong; three IISERs at Mohali, Pune and Kolkata; and an IIIT at Kanchipuram have started
functioning. Government will establish one Central University in each of the hitherto uncovered States.
We propose to make a beginning in 2008-09 by establishing 16 Central Universities. Besides, we propose
to set up three IITs in Andhra Pradesh, Bihar and Rajasthan; two IISERs at Bhopal and
Tiruvananthapuram; and two Schools of Planning and Architecture at Bhopal and Vijayawada. More
institutes of higher education, as promised by the Prime Minister, will be established during the Eleventh
Plan period.

27. I also propose to make a grant of Rs.5 crore to the Deccan College Post-Graduate and Research
Institute, Pune which is one of the oldest institutions of modern learning in India.

Science and Technology

28. We must encourage our children to take to careers in science and research and development. Ministry
of Science and Technology will introduce a scheme called Innovation in Science Pursuit for Inspired
Research (INSPIRE) that will include scholarships for young learners (10-17 years), scholarships for
continuing science education (17-22 years) and opportunities for research careers (22-32 years). I propose
to provide Rs.85 crore in 2008-09 for this inspired contribution to building a knowledge society.

29. The recommendations of the National Knowledge Commission, submitted from time to time, are
under active consideration. Some of them have been incorporated in the Eleventh Plan. Government has
accepted an important recommendation to inter-connect all knowledge institutions through an electronic
digital broadband network. This will encourage sharing of resources and collaborative research. I propose
to provide Rs. 100 crore to the Ministry of Information and Technology for establishing the National
Knowledge Network.

Health

30. Turning to the health sector, I propose to allocate Rs.16,534 crore for the sector (including NER). This
will mark an increase of 15 per cent over the allocation in 2007-08.

National Rural Health Mission

31. The National Rural Health Mission (NRHM) is the key instrument of intervention by the Central
Government. The goal is to establish a fully functional, community owned, decentralised health delivery
system. 462,000 Associated Social Health Activists (ASHAs) and link workers have been trained and are
in place. 177,924 Village Health and Sanitation Committees are functional. 323 district hospitals have
been taken up for upgradation. Ambitious goals have been set for 2008-09, and I propose to increase the
allocation for NRHM to Rs.12,050 crore .

HIV/AIDS

32. The National Aids Control Programme will be provided Rs.993 crore. Studies have shown that the
prevalence rate of HIV/AIDS has come down from 0.9 per cent to 0.36 per cent, which is a matter of
some satisfaction.

Polio

33. The drive to eradicate polio continues with a revised strategy and a focus on the high risk districts in
Uttar Pradesh and Bihar. I propose to provide Rs.1,042 crore in 2008-09 for this purpose.

Rashtriya Swasthya Bima Yojana

34. Two major interventions are planned to be started in 2008-09. The first is the Rashtriya Swasthya
Bima Yojana that will provide a health cover of Rs.30,000 for every worker in the unorganised sector
falling under the BPL category and his/her family. I am happy to report that most of the States have
agreed to join the Yojana and it will be launched in Delhi and in the States of Haryana and Rajasthan on
April 1, 2008. I propose to provide Rs.205 crore as the Centre's share of the premia in 2008-09.

National Programme for the Elderly

35. The other major intervention will be for the elderly. A National Programme for the Elderly with a
Plan outlay of Rs.400 crore will be started in 2008-09. Among other measures, we will establish, during
the Eleventh Plan period, two National Institutes of Ageing, eight regional centres, and a department for
geriatric medical care in one medical college/tertiary level hospital in each State.
Integrated Child Development Services

36. The universalization of the Integrated Child Development Services (ICDS) Scheme is underway. At
the end of December 2007, 5,959 ICDS projects and 932,000 Anganwadi and mini-Anganwadi centres
were functional. The beneficiary count had increased to 629 lakh children and 132 lakh pregnant and
lactating mothers. I propose to enhance the allocation for ICDS from Rs.5,293 crore in 2007-08 to
Rs.6,300 crore in 2008-09.

37. I am also happy to announce that the remuneration of Anganwadi workers will be increased from
Rs.1,000 per month to Rs.1,500 per month. Likewise, the remuneration of Anganwadi Helpers will be
increased from Rs.500 per month to Rs.750 per month. Over 18 lakh Anganwadi workers and helpers will
benefit from the increase.

Flagship Programmes

38. As Honourable Members are aware, there are eight flagship programmes of the UPA Government. I
have dealt with two in the education sector (SSA & MMS) and two in the health sector (NRHM & ICDS).
Let me now refer to the allocations that I propose to make for the other four flagship programmes:

• The National Rural Employment Guarantee Scheme (NREGS) will be rolled out to all 596 rural districts
in India. Initially, we will provide Rs.16,000 crore. Let there be no apprehension in anyone's mind: as
demand rises, more money will be provided to meet the legal guarantee of employment.

• The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is the main vehicle for improving
urban infrastructure. It has also succeeded in driving reforms in urban governance and urban-related laws.
I propose to increase the allocation from Rs.5,482 crore in 2007-08 to Rs.6,866 crore in 2008-09.

• The goal of the Rajiv Gandhi Drinking Water Mission is to supply safe drinking water to uncovered
habitations and slipped back habitations as well as to address issues of quality. I propose to enhance the
allocation to Rs.7,300 crore in 2008-09 as against Rs.6,500 crore in 2007-08.

The Mission does not yet have a separate component for school children in water-deficient habitations.
Our children should have good, clean drinking water. Hence, I propose to allocate funds to the Mission
under a separate sub-head in order to install a standalone system to provide potable water to each school
in water-deficient habitations. The cost of each system, depending on the technology and design, is
estimated to be between Rs.15,000 to Rs.30,000. While a detailed plan for four years will be drawn up, I
propose to make an initial allocation of Rs.200 crore in 2008-09.

• The Total Sanitation Campaign is all about changing habits and mindsets, and it is a continuous process.
I propose to provide Rs.1,200 crore in 2008-09.

Desalination Plant

39. Honourable Members will recall that I had in July 2004 announced support for a desalination plant to
be installed near Chennai. A proposal has now been received from the Government of Tamil Nadu to
establish a plant under public private partnership. While the proposal will be examined for approval, I
propose to signal the Government's support to the project by setting apart Rs.300 crore in 2008-09.
North Eastern Region

40. The North Eastern Region (NER) will continue to receive special attention and enhanced allocations. I
propose to provide Rs.1,455 crore to the Ministry of Development of North Eastern Region (DONER).
Including that amount, the total Budget allocation for NER, spread over different ministries/departments,
will increase from Rs.14,365 crore in 2007-08 to Rs.16,447 crore in 2008-09.

41. The North Eastern Region and, especially, Arunachal Pradesh and the border areas face special
problems that cannot be tackled in the usual course or through normal schemes. Hence, Government
proposes to identify the urgent needs of these areas and address them through a special mechanism. In
order to jumpstart the process, I propose to set apart a sum of Rs.500 crore in a fund dedicated for the
purpose.

SC, ST, OBC and Minorities

42. Scheduled Castes, Scheduled Tribes, socially and educationally backward classes, and minorities will
continue to receive special attention.

Development and Finance Corporations

43. Development and Finance Corporations have been set up for certain disadvantaged groups. I propose
to contribute additional equity to these corporations in the following manner:

Rs. Crore

1 National Minorities Development and Finance Corporation 75.00

2 Three National Finance and Development Corporations for 106.50
Weaker Sections comprising

(i) Safai Karamcharis

(ii) Scheduled Castes

(iii) Backward Classes

3 National/State Scheduled Tribes Finance and Development 50.00
Corporations
4 National Handicapped Development Corporation 9.00

Scholarships

44. In previous Budgets, we had announced a slew of pre- and post-matric scholarship programmes for
SC, ST, OBC and minorities. All of them will be continued in 2008-09 with adequate funds as
summarised below:

Scheduled Castes Rs.804 crore

Scheduled Tribes Rs.195 crore

Other Backward Classes Rs.164 crore

Minorities (post-matric) Rs.100 crore

45. I propose to allocate a sum of Rs.75 crore in 2008-09 to the Rajiv Gandhi National Fellowship
Programme. As Honourable Members are aware, this programme supports SC and ST students pursuing
M.Phil and PhD courses.

Scheduled Castes and Scheduled Tribes

46. Following the practice initiated in 2005-06, I have included in the Budget documents a statement on
the schemes for the welfare of SCs and STs. I have provided Rs.3,966 crore for schemes benefiting SCs
and STs exclusively and Rs.18,983 crore for schemes where at least 20 per cent of the benefits are
earmarked for SCs and STs.

Minorities

47. The allocation to the Ministry of Minority Affairs will be increased from Rs.500 crore in 2007-08 to
Rs.1,000 crore in 2008-09. Government has taken up the report of the Justice Rajindar Sachar Committee
for speedy implementation. Apart from the schemes commenced in 2007-08, it is proposed to implement
the following schemes/measures in 2008-09:

• a multi-sectoral development plan for each of the 90 minority concentration districts will be drawn up at
a cost of Rs.3,780 crore. The allocation in 2008-09 will be Rs.540 crore;

• a pre-matric scholarship scheme with an allocation of Rs.80 crore next year;

• a scheme for modernising Madrassa education for which a provision of Rs.45.45 crore has been made in
2008-09;

• 256 branches of public sector banks have been opened this year until December 2007 in districts with
substantial minority population. 288 more will be opened by March 2008 and many more in
2008-09; and

• continuing the exercise started this year, more candidates belonging to the minority communities will be
recruited to the Central Para-Military Forces.

48. I also propose to provide Rs.60 crore to enhance the corpus fund of the Maulana Azad Education
Foundation.

Women and Children

49. I confess that policy makers often tend to forget that one-half of the population is constituted by
women and they are entitled to an equal share - and an equal say - in all programmes and schemes.
Gender Budgeting has gained wider acceptance and credibility. Four more ministries/departments have
set up gender budgeting cells taking the total number to 54. Honourable Members will find in the Budget
documents a statement embracing 33 demands for grants contributed by 27 ministries/departments and 5
Union Territories. According to the statement, Rs.11,460 crore has been provided for 100 per cent
women-specific schemes and Rs.16,202 crore for schemes where at least 30 per cent is for women-
specific programmes.

50. We will score another 'first' this year. A statement on child related schemes is included in the budget
documents and Honourable Members will be happy to note that the total expenditure on these schemes is
of the order of Rs.33,434 crore.

51. I propose to allocate Rs.7,200 crore in 2008-09 to the Ministry of Women and Child Development.
This represents an increase of 24 per cent over the allocation in 2007-08.

Self Help Groups

52. The Life Insurance Corporation of India (LIC) runs the Janashree Bima Yojana and offers life and
permanent disability cover to people in 44 categories. One of the categories is Self Help Groups, but only
35,000 SHGs have been covered so far. Considering the fact that there are over 30 lakh SHGs credit-
linked to banks, I propose to single out this category for special attention. I propose to ask LIC to rapidly
scale up the scheme and cover all women SHGs that are credit-linked to banks. Since one-half of the
premium is subsidized through the Social Security Fund, I propose to contribute Rs.500 crore to the
corpus of the fund with the assurance that annual contributions will be made as the scheme is scaled up.
This scheme, together with the Rashtriya Swasthya Bima Yojana, will mark the beginning of a new deal
for women by providing them life and health cover.

Supplement to GBS

53. Honourable Members will note that the allocations to various sectors and schemes are generous. I
hasten to add that more can be done and more will be done subject, however, to one condition: the
condition of performance. In the last Budget, I had announced a Plan 'B' and I was able to provide
additional Plan funds of Rs.8,365 crore in cash through two supplementaries - and a third one will follow
shortly. The nub of the problem lies in implementation - and implementation mostly is in the hands of
State Governments. This year too, I intend to mobilise additional resources to the tune of Rs.10,000 crore
to be used for Plan capital expenditure. This money - under Plan 'B' - will be available to
ministries/departments of the Central Government and to State Governments that achieve the physical and
quality targets set under different Plan schemes.

III. AGRICULTURE

54. I shall now return to the subject of agriculture.

55. I have already referred to the Rashtriya Krishi Vikas Yojana and the National Food Security Mission.

Agricultural Credit

56. Notwithstanding some shortcomings, the growth of agricultural credit has been impressive and for
this I have to thank our scheduled commercial banks and Regional Rural Banks. Between them, they
account for about 75-79 per cent of agricultural credit disbursed during any year. We will exceed the
target set for 2007-08. For 2008-09, I propose to set a target of Rs.280,000 crore.

57. Short-term crop loans will continue to be disbursed at 7 per cent per annum and I am making an initial
provision of Rs.1,600 crore for interest subvention in 2008-09.
Investment in Agriculture

58. What ails agriculture, among other things, is the fall in investment. However, there seems to be a
turnaround. Gross Capital Formation (GCF) in agriculture as a proportion of GDP in the agriculture
sector has improved from a low of 10.2 per cent in 2003-04 to 12.5 per cent in 2006-07. This, however,
needs to be raised to 16 per cent during the Eleventh Plan to achieve the target growth rate of 4 per cent.

Water Resources

59. Government is investing heavily in the Accelerated Irrigation Benefit Programme (AIBP) and the
Rainfed Area Development Programme and in the management and augmentation of water resources.
Under AIBP, 24 major and medium irrigation projects and 753 minor irrigation schemes will be
completed in this financial year, creating additional irrigation potential of 500,000 hectare. The outlay for
2007-08 was Rs.11,000 crore with a grant component of Rs.3,580 crore. These are being increased in
2008-09, and the estimated outlay is Rs.20,000 crore with a grant component of Rs.5,550 crore.

60. The Rainfed Area Development Programme has been finalised and will be implemented in 2008-09
with an allocation of Rs.348 crore. Priority will be given to those areas that have not been the
beneficiaries of watershed development schemes.

61. The centrally sponsored scheme on micro irrigation launched in January 2006 has brought an area of
548,000 hectare under drip and sprinkler irrigation within two years. I propose to allocate Rs.500 crore
for the scheme in 2008-09 with a target of covering another 400,000 hectare.

62. Agreements have been signed with the World Bank by the Governments of Tamil Nadu, Andhra
Pradesh and Karnataka under the project to repair, renovate and restore water bodies. The three
agreements are for a total sum of US$738 million that will benefit a command area of 900,000 hectare. I
am confident that similar agreements will be signed soon between the World Bank and the Governments
of Orissa, West Bengal and some other States.

Irrigation and Water Resources Finance Corporation

63. While these ongoing programmes will raise the level of investment in agriculture, I think that we need
an ambitious scheme of a much larger proportion. Government is of the view that massive investments
are required to be made in irrigation projects. Recently, Government has approved 14 projects that satisfy
certain criteria as national projects and three of them alone would require Rs.7,000 crore during the
Eleventh Plan period. Having regard to the magnitude of the challenge, I propose to establish the
Irrigation and Water Resources Finance Corporation (IWRFC) with an initial capital of Rs.100 crore
contributed by the Central Government. State Governments and other financial institutions will be invited
to contribute to the equity. It is our intention to mobilise the very large resources that will be required to
fund major and medium irrigation projects. I hope to be able to incorporate IWRFC as a company before
March 31, 2008.

National Horticulture Mission

64. The National Horticulture Mission (NHM) now covers 340 districts in 18 States and two Union
Territories. An area of 276,000 hectare has been brought under horticulture crops and an area of 56,000
hectare of old plantations has been rejuvenated. Special thrust is being given to the revival of crops such
as coconut, cashew and pepper. NHM will be provided Rs.1,100 crore in 2008-09.
65. 500 soil testing laboratories will be set up in the public and private sectors during the Eleventh Plan
period with Government assistance of Rs.30 lakh per laboratory. In addition, I propose to make a one-
time allocation of Rs.75 crore to the Ministry of Agriculture in order to provide one fully-fitted mobile
soil testing laboratory each to 250 districts of the country before March 2009.

Plantation Crops

66. The Special Purpose Tea Fund set up last year for re-plantation and rejuvenation will be provided
Rs.40 crore in 2008-09. I propose to provide funds for similar support to other plantation crops such as
cardamom (Rs.10.68 crore), rubber (Rs.19.41 crore) and coffee (Rs.18 crore). A crop insurance scheme
for tea, rubber, tobacco, chilli, ginger, turmeric, pepper and cardamom will be introduced next year.

67. In order to promote research on matters concerning the plantation sector, I propose to make a one-
time grant of Rs.5 crore to the Centre for Development Studies, Tiruvananthapuram. The Tocklai
Experimental Station at Jorhat of the Tea Research Association will celebrate its centenary in 2010. It is
in the process of upgrading its facilities and expanding its activities to cover other North Eastern States,
North Bengal and Darjeeling. I propose to make a special centenary grant of Rs.20 crore to the Tea
Research Association.

68. The National Plant Protection Training Institute at Hyderabad will be converted and upgraded into an
autonomous National Institute of Plant Health Management with budgetary support of Rs.29.4 crore.

Crop Insurance

69. Pending a decision on an alternative crop insurance scheme that is acceptable to the farmers as well as
viable to the insurer, the National Agriculture Insurance Scheme (NAIS) will be continued in its present
form for Kharif and Rabi 2008-09. I propose to provide Rs.644 crore for the scheme.

70. In addition, the Weather Based Crop Insurance Scheme that is being implemented as a pilot scheme in
selected areas of five States will be continued. I intend to provide Rs.50 crore for this purpose in 2008-09.

71. Government will continue to provide fertilisers to farmers at subsidized prices. Government is
examining proposals to move to a nutrient based subsidy regime and alternative methods of delivering the
subsidy.

Cooperative Credit Structure

72. The Prof. Vaidyanathan Committee's report on reviving the short-term cooperative credit structure is
under implementation in 17 States. So far, a sum of Rs.1,185 crore has been released by the Central
Government to four States. I am happy to report that the Central Government and the State Governments
have reached an agreement on the content of the package to implement the Prof. Vaidyanathan
Committee's report on reviving the long-term cooperative credit structure. The cost of the package is
estimated at Rs.3,074 crore, of which the Central Government's share will be Rs.2,642 crore or 86 per
cent of the total burden.

Debt Waiver and Debt Relief

73. Sir, while I am confident that the schemes and measures that I have listed above will give a boost to
the agriculture sector, the question that still looms large is what we should do about the indebtedness of
farmers. Honourable members will recall that Government had appointed a Committee under Dr. R.
Radhakrishna to examine all aspects of agricultural indebtedness. The Committee has since submitted its
report and it is in the public domain. The Committee had made a number of recommendations but stopped
short of recommending waiver of agricultural loans. However, Government is conscious of the
dimensions of the problem and is sensitive to the difficulties of the farming community, especially the
small and marginal farmers. Having carefully weighed the pros and cons of debt waiver and having taken
into account the resource position, I place before this House a scheme of debt waiver and debt relief for
farmers:

(i) All agricultural loans disbursed by scheduled commercial banks, regional rural banks and cooperative
credit institutions up to March 31, 2007 and overdue as on December 31, 2007 will be covered under the
scheme.

(ii) For marginal farmers (i.e., holding upto 1 hectare) and small farmers (1-2 hectare), there will be a
complete waiver of all loans that were overdue on December 31, 2007 and which remained unpaid until
February 29, 2008. In respect of other farmers, there will be a one time settlement (OTS) scheme for all
loans that were overdue on December 31, 2007 and which remained unpaid until February 29, 2008.
Under the OTS, a rebate of 25 per cent will be given against payment of the balance of 75 per cent.

(iii) Agricultural loans were restructured and rescheduled by banks in 2004 and 2006 through special
packages. These rescheduled loans, and other loans rescheduled in the normal course as per RBI
guidelines, will also be eligible either for a waiver or an OTS on the same pattern.

(iv) The implementation of the debt waiver and debt relief scheme will be completed by June 30, 2008.
Upon being granted debt waiver or signing an agreement for debt relief under the OTS, the farmer would
be entitled to fresh agricultural loans from the banks in accordance with normal rules.

(v) Government estimates that about three crore small and marginal farmers and about one crore other
farmers will benefit from the scheme. The total value of overdue loans being waived is estimated at
Rs.50,000 crore and the OTS relief on the overdue loans is estimated at Rs.10,000 crore.

I appeal to Honourable Members - as well as to the people of India - to give their unqualified support to
the scheme and help Government implement this momentous decision.

IV. INVESTMENT, INFRASTRUCTURE, INDUSTRY AND TRADE

74. Since 2005-06, there has been an unmistakable boom in investment. Two indicators tell the story. The
saving rate and the investment rate in 2003-04 were 29.8 per cent and 28.2 per cent, respectively.
According to estimates made by the Economic Advisory Council to the Prime Minister, they will be 35.6
per cent and 36.3 per cent, respectively, by the end of 2007-08. The trend is reflected on the foreign
investment side too. During the period April-December 2007-08, foreign direct investment amounted to
US$12.7 billion and foreign institutional investment to US$18 billion. Our policy is to encourage all
sources of investment, domestic and foreign, private and public.

75. In 2008-09, Government will provide Rs.16,436 crore as equity support and Rs.3,003 crore as loans to
Central Public Sector Enterprises (CPSEs). 44 CPSEs are listed today. It is the policy of the Government
to list more CPSEs in order to unlock their true value and improve corporate governance.
Rural Infrastructure Development Fund

76. The Rural Infrastructure Development Fund (RIDF) is the main instrument to channelize bank funds
for financing rural infrastructure, and it is quite popular among State Governments. Therefore, I propose
to raise the corpus of RIDF-XIV in 2008-09 to Rs.14,000 crore. I also propose to operate a separate
window under RIDF-XIV for rural roads with a corpus of Rs.4,000 crore.

Manufacturing Sector

77. There has been some moderation in the index of production of the six core infrastructure industries as
well as in the overall index of industrial production for the period April-December 2007-08. The decline
has been somewhat sharp in the case of consumer goods, especially consumer durables. The silver lining
is that the growth in capital goods is still very high at 20.2 per cent, indicating that industry continues to
make huge capital investments and has a positive outlook about the future. Manufacturing industries that
have grown more slowly than the average include food products, cotton textiles, textile products including
apparel, paper and transport equipment. Among the reasons for the moderation are a rise in interest rates
and the appreciation of the Rupee. There are limits to monetary policy accommodation, especially when
the need is to maintain price stability. However, some steps can be taken on the fiscal side and I shall,
presently, place before the House some proposals in order to stimulate industrial growth. Our goal is to
take the manufacturing growth rate to a double digit. This will also call for more reforms in the coal and
electricity sectors as well as confronting oligopolistic tendencies in the cement and steel sectors.

Power

78. The Eleventh Plan target for additional power generation capacity is 78,577 MW which is more than
the total capacity added in the previous three Plans. By end March 2008, we will achieve Commercial
Operation Date (COD) on about 10,000 MW, marking the best first year in any Plan period. Government
will redouble its efforts to ensure that the ambitious target for the Eleventh Plan is achieved.

79. The fourth Ultra Mega Power Project (UMPP) at Tilaiya will be awarded shortly. It is possible to
bring five more UMPPs in Chhattisgarh, Karnataka, Maharashtra, Orissa and Tamilnadu to the bidding
stage provided the States extend the required support. I urge them to do so.

80. Government has approved the continuation of the Rajiv Gandhi Grameen Vidyutikaran Yojana during
the Eleventh Plan period with a capital subsidy of Rs.28,000 crore. I propose to allocate Rs.5,500 crore in
2008-09 for the Yojana (including NER).

81. I propose to provide Rs.800 crore in 2008-09 for the Accelerated Power Development and Reforms
Project. However, it is the poor state of transmission and distribution (T&D) that is a drag on the sector.
Huge investments are required to be made in T&D, but linked to fundamental reforms. Hence, I propose
to create a national fund for transmission and distribution reform. The details of the scheme will be
worked out and announced very soon.

Roads

82. All phases of the National Highway Development Programme continue to make progress. The
completion ratio in the Golden Quadrilateral is 96.48 per cent and in the North South, East West Corridor
project is 23.36 per cent. Special attention is being paid to SARDP-NE, a programme devised for the
North Eastern region. 180 kms of roads were completed in 2007-08 and the target for 2008-09 is 300
kms. I propose to enhance the allocation for the NHDP from Rs.10,867 crore in 2007-08 to Rs.12,966
crore next year.

Oil and Gas

83. The 7th round of bidding under the New Exploration Licensing Policy (NELP) was launched in
December 2007 and bids have been invited for 57 exploration blocks. It is estimated that the round will
attract investment of the order of US$3.5 billion to US$8 billion for exploration and discovery.

Coal

84. 53 coal blocks with reserves of 13,842 million tonnes have been allotted during April-January 2007-
08 to Government and private sector companies. A new Coal Distribution Policy was notified in October
2007. A coal regulator will be appointed.

Information Technology

85. Government's forward looking policy is driving the growth of Information Technology and
Information Technology Enabled Services. I propose to enhance the allocation to the Department of
Information Technology from Rs.1,500 crore in 2007-08 to Rs.1,680 crore in 2008-09. A scheme for
establishing 100,000 broadband internet-enabled Common Service Centres in rural areas and a scheme for
establishing State Wide Area Networks (SWAN) with Central assistance are under implementation. A
new scheme for State Data Centres has also been approved. I propose to provide Rs.75 crore for the
common service centres, Rs.450 crore for SWAN and Rs.275 crore for the State Data Centres.

Textiles

86. The two principal schemes of the Ministry of Textiles - the Scheme for Integrated Textile Parks
(SITP) and the Technology Upgradation Fund (TUF) - will be continued in the Eleventh Plan period. All
30 integrated textile parks have been approved and 20 units in four parks have commenced production. I
propose to maintain the provision for SITP at Rs.450 crore in 2008-09. The provision for TUF will be
increased from Rs.911 crore in the current year to Rs.1,090 crore in 2008-09.

87. The cluster approach to the development of the handloom sector has made rapid progress. 250 clusters
are being developed. 443 yarn banks have been established. By March 2008, over 17 lakh families of
weavers will be covered under the health insurance scheme. I propose to increase the allocation to Rs.340
crore in 2008-09.

88. In order to scale up both infrastructure and production, it is proposed to take up six centres for
development as mega-clusters. Varanasi and Sibsagar will be taken up for handlooms, Bhiwandi and
Erode for powerlooms, and Narsapur and Moradabad for handicrafts. Each mega-cluster will require
about Rs.70 crore. I propose to start the process with an initial provision of Rs.100 crore in 2008-09.

Micro, Small and Medium Enterprises

89. Micro, small and medium enterprises will continue to receive support from the Government. I wish to
remove certain wrong perceptions about the sector. In the four years ending 2006-07, for which figures
are available, there has been a secular rise in the number of registered units, the number of unregistered
units, production, employment and exports. In order to give a fillip to the sector, I propose to create a risk
capital fund in the Small Industries and Development Bank of India (SIDBI). As on January 31, 2008, the
Credit Guarantee Trust with SIDBI had extended guarantees to 89,129 units for an amount of Rs.2,479
crore. SIDBI will reduce the guarantee fee from 1.5 per cent to 1 per cent and the annual service fee from
0.75 per cent to 0.5 per cent for loans up to Rs.5 lakh.

Foreign Trade

90. Merchandise exports have come under some pressure due to the appreciation of the Rupee and may
fall just short of the target of US$ 160 billion, although the growth rate was strong at 21.8 per cent during
April-December 2007-08. Relief was given to exporters in three tranches amounting to over Rs.8,000
crore. I may note that the interest cost of sterilization through market stabilization bonds (MSS),
estimated at Rs.8,351 crore for the whole year is, in a sense, subsidy to the export sector. Government is
sensitive to the needs of the export sector and will continue to respond sympathetically as the situation
demands.

V. FINANCIAL SECTOR

91. Government's policy of a careful and calibrated opening of the financial sector has proved successful.
We shall continue to take measured steps.

92. The final report of the Committee on Financial Inclusion has been received. To begin with, I propose
to accept two recommendations:

• to advise commercial banks, including RRBs, to add at least 250 rural household accounts every year at
each of their rural and semi-urban branches; and

• to allow individuals such as retired bank officers, ex-servicemen etc to be appointed as business
facilitator or business correspondent or credit counsellor.

93. Banks will be encouraged to embrace the concept of Total Financial Inclusion. Government will
request all scheduled commercial banks to follow the example set by some public sector banks and meet
the entire credit requirements of SHG members, namely, (a) income generation activities, (b) social needs
like housing, education, marriage etc and (c) debt swapping.

NABARD, SIDBI and NHB

94. Financial inclusion can be taken forward by expanding the reach of NABARD, SIDBI and NHB.
Hence, in order to increase the resource base of these three banks, I propose to tap into the resources of
scheduled commercial banks to the extent that they fall short of their obligation to lend to the priority
sector. Accordingly, it is proposed to create the following funds:

(i) a fund of Rs.5,000 crore in NABARD to enhance its refinance operations to short term cooperative
credit institutions;

(ii) two funds of Rs.2,000 crore each in SIDBI - one for risk capital financing and the other for enhancing
refinance capability to the MSME sector; and

(iii) a fund of Rs.1,200 crore in NHB to enhance its refinance operations in the rural housing sector.
Each of these funds will be governed by the general guidelines that are now applicable to RIDF with
some modifications.

95. Last year, I enhanced the limit of the loan that could be extended under the Differential Rate of
Interest (DRI) scheme to the weaker sections of the community engaged in gainful occupations. However,
I did not enhance the eligibility criteria which still stand at levels fixed in 1986. This needs to be
corrected. Hence, I propose to fix the borrower's eligibility criteria as annual family income of Rs.18,000
in rural areas and Rs.24,000 in urban areas.

Capital Markets

96. In my Budget Speech of 2006, I had informed the House that, on the basis of the R.H. Patil
Committee Report, we shall take steps to create an exchange-traded market for corporate bonds. Both
Bombay Stock Exchange and National Stock Exchange have created platforms for trading in corporate
bonds.

97. I intend to move forward by taking some more measures to expand the market for corporate bonds.
Hence, I propose to:

• take measures to develop the bond, currency and derivatives markets that will include launching
exchange-traded currency and interest rate futures and developing a transparent credit derivatives market
with appropriate safeguards;

• enhance the tradability of domestic convertible bonds by putting in place a mechanism that will enable
investors to separate the embedded equity option from the convertible bond and trade it separately; and

• encourage the development of a market-based system for classifying financial instruments based on
their complexity and implicit risks.

98. The fear of the Permanent Account Number (PAN) has virtually disappeared. PAN is now the sole
identification number for all participants in the securities market. I propose to extend the requirement of
PAN to all transactions in the financial market subject, however, to suitable threshold exemption limits.

99. Our stock exchanges provide national electronic trading platforms for securities transactions. Yet, we
do not have a seamless national market for securities because of differences among States on the scope
and applicability of rates of stamp duty. Hence, I propose to request the Empowered Committee of State
Finance Ministers to work with the Central Government to create a truly pan Indian market for securities
that will expand the market base and enhance the revenues of the State Governments.

VI. OTHER PROPOSALS

100. India is poised to reap a 'demographic dividend' because the size of its working age population will
increase from about 77.5 crore in 2008 to a likely peak of 95 crore in 2026. The 'dividend' can prove
illusory if the workforce does not acquire the skills to support a knowledge and technology driven
economy.
Skill Development Mission

101. Today, skill development programmes are diffused and administered by a number of
ministries/departments. I have no intention of interfering with these sector-specific programmes.
However, there is a compelling need to launch a world-class skill development programme, in mission
mode, that will address the challenge of imparting the skills required by a growing economy. Both the
structure and the leadership of the mission must be such that the programme can be scaled up quickly to
cover the whole country. Hence, I propose to establish a non-profit corporation and entrust the mission to
that corporation. It is my intention to garner about Rs.15,000 crore as capital from Governments, the
public and private sector, and bilateral and multilateral sources. I shall begin by putting Rs.1,000 crore as
Government's equity in the proposed non-profit corporation.

Industrial Training Institutes

102. The upgradation of ITIs is proceeding apace. Under the World Bank assisted scheme, 238 ITIs are
undergoing upgradation. Under the PPP scheme, 309 ITIs in 29 States have been identified with
corresponding industry partners and agreements have been signed in 244 cases. In anticipation of
upgrading 300 more ITIs in 2008-09, I have set apart Rs.750 crore.

Sainik Schools

103. I am concerned by the rate of attrition in the defence forces, especially at the officer level. Sainik
Schools have played a unique role as recruiting and training ground of future leaders of the defence
forces. I propose to make an allocation of Rs.44 crore at the rate of Rs.2 crore each to the 22 Sainik
Schools for immediate improvement of infrastructure including classrooms, laboratories, libraries and
facilities for physical education.

Public Distribution System

104. A sum of Rs.32,667 crore is being provided next year for food subsidy under the Public Distribution
System (PDS) and other welfare programmes. Strengthening the PDS would mean adequate supplies,
reasonable subsidies and efficient delivery of the subsidized food. An idea that has been growing is to
deliver subsidies to the target group through smart cards. Finally, I have found two willing partners - the
State of Haryana and the Union Territory of Chandigarh. They will introduce, on a pilot basis, a smart
card based delivery system to deliver food grains under the PDS in Haryana and Chandigarh,
respectively. I thank the Chief Minister of Haryana and the Administrator of Chandigarh and promise
them full support and cooperation in making a success of the pilot scheme.

Unorganised Sector Workers

105. The Unorganised Sector Workers' Social Security Bill, 2007 is before Parliament. In anticipation of
the Bill being made into law, Government has introduced three schemes that are designed to provide
social security to workers in the unorganised sector in a phased manner. These are:

• the Aam Admi Bima Yojana that will provide insurance cover to poor households. I am happy to
announce that, in the first year of the Yojana, LIC will cover one crore landless households by September
30, 2008. I have already placed Rs.1,500 crore with LIC. In order to cover another one crore poor
households in the second year, I propose to place an additional sum of Rs.1,000 crore with LIC in 2008-
09;
• the Rashtriya Swasthya Bima Yojana that will be implemented with effect from April 1, 2008; and

• the Indira Gandhi National Old Age Pension Scheme that was enlarged with effect from November 19,
2007 to include all persons over 65 years falling under the BPL category. Consequently, the coverage has
expanded from 87 lakh to 157 lakh beneficiaries. I propose to allocate Rs.3,443 crore in 2008-09 as
against Rs.2,392 crore in 2007-08.

Housing for the Poor

106. Housing for the poor is one of the six elements of Bharat Nirman and is implemented through the
Indira Awas Yojana (IAY). Against a target of 60 lakh houses, 41.13 lakh houses have been constructed
up to December 2007 and the cumulative number will be 51.77 lakh houses by end March 2008.
Reflecting the higher cost of construction, I propose to enhance the subsidy per unit in respect of new
houses sanctioned after April 1, 2008 from Rs.25,000 to Rs.35,000 in plain areas and from Rs.27,500 to
Rs.38,500 in hill/difficult areas. The subsidy for upgradation of houses will be increased from Rs.12,500
per unit to Rs.15,000. A beneficiary will still need own funds to complete the house. Public sector banks
will be advised to include IAY houses under the differential rate of interest (DRI) scheme and lend up to
Rs.20,000 per unit at an interest rate of 4 per cent.

Defence

107. I propose to increase the allocation for Defence by 10 per cent from Rs.96,000 crore to Rs.105,600
crore. I have assured the Raksha Mantri that any further amount needed for the Defence Forces, especially
for capital expenditure, will be provided.

Backward Regions Grant Fund

108. The Backward Regions Grant Fund was given Rs.5,800 crore in the current year. Having regard to
the pace of expenditure, I propose to keep the allocation for the next year at the same level. I may add that
nearly 45 per cent of the amount is likely to be allocated to the States of Bihar, Orissa and Uttar Pradesh.

Climate Change

109. In the Budget Speech last year I had announced the decision of the Government to appoint an expert
committee to study the impact of climate change on India and identify the measures that we may have to
take in the future. Work is in progress. Even while adhering to the principle of "common but
differentiated responsibility" we can - and we must - do a number of things in our self-interest. We can
promote clean technology products; we can review fuel emission and efficiency regulations; we can
replace wood by solar as the fuel of common use; we can encourage the use of gas which is the most
benign hydrocarbon; we can set up a trading platform for carbon emissions; we can build sustainable
greenfield cities; and we can do more. In order to explore and implement these and other ideas,
Government proposes to establish a permanent institutional mechanism that will play a development and
coordination role. Details of the institutional mechanism will be announced shortly.

Sixth Central Pay Commission

110. I have been informed that the Sixth Central Pay Commission will submit its report by March 31,
2008. I am confident that the report will meet the legitimate expectations of Government employees.
Commonwealth Games

111. The Commonwealth Games are only 947 days away. As promised, we shall provide Rs.624 crore in
2008-09. I would urge the authorities concerned to adhere to the strict timelines and the quality standards.

Institutions of Excellence

112. For the fourth year in succession, I propose to make a special grant of Rs.100 crore each to three
institutions of excellence. The awards for 2008-09 go to: (i) Mahatma Phule Krishi Vidyapeeth, Rahuri,
Maharashtra; (ii) University of Mysore, Mysore; and (iii) Delhi University, Delhi.

India's Soft Power

113. India's music, literature, dance, art, cuisine and especially films are attracting huge interest around
the world. This is the 'soft power' of India, and it must be projected in a sophisticated and subtle manner. I
propose to provide Rs.75 crore to the Indian Council of Cultural Relations to design and implement a
programme to achieve this objective.

Tiger Protection

114. The number 1,411 should ring the alarm bells. That is the number of tigers in India. The tiger is
under grave threat. In order to redouble our effort to protect the tiger, I propose to make a one time grant
of Rs.50 crore to the National Tiger Conservation Authority. The bulk of the grant will be used to raise,
arm and deploy a special Tiger Protection Force.

Monitoring and Evaluation

115. Robust economic growth has thrown up many new challenges, among them the need to put in place
effective monitoring, evaluation and accounting systems for the large sums of money that are disbursed
by the Central Government to State Governments, district level agencies and other implementing
agencies. I think we do not pay enough attention to outcomes as we do to outlays; or to physical targets as
we do to financial targets; or to quality as we do to quantity. Government therefore proposes to put in
place a Central Plan Schemes Monitoring System (CPSMS) that will be implemented as a Plan scheme of
the Planning Commission. A comprehensive Decision Support System and Management Information
System will also be established. The intended outcome is to generate and monitor scheme-wise and State-
wise releases for about 1,000 Central Plan and centrally sponsored schemes in 2008-09.

116. Government also intends to strengthen evaluation. Some ministries have started concurrent
evaluation. This needs to be supplemented by independent evaluations conducted by research institutions.
The Planning Commission will authorise such evaluations of the major schemes and complete the task by
the time of the mid-term review of the Eleventh Plan.

VII. BUDGET ESTIMATES

117. I shall now turn to the Budget Estimates for 2008-09.

118. The estimate of Plan Expenditure is placed at Rs.243,386 crore. As a proportion of total expenditure,
it will be 32.4 per cent.
119. Non-Plan Expenditure is estimated at Rs.507,498 crore.

Revenue Deficit and Fiscal Deficit

120. It is widely acknowledged that the fiscal position of the country has improved tremendously. I am
happy to report that the revenue deficit for the current year will be 1.4 per cent (against a BE of 1.5 per
cent) and the fiscal deficit will be 3.1 per cent (against a BE of 3.3 per cent).

121. Further progress will be made in 2008-09. The revenue receipts of the Central Government for 2008-
09 are projected at Rs.602,935 crore and the revenue expenditure at Rs.658,119 crore. Consequently, the
revenue deficit is estimated at Rs.55,184 crore, which amounts to 1.0 per cent of GDP. The fiscal deficit
is estimated at Rs.133,287 crore which is 2.5 per cent of GDP. Honourable Members will note that not
only will I achieve the target for fiscal deficit under the FRBM Act, I have also left for myself some
headroom. In the case of revenue deficit, I will meet the target of annual reduction of 0.5 per cent.
However, because of the conscious shift in expenditure in favour of health, education and the social
sector, we may need one more year to eliminate the revenue deficit. In my view, this is an entirely
acceptable deferment.

Revisiting the Roadmap for Fiscal Adjustment

122. I acknowledge that significant liabilities of the Government on account of oil, food and fertilizer
bonds are currently below the line. This accounting arrangement is consistent with past practice.
Nevertheless, our fiscal and revenue deficits are understated to that extent. There is a need to bring these
liabilities into our fiscal accounting. As a first step, I have shown these liabilities clearly in 'Budget at a
Glance'. After the obligations on account of the Sixth Central Pay Commission become clear, I intend to
request the Thirteenth Finance Commission to revisit the roadmap for fiscal adjustment and suggest a
suitably revised roadmap.

PART - B

VIII. TAX PROPOSALS

123. Mr. Speaker, I shall now present my tax proposals.

124. Many people are surprised by the buoyancy in tax revenues, especially in direct taxes. I am not. I
have always maintained that moderate and stable tax rates coupled with a tax administration that shows
no fear or favour will bring high revenues to the exchequer.

125. The UPA Government inherited a tax to GDP ratio of 9.2 per cent in 2003-04. At the end of 2007-
08, that ratio would have risen to 12.5 per cent.

126. High growth rates have helped. Changes in attitude have also helped. Above all, information systems
and technology have helped most. And, if I may add in a lighter vein, having a lucky Finance Minister
may have also helped! We are on course to achieve the Budget Estimates of indirect taxes and exceed the
Budget Estimates of direct taxes. I take this opportunity to thank all tax payers and I promise them an
efficient and tax payer-friendly administration.
Indirect Taxes

127. I shall begin with customs duties.

128. The peak rate for non-agricultural products was 20 per cent in January 2004 and now stands at 10 per
cent. The collection rate is the closest approximation to the level of protection to domestic industry, and
that rate for all imports stood at 10 per cent in 2006-07. Since April 2007, the Rupee has appreciated
against the Dollar by 9.8 per cent. Consequently, the case for reducing the peak rate at this stage is very
weak. Hence, I propose to make no change in the peak rate of customs duty.

129. However, I find that in some cases it is necessary to reduce the customs duty in order to provide a
fillip to that industry or to promote value addition or to remove inversion or any other anomaly. I shall
refer to a few such cases.

130. I propose to reduce the customs duty on Project Imports from 7.5 per cent to 5 per cent. However, I
also propose to impose the 4 per cent special CVD on a few specified projects in the power sector.

131. In order to improve the supply of raw material, I propose to reduce the duty on steel melting scrap
and aluminium scrap from 5 per cent to nil.

132. On certain specified life saving drugs and on the bulk drugs used for the manufacture of such drugs,
I propose to reduce the customs duty from 10 per cent to 5 per cent as well as to totally exempt them from
excise duty or countervailing duty.

133. In order to reduce the cost of manufacture of cattle and poultry feeds, I propose to reduce the duty on
vitamin premixes and mineral mixtures from 30 per cent to 20 per cent and on phosphoric acid from 7.5
per cent to 5 per cent.

134. The duty on bactofuges will be reduced from 7.5 per cent to nil. This will increase the shelf life of
milk and benefit the dairy industry.

135. I propose to fully exempt from duty specified parts of set top boxes and specified raw materials for
use in the IT/electronic hardware industry.

136. To establish parity between devices used in the information/ communication sector and the
entertainment sector, I propose to reduce the duty on convergence products from 10 per cent to 5 per cent.

137. To provide a fillip to the manufacture of sports goods, I propose to reduce the duty on specified
machinery from 7.5 per cent to 5 per cent. I also propose to exempt from duty specified raw materials for
sports goods.

138. The gem and jewellery industry has responded well to the duty reductions made last year. In order to
encourage value addition and exports, I propose to exempt from duty rough cubic zirconia and to reduce
the duty on polished cubic zirconia from 10 per cent to 5 per cent. Similarly, the duty on rough coral will
be reduced from 10 per cent to 5 per cent.

139. To facilitate training of helicopter pilots, I propose to remove the duty on helicopter simulators.
140. In order to support domestic fertiliser production, I propose to reduce the customs duty on crude and
unrefined sulphur from 5 per cent to 2 per cent.

141. Thanks to a complex regime of export benefits and duty exemptions, naphtha is exported from
refineries and naphtha is imported by manufacturers of polymers, leading to price distortions and revenue
losses. I propose to correct the situation by withdrawing the duty exemption on naphtha for use in the
manufacture of polymers and subject it to the normal rate of 5 per cent. However, naphtha imported for
the production of fertilisers will continue to be exempt from import duty.

142. Finally, in order to conserve chrome ore and make it available for value added manufacture in India,
I propose to increase the export duty from Rs.2,000 per metric tonne to Rs.3,000 per metric tonne.

143. I shall now deal with excise duties.

144. The manufacturing sector is the backbone of any economy. It is consumption that drives production
and it is production that drives investment. Having carefully studied current trends of production and
consumption, I believe there is a need to give a stimulus to the manufacturing sector. Hence, I propose to
reduce the general CENVAT rate on all goods from 16 per cent to 14 per cent.

145. I have looked at specific sectors where growth is flagging. These sectors are important because they
are growth and employment drivers. Some of them also have large externalities. Therefore, I propose to:

• reduce the excise duty on all goods produced in the pharmaceutical sector from 16 per cent to 8 per cent;

• reduce the excise duty on buses and their chassis from 16 per cent to 12 per cent;

• reduce the excise duty on small cars from 16 per cent to 12 per cent and on hybrid cars from 24 per cent
to the general revised rate of 14 per cent;

• reduce the excise duty on two wheelers and three wheelers from 16 per cent to 12 per cent; and

• reduce the excise duty on paper, paper board and articles made therefrom manufactured out of non-
conventional raw materials by units not having an attached bamboo/wood pulp making plant from 12 per
cent to 8 per cent with a further reduction on clearances up to 3,500 MT from 8 per cent to nil.
Furthermore, excise duty on certain varieties of writing, printing and packing paper will be reduced from
12 per cent to 8 per cent.

146. There are a number of products which are goods of mass consumption. There is also the need to have
tax parity on similar goods. Taking into account requests from a number of industries, I propose to reduce
the excise duty from 16 per cent to nil on a few items including composting machines, wireless data
cards, packaged coconut water, tea and coffee mixes, and puffed rice.

147. Further, I propose to reduce the excise duty from 16 per cent to 8 per cent on a few items including
water purification devices, veneers and flush doors, sterile dressing pads, specified packaging material,
and breakfast cereals.

148. I propose to totally exempt from excise duty the anti AIDS drug, Atazanavir, as well as bulk drugs
for its manufacture.
149. To further encourage cold chain facilities, I propose to exempt from excise duty, on end-use basis,
refrigeration equipment (consisting of compressor, condenser units, evaporator etc) above 2 TR (tonne
refrigeration) utilising power of 50 KW and above.

150. I propose to bring parity in the excise duty rates on bulk cement and packaged cement. Accordingly,
bulk cement will now attract excise duty of Rs.400 per Metric Tonne or 14 per cent ad valorem,
whichever is higher. Cement clinkers will be liable to excise duty of Rs.450 per Metric Tonne.

151. Similarly, I propose to increase the excise duty on packaged software from 8 per cent to 12 per cent
to bring it on par with customised software which will attract a service tax of 12 per cent.

152. Non-filter cigarettes are more toxic than filter cigarettes, yet they enjoy a favourable tax regime,
which is iniquitous. I propose to tax both filter and non-filter cigarettes on par by applying - as
Honourable Members may have guessed - the higher rates.

153. In order to remove a source of misinformation, I propose to abolish the ad valorem part of the excise
duty on unbranded petrol and unbranded diesel and replace the same by an equivalent specific duty of
Rs.1.35 per litre. Henceforth, there will be only a specific duty of Rs.14.35 per litre on unbranded petrol
and Rs.4.60 per litre on unbranded diesel. There will be no impact on retail prices.

154. An excise duty of 1 per cent called NCCD is now imposed on polyester filament yarn, which is the
only yarn suffering this excise duty. I propose to remove that duty and shift the levy to cellular mobile
phones.

155. Finally, I turn to my proposals on service tax.

156. 55 per cent of the GDP is contributed by the services sector, which is a growing sector that must
contribute its legitimate share to the exchequer. I propose to bring under the service tax net four services.
They are:-

(i) asset management service provided under ULIP, to bring it on par with asset management service
provided under mutual funds;

(ii) services provided by stock/commodity exchanges and clearing houses;

(iii) right to use goods, in cases where VAT is not payable; and

(iv) customised software, to bring it on par with packaged software and other IT services

157. I also propose to remove unwarranted doubts raised in respect of certain services and clarify that
they are liable to service tax. These include money changers, persons running games of chance, and tour
operators using contract carriage vehicles.

158. There are some miscellaneous changes but I do not wish to burden the House with the same.

159. Finally, I am happy to announce that the threshold limit of exemption for small service providers
will be increased from Rs.8 lakhs per year to Rs.10 lakh per year. As a result, about 65,000 small service
providers will go out of the tax net.
Direct Taxes

160. I shall now deal with direct taxes.

161. I recall the Budget Speech of 1997. I believe that boldness pays. I also believe that trust will beget
trust, moderation will beget revenues and fairness will beget compliance. Income tax payers have made
out a persuasive case for some relief. Accordingly, I propose to make some changes in the slabs for
personal income tax. I propose to increase the threshold limit of exemption:

• in the case of all assesses, from Rs.110,000 to Rs.150,000, thus giving every assessee a relief at a
minimum of Rs.4,000. Consequently, the four slabs and rates will be as follows:

Up to Rs.150,000 NIL

Rs.150,001 to Rs.300,000 10 per cent

Rs.300,001 to Rs.500,000 20 per cent

Rs.500,001 and above 30 per cent

• in the case of a woman assessee, from Rs.145,000 to Rs.180,000;

• in the case of a senior citizen, from Rs.195,000 to Rs.225,000.

162. I do not propose to make any change in the corporate income tax rates.

163. No change is proposed in the rate of surcharge.

164. I propose to add the Senior Citizens Savings Scheme 2004 and the Post Office Time Deposit
Account to the basket of saving instruments under Section 80C of the Income Tax Act.

165. I propose to allow an additional deduction of Rs.15,000 under Section 80D to an individual who
pays medical insurance premium for his/her parent or parents.

166. The Reverse Mortgage Scheme was notified by the National Housing Bank in the current financial
year. In order to clarify the tax issues arising out of the scheme, I propose to amend the Income Tax Act
to provide that:

(i) reverse mortgage would not amount to "transfer"; and

(ii) the stream of revenue received by the senior citizen would not be "income";

167. Agricultural income is exempt from income tax. However, courts have ruled that growing saplings or
seedlings on land is agriculture but growing them in pots is not agriculture. This does not seem fair.
Hence, I propose to exempt from tax income arising from saplings or seedlings grown in a nursery.

168. Companies engaged in certain businesses are allowed a weighted deduction of 150 per cent on any
expenditure on in-house scientific research. I propose to add the business of production of seeds and
manufacture of agricultural implements to this list.
169. In order to promote outsourcing of research, I propose to allow a weighted deduction of 125 per cent
on any payment made to companies engaged in research and development.

170. I propose to extend the benefit of amortisation of certain preliminary expenses under Section 35D to
assesses in the services sector.

171. To supplement measures that I announced earlier in respect of the corporate debt market, I propose
to exempt from TDS corporate debt instruments issued in demat form and listed on recognised stock
exchanges.

172. I propose to make some changes in the provisions of law pertaining to Fringe Benefit Tax (FBT) that
will give some relief to corporates and firms. Crèche facilities, sponsorship of an employee-sportsperson,
organising sports events for employees, and guest houses will be excluded from the purview of FBT.

173. At present, a domestic company is liable to pay Dividend Distribution Tax (DDT). As a result, the
distributed dividend is sometimes taxed twice in the hands of a subsidiary company and its parent
company, causing hardship. In order to remove the hardship, I propose to allow a parent company to set
off the dividend received from its subsidiary company against dividend distributed by the parent
company, provided that the dividend received has suffered DDT and the parent company is not a
subsidiary of another company.

174. I propose to insert a new sub-section (11C) in Section 80-IB to grant a five year tax holiday to
encourage hospitals to be set up anywhere in India, except certain specified urban agglomerations, and
especially in tier-2 and tier-3 towns in order to serve the rural hinterland. This window will be open for
the period April 1, 2008 to March 31, 2013, during which the hospital must commence operations.

175. Having regard to the significant rise in tourist arrivals, especially for cultural tourism, I propose to
grant a five year holiday from income tax to two, three or four star hotels that are established in specified
districts which have UNESCO-declared 'World Heritage Sites'. The hotel should be constructed and start
functioning during the period April 1, 2008 to March 31, 2013.

176. I am happy to announce that the Coir Board will be included in Section 10(29A) and exempt from
income tax.

177. Dividends that are distributed attract a tax of 15 per cent. Short term capital gains attract a tax of 10
per cent under Section 111A. There is merit in equating the rates and hence I propose to increase the rate
of tax on short term capital gains under Section 111A and Section 115AD to 15 per cent. This will also
encourage investors to stay invested for a longer term.

178. At present, Securities Transaction Tax (STT) paid is allowed as a rebate against tax liability. Further,
STT on options is levied on the aggregate of the strike price and the option premium and is borne by the
seller. I propose to make some changes. Henceforth, STT paid will be treated like any other deductible
expenditure against business income. Further, the levy of STT, in the case of options, will be only on the
option premium where the option is not exercised, and the liability will be on the seller. In a case where
the option is exercised, the levy will be on the settlement price and the liability will be on the buyer.
There will be no change in the present rates.

179. Transactions in commodity futures have come of age. Hence, I propose to introduce the
Commodities Transaction Tax (CTT) on the same lines as STT on options and futures.
180. "Charitable purpose" includes relief of the poor, education, medical relief and any other object of
general public utility. These activities are tax exempt, as they should be. However, some entities carrying
on regular trade, commerce or business or providing services in relation to any trade, commerce or
business and earning incomes have sought to claim that their purposes would also fall under "charitable
purpose". Obviously, this was not the intention of Parliament and, hence, I propose to amend the law to
exclude the aforesaid cases. Genuine charitable organisations will not in any way be affected.

181. The Banking Cash Transaction Tax (BCTT) has served a very useful purpose in enlarging the
information system of the Income Tax Department. Since the information is also being gathered through
other instruments introduced in the last few years, I propose to withdraw this tax with effect from April 1,
2009.

182. My tax proposals on direct taxes are revenue neutral. On the indirect taxes side, the proposals are
estimated to result in a loss of Rs.5,900 crore.

CST and a Roadmap towards GST

183. Following an agreement between the Central Government and the State Governments, the rate of
Central Sales Tax was reduced from 4 per cent to 3 per cent in this financial year. It is now proposed to
reduce the rate to 2 per cent from April 1, 2008. Consultations are underway on the compensation for
losses, if any, and once agreement is reached the new rate will be notified. I am also happy to report that
there is considerable progress in preparing a roadmap for introducing the Goods and Services Tax with
effect from April 1, 2010.

IX. CONCLUSION

184. Mr. Speaker, Sir, once upon a time India, together with China, accounted for 50 per cent of the
world's output. We must regain our position and it is within our capacity to do so.

185. Our work in Government is, every day and every hour, a discovery of the path to reach our goals:
full employment, abolition of poverty and elimination of inequality. "These goals can only be achieved by
a considerable increase in national income and our economic policy must, therefore, aim at plenty and
equitable distribution. We must produce wealth, and then divide it equitably. How can we have a welfare
state without wealth?" Those are not my words; they were uttered in 1955 by Pandit Jawaharlal Nehru.
Although Jawaharlal Nehru did not use the phrase inclusive growth, he actually spelt out the conditions
for inclusive growth.

186. Those words will guide the UPA Government. As always, I turned to my muse, Saint Tiruvalluvar,
for guidance and reassurance. 2,000 years ago he set the benchmark for good governance in the following
immortal words:

"Kodai Ali Sengol Kudi Ombal Nangum

Udaiyanam Vendharkku Oli"

[Generous grants, compassion, righteous rule

and succour to the downtrodden

Are the hallmarks of good governance]

We have tried to remain true to this philosophy. The four years to 2007-08 have been the best years so far
but, may I say with humility, that the best is yet to come.

187. Sir, with these words I commend the Budget to the House.
 CONTENTS
Page No.
PART—A
I. A MID-TERM REPORT CARD ON THE ECONOMY 1
Income and Savings 2
Outlook on Inflation 2
II. BHARAT NIRMAN AND THE FLAGSHIP PROGRAMMES 2
III. HERALDING THE ELEVENTH FIVE YEAR PLAN 3
Gross Budgetary Support 3
Allocations for Major Sectors 3
Sarva Siksha Abhiyan and Mid-day Meal Scheme 3
Means-Cum-Merit Scholarships 4
Drinking Water and Sanitation 4
Health Sector; National Rural Health Mission 4
HIV/AIDS 5
Polio 5
Integrated Child Development Services 5
National Rural Employment Guarantee Scheme 5
Urban Unemployment 6
Jawaharlal Nehru National Urban Renewal Mission 6
Targeted Public Distribution System and Antyodaya Anna Yojana 6
Scheduled Castes and Scheduled Tribes 6
Post-Matric Scholarships 6
Minorities 7
Women 7
North Eastern Region (NER) 7
Supplement to the GBS 7
IV. AGRICULTURE 8
Farm Credit 8
Agricultural Indebtedness 8
A Mission for Pulses 8
Plantation Sector 9
Accelerated Irrigation Benefit Programme 9
Rainfed Area Development Programme 9
Water Resources Management: Restoring Water Bodies 9
Ground Water Recharge 9
Training of Farmers 10
Extension System 10
Fertiliser Subsidies 10
Agricultural Insurance 10
National Bank for Agriculture and Rural Development (NABARD) 11
Rural Infrastructure Development Fund 11
Social Security 11
V. INVESTMENT 12
VI. INFRASTRUCTURE 12
Power 12
Rajiv Gandhi Grameen Vidyutikaran Yojana 13
Coal 13
National Highways 13
Public Private Partnership and Viability Gap Funding 13
 (ii)
Page No.
VII. INDUSTRY 14
Petroleum and Natural Gas 14
Textiles 14
Handlooms 14
Small and Medium Enterprises 14
Coir Industry 14
VIII. SERVICES SECTOR 15
Foreign Trade 15
Tourism 15
IX. FINANCIAL SECTOR 15
Banking 15
Regional Rural Banks 15
Housing Loans 15
Insurance 16
Financial Inclusion 16
Capital Markets 16
Innovative Financing for Infrastructure 17
X. OTHER PROPOSALS 17
Defence Expenditure 17
Information Technology 17
Backward Regions Grant Fund 18
Mumbai as a Financial Centre 18
Vocational Education Mission 18
Upgradation of ITIs 18
Employment for the Physically Challenged 19
Debt Management Office 19
Development Cooperation 19
Climate Change 19
Commonwealth Games 20
History and Culture 20
Institutions of Excellence 20
XI. PUBLIC FINANCE 20
VAT, CST and a Roadmap towards GST 21
XII. BUDGET ESTIMATES FOR 2007-08 21
Plan Expenditure 21
Non-Plan Expenditure 21
Revenue Deficit and Fiscal Deficit 21

PART—B
XIII. TAX PROPOSALS 22
Indirect Taxes 22
Direct Taxes 26
XIV. CONCLUSION 30
 1

Budget 2007-2008
Speech of
P. Chidambaram
Minister of Finance

February 28, 2007

Mr. Speaker, Sir

It is my privilege to present the Budget for 2007-08.

I. A MID-TERM REPORT CARD ON THE ECONOMY

2. In November 2006, the UPA Government crossed the midpoint of its
term of office. A midterm report card can now be presented. There are many
pluses and a few minuses, and I shall deal with both candidly. The biggest plus is
that the growth rate of GDP has improved from 7.5 per cent in 2004-05 to 9 per
cent (Quick Estimate) in 2005-06 and, according to Advance Estimate, to 9.2
per cent in 2006-07. The average growth rate in the three years of the UPA
Government is, therefore, 8.6 per cent. Thanks to this impressive performance,
despite the poor start in 2002-03, the growth target set for the Tenth Plan of 8 per
cent will be nearly achieved.
3. Manufacturing is the main driver of growth, and this augurs well for the
future. In the three years of the UPA Government, the growth rate in manufacturing
has accelerated from 8.7 per cent to 9.1 per cent and further to 11.3 per cent. The
services sector continues to maintain impressive growth and has recorded, in the
three years, a growth rate of 9.6 per cent, 9.8 per cent and 11.2 per cent
respectively.
4. On the other hand, the agriculture sector has witnessed sharp ups and
downs. Average growth during the Tenth Plan period is estimated at 2.3 per cent,
which is below the desired level of 4 per cent a year. About 115 million families
are classified as farming families. Furthermore, a country with a large population
has to be nearly self-sufficient in essential food items; otherwise supply constraints
could upset macro economic stability and growth prospects. Hence, agriculture
must top the agenda of the policy makers and must hold the first charge on our
resources. In a short while, I shall place before this House a number of proposals
in this regard.
 2
Income and Savings
5. To continue with the report card, per capita income in 2005-06, in real
terms, increased by 7.4 per cent, and the savings rate has been estimated at 32.4
per cent and the investment rate at 33.8 per cent. Intuitively, I believe that these
high rates have continued in the current year too.
6. The UPA Government has remained committed to economic reforms,
fiscal prudence and monetary stability.
7. Revenues are buoyant for the third year in succession. We have garnered
additional revenues and, as Honourable Members will notice presently, I have
put these revenues to good use to promote inclusive growth, equity and social
justice - goals that are at the core of the National Common Minimum Programme
(NCMP) and close to the hearts of the UPA, its Chairperson and the Prime
Minister.
Outlook on Inflation
8. Until February 2, 2007, bank credit, year on year, had grown by 29.6 per
cent. Money supply (M3) had expanded by 21.3 per cent. Foreign exchange
reserves stood at US$ 180 billion. While these are concomitant features of high
growth, it cannot be denied that these monetary trends have put pressure on
prices. Global commodity prices have also exerted pressure on domestic prices.
At the same time, supply constraints have emerged in some essential commodities
such as wheat, pulses and edible oils. Consequently, average inflation in
2006-07 is estimated at between 5.2 and 5.4 per cent, which is higher than 4.4
per cent last year. I wish to reiterate Government's concern over inflation.
Government has already taken a number of measures on the fiscal, monetary and
supply sides to maintain price stability and, if required, will not hesitate to take
more measures. When the UPA Government assumed office in 2004, the inflation
graph was on the rise; but we succeeded in moderating inflation and we are
confident that we can moderate the present inflationary trend too.

II. BHARAT NIRMAN AND THE FLAGSHIP PROGRAMMES

9. Bharat Nirman remains the cornerstone of the Government's policy. I am
glad to report that in the current financial year:
• Additional irrigation potential of 2,400,000 hectares, including
900,000 hectares under AIBP, will be created;
• Drinking water has been provided to 55,512 habitations until
December 2006 against a target of 73,120 habitations;
• Until December 2006, 12,198 kilometres of rural roads have been
completed. The separate window under RIDF will augment funds
for the programme by Rs.4,000 crore a year;
• 783,000 rural houses have been constructed up to December 2006
and 914,000 houses are under construction, and the annual target of
1,500,000 houses is likely to be exceeded;
 3
• 19,758 villages have been covered so far under the Rajiv Gandhi
Grameen Vidyutikaran Yojana;
• 15,054 villages have been provided with a telephone against the
target of 20,000 villages, and the balance will be covered by the end
of the year;
Honourable Members will note that Bharat Nirman continues to make impressive
progress.
10. The eight flagship programmes of the UPA Government will continue to
receive high priority. Presently, I shall refer to these programmes in some detail.

III. HERALDING THE ELEVENTH FIVE YEAR PLAN

11. The year 2007-08 will mark the beginning of the Eleventh Plan. The
declared objective is "Faster and More Inclusive Growth". I can state with
confidence that, on the eve of the Plan, the economy is in a stronger position
than ever before. It therefore behoves us to set higher goals. The Approach Paper
to the Eleventh Plan states that the Plan "will aim at putting the economy on a
sustainable growth trajectory with a growth rate of approximately 10 per cent by
the end of its period." Among the other objectives of the Plan are growth of 4 per
cent in the agriculture sector, faster employment creation, reducing disparities
across regions and ensuring access to basic physical infrastructure as well as
health and education services to all. I have kept these objectives in mind while
allocating resources to various sectors.
Gross Budgetary Support
12. Notwithstanding some constraints, I propose to increase substantially
the Gross Budgetary Support (GBS) for the Plan. In 2006-07, the GBS was fixed
at Rs.172,728 crore and, of this, support to the Central Plan was Rs.131,284
crore. GBS for 2007-08 will be increased to Rs.205,100 crore. Out of this, the
Central Plan will receive Rs.154,939 crore.
Allocations for Major Sectors
13. For Bharat Nirman, as against Rs.18,696 crore (including the NER
component) in 2006-07, I propose to provide Rs.24,603 crore in 2007-08, which
marks an increase of 31.6 per cent.
14. The education and health sectors will also receive substantial funds. In
2007-08, I propose to enhance the allocation for education by 34.2 per cent to
Rs.32,352 crore and for health and family welfare by 21.9 per cent to Rs.15,291
crore.
Sarva Shiksha Abhiyan and Mid-day Meal Scheme
15. In allocating resources, school education must have primacy. Hence, I
propose to increase the allocation for school education by about 35 per cent
from Rs.17,133 crore in 2006-07 to Rs.23,142 crore in 2007-08.
16. Out of this amount, Sarva Shiksha Abhiyan (SSA) will be provided
Rs.10,671 crore. Further, I propose to increase the provision for strengthening
 4
teachers training institutions from Rs.162 crore to Rs.450 crore. Next year, we
will appoint 200,000 more teachers and construct 500,000 more class rooms.
17. The Mid-day Meal Scheme will be provided Rs.7,324 crore next year. In
addition to covering children in primary classes, beginning 2007-08, we propose
to cover children in upper primary classes in 3,427 educationally backward blocks.
18. The transfer to Prarambhik Shiksha Kosh will increase from Rs.8,746
crore to Rs.10,393 crore.
19. As more students complete upper primary classes, it is necessary to
increase access to secondary education. Schemes for this purpose are under
formulation, and I propose to double the provision for secondary education from
Rs.1,837 crore in 2006-07 to Rs.3,794 crore in 2007-08.
Means-Cum-Merit Scholarships
20. While the SSA has improved the enrolment ratio in schools to 96 per
cent, the drop out ratio continues to be high. The critical year appears to be
transition from class VIII to class IX. In order to arrest the drop out ratio and
encourage students to continue their education beyond class VIII, I propose to
introduce a National Means-cum-Merit Scholarship Scheme. Selection will be
made through a national test from among students who have passed class VIII.
Each student will be given Rs.6,000 per year for study in classes IX, X, XI and
XII. I propose that 100,000 scholarships may be awarded every year. In order to
fund this programme, I intend to create a corpus fund of Rs.750 crore this year,
and add a like amount to the fund every year over the next three years. Accordingly,
a sum of Rs.750 crore will be placed with the State Bank of India, and the yield
from the fund will be used for awarding the scholarships.
Drinking Water and Sanitation
21. 55,512 habitations and 34,000 schools have been provided drinking water
supply till December, 2006 under the Rajiv Gandhi Drinking Water Mission.
More ambitious targets have been set for 2007-08 to deal with both non-coverage
and slippage. I propose to enhance the allocation for the Mission from Rs.4,680
crore in 2006-07 to Rs.5,850 crore in 2007-08.
22. As regards the Total Sanitation Campaign, I propose to increase the
provision from Rs.720 crore this year to Rs.954 crore next year.
Health Sector; National Rural Health Mission
23. In the second year of its implementation, the National Rural Health
Mission (NRHM) is on schedule to meet its timelines. The institutional integration
of all the health schemes at the district and lower levels has been achieved. All
districts in the country will complete preparation of District Health Action Plans
by March 2007. The major emphasis will be on mother and child care and on the
prevention and treatment of communicable diseases such as tuberculosis and
malaria. Through Monthly Health Days (MHD) organised at Anganwadi centres,
convergence is sought to be achieved among various programmes such as
immunization, ante natal care as well as nutrition and sanitation.
 5
24. I am happy to report that 320,000 Associated Social Health Activists
(ASHAs) have been recruited and over 200,000 have received orientation training.
Besides, 90,000 link workers have been selected by the States. With trained
ASHAs in place, I am confident there will be significant improvement in health
care in rural areas. The Ayurveda, Yoga & Naturopathy, Unani, Sidha and
Homeopathy (AYUSH) systems are also being mainstreamed into the health
delivery system at all levels. I propose to increase the allocation for NRHM
from Rs.8,207 crore in 2006-07 to Rs.9,947 crore in 2007-08.
HIV/AIDS
25. Government has brought HIV/AIDS out of the closet and promised bold
and determined efforts to achieve zero-level growth of the disease. The epidemic
will be deemed 'stabilised' if the prevalence rate is less than one per cent of the
population. National Aids Control Programme (NACP)-III, starting in 2007-08
and building on NACP-I and NACP-II, will target the high risk groups in all the
States. We will expand access to condoms and ensure universal access to blood
screening and safe blood. More hospitals will provide treatment to prevent
transmission of HIV/AIDS from mother to child. Support will be given to the
protocol on paediatric dosage developed by Indian doctors and launched in
November 2006. For the year 2007-08, I propose to step up the provision for the
AIDS control programme to Rs.969 crore.
Polio
26. Last year, I had expressed the hope that polio will be eliminated from the
country by December 2007. However, there was an outbreak in western Uttar
Pradesh in early 2006. The strategy for polio eradication has been revised. The
number of polio rounds will be increased, monovalent vaccine will be introduced,
and there will be intensive coverage in the 20 high risk districts of Uttar Pradesh
and 10 districts of Bihar. The programme has been integrated into the NRHM.
The ASHAs and the Anganwadi workers will visit every household and track
every child for the immunization programme. To achieve the goal of eliminating
polio, I propose to provide Rs.1,290 crore in 2007-08.
Integrated Child Development Services
27. In the second phase of expansion of the Integrated Child Development
Services (ICDS), Government has sanctioned 173 ICDS projects, 107,274
Anganwadi centres and 25,961 mini-Anganwadi centres. Government is
committed to expand the scheme in order to cover all habitations and settlements
during the Eleventh Plan and to reach out to pregnant women, lactating mothers
and all children below the age of six. I propose to increase the allocation for
ICDS from Rs.4,087 crore in 2006-07 to Rs.4,761 crore in 2007-08.
National Rural Employment Guarantee Scheme
28. The National Rural Employment Guarantee Scheme (NREGS) was
launched on February 2, 2006. The pace of implementation varies from State to
State. Since NREGS is a demand-driven scheme carrying a legal guarantee of
employment, the budget allocation would have to be supplemented according to
 6
need. I therefore propose to make an initial allocation of Rs.12,000 crore
(including NER component) for NREGS. I am also happy to announce that
NREGS will be expanded from the current level of 200 districts to 330 districts.
In addition, I have provided Rs.2,800 crore for Sampoorna Gramin Rozgar Yojana
(SGRY) for rural employment in the districts not covered by NREGS.
29. Swaranjayanti Gram Swarozgar Yojana (SGSY) is intended to promote
self-employment among the rural poor through Self Help Groups (SHG). I propose
to strengthen this programme by increasing the allocation from Rs.1,200 crore
in the current year to Rs.1,800 crore (including NER component) next year.
Urban Unemployment
30. The issue of urban unemployment and poverty alleviation is equally
critical. Hence, I propose to increase the allocation for Swarna Jayanti Shahari
Rojgar Yojana from Rs.250 crore in 2006-07 to Rs.344 crore next year.
Jawaharlal Nehru National Urban Renewal Mission
31. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) has
evoked a positive response from State Governments. As on date, 538 projects
with a total cost of Rs.23,950 crore have been sanctioned in sectors such as
water supply, sanitation, transport, road and housing in many cities spread over
several States. I propose to enhance the allocation from Rs.4,595 crore in
2006-07 to Rs.4,987 crore 2007-08.
Targeted Public Distribution System and Antyodaya Anna Yojana
32. The issue prices of food grains under the Public Distribution System
(PDS) and for the beneficiaries of the Antyodaya Anna Yojana have been retained.
A Plan scheme for evaluation, monitoring, management and strengthening of
the targeted PDS will be implemented in 2007-08, and this will include
computerisation of the PDS and an integrated information system in the Food
Corporation of India.
Scheduled Castes and Scheduled Tribes
33. Continuing the practice that was started in 2005-06, a separate statement
on the schemes for the welfare of Scheduled Castes (SCs) and Scheduled Tribes
(STs) is placed in the Budget documents. The allocation in 2007-08 for SCs and
STs has been substantially enhanced. In respect of schemes benefiting only SCs
and STs, I have increased the allocation to Rs.3,271 crore. In respect of schemes
with at least 20 per cent of the benefits earmarked for SCs and STs, I have
increased the allocation to Rs.17,691 crore.
34. SC and ST students studying in M.Phil and PhD courses are supported
by the Rajiv Gandhi National Fellowship Programme. I propose to enhance the
allocation from Rs.35 crore in 2006-07 to Rs.88 crore in 2007-08.
Post-Matric Scholarships
35. There is a post-matric scholarship programme for SC and ST students. I
propose to increase the provision for these scholarships from Rs.440 crore in
 7
2006-07 to Rs.611 crore in 2007-08. I also propose to make a separate provision
of Rs.91 crore for similar scholarships to be awarded to students belonging to
socially and educationally backward classes.
Minorities
36. Last year, I made a modest contribution of Rs.16.47 crore to the equity of
the National Minorities Development and Finance Corporation (NMDFC).
Following the Sachar Committee report, NMDFC would be required to expand
its reach and intensify its efforts. Hence, I propose to provide a further sum of
Rs.63 crore to the share capital of NMDFC.
37. There are a number of districts with a concentration of minorities. I
propose to make a provision of Rs.108 crore for a multi-sector development
programme in these districts.
38. Three scholarship programmes are being implemented for students
belonging to minority communities. I propose to make the following allocations:
Pre-matric scholarships Rs.72 crore
Post-matric scholarships Rs.90 crore
Merit-cum-Means scholarships at
graduate and post-graduate levels Rs.48.60 crore
Women
39. There is growing awareness of gender sensitivities of budgetary
allocations. 50 ministries/departments have set up gender budgeting cells. For
2007-08, 27 ministries/departments and 5 Union Territories covering 33 demands
for grants have contributed to a statement placed in the budget papers. The outlay
for 100 per cent women specific programmes is Rs.8,795 crore and for schemes
where at least 30 per cent is for women specific programmes is Rs.22,382 crore.
We have made a sincere effort to remove the errors that were pointed out in last
year's statement.
North Eastern Region (NER)
40. The total budget allocation in 2007-08 for the North Eastern Region,
culled out from allocations under different ministries/ departments, has increased
from Rs.12,041 crore in 2006-07 to Rs.14,365 crore in 2007-08. This includes
Rs.1,380 crore provided to the Ministry of Development of North Eastern Region
(DONER). The new industrial policy for NER, with suitable fiscal incentives,
will be in place before March 31, 2007.
Supplement to the GBS
41. I have, so far, outlined the allocations under what may be called Plan 'A'
which has a resource basket of Rs.205,100 crore. In consultation with the
Planning Commission, I have also drawn up Plan 'B'. Since the Eleventh Plan
will begin on April 1, 2007, we recognize that there will be a need to take new
initiatives in critical areas. Additional resources will be needed once the proposals
are finalised and the pace of expenditure builds up. Therefore, I shall endeavour
to find additional resources through better tax administration to the extent of
 8
Rs.7,000 crore during the course of the year. I have been advised by the Planning
Commission that these additional funds, once voted by this House, will be
allocated among sectors such as agriculture, rural development, health, women
and child development, urban infrastructure, water resources, etc.
42. I also have Plan 'C'. Under Plan 'C', I propose to tap into resources available
outside the Budget and leverage them for the purpose of investment, especially
in the infrastructure sector. I shall deal with this subject a little later.

IV. AGRICULTURE
43. I shall now take up our main challenge: agriculture. I may recall the
words of Jawaharlal Nehru, who said "Everything else can wait, but not
agriculture".
44. The draft National Policy for Farmers submitted by the National
Commission on Farmers is under consideration. Meanwhile, I have a number of
proposals to improve the economic viability of farming and ensure that farmers
earn a minimum net income.
Farm Credit
45. Farm credit continues to grow at a satisfactory pace. The goal of doubling
farm credit in three years was achieved in two years. The target of Rs.175,000
crore set for 2006-07 will be exceeded comfortably and is likely to reach
Rs.190,000 crore. This year, until December 2006, 53.37 lakh new farmers were
brought into the institutional credit system. For 2007-08, I propose to fix a target
of Rs.225,000 crore as farm credit and an addition of 50 lakh new farmers to the
banking system.
46. The two per cent interest subvention scheme for short-term crop loans
will continue in 2007-08, and I am making a provision of Rs.1,677 crore for that
purpose.
47. A special plan is being implemented over a period of three years in 31
especially distressed districts in four States of the country involving a total amount
of Rs.16,979 crore. Of this, about Rs.12,400 crore will be on water related
schemes. In order to provide subsidiary income to the farmer, the special plan
includes a scheme for induction of high yielding milch animals and related
activities. I propose to provide Rs.153 crore for this scheme.
Agricultural Indebtedness
48. Government had appointed a Committee under Dr. R. Radhakrishna to
examine all aspects of agricultural indebtedness. The Committee has held wide
ranging consultations across the country and is in the process of finalising its
recommendations. Government will act on the report as soon as it is received.
A Mission for Pulses
49. Government is concerned about the stagnation in the production and
productivity of pulses. A critical deficiency is the availability and quality of
certified seeds. I therefore propose to expand the Integrated Oilseeds, Oil palm,
 9
Pulses and Maize Development programme. There will be a sharper focus on
scaling up the production of breeder, foundation and certified seeds. The Indian
Institute of Pulses Research (IIPR), Kanpur, the National and State level seeds
corporations, agricultural universities, ICAR centres, KRIBHCO, IFFCO and
NAFED as well as large private sector companies will be invited to submit plans
to scale up the production of seeds. Government will fund the expansion of
IIPR, Kanpur, and offer the other producers a capital grant or concessional
financing in order to double the production of certified seeds within a period of
three years.
Plantation Sector
50. A Special Purpose Tea Fund has been launched for re-plantation and
rejuvenation of tea. Government will soon put in place similar financial
mechanisms for coffee, rubber, spices, cashew and coconut.
Accelerated Irrigation Benefit Programme
51. The Accelerated Irrigation Benefit Programme (AIBP) has been revamped
in order to complete more irrigation projects in the quickest possible time. 35
projects are likely to be completed in 2006-07 and additional irrigation potential
of 900,000 hectares will be created. As against an outlay of Rs.7,121 crore in
2006-07, the outlay for 2007-08 will be increased to Rs.11,000 crore. Of this,
the grant component to State Governments will be Rs.3,580 crore, an increase
from Rs.2,350 crore.
Rainfed Area Development Programme
52. The National Rainfed Area Authority was established a few months ago
to coordinate all schemes relating to watershed development and other aspects
of land use. I propose to allocate Rs.100 crore for the new Rainfed Area
Development Programme.
Water Resources Management: Restoring Water Bodies
53. Honourable Members will recall that, in March 2005, a pilot project to
repair, renovate and restore water bodies was launched in 13 States. I am happy
to inform the House that the World Bank has signed a loan agreement with Tamil
Nadu for Rs.2,182 crore to restore 5,763 water bodies having a command area
of 400,000 hectares. An agreement for Andhra Pradesh is expected to be concluded
in March 2007 and will cover 3,000 water bodies with a command area of 250,000
hectares. Preparation of similar projects for Karnataka, Orissa and West Bengal
are at different stages and at least two more agreements are likely to be concluded
before June 2007. I would urge other State Governments to come forward with
proposals so that the whole country can be covered within the next two years.
Ground Water Recharge
54. Depletion of ground water has assumed grave proportions. The Central
Ground Water Board has identified 1,065 assessment blocks in the country as
'over-exploited' or 'critical'. Over 80 per cent of these blocks are in 100 districts
in seven States. The strategy for ground water recharge is to divert rain water
 10
into 'dug wells'. Each structure will cost about Rs.4,000. The requirement is
seven million structures, including about two million structures on land belonging
to small and marginal farmers. I propose to provide 100 per cent subsidy to
small and marginal farmers and 50 per cent subsidy to other farmers. Ministry of
Water Resources will finalise the scheme shortly. In anticipation, I intend to
transfer a sum of Rs.1,800 crore to NABARD. The amount will be held in escrow
and will be disbursed through the lead bank of the district concerned to the
beneficiaries.
Training of Farmers
55. With minimum instruction and training, our farmers will easily absorb
good water management practices. I therefore propose that the Indian Council of
Agricultural Research (ICAR) may set up one teaching-cum-demonstration model
of water harvesting in each of 32 selected State Agricultural Universities and
ICAR institutes. Each institution will train 100 trainers and 1,000 farmers every
year in two-week and one-week programmes respectively. Based on estimates
of recurring costs, I intend to provide an interest free loan of Rs.3 crore to each
institution to create a corpus fund. The yield from the fund will be used for
implementing the training programme. The total cost is estimated at Rs.100 crore.
Extension System
56. The green revolution of the 1960s was brought about by thousands of
agricultural extension workers who worked side by side with our farmers under
a programme called Training and Visit (T&V). Sadly, the extension system seems
to have collapsed. In order to revive extension work, the Ministry of Agriculture
will, in consultation with State Governments, draw up a new programme that
will replicate T&V with suitable changes.
57. The Agriculture Technology Management Agency (ATMA) that is now
in place in 262 districts will be extended to another 300 districts in 2007-08. I
propose to enhance the provision for ATMA from Rs.50 crore to Rs.230 crore
next year.
Fertiliser Subsidies
58. I had budgeted Rs.17,253 crore for fertiliser subsidies in 2006-07.
According to Revised Estimates, this will rise to Rs.22,452 crore, and there is a
demand for more money. While fertilisers should indeed be subsidised, we must
find an alternative method of delivering the subsidy directly to the farmer. The
fertiliser industry has agreed to work with the Department of Fertilisers to conduct
a study and find a solution. Based on the report, Government intends to implement
a pilot programme in at least one district in each State in 2007-08.
Agricultural Insurance
59. The National Agricultural Insurance Scheme (NAIS) will be continued
in its present form for Kharif and Rabi 2007-08. I propose to make a provision of
Rs.500 crore for the scheme.
 11
60. Agricultural Insurance Corporation (AIC) has been running a pilot weather
insurance scheme since Kharif 2004 and it appears to be a more promising risk
mitigation scheme. Hence, Government will ask AIC to start a weather based
crop insurance scheme on a pilot basis in two or three States, in consultation
with the State Governments concerned, as an alternative to the NAIS. The scheme
will be operated on an actuarial basis with an element of subsidy. I intend to
allocate Rs.100 crore for this purpose in 2007-08.
National Bank for Agriculture and Rural Development (NABARD)
61. NABARD provides refinance to cooperative institutions. As the volume
of farm credit increases and the Vaidyanathan Committee recommendations for
reform of rural credit cooperatives are implemented, the demand for refinance
will increase. In order to augment its resources, I propose to allow NABARD to
issue rural bonds to the extent of Rs.5,000 crore. These bonds will be guaranteed
by the Government and will be eligible for suitable tax exemption.
Rural Infrastructure Development Fund
62. The Rural Infrastructure Development Fund (RIDF) continues to sanction
and disburse funds to State Governments. In 2006-07, out of a corpus of Rs.10,000
crore, NABARD has so far issued sanctions for Rs.8,440 crore and will achieve
its target. Keeping in view the growing demand for these funds, I propose to
raise the corpus of RIDF-XIII in 2007-08 to Rs.12,000 crore. I would urge State
Governments to use these funds primarily in the distressed districts of the State.
63. A separate window for rural roads under RIDF was opened with Rs.4,000
crore. Against this, projects for Rs.2,311 crore have been sanctioned in 2006-07.
I propose to continue the separate window under RIDF-XIII in 2007-08 with a
corpus of Rs.4,000 crore.
Social Security
64. One of the commitments made in the NCMP is that Government will
introduce a social security scheme for unorganised workers. A committee chaired
by Dr. Arjun Sengupta has given its report which is under consideration. Pending
a decision, in order to signal the UPA Government's concern for the welfare of
unorganised workers, I propose to make a beginning. I propose to extend death
and disability insurance cover through Life Insurance Corporation of India (LIC)
to rural landless households under a new scheme called 'Aam Admi Bima Yojana'
(AABY). According to NSS Report No. 491, the estimate of such households is
about 1.5 crore. By end March 2007, 70 lakh households will be covered through
existing schemes of the LIC with the support of some State Governments and
the social security fund with the LIC. Under AABY, I propose to cover the rural
landless households which enjoy no cover at all today, and the number may be
actually more than what is indicated in the NSS report. The head of the family or
one earning member in the family will be insured. The Central Government will
bear 50 per cent of the premium of Rs.200 per year per person and I would urge
the State Governments to come forward to bear the other 50 per cent on behalf
of the beneficiaries. Taking into account the annual cost to the Central
 12
Government, I intend to place a sum of Rs.1,000 crore in a fund that will be
maintained by LIC. I propose to finalise the scheme in consultation with State
Governments and begin to implement it in 2007-08.
65. Mr. Speaker, Sir, I have devoted the last 15 minutes or so to agriculture.
There is no dearth of schemes; there is no dearth of funds. What needs to be
done is to deliver the intended outcomes. Saint Tiruvalluvar watches over us and
warns:-
“Uzhavinar Kai Madangin Illai Vizhaivathoom
Vittame Enbarkum Nilai”
[ If ploughmen keep their hands folded
Even sages claiming renunciation cannot find salvation]

V. INVESTMENT
66. All indicators point to an accelerating rate of investment in the economy.
For example, gross domestic capital formation (GDCF) in 2005-06 grew by 23.7
per cent over the previous year to Rs.11,47,254 crore. I believe that this trend
continues in 2006-07. In April-January, 2006-07, foreign direct investment
amounted to US$12.5 billion and outpaced portfolio investment which was
US$6.8 billion.
67. Central Public Sector Enterprises (CPSEs) will, through internal and extra
budgetary resources, invest Rs.165,053 crore in 2007-08. Government will
provide equity support of Rs.16,361 crore and loans of Rs.2,970 crore to CPSEs.
68. Further, in the current year, we have restructured eight CPSEs with a
cash infusion of Rs.1,590 crore and non-cash sacrifices of Rs.1,612 crore.

VI. INFRASTRUCTURE
Power
69. Electricity generation has recorded a growth rate of 7.5 per cent in April-
December this year. However, as we complete the Tenth Plan, we would have
added only 23,163 MW of additional capacity in the five year period including
16,339 MW added in the three years beginning 2004-05. Hence, it is imperative
that we take new initiatives.
70. The Ministry of Power has awarded two Ultra Mega Power Projects
(UMPP) in Sasan and Mundra. Seven more UMPPs are under process and we
are confident that at least two more will be awarded by July, 2007. Other initiatives
taken by the Ministry of Power include facilitating setting up of merchant power
plants by private developers and private participation in transmission projects.
71. Besides, the Accelerated Power Development and Reforms Project
(APDRP) has reduced significantly Aggregate Technical and Commercial (ATC)
losses in 213 towns. APDRP is being restructured to cover all district headquarters
 13
and towns with a population of more than 50,000. I propose to increase the
budgetary support for APDRP from Rs.650 crore in 2006-07 to Rs.800 crore
next year.
Rajiv Gandhi Grameen Vidyutikaran Yojana
72. Having regard to the pace of implementation under the Rajiv Gandhi
Grameen Vidyutikaran Yojana and the annual target, I propose to increase the
allocation from Rs.3,000 crore in 2006-07 to Rs.3,983 crore in 2007-08.
Coal
73. Following the announcement last year, 26 coal blocks with reserves of
8,581 million tonnes and four lignite blocks with reserves of 755 million tonnes
have been allotted, up to December 2006, to Government companies and approved
end users. The definition of specified end use will be enlarged to include
underground coal gasification and coal liquefaction.
National Highways
74. Work on the golden quadrilateral is nearly complete and there is
considerable progress in the North-South, East-West corridor project which is
expected to be completed by 2009. NHDP-III, NHDP-V and NHDP-VI are in
advanced stages of planning or implementation. So far, National Highways
Authority of India (NHAI) has given Rs.2,072 crore as viability gap funding but
has also received Rs.1,900 crore as negative grant. The private sector investment
leveraged under NHDP is Rs.25,366 crore. Under the programme for the North
Eastern Region (SARDP-NE), 450 kilometres have been awarded in 2006-07
and the balance will be awarded in 2007-08. I propose to increase the provision
for the National Highway Development Programme (NHDP) from Rs.9,945 crore
in 2006-07 to Rs.10,667 crore next year.
75. The road-cum-rail bridge at Munger, Bihar, over the Ganga, has been
taken up as a national project. Likewise, the road-cum-rail bridge at Bogibeel,
Assam, over the Brahmaputra, will be taken up as a national project.
Public Private Partnership and Viability Gap Funding
76. The Public Private Partnership (PPP) model has enabled greater private
sector participation in the creation and maintenance of infrastructure. So far,
under the viability gap funding scheme, 37 proposals have been received of
which 21 proposals have been granted 'in-principle' approval with a total project
cost of Rs.9,842 crore and an estimated viability gap funding of Rs.2,521 crore.
The pace is slow, and there is a need to adopt a more aggressive approach for
preparing a shelf of bankable projects that can be offered for competitive bidding.
Apart from the steps already taken for capacity building and engaging consultants,
I intend to set up a revolving fund with a corpus of Rs.100 crore to quicken
project preparation. The fund will contribute up to 75 per cent of the preparatory
expenditure in the form of interest free loan that will be eventually recovered
from the successful bidder. Guidelines for operating the fund will be announced
in due course.
 14
VII. INDUSTRY
Petroleum and Natural Gas
77. Energy security is high on the Government's agenda. In the six rounds of
New Exploration Licensing Policy (NELP) so far, 162 production sharing
contracts have been awarded. Indian and foreign companies have already made
an investment of Rs.97,000 crore in exploration. Similarly, after three rounds of
bidding, 23 coal bed methane blocks have been awarded for exploration.
Textiles
78. A rejuvenated textile industry is geared to meet the global challenge. 26
parks have been approved so far out of 30 sanctioned under the Scheme for
Integrated Textiles Parks (SITP). I propose to increase the provision for these
parks from Rs.189 crore in 2006-07 to Rs.425 crore in 2007-08.
79. I am also glad to announce that the Technology Upgradation Fund (TUF)
scheme will be continued during the Eleventh Plan. Against a provision of Rs.535
crore in 2006-07, I propose to provide Rs.911 crore in 2007-08. As before,
handlooms will be covered under the TUF scheme.
Handlooms
80. A cluster approach for the development of the handloom sector was
introduced in 2005-06 and 120 clusters have been selected. 273 new yarn depots
have been opened in the current year and the Handloom Mark was launched.
Government proposes to take up an additional 100-150 clusters in 2007-08. The
12 schemes that are now implemented will be grouped into five schemes in the
Eleventh Plan period. The health insurance scheme has so far covered 300,000
weavers and will be extended to more weavers. The scheme will also be enlarged
to include ancillary workers. I propose to enhance the allocation for the sector
from Rs.241 crore in 2006-07 to Rs.321 crore next year.
Small and Medium Enterprises
81. Following the credit policy for small and medium enterprises (SME)
announced in August 2005, outstanding credit to the SME sector increased from
Rs.135,200 crore at end December 2005 to Rs.173,460 crore at end December
2006. While encouraging banks to lend more to the SME sector, I propose to ask
banks to have regard to the credit rating acquired by an SME while fixing the
interest rate.
Coir Industry
82. Coir is an eco-friendly fibre. The coir industry provides employment to a
large number as well as earns valuable foreign exchange. I am happy to announce
a scheme for the modernisation and technology upgradation of the coir industry
with special emphasis to major coir producing States such as Kerala, Karnataka,
Tamil Nadu, Andhra Pradesh and Orissa. I propose to make a provision of
Rs.22.50 crore.
 15
VIII. SERVICES SECTOR
Foreign Trade
83. Our merchandise exports crossed the milestone of US$100 billion in
2005-06 and are expected to cross another milestone of US$125 billion by the
end of the current fiscal. Foreign trade is growing at a rate more than twice the
growth rate of GDP. Government will continue to follow export friendly policies.
Tourism
84. I propose to increase the provision for building tourist infrastructure from
Rs.423 crore in 2006-07 to Rs.520 crore in 2007-08.

IX. FINANCIAL SECTOR

Banking
85. In addition to the important legislative measures now before Parliament,
Government proposes to take a number of initiatives in banking and insurance.
86. Government proposes to acquire RBI's equity holding in State Bank of
India. I have provided a sum of Rs.40,000 crore for this purpose, but the
transaction will be deficit neutral to the Government.
87. The Differential Rate of Interest (DRI) scheme provides finance at a rate
of 4 per cent to the weaker sections of the community engaged in gainful
occupations. I propose to raise the limit of the loan from Rs.6,500 to Rs.15,000
and the limit of the housing loan from Rs.5,000 to Rs.20,000 per beneficiary.
Regional Rural Banks
88. Regional Rural Banks (RRBs) have emerged as the third arm for
delivering rural credit, and the sponsor banks have assured me that RRBs are
willing to take on greater responsibilities. The Committee on Financial Inclusion,
chaired by Dr. C. Rangarajan, has also made certain recommendations concerning
RRBs. I, therefore, propose to:
• ask RRBs to undertake an aggressive branch expansion programme
and, in 2007-08, open at least one branch in the 80 uncovered districts
of the country;
• extend the Securitisation and Reconstruction of Financial Assets and
Enforcement of Securitisation of Interest (SARFAESI) Act to loans
advanced by RRBs;
• permit RRBs to accept NRE/FCNR deposits; and
• recapitalize, in a phased programme, the RRBs which have a negative
net worth.
Housing Loans
89. The National Housing Bank (NHB) will shortly introduce a novel product
for senior citizens: a 'reverse mortgage' under which a senior citizen who is the
owner of a house can avail of a monthly stream of income against the mortgage
of his/her house, while remaining the owner and occupying the house throughout
his/her lifetime, without repayment or servicing of the loan.
 16
90. Our people want housing loans. Banks and housing finance companies
that lend against mortgages would have greater comfort if the mortgage can be
guaranteed through a three way contract among borrower, lender and guarantor.
Regulations will be put in place to allow the creation of mortgage guarantee
companies.
Insurance
91. On December 6, 2006, Rashtrapatiji launched an exclusive health
insurance scheme for senior citizens offered by National Insurance Company. I
have asked the other three public sector insurance companies to offer a similar
product to senior citizens, and they have agreed to do so in 2007-08.
92. The Micro Financial Sector (Development and Regulation) Bill as well
as a comprehensive Bill to amend the insurance laws will be introduced in the
Budget Session.
Financial Inclusion
93. Financial inclusion is the process of ensuring access to timely and adequate
credit and financial services by vulnerable groups at an affordable cost. The
Committee on Financial Inclusion has given an interim report. While we await
the final report, Government has decided to implement, immediately, two
recommendations. The first is to establish a Financial Inclusion Fund with
NABARD for meeting the cost of developmental and promotional interventions.
The second is to establish a Financial Inclusion Technology Fund to meet the
costs of technology adoption. Each fund will have an overall corpus of Rs.500
crore, with initial funding to be contributed by the Central Government, RBI and
NABARD.
Capital Markets
94. The capital market is an important instrument for intermediating financial
resources. Recognising the strength of the Indian capital market, the International
Organisation of Securities Commissions (IOSCO) has decided to hold its annual
conference in Mumbai in April 2007. In line with measures announced every
year to strengthen the market, I propose to:
• make PAN the sole identification number for all participants in the
securities market with an alpha-numeric prefix or suffix to distinguish
a particular kind of account;
• take forward the idea of Self Regulating Organisations (SRO) for
different market participants under regulations that will be made by
SEBI and, if necessary, supported by an enabling law;
• promote the flow of investment to the infrastructure sector by
permitting mutual funds to launch and operate dedicated
infrastructure funds;
• converge the different regulations that allow individuals and Indian
mutual funds to invest in overseas securities by permitting individuals
to invest through Indian mutual funds;
 17
• allow short selling settled by delivery, and securities lending and
borrowing to facilitate delivery, by institutions;
• put in place an enabling mechanism to permit Indian companies to
unlock a part of their holdings in group companies for meeting
their financing requirements by issue of Exchangeable Bonds.
Innovative Financing for Infrastructure
95. The minimum obligation of States to borrow from the National Small
Savings Fund (NSSF) has been brought down to 80 per cent of net collections.
Repayments of past NSSF loans by the Central and State Governments have
also commenced from 2005-06, making available resources for long-term lending.
I therefore propose that these funds may also be borrowed from NSSF by India
Infrastructure Finance Company Limited (IIFCL).
96. An initiative that has borne fruit is the launch of the US$5 billion
infrastructure financing initiative by Citigroup, Blackstone, IDFC and IIFCL.
97. A committee chaired by Shri Deepak Parekh has made a number of
recommendations for financing infrastructure. One of the recommendations is
to use a small part of the foreign exchange reserves without the risk of monetary
expansion. The Committee has suggested the establishment of two wholly-owned
overseas subsidiaries of IIFCL with the following objectives:
(i) to borrow funds from the RBI and lend to Indian companies
implementing infrastructure projects in India, or to co-finance their
ECBs for such projects, solely for capital expenditure outside India;
and
(ii) to borrow funds from the RBI, invest such funds in highly rated
collateral securities, and provide 'credit wrap' insurance to
infrastructure projects in India for raising resources in international
markets.
The loans by RBI to these two subsidiary companies will be guaranteed by the
Government of India and the RBI will be assured of a return higher than the
average rate of return on its incremental investment. Government proposes to
examine the legal and regulatory aspects of the recommendation, in consultation
with RBI, in order to find an innovative method of enhancing the financial
resources for infrastructure.

X. OTHER PROPOSALS
Defence Expenditure
98. I propose to increase the allocation for Defence to Rs.96,000 crore. This
will include Rs.41,922 crore for capital expenditure. Needless to say, any
additional requirement for the security of the nation will be provided.
Information Technology
99. Government has launched an ambitious programme for e-governance.
The goal is to improve efficiency, convenience, accessibility and transparency in
 18
Government functions and take Government services to the common citizen.
I propose to increase the allocation for e-governance from Rs.395 crore in
2006-07 to Rs.719 crore in 2007-08. The Central Government supports
e-governance action plans at State levels, and I propose to increase the allocation
for such support from Rs.300 crore in 2006-07 to Rs.500 crore in 2007-08. I also
propose to provide Rs.33 crore for a new scheme of manpower development for
the software export industry.
Backward Regions Grant Fund
100. The Backward Regions Grant Fund received Rs.5,000 crore in 2006-07.
I propose to increase the allocation to Rs.5,800 crore in 2007-08. This will finance
two components, one pertaining to 250 districts and the other pertaining to the
special plan for Bihar. KBK districts of Orissa, which are included in the 250
districts, will continue to receive the same quantum of assistance as they have
been receiving in the past.
Mumbai as a Financial Centre
101. The High Powered Expert Committee to make Mumbai a regional
financial centre has submitted its report recently. I intend to place the report in
the public domain and obtain feedback. It is my hope that we would be able to
build a consensus on the key recommendations of the Committee, promote a
world class financial centre in Mumbai, and realise the objective of making
'financial services' the next growth engine for India.
Vocational Education Mission
102. To sustain a high level of economic growth, it is essential to have a
reservoir of skilled and trained manpower. Shortages have already emerged in a
number of sectors. Moreover, we can take advantage of the demographic dividend
thrown up by an increase in the working age population only if our young men
and women have the required skills. The Prime Minister spoke of a Vocational
Education Mission in his Independence Day address in 2006. A taskforce in the
Planning Commission is chalking out strategies for vocational education
programmes. Alternate models may be adopted, but the approach will be based
on public-private partnership. I propose to make an initial provision of Rs.50
crore for beginning work on this mission.
Upgradation of ITIs
103. Honourable Members will recall that Government had taken up a
programme for upgradation of 500 ITIs over five years beginning 2005. Revised
courses in the first lot of 100 upgraded ITIs were started in August 2005 and in
the second lot of 100 upgraded ITIs in August 2006. I expect that another 300
ITIs will be covered by August 2009. That would still leave 1,396 Government
ITIs.
104. I propose that the 1,396 ITIs be upgraded into centres of excellence in
specific trades and skills under public-private partnership. Under the proposed
scheme, the State Government, as the owner of the ITI, will continue to regulate
admissions and fees; the new management will be given academic and financial
 19
autonomy; and the Central Government will provide financial assistance by way
of seed money. ITIs will be encouraged to start a second shift. Once a tripartite
MoU is signed among the three stakeholders, I propose to grant an interest free
loan up to Rs.2.5 crore to each ITI for upgradation and revision of courses. I seek
the cooperation of State Governments in upgrading at least 300 ITIs every year,
beginning 2007-08, under the PPP mode. I have kept aside Rs.750 crore for this
purpose.
Employment for the Physically Challenged
105. Among the disadvantaged sections of the society are physically challenged
persons. They face difficulties in obtaining regular employment. In order to
incentivise employers in the organised sector to provide regular employment, I
propose a scheme whereunder Government will reward the employer once the
physically challenged employee is regularised and is enrolled under the Employees
Provident Fund (EPF) and the Employees State Insurance (ESI). Under the
scheme, Government will reimburse the employer's contribution to the EPF and
ESI for the first three years. Government is ready to support the creation of
about 100,000 jobs every year for physically challenged persons with a salary
limit of Rs.25,000 per month. I estimate the cost to Government at Rs.150 crore
per annum rising to Rs.450 crore per annum when the scheme is fully rolled out.
I have therefore earmarked Rs.1,800 crore.
Debt Management Office
106. World over, debt management is distinct from monetary management.
The establishment of a Debt Management Office (DMO) in the Government has
been advocated for quite some time. The fiscal consolidation achieved so far has
encouraged us to take the first step. Accordingly, I propose to set up an autonomous
DMO and, in the first phase, a Middle Office will be set up to facilitate the
transition to a full-fledged DMO.
Development Cooperation
107. In keeping with India's growing stature in international affairs, we must
willingly assume greater responsibility in promoting development in other
developing countries. At present, India extends development cooperation through
a number of Ministries and agencies and the total sum is about US$ 1 billion per
annum. It is felt that all activities relating to development cooperation should be
brought under one umbrella. Accordingly, Government proposes to establish the
India International Development Cooperation Agency (IIDCA). The Ministries
of External Affairs, Finance and Commerce and other stakeholders will be
represented on IIDCA.
Climate Change
108. India is not a significant contributor to green house gas (GHG) emissions,
nor will it be so in the foreseeable future. Nevertheless, in line with the principle
of "common but differentiated responsibility", India has taken important steps
to mitigate GHG emissions and adapt to climate change impact. India has also
strongly promoted the clean development mechanism (CDM) under the Kyoto
 20
Protocol and has the world's largest number of CDM projects. Nevertheless,
India is among the countries more vulnerable to climate change. Hence,
Government proposes to appoint an expert committee to study the impact of
climate change on India and identify the measures that we may have to take in
the future.
Commonwealth Games
109. India bid for and won for the city of Delhi the Commonwealth Games
2010. The nation was filled with pride when, under the guidance of Shri Rajiv
Gandhi, we successfully hosted the Asian Games in 1982. We owe it to our
people to make the Commonwealth Games an equally memorable event. I propose
to provide in 2007-08 Rs.150 crore to the Ministry of Youth Affairs and Sports
and Rs.350 crore to the Delhi Government for the Games. Similarly, I propose to
provide Rs.50 crore for the Commonwealth Youth Games 2008 to be held in
Pune.
History and Culture
110. As we celebrate the 150th year of the First War of Independence and the
centenary year of the Satyagraha Movement, our thoughts go to the institutions
that continue the work of Gandhiji and other constructive work. I intend to set
apart Rs.30 crore for four institutions whose work we gratefully acknowledge.
These are Sabarmati Ashram, Ahmedabad; Sevagram Ashram, Wardha;
Bhandarkar Oriental Research Institute, Pune; and Rajendra Smriti Sanghrahalaya,
Patna. I also intend to provide Rs.20 crore to reposition the Nehru Memorial
Museum and Library, Delhi, as a major centre of intellectual activity.
111. The Ministry of Culture proposes to engage scholars from Indian and
foreign institutions to work on specific projects. The terms of engagement will
provide freedom and flexibility to the scholars. I intend to make an initial grant
of Rs.5 crore to encourage this effort.
Institutions of Excellence
112. As in the last two years, I propose to make a special grant of Rs.100 crore
to recognise excellence. Government has selected the Govind Ballabh Pant
University of Agriculture & Technology, Pantnagar and the Tamil Nadu
Agricultural University, Coimbatore, and each will be given Rs.50 crore.

XI. PUBLIC FINANCE

113. Thanks to the Fiscal Responsibility legislations, the Central Government
and the State Governments have regained lost fiscal ground. Rs. 110,268 crore
of States' debt has been consolidated. Twenty States have availed of the benefit
of debt waiver to the tune of Rs.8,575 crore.
114. In 2006-07, the Centre will give to the States as their share of taxes and
duties Rs.120,377 crore. In 2007-08, this amount will increase to Rs.142,450
crore. Besides, total grants and loans, both under Plan and non-Plan, to States
and Union Territories will increase from Rs.90,521 crore in 2006-07 to Rs.106,987
crore in 2007-08.
 21
VAT, CST and a Roadmap towards GST
115. VAT has proved to be an unqualified success. VAT revenues of the
implementing States increased by 13.8 per cent in 2005-06 and by 24.3 per cent
in the first nine months of 2006-07. The next logical step is to phase out Central
Sales Tax (CST). I am glad to report that the Central Government has reached an
agreement with State Governments to phase out CST. Consequently, the CST
rate will be reduced from 4 per cent to 3 per cent with effect from April 1, 2007.
I have provided Rs.5,495 crore for compensation for losses, if any, on account
of VAT and also on account of CST.
116. I wish to record my deep appreciation of the spirit of cooperative
federalism displayed by State Governments and especially their Finance Ministers.
At my request, the Empowered Committee of State Finance Ministers has agreed
to work with the Central Government to prepare a roadmap for introducing a
national level Goods and Services Tax (GST) with effect from April 1, 2010.
117. So far as the Central Government is concerned, the fiscal consolidation
is proceeding according to the FRBM Act. Based on Revised Estimates, I am
happy to report that the revenue deficit for the current year will be 2.0 per cent
(against a BE of 2.1 per cent) and the fiscal deficit will be 3.7 per cent (against a
BE of 3.8 per cent).

XII. BUDGET ESTIMATES FOR 2007-08

118. I turn to the Budget Estimates for 2007-08.
Plan Expenditure
119. I estimate Plan expenditure for 2007-08 at Rs.205,100 crore. As a
proportion of total expenditure (net of the SBI share acquisition), Plan expenditure
will be 32.0 per cent.
Non-Plan Expenditure
120. Non-Plan Expenditure in 2007-08 (net of the SBI share acquisition) is
estimated at Rs.435,421. The increase over 2006-07 is only 6.5 per cent.
Revenue Deficit and Fiscal Deficit
121. Mr. Speaker, Sir, in the Budget Estimates for 2007-08, the total
expenditure is estimated at Rs.680,521 crore (including Rs.40,000 crore for the
SBI share acquisition). The total revenue receipts of the Central Government are
projected to be Rs.486,422 crore and the revenue expenditure to be Rs.557,900
crore. Consequently, the revenue deficit is estimated at Rs.71,478 crore which is
1.5 per cent of the GDP. The fiscal deficit is estimated at Rs.150,948 crore,
which is 3.3 per cent of the GDP. I am happy to report that we are on course to
achieve the FRBMA targets.
 22

Part - B

XIII. TAX PROPOSALS

122. Mr. Speaker, I shall now present my tax proposals.
123. The UPA Government promised that "tax rates will be stable and
conducive to growth, compliance and investment". The increase in gross tax
revenue is proof of a promise fulfilled. While we have raised more tax revenue,
we have also left more money in the hands of the people as savings and for
investment.
124. Gross tax revenue has grown by 19.9 per cent, 20.0 per cent and 27.8 per
cent in the first three years of this Government. The tax to GDP ratio has increased
from 9.2 per cent in 2003-04 to 11.4 per cent in 2006-07. We intend to keep our
tax rates moderate and stable and administer the tax laws in a tax payer-friendly
manner.
Indirect Taxes
125. I shall begin with indirect taxes. Firstly, customs duties.
126. In January 2007, Government announced wide ranging reductions in
tariffs. Import duties on capital goods, project imports, metals and specified
inorganic chemicals were reduced by 2.5 percentage points and, in some cases,
by 5 percentage points. Duties on some edible oils were reduced by 10 to 12.5
percentage points.
127. In order to take one more step towards comparable East Asian rates, I
propose to reduce the peak rate for non-agricultural products from 12.5 per cent
to 10 per cent.
128. I propose to reduce the duties on most chemicals and plastics from 12.5
per cent to 7.5 per cent.
129. The duty on prime steel is 5 per cent. Seconds and defectives augment
supply. Keeping in mind the need for a differential, I propose to reduce the duty
on seconds and defectives of steel from 20 per cent to 10 per cent.
130. I propose to fully exempt from duty all coking coal irrespective of the
ash content.
131. Last year, I reduced the excise duty on all man-made fibres and yarns
from 16 per cent to 8 per cent. To further encourage this industry, I propose to
reduce the customs duty on polyester fibres and yarns from 10 per cent to 7.5 per
cent. Consequently, the customs duty on raw-materials such as DMT, PTA and
MEG will also be reduced from 10 per cent to 7.5 per cent.
132. Another industry that is a growth- and employment- driver is gem and
jewellery. I propose to bring down the duty on cut and polished diamonds from
 23
5 per cent to 3 per cent; on rough synthetic stones from 12.5 per cent to 5 per
cent; and on unworked corals from 30 per cent to 10 per cent.

133. I propose to fully exempt dredgers from import duty.

134. To augment irrigation facilities and processing of agricultural products, I

propose to reduce the duty on drip irrigation systems, agricultural sprinklers and
food processing machinery from 7.5 per cent to 5 per cent.

135. While specified medical equipment attract a concessional duty of 5 per

cent, other equipment are taxed at 12.5 per cent. I propose to bring down the
general rate of import duty on medical equipment to 7.5 per cent.

136. In order to make edible oils more affordable, I propose to exempt crude
as well as refined edible oils from the additional CV duty of 4 per cent. I also
propose to reduce the duty on sunflower oil, both crude and refined, by 15
percentage points.

137. I have good news for cat and dog lovers. I propose to reduce the duty on
pet foods from 30 per cent to 20 per cent.

138. I propose to reduce the duty on watch dials and movements as well as
umbrella parts from 12.5 per cent to 5 per cent.

139. In order to promote research and development, I propose to extend the

concessional rate of 5 per cent duty available to public funded research institutions
to all research institutions registered with the Directorate of Scientific and
Industrial Research. For the pharmaceutical and biotechnology sector, I propose
to reduce the duty on 15 specified machinery from 7.5 per cent to 5 per cent.

140. Import of aircraft, including helicopters, by Government and scheduled

airlines is, at present, exempt from all duties, and that position will continue.
However, there is no reason to allow the exemption to other private importers.
Hence, I propose to levy an import duty of 3 per cent, which is the WTO bound
rate, on all private import of aircraft including helicopters. Such import will also
attract countervailing duty and additional customs duty.

141. The Hoda Committee has submitted a report on mineral policy. Taking a
leaf out of the report, and in order to conserve our natural resources as well as to
raise revenue, I propose to impose an export duty of Rs.300 per metric tonne on
export of iron ores and concentrates and Rs.2,000 per metric tonne on export of
chrome ores and concentrates.

142. I shall now turn to my proposals on excise duties and service tax.

143. There will be no change in the general CENVAT rate or in the service tax
rate.
 24
144. On February 15, 2007, Government reduced the price of petrol and diesel
by Rs.2 per litre and Re.1 per litre, respectively. I had agreed that the Revenue
will bear a part of the burden. Hence, I propose to reduce the ad valorem
component of excise duty on petrol and diesel from 8 per cent to 6 per cent.
145. Keeping in mind the special needs of several sectors and the interest of
the consumers, I propose to grant relief from excise duty in deserving cases,
especially job creating sectors:
• I propose to raise the exemption limit for small scale industry (SSI)
from Rs.1 crore to Rs.1.5 crore.
• The food processing sector is poised to achieve high growth.
Concessions were extended last year to several items of food. This
year, I propose to fully exempt from excise duty biscuits whose retail
sale price does not exceed Rs.50 per kilogram. I also propose to
fully exempt from excise duty all kinds of food mixes including
instant mixes. I can no longer be accused of being partial to idli and
dosa mixes.
• I propose to reduce excise duty on umbrellas and parts of footwear
from 16 per cent to 8 per cent.
• Plywood helps to save wood. Hence, I propose to reduce excise duty
on plywood from 16 per cent to 8 per cent.
• Biodiesel will greatly reduce our dependence on fossil fuels. Hence,
I propose to fully exempt biodiesel from excise duty.
146. To provide access to pure drinking water for households and communities,
I propose to fully exempt from excise duty water purification devices operating
on specified membrane based technologies as well as domestic water filters not
using electricity.
147. Pipes used for carrying water from a water supply plant to a storage facility
are exempt from excise duty. I propose to extend the exemption to all pipes of
diameter exceeding 200 mm used in water supply systems.
148. There has been a significant increase in the retail price of cement. Last
year, at this time, a bag of 50 kilogram was sold at a Maximum Retail Price
(MRP) of Rs.190 or less which, I understand, is a remunerative price. I propose
to reward cement manufacturers who hold the price line and tax those who do
not. Accordingly, I propose to reduce the present rate of excise duty of Rs.400
per metric tonne to Rs.350 per metric tonne on cement which is sold in retail at
not more than Rs.190 per bag. On cement that has a higher MRP, the excise duty
will be Rs.600 per metric tonne.
149. I strongly support the campaign "say no to tobacco". Hence, I propose to
increase the specific rates of excise duty on cigarettes by about 5 per cent.
Similarly, excise duty (excluding cess) on biris, which was last fixed in 2001,
 25
will be raised from Rs.7 to Rs.11 per thousand for non-machine made biris and
from Rs.17 to Rs.24 per thousand for machine made biris. There is an exemption
from excise duty for unbranded biris up to 20 lakh biris in a year. Complaints
have been received of misuse of the exemption. This exemption will henceforth
be available subject to fulfilment of the condition of declaration with the
Department of Central Excise and regular monitoring.
150. Pan masala containing tobacco will continue to bear an excise duty of 66
per cent. However, in the case of pan masala not containing tobacco, the duty
will be reduced from 66 per cent to 45 per cent. I also propose to withdraw the
exemption for pan masala containing tobacco and other tobacco products that is
now given to units in the North Eastern States.
151. Based on a comprehensive review of exemptions and having posted them
on the website and having invited comments, I propose to remove certain excise
duty exemptions which are redundant or have outlived their utility.
152. I propose to raise the exemption limit for small service providers from
Rs.400,000 to Rs.800,000. Consequently, 200,000 assessees out of a total of
400,000 assessees will go out of the service tax net. The revenue loss will be
Rs.800 crore, but I am happy to give away this sum in the interest of the small
service provider and the consumer.
153. While I bid goodbye to 200,000 assessees, I welcome the new assessees
who will be brought into the fold. I propose to extend service tax to:
• Services outsourced for mining of mineral, oil or gas;
• Renting of immovable property for use in commerce or business;
however, residential properties, vacant land used for agriculture and
similar purposes, land for sports, entertainment and parking purposes,
and immovable property for educational or religious purposes will
be excluded;
• Development and supply of content for use in telecom and advertising
purposes;
• Asset management services provided by individuals; and
• Design services.
154. State Governments levy a tax on the transfer of property in goods involved
in the execution of a works contract. The value of services in a works contract
should attract service tax. Hence, I propose to levy service tax on services involved
in the execution of a works contract. However, I also propose an optional
composition scheme under which service tax will be levied at only 2 per cent of
the total value of the works contract.
155. I propose to exempt service tax on services provided by Resident Welfare
Associations to their members who contribute Rs.3000 or less per month for
services rendered.
 26
156. In order to encourage innovation, I propose to exempt from service tax
all services provided by technology business incubators. Similarly, their
incubatees whose annual business turnover does not exceed Rs.50 lakhs will be
exempt from service tax for the first three years.
157. To make India a preferred destination for drug testing, I propose to exempt
clinical trial of new drugs from service tax.
158. The scope of some services that are currently taxed is being expanded or
redefined. However, I shall not burden the House with the details.
159. The telecommunications industry has repeatedly requested that the
multifarious taxes, charges and fees applicable to the industry should be unified
and a single levy on revenue should be collected. The request merits consideration.
Hence, I propose to request the Department of Telecommunications to constitute
a committee to study the present structure of levies and make suitable
recommendations to Government.
Direct Taxes
160. I shall now move to direct taxes.
161. In the current year, there has been better tax compliance by individuals. I
hope this trend will continue.
162. The current slabs and rates of personal income tax (PIT) were introduced
only two years ago. They constitute a moderate tax regime. A comprehensive
review should await the proposed Income Tax code which will be introduced in
Parliament this year. Nevertheless, without altering the rates, I am inclined to
consider giving some relief to tax payers, especially in view of the cooperation
they have extended to the Department of Revenue. Accordingly, I propose that:
• the threshold limit of exemption in the case of all assessees be
increased by Rs.10,000, thus giving every assessee a relief of
Rs.1,000;
• consequently, in the case of a woman assessee, the threshold limit
be increased from Rs.135,000 to Rs.145,000, giving her a relief of
Rs.1,000;
• the threshold limit of exemption in the case of a senior citizen be
increased from Rs.185,000 to Rs.195,000, giving him or her a relief
of Rs.2,000; and
• the deduction in respect of medical insurance premium under section
80D be increased to a maximum of Rs.15,000 and, in the case of a
senior citizen, a maximum of Rs.20,000.

163. On the corporate income tax (CIT) side too, there has been better
compliance. Consequently, I propose to keep the same rate of CIT with one
important modification. In order to encourage small and medium enterprises to
 27
invest and grow, I propose to remove the surcharge on income tax on all firms
and companies with a taxable income of Rs.1 crore or less. This will benefit
about 1,200,000 firms and companies.

164. Profit-making cooperative banks, other than primary societies and primary
banks (i.e., PACs and PCARDBs), have been brought on par with other banks.
However, I have noticed some anomalies and I propose to correct them in the
interest of the cooperative banks. Accordingly, the benefit of Section 36(1)(viii)
will be available to cooperative banks. Likewise, cooperative banks will also be
allowed deduction in respect of provision for bad and doubtful debts under section
36(1)(viia). Amalgamation and de-merger of banking companies is tax neutral
and this benefit will be extended to cooperative banks.

165. Section 80IA of the Income Tax Act lists the infrastructure facilities that
are entitled to tax concessions. There are some obvious claimants to this benefit.
One is cross country natural gas distribution network, including gas pipeline and
storage facilities integrated to the network. The second is navigation channel in
the sea. I propose to extend the tax concession to these two facilities.

166. In order to facilitate the creation of urban infrastructure, I propose to

allow issue of tax-free bonds through State Pooled Finance Entities formed for
raising funds for a group of urban local bodies.

167. Last year, I had constituted an expert body to advise the Government on
tax policy in respect of the gem and jewellery industry. Taking into account its
recommendations, the best international practices and the need for a simple tax
regime, I propose to introduce a benign assessment procedure for assessees
engaged in diamond manufacturing and trading who declare profits from such
activities at 8 per cent or more of the turnover. Instructions in this regard will
issue shortly.

168. We will require 20,000 more hotel rooms for the Commonwealth Games.
Hence, I propose a five year holiday from income tax for two, three or four star
hotels as well as for convention centres with a seating capacity of not less than
3,000. They should be completed and begin operations in the National Capital
Territory of Delhi or in the adjacent districts of Faridabad, Gurgaon, Ghaziabad
or Gautam Budh Nagar during the period April 1, 2007 to March 31, 2010.

169. Section 35(2AB) allows a weighted deduction of 150 per cent for
expenditure relating to in-house research and development. I propose to extend
the concession for five more years until March 31, 2012.

170. Undertakings in Jammu & Kashmir presently enjoy a tax holiday that is
due to end on March 31, 2007. Considering the importance of promoting further
investment in that State, I propose to extend the benefit for another five years up
to March 31, 2012.
 28
171. E-filing of corporate returns introduced this financial year has been a
resounding success. Until January 31, 2007, 301,736 returns were electronically
filed by corporates. Our analysis shows that the effective rate of tax paid by all
corporates, thanks to numerous tax concessions and exemptions - several of
them well-intended - was only 19.2 per cent. In 1996-97, we introduced the
Minimum Alternate Tax (MAT) for companies with book profits, and its purpose
is to bring about horizontal equity in taxation. MAT should therefore apply, as
far as possible, to all corporate incomes. Hence, I propose to extend MAT to
income in respect of which deduction is claimed under sections 10A and 10B of
the Income Tax Act.

172. I also propose to partially modify a deduction that is available to certain

companies. Without altering the overall limit of the special reserve equal to twice
the net worth under section 36(1)(viii) of the Income Tax Act, I propose to stretch
out the period by restricting the deduction to 20 per cent of the profits each year
and limit the benefit to banks and certain financial corporations.

173. Venture capital funds are a useful source of risk capital, especially for
start-up ventures in the knowledge-intensive sectors. Since such funds enjoy a
pass-through status, it is necessary to limit the tax benefit to investments made
in truly deserving sectors. Accordingly, I propose to grant pass-through status to
venture capital funds only in respect of investments in venture capital undertakings
in biotechnology; information technology relating to hardware and software
development; nanotechnology; seed research and development; research and
development of new chemical entities in the pharmaceutical sector; dairy industry;
poultry industry; and production of bio-fuels. In order to promote business
tourism, I also propose to allow this benefit to venture capital funds that invest
in hotel-cum-convention centres of a certain description and size.

174. In December 2006, I put a limit of Rs.50 lakh per investor per year with
respect to capital gains bonds issued by NHAI and REC under section 54EC of
the Income Tax Act. As a result, many small investors could obtain these bonds
and save on capital gains. I propose to continue this provision and, accordingly,
I propose to amend section 54EC to that effect.

175. I propose to expand the tax base of capital gains to include certain works
of art.

176. I believe that my direct tax proposals have brought about more horizontal
equity. It is also necessary to improve vertical equity. Having regard to the capacity
to pay, I propose to raise the rate of dividend distribution tax from 12.5 per cent
to 15 per cent on dividends distributed by companies.

177. Dividends distributed by money market mutual funds and liquid mutual
funds enjoy concessional tax rates giving rise to huge arbitrage opportunities. I
propose to address this distortion by raising the dividend distribution tax on
dividends paid by such entities to 25 per cent for all investors.
 29
178. Fringe Benefit Tax (FBT) has now stabilized. I have received a few
representations regarding some aspects of sales promotion. Hence, I propose to
clarify the doubts by excluding expenditure on free samples as well as expenditure
on displays from the scope of FBT.

179. A number of companies provide fringe benefits to employees through

Employees' Stock Option Plan (ESOP). I propose to bring ESOPs under FBT.
The value of the fringe benefit will be determined, in accordance with a prescribed
method, on the date of exercise of the option.

180. The Banking Cash Transactions Tax (BCTT) continues to be an extremely

useful tool to track unaccounted monies and trace their source and destination. It
has led the Income Tax Department to many money laundering and hawala
transactions. Having regard to the experience gained, I propose to exclude cash
withdrawals by the Central and State Governments from the scope of BCTT.
Further, I propose to raise the exemption limit for individuals and HUFs from
Rs.25,000 to Rs.50,000. As other instruments become more effective, I think it
would be possible to review BCTT next year.

181. I have a proposal regarding the cess for education. While the cess of 2
per cent on all taxes to fund basic education will remain, I propose to levy an
additional cess of 1 per cent on all taxes to fund secondary education and higher
education and the expansion of capacity by 54 per cent for reservation for socially
and educationally backward classes.

182. Finally, there is a small matter which has large beneficial consequences.
In 2001, 'Aviation Turbine Fuel sold to turbo-prop aircraft' was included in the
list of declared goods under section 14 of the CST Act. Turbo-prop aircraft have
been replaced by new generation small aircraft which have taken air services to
smaller airports and to the remote parts of the country. Hence, I propose to amend
the provision to cover all small aircraft with maximum takeoff mass of less than
40,000 kgs operated by scheduled airlines.

183. Along with tax reforms, the Government has laid great emphasis on tax
administration. The cost of collection of taxes in India is among the lowest in the
world. A number of administrative goals have been set for 2007-08. These include
expanding the coverage of Annual Information Returns, extending the Refund
Banker System to more areas, extending the e-payment facility through more
banks, making electronic filing of returns mandatory for more categories of
assessees and creating new Large Tax Payer Units.

184. My tax proposals on direct taxes are estimated to yield a gain of Rs.3,000
crore. On the indirect taxes side, the proposals are revenue neutral.
 30
XIV. CONCLUSION
185. Mr. Speaker, Sir, our human and gender development indices are low not
because of high growth but because growth is not high enough. Faster economic
growth has given us, once again, the opportunity to unfurl the sails and catch the
wind. Without growth, I could not have given a new thrust to agriculture. I could
not have given relief to the small tax payer, the small service provider and to
small scale industry. I could not have promised 100,000 scholarships or 100,000
jobs for the physically challenged. I could not have promised a massive ground
water recharge programme or social security for rural landless households.

186. The UPA Government has delivered on the promise of savings and
investment, and will deliver on the promise of encouraging more savings and
translating the savings into more investment. It has delivered on the promise of
growth, and will deliver on the promise of making growth more inclusive. I
believe that, given a right mix of policies, the poor will benefit from growth that
is driven by savings and investment and that is more inclusive. As Dr. Muhammad
Yunus, the Nobel laureate, said, “Faster growth rate is essential for faster reduction
in poverty. There is no other trick to it.”

187. Sir, with these words, I commend the Budget to the House.
 CONTENTS
Page No.
PART—A

I. AN OVERVIEW OF THE ECONOMY 1

II. IMPLEMENTING THE NCMP MANDATE 2

III. BHARAT NIRMAN 3

IV. THE FLAGSHIP PROGRAMMES 3

North Eastern Region (NER) 4
Sarva Siksha Abhiyan 4
Mid-day Meal Scheme 4
Drinking Water and Sanitation 4
National Rural Health Mission 5
Integrated Child Development Services 5
National Rural Employment Guarantee Scheme 5
Jawaharlal Nehru National Urban Renewal Mission 5
National Social Assistance Programme 6
Women and Children 6
Scheduled Castes and Scheduled Tribes 6
Minorities 7
Kasturba Gandhi Balika Vidyalaya Scheme 7

V. INVESTMENT 7

VI. AGRICULTURE 8
Irrigation 8
Credit 9
Agricultural Insurance 10
Plantation Sector 10
Micro Finance 10
Horticulture and Fisheries 11

VII. MANUFACTURING 11
Employment 11
Textiles 11
Handlooms 11
Food Processing Industry 12
Petroleum, Chemicals and Petro-chemicals 12
Information Technology 12
Small and Medium Enterprises 12
Cluster Development 13
 (ii)
Page No.
VIII. SERVICES SECTOR 13
Tourism 13
Foreign Trade 14

IX. INFRASTRUCTURE 14
Telecommunication 14
Power 14
Rajiv Gandhi Grameen Vidyutikaran Yojana 15
Coal 15
Petroleum 15
Road Transport 15
Maritime Development 16

X. FINANCIAL SECTOR 16
Banking, Insurance and Pensions 16
Capital Market 17

XI. OTHER PROPOSALS 18

Research and Development 18
Institutions of Excellence 18
Skills Development 18
Backward Regions Grant Fund 19
Jammu and Kashmir 19
Defence Expenditure 19
e-Governance 19
Celebrating History and Heritage 19

XII. FISCAL CONSOLIDATION 20

Twelfth Finance Commission 20
Subsidies 20
Gross Budgetary Support and Gross Fiscal Deficit 20

XIII. BUDGET ESTIMATES FOR 2006-07 21

Plan Expenditure 21
Non-Plan Expenditure 21
Revenue Deficit and Fiscal Deficit 21

PART—B
XIV. TAX PROPOSALS 22
Indirect Taxes 22
Direct Taxes 26
Modernizing Tax Administration 29
VAT and CST 29

XV. CONCLUSION 30
 1

Budget 2006-2007
Speech of
P. Chidambaram
Minister of Finance

February 28, 2006

Mr. Speaker, Sir

It is my privilege to present the Budget for the year 2006-07.

I AN OVERVIEW OF THE ECONOMY

2. Twenty months ago, when I presented the first Budget of the UPA
Government, I asked Honourable Members – and the people of this country – to
walk with us on the path of honour and courage. The final report card on the first
year of the UPA Government is out, and there are reasons to celebrate. According
to the Central Statistical Organization (CSO), the growth rate in 2004-05 was
7.5 per cent, with the manufacturing sector growing at 8.1 per cent. More
importantly, at current market prices, gross domestic saving increased to 29.1
per cent of GDP and the rate of gross capital formation increased to 30.1 per cent
of GDP. I have no doubt in my mind that these results were due to the political
message conveyed by the National Common Minimum Programme (NCMP);
the perceptive leadership of the Prime Minister, Dr. Manmohan Singh; the policy
changes made by the Government; and the palpable confidence of the Indian
people that their future is in safe hands.
3. I am happy to report that the prospects for 2005-06 are just as good, if
not better. This year can be characterized as the best of times and the worst of
times. Nature has not been kind to us. Natural calamities took a heavy toll on
human lives besides causing extensive damage to crops, roads, houses, and the
infrastructure. Government provided immediate interim relief; this was followed
by releases from the CRF and NCCF totalling Rs. 5145.37 crore to date.
Obviously, this assistance will not be enough. The Planning Commission will
draw up a programme for rebuilding the damaged infrastructure, and I wish to
assure the House that the Government will provide the money for rehabilitation
and reconstruction.
4. It was also the best of times. Government has been able to fulfil the first
NCMP obligation of ensuring a high growth rate. According to the CSO’s advance
 2
estimates, GDP growth is likely to be 8.1 per cent this year, with the manufacturing
sector expected to grow at 9.4 per cent. Agricultural growth has bounced back to
2.3 per cent and, barring mining, all other sectors are performing satisfactorily.
Inflation, as on February 11, 2006 was 4.02 per cent. Non-food credit is growing
by over 25 per cent. A large part of the credit goes to our farmers, workers,
service providers, traders and business persons, and I would urge the House to
join me in saluting them.
5. The assault on poverty and unemployment continues. I believe that growth
is the best antidote to poverty. The GDP growth target for the Tenth Plan was set
at 8 per cent. Thanks to three years of 7.5 per cent plus growth, it is possible that
the overall growth rate will be 7 per cent. In recent speeches, the Prime Minister
has raised the bar to 10 per cent, and the Government is determined to take the
country to that high growth path. Growth will be our mount; equity will be our
companion; and social justice will be our destination.

II IMPLEMENTING THE NCMP MANDATE

6. Our success this year is due to our unrelenting emphasis on fiscal prudence
through enhanced revenues and expenditure control, monetary stability and
management of the external debt. However, our success should not tempt us to
stray from this path, and we shall not do so.
7. One of the important NCMP obligations was to focus on agriculture: we
have done so, and the output of food grains is expected to be 209.3 million
tonnes, which is about 5 million tonnes more than in the previous year.
8. The NCMP mandates the Government to promote employment: while
creating permanent and quality jobs in the productive sectors, for providing
immediate relief to the poor, the National Rural Employment Guarantee Scheme
was launched on February 2, 2006. In the current year, under a clutch of schemes
including the Food for Work programme, a sum of Rs.11,700 crore is expected
to be spent on rural employment.
9. The NCMP mandates the Government to enhance investment: the
investment rate has increased steadily from 25.3 per cent in 2002-03 to 30.1 per
cent in 2004-05. Several indicators point to continued buoyancy of capital
formation in the economy.
10. The NCMP also mandates the Government to augment infrastructure.
5,083 MW of capacity will be added to power generation in 2005-06, and during
the Tenth Plan period the total addition is estimated at 34,000 MW, which is a
record. Until December, 2005, under the Rajiv Gandhi Grameen Vidyutikaran
Yojana, contracts have been placed for projects spanning 95 districts and covering
41,461 un-electrified and 9,379 electrified villages. Work is on at full steam on
the Golden Quadrilateral (GQ) and the North-South, East-West Corridors. As
against 1.86 kms per day completed prior to May, 2004, the schemes are
 3
progressing at the rate of 4.48 kms per day. 96 per cent of the GQ will be completed
by June, 2006 and the Corridors will be completed by end 2008. There is also
substantial and visible progress in improving our ports, airports and rural roads.
11. As the year draws to a close, I look back with satisfaction that the promises
we made to the common citizen – the aam admi – have been substantially
redeemed.

III BHARAT NIRMAN

12. I would like to make special mention of Bharat Nirman. It epitomizes the
UPA’s approach to governance. It is a paradigm shift that will enable us to use
the resources thrown up by the engine of growth for building infrastructure and
bringing basic amenities to rural India. Honourable Members are aware of the
six components of Bharat Nirman and the ambitious targets to be achieved by
the year 2009. In the first year of its implementation, 2005-06:
• Rs.944.18 crore has been released so far as grant under the
Accelerated Irrigation Benefit Programme (AIBP) and the target of
600,000 hectares of irrigation potential is expected to be created
this year.
• Against the physical target of 56,270 habitations, 47,546 habitations
have been covered until January, 2006 under the Accelerated Rural
Water Supply Project (ARWSP)
• 5,337 habitations were connected under the rural roads programme
by September, 2005, and Rs.3,749 crore has been released so far.
• 870,000 rural houses have been constructed and a sum of Rs.2,260
crore has been released till January, 2006.
• The entire allocation for rural electrification of Rs.1,100 crore has
been released and the target of covering 10,366 villages is expected
to be achieved in the current fiscal.
• 17,182 villages have been provided with a telephone till December,
2005 in the first year of the three year programme.

These numbers are a complete answer to those who scoffed at Bharat Nirman.
We are determined to soldier on, and execute the programme in the mission
mode. Since the implementation of Bharat Nirman has gathered pace, I propose
to extend larger budgetary support to the programme. Including the North East
component, as against Rs.12,160 crore provided in the current year, the
corresponding budgetary provision will be Rs.18,696 crore in 2006-07, an increase
of 54 per cent.

IV THE FLAGSHIP PROGRAMMES

13. Let me now present an overview of the Budget. Obviously, the bulk of
 4
the resources must go to the UPA Government’s eight flagship programmes:
Sarva Siksha Abhiyan, Mid-day Meal Scheme, Rajiv Gandhi Drinking Water
Mission, Total Sanitation Campaign, National Rural Health Mission, Integrated
Child Development Services, National Rural Employment Guarantee Scheme
and Jawaharlal Nehru National Urban Renewal Mission.
14. In 2005-06, Gross Budgetary Support (GBS) for the Plan was Rs.143,497
crore. Of this, support to the Central Plan was Rs.110,385 crore. I propose to
increase both allocations substantially. GBS for 2006-07 has been fixed at
Rs.172,728 crore, representing an increase of 20.4 per cent. Out of this, the
Central Plan will receive a support of Rs.131,285 crore.
15. Education and health will continue to enjoy primacy. For 2006-07, the
allocation for education has been enhanced by 31.5 per cent to Rs.24,115 crore
and for health and family welfare by 22.0 per cent to Rs.12,546 crore.
16. On the eight flagship programmes, the total allocation in 2005-06 was
Rs.34,927 crore. In the ensuing fiscal year, the total allocation will be Rs.50,015
crore, representing an additionality of Rs.15,088 crore or 43.2 per cent.
North Eastern Region (NER)
17. To this, however, we must add the allocation of 10 per cent of the Plan
Budget of each Ministry/Department for schemes and programmes in the North
Eastern Region (NER). For the flagship programmes alone, this would amount
to an additional allocation of Rs.4,870 crore in 2006-07. The total budget
allocation for the NER is Rs.12,041 crore which includes Rs.1,350 crore provided
to the Ministry of Development of North Eastern Region (DONER). From BE
2005-06 to BE 2006-07, the step up is 18 per cent.
Sarva Siksha Abhiyan
18. Sarva Siksha Abhiyan (SSA) has recorded remarkable progress in
2005-06 in terms of new schools, additional class rooms and additional teachers.
Two independent surveys show that 93 per cent of the children in the age group
6-14 years are in school, and the number of children not in school has come
down to about one crore. Recognizing good performance, I propose to increase
the outlay for SSA from Rs.7,156 crore to Rs.10,041 crore in 2006-07. 500,000
additional class rooms will be constructed and 150,000 more teachers will be
appointed.
19. In 2006-07, we shall transfer Rs.8,746 crore to the Prarambhik Siksha
Kosh from the revenues raised through the education cess.
Mid-day Meal Scheme
20. 12 crore children are now covered under the Mid-day Meal Scheme,
which is the largest school lunch programme in the world. I propose to enhance
the allocation from Rs.3,010 crore to Rs.4,813 crore in 2006-07.
Drinking Water and Sanitation
21. The target for the current year for drinking water supply will be completed,
 5
and 56,270 habitations and 140,000 schools will be covered. Apart from non-
coverage, there is the persistent problem of slippage. The strategy to tackle both
includes conservation, better operational management, and water quality
monitoring and capacity building at the village level. The Government will
provide non-recurring assistance of Rs.213 crore in 2006-07 for setting up district-
level water testing laboratories and field-level water testing kits. I propose to
increase the provision for the Rajiv Gandhi National Drinking Water Mission
from Rs.3,645 crore to Rs.4,680 crore next year.
22. I also propose to increase the provision for the Rural Sanitation Campaign
from Rs.630 crore to Rs.720 crore in 2006-07.
National Rural Health Mission
23. The National Rural Health Mission was launched on April 12, 2005. I
am confident that in 2006-07 more than 200,000 Associated Social Health
Activists (ASHA) will be fully functional and over 1,000 block level community
health centres will provide round the clock services. I have increased the allocation
for NRHM from Rs.6,553 crore to Rs.8,207 crore for the next year.
24. The WHO standard defining ‘elimination of leprosy’ is one case per
10,000 population. I am happy to announce that the goal of eliminating leprosy
was reached in December, 2005. Continuing the vigorous immunization
programme, we hope to eliminate polio too from the country by December, 2007.
Integrated Child Development Services
25. We have expanded the Integrated Child Development Services (ICDS)
scheme and created an additional 188,168 centres. Supplementary nutrition is
the most important component of the scheme. Beginning this year, the Centre is
assisting the States to the extent of 50 per cent of the actual expenditure incurred
for supplementary nutrition or 50 per cent of the cost norms, whichever is less.
The cost to the Centre this year is estimated at Rs.1,500 crore, and I propose to
increase this assistance to Rs.1,700 crore for 2006-07. The total allocation for
ICDS is being increased from Rs.3,315 crore to Rs.4,087 crore.
National Rural Employment Guarantee Scheme
26. I have already referred to the Rural Employment scheme which is
the primary instrument to combat rural unemployment and hunger poverty. For
2006-07, the total allocation for rural employment will be Rs.14,300 crore. Of
this, Rs.11,300 crore (including NER component) will be under the NREG Act
and Rs.3,000 crore (including NER component) will be under SGRY. Since there
is a legal guarantee of employment under the NREG Act, more funds will be
provided according to need.
Jawaharlal Nehru National Urban Renewal Mission
27. The Jawaharlal Nehru National Urban Renewal Mission was launched
on December 3, 2005. For the next year, against the estimated outlay of Rs.6,250
crore, I propose to provide a grant of Rs.4,595 crore. Apart from the four projects,
 6
including Mumbai metro rail and Bangalore metro rail, mentioned in my Budget
speech last year, the projects under active consideration include projects in
Maharashtra, Madhya Pradesh and Gujarat.
28. Planned urbanization can act as a spur to growth, employment and a
better quality of life. Government will actively promote the establishment of
new towns, preferably focussed on a specific industry, for example Information
Technology, or a specific theme, for example education or health. Some projects
are on the anvil in West Bengal and Karnataka.
National Social Assistance Programme
29. Old age pensions are granted under the National Social Assistance
Programme (NSAP) to destitute persons above the age of 65 years at Rs.75 per
month. This is woefully inadequate. I propose to increase the pension to Rs.200
per month. I have provided Rs.1,430 crore for 2006-07 and additional funds, if
required, will be provided during the course of the year. I would urge State
Governments to make an equal contribution from their resources so that a destitute
pensioner would get at least Rs.400 per month. I also propose to work with the
Department of Posts and the banks to establish, within two years, a system under
which the pension will be credited directly to the account of the beneficiary in a
post office or a bank.
Women and Children
30. Last year, I introduced a statement highlighting the gender sensitivities
of the budgetary allocations. I was able to cover 10 demands for grants. This
time, I have been able to enlarge the statement on gender budgeting to include
schemes where 100 per cent of the allocation is for the benefit of women as well
as schemes where at least 30 per cent of the allocation is targeted towards women.
The statement now covers 24 demands for grants in 18 Ministries/Departments
and five Union Territories and schemes with an outlay of Rs.28,737 crore.
31. Furthermore, several Ministries and Departments have initiated an
exercise to prepare a public expenditure profile of their budgets from a gender
perspective. 32 Ministries and Departments have set up Gender Budgeting Cells.
Scheduled Castes and Scheduled Tribes
32. Government is committed to the welfare of Scheduled Castes (SCs) and
Scheduled Tribes (STs). Honourable Members will be happy to know that this
Budget, like last year’s, contains a separate statement on the schemes for the
welfare and development of SCs and STs. On a like to like basis, the allocations
for schemes benefiting only SCs and STs have been enhanced by 14.5 per cent to
Rs.2,902 crore and the allocations for schemes with at least 20 per cent allocation
for SCs and STs have been enhanced by 13.9 per cent to Rs.9,690 crore.
33. The equity contribution to the National SC Finance and Development
Corporation is being increased to Rs.37 crore and to the National Safai Karamchari
Finance and Development Corporation to Rs.80 crore in 2006-07.
 7
Minorities
34. I propose to extend greater financial support to the organizations actively
involved in the welfare of the minorities. Accordingly, I intend to double the
corpus fund of the Maulana Azad Educational Foundation to Rs.200 crore.
35. I propose to contribute Rs.16.47 crore to strengthen the equity base of
the National Minorities Development and Finance Corporation. In line with the
Prime Minister’s announcement on August 15, 2005, the Corporation will
intensify its efforts to reach out to artisans and weavers living in urban and peri-
urban centres, especially in districts with concentration of minorities. The
programme will focus on skill enhancement, credit and techno-managerial
support.
36. I propose to increase the allocation to the National Council for Promotion
of Urdu Language from Rs.10 crore to Rs.13 crore.
37. Merit-cum-means based scholarships encourage students to pursue higher
studies. Government will finance 20,000 such scholarships to students belonging
to the minority communities. Once the scheme is finalized in 2006-07, I intend
to allocate the necessary funds.
Kasturba Gandhi Balika Vidyalaya Scheme
38. The initial results of the Kasturba Gandhi Balika Vidyalaya Scheme
launched in 2004 are encouraging. 1,000 new residential schools for girls from
SC, ST, OBC and minority communities will be opened in 2006-07. I have
provided Rs.128 crore, and I have agreed to provide an additional sum of Rs.172
crore during the year. I propose to provide a further incentive to the girl child
who passes the VIII Standard Examination and enrols in a secondary school. A
sum of Rs.3,000 will be deposited in her name, and she would be entitled to
withdraw it on reaching 18 years of age.
39. Government has shifted the emphasis from sheer ‘quantity’ to the ‘quality’
of the outcome of the various social sector programmes. To ensure value for
public expenditure, an Outcome Budget was presented on August 25, 2005.
Government intends to present a Performance Budget on the first Outcome Budget
before the end of the Budget Session. The Outcome Budget for 2006-07 will be
placed before this House by March 17, 2006. This new approach underscores
our resolve to ensure that the intended services in the right quantity and quality
are delivered to the aam admi.

V INVESTMENT
40. There is an investment boom in the country and it is necessary to maintain
the confidence of investors. It appears that India is catching up with the high
investment rates of East Asia and China. Honourable Members will notice
presently that, in every sector, the attempt is to promote more investment.
 8
41. Government is committed to a strong and effective public sector. Public
Sector Enterprises (PSEs) have, through internal and extra-budgetary resources,
investment plans amounting to Rs.122,757 crore in 2006-07. I am happy to
announce that Government will provide equity support of Rs.16,901 crore and
loans of Rs.2,789 crore to Central PSEs (including Railways). Besides, I wish to
point out that in the two years of this Government, we have infused Rs.1,180
crore in cash and made non-cash sacrifices of Rs.2,566 crore to restructure ten
PSEs, including Indian Telephone Industries Limited and Heavy Engineering
Corporation Limited.
42. We believe that there is considerable scope for developing India as a hub
for the gems and jewellery industry. I, therefore, propose to constitute an expert
body that will look into the potential of this sector and the prevalent taxation
practices in India and abroad, and make its recommendations in this behalf. I am
sure this announcement will be welcomed by Non Resident Indians who are
looking to India as the place for future expansion and growth.
43. Foreign Direct Investment (FDI) continues to play an important role. We
have the opportunity to make India a manufacturing hub for textiles, automobiles,
steel, metals, petroleum products etc. for the world market. In calendar 2005, up
to November, 2005, FDI is estimated at $ 4 billion, without counting reinvested
earnings and other capital. I am confident that recent policy changes will attract
more foreign investment into the country, especially in infrastructure.

VI AGRICULTURE
44. Let me now turn to the productive sectors of the economy. As always,
our Government’s focus is on agriculture. Assured irrigation, credit, diversification
and creating a market for agricultural products are the thrust areas.
Irrigation
45. Out of an outlay of Rs.4,500 crore under AIBP in 2005-06, the grant
component is Rs.1,680 crore. The States are expected to spend about Rs.2,520
crore from their resources, and 25 projects are expected to be completed before
the end of the year. The outlay for 2006-07 has been increased to Rs.7,121 crore,
and the Central Government will support the programme through a grant of
Rs.2,350 crore. The Ministry of Water Resources will revamp the Command
Area Development Programme to allow participatory irrigation management
through water users’ associations.
46. The programme for repair, renovation and restoration of water bodies is
being implemented through pilot projects in 23 districts in 13 States. The design
of the programme has been finalized in consultation with the States. 20,000
water bodies with a command area of 1.47 million hectares have been identified
in the first phase. The estimated cost is Rs.4,481 crore. The funding pattern
(Centre, States and external assistance) has been finalized, and I intend to seek,
 9
and receive, funds from multi-lateral agencies. The participating State
Government will be requested to sign a memorandum of understanding and the
water bodies in that State will be taken up for repair, renovation and restoration
in 2006-07.
Credit
47. Farm credit increased to Rs.125,309 crore in 2004-05 (well above the
target) and is again expected to cross the target of Rs.141,500 crore set for the
current year. I propose to ask the banks to increase the level of credit to Rs.175,000
crore in 2006-07 and also add another 50 lakh farmers to their portfolio. We
shall not only achieve but exceed the target of doubling farm credit in three
years. Since tenant farmers are not adequately served, I have asked the banks to
open a separate window for self-help groups or joint liability groups of tenant
farmers and ensure that a certain proportion of the total credit is extended to
them. I intend to monitor closely progress in this behalf.
48. I am aware of the severe difficulties faced by farmers in the last two
years. Ours is a compassionate Government. I also have severe fiscal constraints.
When faced with a dilemma, I usually turn to my favourite poet-philosopher,
Saint Tiruvalluvar. Writing over 2,000 years ago, he said:
“Karumam Sidhaiyamal Kannoda Vallarku
Urimai Udaithu Iv Ulagu”
(The world is his who does his job
With compassion)
I am prepared to go the extra mile to come to the aid of our farmers. To begin
with, I propose to grant some relief to the farmers who have availed of crop
loans from scheduled commercial banks, RRBs and PACS for Kharif and Rabi
2005-06. Accordingly, an amount equal to two percentage points of the borrower’s
interest liability on the principal amount up to Rs.100,000, will be credited to
his/her bank account before March 31, 2006. I have provided a sum of Rs.1,700
crore for this purpose. I hope the House will welcome this exceptional gesture of
the Government.
49. For our farmers, I have more. Farmers obtain short-term credit from the
cooperative credit structure and Regional Rural Banks (RRBs), with refinance
from NABARD. Increasingly, scheduled commercial banks are also lending more
to farmers. It is my intention to ensure that NABARD continues to provide
refinance at an economical rate, so that the farmer ultimately gets the loan at a
reasonable rate. Accordingly, after giving anxious consideration to market
conditions, Government has decided to ensure that the farmer receives short-
term credit at 7 per cent, with an upper limit of Rs.300,000 on the principal
amount. This would require a certain level of subvention to NABARD. I propose
to give the subvention. This policy will come into force with effect from Kharif
2006-07, and I shall make a detailed statement in due course.
 10
50. The Rural Infrastructure Development Fund (RIDF) has so far disbursed
funds in 11 tranches. RIDF XI sanctions have touched a level of Rs.7,301 crore
as on January 31, 2006. A special feature this year has been that Rs.346 crore has
been sanctioned to the North Eastern States. This sum is likely to touch Rs.600
crore by the year end. Keeping in view the expanding requirements for creating
rural infrastructure, I propose to increase the corpus of RIDF XII to Rs.10,000
crore, and I urge State Governments to make the best use of these funds.
51. I also propose to allow specified projects under the Public Private
Partnership (PPP) model to access RIDF funds.
52. The rural roads component of Bharat Nirman requires large funds. Hence,
I propose to open a separate window under RIDF XII for rural roads with a
corpus of Rs.4,000 crore during 2006-07.
Agricultural Insurance
53. The National Agricultural Insurance Scheme (NAIS) will be continued
in its present form for Kharif and Rabi 2006-07.
Plantation Sector
54. In continuation of the announcement in the last Budget to introduce a 15
year programme for massive re-plantation and rejuvenation of tea, Ministry of
Commerce has proposed to set up a Special Purpose Tea Fund. While the details
are being worked out, to signal my support to the idea, I propose to make a
levelized contribution every year to the Fund. For 2006-07, the contribution is
expected to be Rs.100 crore. When established, the Fund will benefit growers in
the tea growing States including Assam, West Bengal, Tamil Nadu, Kerala and
Uttaranchal.
Micro Finance
55. I had proposed major initiatives in respect of micro finance in the last
Budget. RBI has since issued guidelines to enable banks to appoint banking
correspondents and banking agents. A window to access ECB funds has also
been opened. A Bill to provide a formal statutory framework for the promotion,
development and regulation of the micro finance sector will be introduced in
this session.
56. The Self Help Group (SHG) movement is making rapid strides. In the
two years of the UPA Government, we have credit-linked 801,000 SHGs. The
credit disbursed to these SHGs is approximately Rs.4,863 crore. I propose to ask
the banking sector to credit-link another 385,000 SHGs in 2006-07. I shall also
ask NABARD to open a separate line of credit for financing farm production
and investment activities through SHGs.
57. The findings of the NSS 59th Round (2003) reveal that out of the total
number of cultivator households only 27 per cent receive credit from formal
sources and 22 per cent from informal sources. The remaining households, mainly
 11
small and marginal farmers, have virtually no access to credit. With a view to
bringing more cultivator households within the banking fold, I propose to appoint
a Committee on Financial Inclusion. The Committee will be asked to identify
the reasons for exclusion, and suggest a plan for designing and delivering credit
to every household that seeks credit from lending institutions.
Horticulture and Fisheries
58. The PPP model will be employed to set up model terminal markets in
different parts of the country. A sum of Rs.150 crore has been earmarked for this
purpose in 2006-07 under the National Horticulture Mission. A Central Institute
of Horticulture will be established in Nagaland. The National Fisheries
Development Board will be constituted shortly.

VII MANUFACTURING
Employment
59. The two sectors which have the potential to create a large number of jobs
are manufacturing and services. In manufacturing, we have identified some
industries which, with appropriate incentives, can throw up huge job opportunities.
These include textiles, food processing, petroleum, chemicals and petro-
chemicals, leather, and automobiles. In services, tourism and software can offer
a large number of jobs.
Textiles
60. The last two Budgets have created an enabling environment for the growth
of the textile industry, especially cotton textiles. There has been an encouraging
response to the Technology Upgradation Fund (TUF) scheme. I propose to
enhance the allocation from Rs.435 crore to Rs.535 crore next year. The Scheme
for Integrated Textiles Parks (SITP) was launched in October 2005 with the
intention of creating 25 textile parks. As on date, 7 parks have been sanctioned
and 10 parks have been identified for development. I propose to provide Rs.189
crore for this scheme.
61. Government proposes to launch the Jute Technology Mission in 2006-
07 to harness the potential of the golden fibre. A National Jute Board will be
established. I propose to make a token provision with the assurance that the
funds required will be made available once the outlay is finalized.
Handlooms
62. Several schemes, including schemes for life insurance and health
insurance, were announced in the last Budget for the handloom sector. They are
being implemented. The Cluster Development approach will continue. It is
proposed to cover an additional 100 clusters at a cost of Rs.50 crore in 2006-07.
Yarn depots will be established in different parts of the country to ensure
uninterrupted supply of yarn to weavers. Just as ‘woolmark’ has gained
recognition, it is proposed to launch a ‘handloom’ mark. A scheme similar to
 12
TUFS will be introduced for the handloom sector to provide interest subsidy on
term loans. I propose to increase the provision for the handloom sector from
Rs.195 crore to Rs.241 crore next year.
Food Processing Industry
63. Recognizing the enormous benefits that the food processing industry can
bring to agriculture and job creation, and to consumers, food processing will be
treated as a priority sector for bank credit. NABARD will create a separate window
with a corpus of Rs.1,000 crore for refinancing loans to the sector, especially for
agro-processing infrastructure and market development. Government will also
set up the National Institute of Food Technology Entrepreneurship and
Management. The Paddy Processing Research Centre at Thanjavur will be
developed into a national-level institute.
Petroleum, Chemicals and Petro-chemicals
64. Petroleum, chemicals and petro-chemicals (PC&P) is a sector with
potential for large investment and employment. In order to promote investment
in this sector, Government has set up a Task Force to facilitate the development
of large PC&P Investment Regions. World class developers and investors are
being associated with the Task Force. It is expected that in 2006-07 at least three
such Investment Regions will be developed.
Information Technology
65. With the spread of Information Technology (IT) and IT Enabled Services
(ITES), the time is ripe to make India a preferred destination for the manufacture
of semi-conductors and other high technology IT products including Wafer;
Assemble, Test and Manufacture of Semi-conductors; Flat LCD/OLED/Plasma
Panel Displays; and Storage Devices. To achieve this goal the Ministry of
Information Technology will announce a policy shortly. I propose to use the
existing vehicles of viability gap funding and the India Infrastructure Finance
Company Limited (IIFCL) to create a window to provide equity participation
and/or viability gap funding to the new ventures. The window will be open for
three years in order to accelerate investment.
Small and Medium Enterprises
66. The introduction of the Small and Medium Enterprises (Development)
Bill and the policy on credit announced on August 10, 2005 have, I believe,
triggered a change in the mindset of small and medium entrepreneurs. The new
thrust is towards up-scaling the size and technological upgradation. After due
consultation with the stakeholders and on the recommendation of the Advisory
Committee, the Ministry of Small Scale Industries has identified 180 items for
dereservation.
67. In order to give a fresh impetus to lending by the Small Industries
Development Bank of India (SIDBI), I propose to:
 13
• Recognize SMEs in the services sector, and treat the small scale
enterprises in the services sector on par with the small scale
enterprises in the manufacturing sector;
• Raise the corpus of the Credit Guarantee Fund from Rs.1,132 crore
at end-March 2006 to Rs.2,500 crore in five years. In 2006-07, I
propose to provide a sum of Rs.118 crore;
• Advise Credit Guarantee Trust for Small Industries (CGTSI) to
reduce the one time guarantee fee from 2.5 per cent to 1.5 per cent
for all loans; and
• Extend insurance cover to approximately 30,000 borrowers,
identified as chief promoters, under the CGTSI. The sum assured
would be Rs.200,000 per beneficiary and the premium will be paid
by CGTSI.
68. The National Manufacturing Competitiveness Council (NMCC) has
finalized a five-year National Manufacturing Competitiveness Programme. Ten
schemes have been drawn up including schemes for promotion of ICT, mini tool
rooms, design clinics and marketing support for SMEs. Implementation will be
in the PPP model, and financing will be tied up during the course of the next
year.
Cluster Development
69. The Cluster Development model can be usefully adopted not only to
promote manufacturing but also to renew industrial towns and build new industrial
townships. The model is now being implemented, in one form or other, in nine
sectors falling under different Ministries. The sectors include khadi and village
industries, handlooms, handicrafts, textiles, agricultural products and medicinal
plants. It would be advantageous to empower a group to oversee cluster
development and monitor progress. Hence, the Prime Minister has decided to
constitute an Empowered Group of Ministers who will lay down the policy for
cluster development and oversee the implementation.

VIII SERVICES SECTOR

Tourism
70. Foreign tourist arrivals increased to 3.92 million in 2005. It is still a
fraction of India’s potential. During 2006-07, Ministry of Tourism will:
• Take up for development 15 tourist destinations and circuits
following an integrated area development approach;
• Identify 50 villages with core competency in handicrafts, handlooms
and culture, close to existing destinations and circuits, and develop
them for enhancing tourists’ experience; and
• Establish 4 new institutes of hotel management in the States of
Chhattisgarh, Haryana, Jharkhand and Uttaranchal.
 14
I propose to increase the Plan allocation from Rs.786 crore to Rs.830 crore in
2006-07.
Foreign Trade
71. Merchandise exports are growing at the rate of over 18 per cent in the
current year. Imports are high, but they are welcome because they are a sign of
enhanced capital investment and industrial activity. Ministry of Commerce and
Industry and Ministry of Finance have worked together to create an environment
that is supportive of our exporters, and we are determined to double our share in
world exports to 1.5 per cent by the year 2008-09.

IX INFRASTRUCTURE
Telecommunication
72. The telecommunication sector in India is recording one of the fastest
growth rates in the world. Tele-density stood at 11.75 per hundred at end-January,
2006. The ambitious target is to reach 250 million connections by December,
2007, and I am confident of success. I propose to provide Rs.1,500 crore from
the Universal Services Obligation Fund in 2006-07.
73. More than 50 million rural connections will be rolled out in three years
and, thereafter, a connection will be available on demand. The digital divide
between rural India and urban India will be bridged. In order to extend financial
support to infrastructure for cellular telephony in rural areas, the Minister of
Communications will bring a Bill in the Budget session to amend the Indian
Telegraph Act.
Power
74. Power generation in 2005-06 has so far shown a modest growth of 4.7
per cent because of shortage of fuel, mainly LNG and coal. The demand-supply
mismatch continues. More efforts are required to augment capacity in generation,
transmission and distribution. 82 projects are under construction and, when
completed in one to three years, will add 33,000 MW of capacity in the public
sector and 6,500 MW of capacity in the private sector. Of these, about 15,000
MW will come on stream by March 31, 2007.
75. Ministry of Power has invited bids for five ultra mega power projects of
4,000 MW each, of which two will be pit-head (in Chhattisgarh and Madhya
Pradesh) and three will be coastal (in Gujarat, Karnataka and Maharashtra). It is
our intention to award these projects before December 31, 2006.
76. Capacity addition alone is not enough; we need deep and durable reforms
in transmission and distribution. In order to create an enabling and empowered
framework to carry out these reforms, the Prime Minister will establish an
Empowered Committee of Chief Ministers and Power Ministers.
 15
77. A target of 3,075 MW of installed capacity for the Tenth Plan was fixed
for non-conventional energy sources, including wind power. By December 31,
2005, that target had been exceeded and 3,650 MW of capacity installed. I propose
to provide a sum of Rs.597 crore next year for non-conventional energy resources.
Rajiv Gandhi Grameen Vidyutikaran Yojana
78. All States have signed memoranda of understanding to implement the
Rajiv Gandhi Grameen Vidyutikaran Yojana. 10,000 villages will be electrified
in the current year and, in 2006-07, 40,000 more villages will be electrified. The
key to the success of this programme is the engagement of franchisees and proper
commercial and contractual arrangements for distribution, billing and collection.
Coal
79. A comprehensive review of the coal policy is underway. This year, 45
coal blocks have been allotted for captive consumption to the power, cement
and steel sectors and to the State Governments. After reserving blocks for Coal
India Limited and its subsidiaries for the period up to 2012, it has been decided
to de-block coal reserves of 20 billion tonnes for power projects. The definition
of captive consumption will also be amended to allow coal mining by producers
with firm supply contracts with steel, cement and power companies. The capacity
of Central Mines Planning and Development Institute Limited (CMPDIL) to
drill in order to prove reserves is now only 200,000 metres per annum, and this
will be expanded substantially.
Petroleum
80. Energy security is high on the Government’s agenda. In five rounds of
the New Exploration Licensing Policy (NELP), 110 production sharing contracts
have been awarded. Ministry of Petroleum and Natural Gas has now made its
biggest offer under NELP VI. 55 blocks and an area of 355,000 sq kms, which is
thrice as large as the previous round, have been offered. Besides investment in
the upstream and downstream segments, we are encouraging investment in
refining, pipelines and green fuel projects. In the refinery sector alone, an
investment of Rs.22,000 crore is expected in the next few years.
Road Transport
81. The National Highways Development Programme (NHDP) continues to
make impressive progress. The highest ever number and value of contracts were
awarded in calendar 2005. I propose to enhance the Budget support for NHDP
from Rs.9,320 crore to Rs.9,945 crore in 2006-07.
82. A special accelerated road development programme for the North Eastern
region at an estimated cost of Rs.4,618 crore has been approved. For 2006-07, I
propose to provide a sum of Rs.550 crore for this programme.
83. Government has also decided to develop 1,000 kms of access-controlled
Expressways. These will be on new alignment and built on the Design, Build,
 16
Finance and Operate (DBFO) model. The sections that have been identified are
Vadodara-Mumbai, Delhi-Chandigarh, Delhi-Jaipur, Delhi-Meerut, Delhi-Agra,
Bangalore-Chennai and Kolkata-Dhanbad. The concessionaires will be selected
through an international competitive bidding process.
84. National Highway Authority of India (NHAI) will be restructured and
made more effective. It will be made into a multi-disciplinary body with the
capacity to handle a large number of PPP projects. New skill areas in planning
and quality assurance, standardization, arbitration, road-safety and R&D will be
created.
Maritime Development
85. Honourable Members are aware that the National Maritime Development
Programme (NMDP) has been approved by the Government. The port sector
alone will require Rs.55,804 crore. Work is in progress in 101 projects covering,
inland waterways, shipping and ports which include deepening of channels in
Kandla, JNPT and Paradip. I propose to increase the Plan allocation for the
Department of Shipping by 37 per cent to Rs.735 crore.
86. A deep draft port is required in the eastern part of the country. I am happy
to announce that it is proposed to carry out a detailed study to identify a suitable
location for a new deep draft port in West Bengal. The existing National Institute
of Port Management, Chennai, has been renamed as the National Maritime
Academy, and it is proposed to upgrade it into a Central University under an Act
of Parliament. The University will have regional campuses at Mumbai, Kolkata
and Visakhapatnam.
87. The India Infrastructure Finance Company Limited (IIFCL) has been
incorporated, and the first proposal for funds has been received. Several proposals
have been received for viability gap funding for PPP projects. In-principle
approval has been granted to three road projects in Gujarat and a final decision
is likely to be taken before March 31, 2007.

X FINANCIAL SECTOR
Banking, Insurance and Pensions
88. As part of the reforms in the banking sector introduced in 1993-94, capital
was infused in the banks by issue of special securities. To date, Government has
injected Rs.16,809 crore into nationalised banks. Adding the perpetual securities
issued earlier, the total net capital support stands at Rs.22,808 crore. Thanks to
the capital support, a sound banking sector meeting international norms has
emerged. We have reached a stage when we can wind up the special arrangements
between Government and the banks. Accordingly, after consulting the RBI, I
propose to unwind the special securities through conversion of these non-tradable
special securities into tradable, SLR Government of India dated securities. This
will facilitate increased access of the banks to additional resources for lending to
the productive sectors in the light of the increasing credit needs of the economy.
 17
89. Honourable Members are aware that the K.P. Narasimhan Committee
was appointed to recommend a comprehensive law on insurance. The report of
the committee has been received, and is being examined by the Insurance
Regulatory and Development Authority and the Government. I intend to introduce
a comprehensive Bill on insurance in 2006-07.
90. Important Bills to amend the banking laws and for setting up the Pension
Fund Regulatory and Development Authority are before Parliament. The Standing
Committee on Finance has recommended these Bills. I would urge Honourable
Members to cooperate with the Government and pass these Bills.
Capital Market
91. In recent months, the capital market has attracted a great deal of attention.
The measures taken in the last year-and-a-half have deepened, broadened and
strengthened the market. It is necessary to take more measures. Hence, I propose
to
• Increase the limit on FII investment in Government securities from
$ 1.75 billion to $ 2 billion and the limit on FII investment in corporate
debt from $ 0.5 billion to $ 1.5 billion;
• To raise the ceiling on aggregate investment by mutual funds in
overseas instruments from $ 1 billion to $ 2 billion and to remove
the requirement of 10 per cent reciprocal share holding;
• To allow a limited number of qualified Indian mutual funds to invest,
cumulatively up to $ 1 billion, in overseas exchange traded funds;
and
• To set up an investor protection fund under the aegis of SEBI, funded
by fines and penalties recovered by SEBI. This will bolster confidence
among retail investors who should be the key drivers of the capital
market.

Consultations have been held in this behalf with RBI and SEBI, who will issue
the guidelines in due course.
92. RBI had introduced the anonymous electronic order matching trading
module called NDS-OM on its Negotiated Dealing System. In the first phase,
RBI-regulated entities, banks and primary dealers were allowed to trade on the
system. The system has now been extended to all insurance entities. In view of
the encouraging response of market participants and to further deepen the
Government securities market, it is proposed to extend access to qualified mutual
funds, provident funds and pension funds.
93. In my Budget speech last year, I had appointed a high-level expert
committee on corporate bonds. The committee has submitted its report and
Government has accepted the recommendations. We shall now take steps to create
a single, unified exchange-traded market for corporate bonds.
 18
XI OTHER PROPOSALS
Research and Development
94. Our outstanding human resources have the capacity to make India a
Knowledge Society. Government accords high importance to research and
development. The National Agricultural Innovation Project for research at the
frontiers of agricultural science is expected to receive multilateral assistance
shortly, and will be launched in July, 2006.
95. The National S&T Entrepreneurship Board has set up a number of
Technology Business Incubators with seed funding from the Technology
Development Board. Government will be happy to provide enabling concessions
to the incubatee-entrepreneurs.
Institutions of Excellence
96. Last year, I made a beginning with an unprecedented grant of Rs.100
crore to the Indian Institute of Science (IISc), Bangalore to help develop it into a
world-class institution. I am happy to report that the IISc has obtained approval
for an ambitious programme of modernization, and is implementing the same.
This year, I must recognize another historical event. Three great Universities
have entered their 150th year. These are the University of Calcutta, the University
of Mumbai and the University of Madras. I propose to mark the beginning of
the 150th year celebrations with a grant of Rs.50 crore to each University for a
specified research department or a research programme in that University. On
the conclusion of the year, I intend to make another grant of Rs.50 crore to each
of them.
97. I propose to make the special grant of Rs.100 crore for an institution of
excellence to a distinguished institution, the Punjab Agricultural University,
Ludhiana, in acknowledgement of its pioneering contribution to the green
revolution.
98. If agriculture is an ancient Indian skill, biotechnology is the new frontier
that India will conquer. In order to foster research and development in
biotechnology, the Ministry of Science and Technology has decided to accord
the status of an autonomous National Institute to the Rajiv Gandhi Centre for
Biotechnology, Tiruvananthapuram, Kerala.
Skills Development
99. Honourable Members will recall that Government has taken up a
programme to upgrade 500 ITIs over five years. 100 ITIs are now covered with
the help of the private sector. Assistance has been sought from multilateral
agencies to cover the remaining 400 ITIs. I propose to allocate Rs.97 crore for
this purpose in 2006-07. The Skills Development Initiative (SDI) announced
last year has been taken up through a PPP scheme, and I propose to make an
initial provision of Rs.10 crore.
 19
Backward Regions Grant Fund
100. Upon the establishment of a Backward Regions Grant Fund, a sum of
Rs.1,156 crore has been disbursed so far in the current year to the districts
identified as backward as well as under Rashtriya Sam Vikas Yojana (RSVY).
The Fund is being placed under the administrative control of the Ministry of
Panchayati Raj, and I propose to allocate Rs.5,000 crore in 2006-07.
Jammu and Kashmir
101. Government will continue to provide special assistance to Jammu and
Kashmir. The State Plan for 2006-07 has been fixed at Rs.2,300 crore. In addition,
I propose to provide a sum of Rs.848 crore for the J&K Reconstruction Plan,
including Rs.230 crore for the Baglihar Project. I also propose to provide special
central Plan assistance of Rs.1,300 crore to enable the State to undertake reforms
in the power sector.
Defence Expenditure
102. Government has fulfilled the long-standing need of retired Armed Forces
Personnel Below Officer Rank (PBOR) for better pensionary benefits. About 12
lakh PBOR have benefited to the tune of Rs.460 crore with effect from January
1, 2006, and I am sure the House will welcome this decision.
103. In view of the enhanced expenditure on modernisation of defence forces,
I propose to increase the allocation for defence from Rs. 83,000 crore to Rs.
89,000 crore in 2006-07, and this will include Rs. 37,458 crore for capital
expenditure.
e-Governance
104. The National e-Governance Plan will be approved shortly, and 25 projects,
in mission mode, will be launched in 2006-07. Among them is Project MCA-21
to enable companies to file returns electronically and a project for setting up
common service centres and assigning unique ID to BPL families. It is
Government’s intention to bring a number of services online, in a web-based
mode, including applications under the Right to Information Act, applications
for house sites, ration cards, transfers of teachers, inclusion in the electoral roll,
filing of police complaint, and issue of birth/death certificates and copies of land
records.
Celebrating History and Heritage
105. In 2007, we will celebrate the 150th anniversary of the First War of Indian
Independence, an event that shaped the destiny of the nation. To ensure that the
event is observed in a befitting manner, I propose to make a provision of Rs.10
crore for preparatory activities.
106. Two Gandhian institutions, the National Gandhi Museum, Rajghat and
the Kasturba Gandhi National Memorial Fund, Indore deserve support. I intend
to provide Rs.5 crore each to the corpus of these institutions in 2006-07.
 20
107. I am happy to inform the House that Kuttiyattam, Vedic Chanting and
Ramlila have been declared ‘Oral and Intangible Heritage of Humanity’ by the
UNESCO. These old art forms and oral traditions need to be safeguarded. Pending
drawing up a detailed scheme, I propose to make an initial provision of Rs.5
crore in 2006-07.

XII FISCAL CONSOLIDATION

Twelfth Finance Commission
108. The recommendations of the Twelfth Finance Commission (TFC) are
being implemented. Cumulatively, State loans amounting to Rs.103,710 crore
have been consolidated so far. Under the new scheme of tax devolution, Rs.94,402
crore will be released as the States’ share in the current year compared to Rs.78,595
crore in 2004-05. As regards grants-in-aid, the amounts granted in 2004-05 and
2005-06 (RE) are Rs.12,081 crore and Rs.25,134 crore respectively. In 2006-07,
both the tax devolution and the grants will be substantially higher. The States
have never been so well provided, as you will find from the Budget papers.
109. I may add that I have made appropriate provision in the Budget for debt
consolidation and relief. I have also provided Rs.3,000 crore towards
compensation for VAT losses, if any, in 2006-07.
Subsidies
110. The issue of subsidies is proving to be a divisive one, but I would urge
Honourable Members that it is imperative that we make progress on this front if
we are serious about targeting subsidies at the poor and the truly needy. My
Ministry has held extensive discussions with stakeholders on three major
subsidies, namely, food, fertilizer and petroleum. We have also sought the views
of the general public. Working groups/committees have gone into the question
of fertilizer and petroleum subsidies, the latest being the Dr. C. Rangarajan
Committee. I would urge Members to help the Government evolve a consensus
on the issue of subsidies.
Gross Budgetary Support and Gross Fiscal Deficit
111. Mr. Speaker, Sir, please allow me to draw your attention to two path
breaking developments on the fiscal front. Firstly, the strategy of enhanced
revenue mobilization through reasonable rates, better compliance and widening
of the tax base is yielding tangible results. For the Centre, the gross tax-GDP
ratio, after rising from 9.2 per cent in 2003-04 to 9.8 per cent in 2004-05, has
increased further to 10.5 per cent in 2005-06 (RE). Government estimates that,
through better tax administration, it will increase to 11.2 per cent in 2006-07(BE).
112. Secondly, the year 2004-05, for which the actuals are available, has proved
to be a turning point. After 20 years, the Gross Fiscal Deficit is less than the
Gross Budgetary Support for Plan in that year. What does this mean? This means
 21
that Government is not financing the Plan entirely through borrowing. Whether
this trend continued in 2005-06 will be known only after the actuals are available.
However, in the BE for 2006-07, I have been able to confine the gross fiscal
deficit to a number much smaller than the gross budgetary support for the Plan.
113. Last year, reluctantly, I pressed the ‘pause’ button on fiscal correction. I
had estimated the revenue deficit for 2005-06 at 2.7 per cent and the fiscal deficit
at 4.3 per cent. I am happy to report that I have been proved wrong. We have
improved upon both measures. According to revised estimates, the revenue deficit
for the current year will be only 2.6 per cent and the fiscal deficit will be only 4.1
per cent.

XIII BUDGET ESTIMATES FOR 2006-07

114. I turn to the Budget Estimates for the next fiscal.
Plan Expenditure
115. Plan expenditure for 2006-07 is estimated at Rs.172,728 crore, up by
20.4 per cent. As a proportion of total expenditure, Plan expenditure has increased
from 26.6 per cent in 2004-05 to 28.3 per cent in 2005-06 (RE) and further to
30.6 per cent in 2006-07 (BE). This points to the improvement in the quality of
Government expenditure.
Non-Plan Expenditure
116. Non-Plan expenditure in 2006-07 is estimated to be Rs.391,263 crore.
The increase of 5.5 per cent over non-plan expenditure in 2005-06 (BE) is due to
normal growth and is one the smallest in recent years.
Revenue Deficit and Fiscal Deficit
117. Mr. Speaker, Sir, in the Budget Estimates for 2006-07, the total
expenditure is estimated at Rs.563,991 crore. I estimate total revenue receipts
of the Central Government at Rs.403,465 crore and the revenue expenditure at
Rs.488,192 crore. Consequently, the revenue deficit is estimated at Rs.84,727
crore which is 2.1 per cent of the GDP. The fiscal deficit is estimated at Rs.148,686
crore, which is 3.8 per cent of the GDP. I believe that I have redeemed my
promise that the process of fiscal correction will be resumed in 2006-07.
 22

PART-B

XIV TAX PROPOSALS

118. Mr. Speaker, I shall now present my tax proposals. In the UPA
Government’s first Budget, and more so in the second, I had attempted significant
tax reforms. The results are encouraging. In 2004-05, gross tax revenues
(provisional actuals) increased by 19.9 per cent over the actuals of the previous
year and, according to Revised Estimates, in 2005-06, they are expected to
increase by 21.4 per cent over the provisional actuals of the previous year. These
figures confirm our belief that we should keep our tax rates moderate and stable.
Indirect Taxes
119. I shall begin with my proposals on indirect taxes. Firstly, customs duties.
120. In line with the Government’s policy of reducing customs duties, I propose
to reduce the peak rate for non-agricultural products from 15 per cent to 12.5 per
cent. I believe that we are now only a short distance away from East Asian rates.
121. As the peak rate comes down, there is a need to reduce the duty on raw
materials and intermediates.
122. The duty on primary steel is at 5 per cent. I propose to reduce the duty on
alloy steel and primary and secondary non-ferrous metals from 10 per cent to 7.5
per cent. This will also be the rate of duty for ferro alloys.
123. In 2004-05, in view of the high international prices of steel, I had reduced
the import duty on steel melting scrap to zero. With prices of steel coming down,
I propose to restore the duty to 5 per cent and bring it on par with primary steel.
124. The duty on mineral products is now 15 per cent. I propose to reduce it to
5 per cent, with a few exceptions.
125. I also propose to reduce the duty on ores and concentrates from 5 per
cent to 2 per cent.
126. Refractories attract a duty of 10 per cent. A number of materials required
for manufacture of refractories are also at 10 per cent or higher rates. I propose
to reduce these duties to 7.5 per cent.
127. Basic inorganic chemicals are crucial raw materials. I propose to reduce
the duty from 15 per cent to 10 per cent. On basic cyclic and acyclic hydrocarbons
and their derivatives, I propose to bring down the rate to 5 per cent. I also propose
to reduce the duty on catalysts from 10 per cent to 7.5 per cent.
128. Plastics are important raw materials. Hence, I propose to reduce the duty
on major bulk plastics like PVC, LDPE and PP from 10 per cent to 5 per cent.
Simultaneously, the duty on naptha for plastics will be reduced to nil.
129. I propose to reduce the duty on styrene, EDC and VCM which are raw
materials for plastics to 2 per cent.
 23
130. I propose to give some concessions to vital drugs. I propose to reduce the
customs duty on 10 anti-AIDS and 14 anti-cancer drugs to 5 per cent. I also
propose to reduce the duty on certain life saving drugs, kits and equipment from
15 per cent to 5 per cent. These drugs will also be exempt from excise duty and
countervailing duty (CVD).
131. Packaging machines serve a wide variety of industries, including food
processing. I propose to reduce the duty on packaging machines from 15 per
cent to 5 per cent.
132. I propose to extend the concessional project rate of 10 per cent to pipeline
projects for transportation of natural gas, crude petroleum and petroleum products.
133. Honourable Members would recall that last year I had taken the power to
impose a CVD on all imports to compensate for State level taxes. This levy was
applied only to imports of ITA bound items and their inputs, except IT software.
After the introduction of VAT in most States, I have received representations
from trade and industry that this levy should be extended to all imports. The
argument is persuasive, and I propose to impose a CVD of 4 per cent on all
imports with a few exceptions. Full credit of this duty will be allowed to
manufacturers of excisable goods.
134. In order to protect the domestic vanaspati industry, I propose to increase
the customs duty on vanaspati to 80 per cent, the rate applicable to crude palm
oil.
135. Export oriented units (EOUs) are allowed to clear their goods to the
Domestic Tariff Area (DTA) at a concessional rate. With declining import duties,
DTA units and EOUs should have a level playing field as regards excise duty or
CVD. Hence, I propose to adjust the duty rates on clearances by EOUs to the
DTA at 25 per cent of basic customs duty plus excise duty on like goods. This
will still give the EOU a tariff advantage or, at any rate, in most cases, it will be
on par with a DTA unit.
136. Finally, I have an important proposal that involves both excise and customs
duties. Cotton textile industry has greatly benefited from the relief granted two
years ago. The man-made textile industry is a growth- and employment-driver. It
deserves encouragement. Hence, I propose to reduce the excise duty on all man-
made fibre yarn and filament yarn from 16 per cent to 8 per cent. Simultaneously,
I propose to reduce the import duty on all man-made fibres and yarns from 15
per cent to 10 per cent. Consequently, the import duty on raw materials such as
DMT, PTA and MEG will also be reduced from 15 per cent to 10 per cent. The
import duty on paraxylene is proposed to be reduced to 2 per cent.
137. I have a few proposals on the excise side. I reiterate that it is our intention
to converge all rates at the CENVAT rate which is now at 16 per cent. There are
only two items – aerated drinks and cars – that still attract the higher rate of 24
per cent. I propose to correct this substantially. I propose to reduce the excise
 24
duty on aerated drinks to 16 per cent. On cars, I propose to reduce the excise
duty to 16 per cent, but only for small cars. A small car, for this purpose, will
mean a car of length not exceeding 4,000 mm and with an engine capacity not
exceeding 1,500 cc for diesel cars and not exceeding 1,200 cc for petrol cars. I
am confident that industry will seize the opportunity to make India a hub for the
manufacture of small and fuel-efficient cars.
138. I propose to impose an 8 per cent excise duty on packaged software sold
over the counter. Customized software and software packages downloaded from
the internet will be exempt from this levy.
139. I propose to fully exempt from excise duty DVD Drives, Flash Drives
and Combo Drives.
140. Many food items, including packaged items, attract nil excise duty. With
a view to giving a fillip to the food processing industry, I propose to fully exempt
from excise duty condensed milk, ice cream, preparations of meat, fish and poultry,
pectins, pasta and yeast. Excise duty on ready-to-eat packaged foods and instant
food mixes, like dosa and idli mixes, will be reduced from 16 per cent to 8 per
cent.
141. Since leather and footwear are thrust sectors, I propose to exempt from
excise duty two vegetable tanning extracts, namely, quebracho and chestnut.
Footwear carrying a retail sale price up to Rs.250 is already exempt from excise
duty. I propose to reduce excise duty on footwear with a retail sale price between
Rs.250 and Rs.750 from 16 per cent to 8 per cent.
142. At present LPG stoves up to a value of Rs.2,000 attract excise duty of 8
per cent. I propose to extend the concessional rate to all LPG stoves without any
value limit.
143. To promote the use of energy efficient lamps, I propose to reduce the
excise duty on compact fluorescent lamps from 16 per cent to 8 per cent.
144. I propose to remove rate differences between different kinds of tableware
and kitchenware. Consequently, glassware will attract excise duty of 16 per cent
on par with ceramicware and plasticware.
145. Paper finds widespread use in education as well as in packaging. In order
to encourage capacity addition, I propose to reduce excise duty on specified
printing, writing and packing paper from 16 per cent to 12 per cent.
146. Domestically produced petroleum crude is subject to a cess under the
Oil Industries Development Act. The rate of Rs.1,800 per metric tonne was fixed
in 2002. After consulting the Ministry of Petroleum and Natural Gas, I propose
to increase the cess to Rs.2,500 per MT. I have been assured that this increase
will be absorbed by the oil producing companies and have no impact on retail
prices of petroleum products.
 25
147. There are two requests from trade and industry. I had exempted computers
from excise duty in order to boost the use of computers. That purpose has been
largely served. Domestic manufacturers have sought re-imposition of excise duty
at 12 per cent in order to enable them to take CENVAT credit as well as to face
competition from imports. I propose to accept the request. Since the 12 per cent
excise duty will be eligible for full input tax credit, there should not be any
impact on price.
148. The second request is to impose excise duty on set top boxes. I propose
to accept the request and levy an excise duty of 16 per cent and, at the same time,
reduce the customs duty from 15 per cent to nil. This change will equalize the
duty rates on various types of set top boxes.
149. To round off, I would be failing in my duty if I did not raise the excise
duty on cigarettes. Hence, I propose to increase the excise duty on cigarettes by
about 5 per cent.
150. The bane of excise and customs tariffs is the plethora of exemptions. On
the basis of a comprehensive review, I propose to remove many exemptions that
were granted through notifications. Broadly, exemptions that are end-use based
or have outlived their utility or need certification or give rise to disputes are
being rescinded, with only a few exceptions. The exemption for the SSI sector
will, however, remain unchanged.
151. We have also identified some more notifications which need to be
removed. However, before taking a final view, I propose to put a list of such
notifications on the Ministry’s website and invite comments.
152. This leaves service tax. In 2005-06, the services sector is estimated to
contribute 54 per cent of GDP. Naturally, it should also contribute significantly
to the exchequer. Continuing in the direction followed in the last few years, I
propose to bring more services under the service tax net. The new services to be
covered include ATM operations, maintenance and management; registrars, share
transfer agents and bankers to an issue; sale of space or time, other than in the
print media, for advertisements; sponsorship of events, other than sports events,
by companies; international air travel excluding economy class passengers;
container services on rail, excluding the railway freight charges; business support
services; auctioneering; recovery agents; ship management services; travel on
cruise ships; and public relations management services.
153. I also propose to expand the coverage of certain services now subject to
service tax. I do not wish to burden the House with the details which are available
in the Budget papers.
154. The leasing and hire purchase industry has faced some difficulty owing
to the levy of service tax on all components of payments, including interest. I
propose to rectify the anomaly. Accordingly, interest and instalments of the
principal amount will be abated in calculating the value of the service.
 26
155. It is my sense that there is a large consensus that the country should
move towards a national level Goods and Services Tax (GST) that should be
shared between the Centre and the States. I propose that we set April 1, 2010 as
the date for introducing GST. World over, goods and services attract the same
rate of tax. That is the foundation of a GST. People must get used to the idea of
a GST. Hence, we must progressively converge the service tax rate and the
CENVAT rate. I propose to take one step this year and increase the service tax
rate from 10 per cent to 12 per cent. Let me hasten to add that since service tax
paid can be credited against service tax payable or excise duty payable, the net
impact will be very small.
Direct Taxes
156. I shall now turn to my proposals on direct taxes.
157. The good news is that there will be no change in the rates of personal
income tax or corporate income tax.
158. The other piece of good news is that no new taxes are being imposed.
159. The one-by-six scheme under the Income Tax Act obliging certain
categories of persons to file returns will stand abolished.
160. I propose to marginally revise certain tax rates in the quest for equity.
While the corporate tax rate is 30 per cent, the rate under Minimum Alternate
Tax (MAT) is only 7.5 per cent of book profits. I propose to increase the rate to
10 per cent, which is still only one-third of the normal rate. I also propose to
include long-term capital gains arising out of securities in calculating book profits.
I have already allowed MAT-paying companies to take credit for MAT over five
years. I propose to extend the period to seven years as well as adjust MAT credit
while calculating interest liability.
161. The rates for the Securities Transaction Tax (STT) were fixed when prices
of securities were much lower. Reflecting the increase in implicit capital gains
in securities transactions, I propose an increase of 25 per cent, across the board,
on all rates of STT.
162. Section 80IA of the Income Tax Act applies to infrastructure facilities.
For developing an industrial park the terminal date is March 31, 2006. I propose
to extend the period to March 31, 2009. For the power sector, in view of the ultra
mega projects, I propose to extend the date to March 31, 2010.
163. Last year, I recast the provisions relating to savings. Fixed deposits were
not included. There is a demand that fixed deposits of certain tenure should
qualify for tax exemption. I propose to include investments in fixed deposits in
scheduled banks for a term of not less than five years in section 80C of the
Income Tax Act. I also propose to remove the limit of Rs.10,000 in respect of
contribution to certain pension funds in section 80CCC, subject to the overall
ceiling of Rs.100,000.
 27
164. I propose to align the definition of open-ended equity-oriented schemes
of mutual funds in the Income Tax Act with the definition adopted by SEBI. I
also propose to treat open-ended equity-oriented schemes and close-ended equity-
oriented schemes on par for the purpose of exemption from dividend distribution
tax.
165. I have revisited the exemptions in the Income Tax Act. As a result, I
propose to remove the exemption under section 10(23G) which is not relevant
when interest rates are moderate.
166. Cooperative banks, like any other bank, are lending institutions and should
pay tax on their profits. Primary Agricultural Credit Societies (PACS) and Primary
Cooperative Agricultural and Rural Development Banks (PCARDB) stand on a
special footing and will continue to be exempt from tax under section 80P of the
Income Tax Act. However, I propose to exclude all other cooperative banks from
the scope of that section.
167. Section 54EC and section 54ED are tax shelters. I propose to restrict the
scope of section 54EC to two institutions, viz., NHAI and REC. For NABARD,
SIDBI and NHB, which are banks, we have already opened the route of zero
coupon bonds to raise low cost funds. Government will, if needed, provide
appropriate support to these institutions to enable them to access resources to
fulfil their mandate effectively. I also propose to withdraw the benefit of section
54ED, which has become virtually redundant, with effect from April 1, 2006.
168. The Standing Committee on Finance has expressed concern that many
charitable institutions misuse the provisions of the Income Tax Act. I propose to
focus on one misuse, namely, receiving anonymous or pseudonymous donations.
Accordingly, I propose that anonymous or pseudonymous donations to wholly
charitable institutions will be taxed at the highest marginal rate. Such donations
to partly religious and partly charitable institutions/trusts will be taxed only if
the donation is specifically for an educational or medical purpose. However, I
make it clear that such donations to wholly religious institutions and religious
trusts will not be covered by the new provision.
169. Members of State Legislatures have complained that their constituency
allowances are taxed differently from the constituency allowance received by
Members of Parliament. I propose to remove the discrimination and treat them
equally.
170. The Permanent Account Number (PAN) of the Department of Income
Tax is the critical element in capturing incomes and expenditures. Scrutiny of
Annual Information Returns (AIR) on high-value transactions reveals that 60
per cent of the transactions are without quoting PAN. Hence, I propose to take
the power to issue PAN suo motu in certain cases. I also propose to take the
power to direct persons to apply for PAN in certain cases. I propose to notify, in
due course, more transactions for which quoting of PAN will be mandatory. I
also propose to prescribe a few more transactions to be reported in AIRs.
 28
171. Last year, I introduced two new taxes. The Banking Cash Transaction
Tax (BCTT) has turned out to be a boon, not for the modest revenues it brought
which was never its purpose, but for the remarkable trails that it has helped
establish. To cite just one example, huge cash withdrawals in a bank branch in
Chandni Chowk, noticed through the BCTT, led the Department of Income Tax
to three entities which were carrying on the business of purchasing demand drafts
from traders at a discount and helping the traders to avoid both sales tax and
income tax. These entities would deposit the demand drafts in their own accounts
and withdraw the cash. In a period of 18 months, they had laundered Rs.1,500
crore. BCTT has also helped the Department to detect bogus bills, accommodation
entries, artificial loss claims and dummy firms. I propose to continue the BCTT
for some more time until the AIR system is able to capture all significant financial
transactions.
172. Fringe Benefit Tax (FBT) was introduced as a revenue raising measure.
FBT can be justified on the principles of horizontal equity and vertical equity.
Nevertheless, I have reviewed it with an open mind. I have also taken on board
the views expressed by the apex chambers of commerce. I propose to make the
following changes in chapter XII-H of the Income Tax Act:
• Value the benefit in the form of ‘tour and travel’ at 5 per cent instead
of 20 per cent;
• Value the benefit in the form of ‘hospitality’ and ‘use of hotel boarding
and lodging facilities’, in the case of airline companies and shipping
industry, at 5 per cent instead of 20 per cent;
• Exclude the expenses on free samples of medicines and of medical
equipment distributed to doctors;
• Exclude the expenses incurred on brand ambassador and celebrity
endorsement; and
• Prescribe a threshold of Rs.100,000 under section 115WB(1)(c) so
that only a contribution by an employer to an approved
superannuation fund in excess of Rs.100,000 per year per employee
will attract FBT. Under section 80C there is already an exemption
up to Rs.100,000 for contribution by an employee to an approved
superannuation fund. Honourable Members will note that, under
these two provisions, there can now be a tax-exempt contribution
up to Rs.200,000 per year for the benefit of an employee. This
allowance, I believe, is generous enough in the case of an
overwhelming majority of employees.

With these changes, I am confident that the debate on FBT will draw to a close.
Let me remind everyone concerned once again that FBT is justified on the
principle of equity.
 29
Modernizing Tax Administration
173. I am glad to inform the House that technology is being increasingly
employed to modernize tax administration. The Departments of Income Tax and
Customs and Central Excise will undergo Business Process Reengineering (BPR).
Nationwide networks will connect 745 income tax offices in 510 cities and 550
customs and central excise offices in 245 cities, creating national databases.
National data centres, data warehousing facilities and disaster recovery sites are
being set up. Jurisdiction-free filing of returns, online tracking of status of
accounts and refunds of income tax will be possible. Introduction of a risk
management system and Electronic Data Interchange (EDI) in the Customs
Department will reduce dwell time for cargo. E-payments of customs and excise
duties will be possible. Both Departments will have fully computerised networks
by end 2006.
174. Our Government’s two Budgets have seen many innovations – the Gender
Budget, the Outcome Budget etc. Today, I place before the House another
innovation – a statement on revenue foregone, known worldwide as tax
expenditure statement. This statement captures the departures from the normal
tax regime. This exercise is a first attempt that will be fine tuned in the years to
come.
VAT and CST
175. The House is aware that most States have implemented VAT with effect
from April 1, 2005, and the unanimous opinion is that VAT has been a resounding
success. I hope that the non-VAT States will soon join the mainstream, because
the next stage of reform depends on all States implementing VAT. The Empowered
Committee of State Finance Ministers has recommended that Central Sales Tax
(CST) be phased out, and have requested the Centre to compensate them for the
expected loss of revenue. Government has proposed that the loss of revenue
may be compensated through monetary and non-monetary measures which, taken
together, will ensure that the States’ revenues remain buoyant. Once the
Empowered Committee and the Government reach an agreement, I shall return
to the House with firm proposals, including legislative changes and a
supplementary demand.
176. In the meanwhile, there is an urgent matter connected with CST and VAT
which has to be attended to. It has become imperative to moderate the price of
Liquified Petroleum Gas (LPG) for domestic use. States are taxing LPG
(domestic) at high rates. They should also bear a portion of the burden of high
prices of petroleum products. Hence, in order to moderate the price of LPG
(domestic), I propose to include LPG (domestic) in the list of ‘declared goods’
under the CST Act.
177. My tax proposals on direct taxes are estimated to yield a gain of about
Rs.4,000 crore. On the indirect taxes side, the gain is estimated at Rs.2,000 crore.
 30
XV CONCLUSION
178. Mr. Speaker, Sir, I believe that the world has recognized the potential of
India. It is now for us, the generation to which has been given the privilege of
carrying the torch, to rediscover the greatness of this country and the potential of
its people. The young people of India are building castles, it may appear that
those castles are in the air, but as Henry David Thoreau said: “If you have built
castles in the air, your work need not be lost; that is where they should be. Now
put the foundations under them.” It is our duty to put the foundations on which
the young can build their castles. The UPA Government has pledged itself to
that task.
179. Over a hundred years ago, a restless young man in his quest for the core
of all spirituality admonished his fellow men in the following words: “We reap
what we sow. We are the makers of our own fate. The wind is blowing; those
vessels whose sails are unfurled catch it, and go forward on their way, but those
which have their sails furled do not catch the wind. Is that the fault of the
wind?....... We make our own destiny.” Those are the immortal words of Swami
Vivekananda. Let us believe in our destiny, let us make our future.
180. Sir, with these words, I commend the Budget to the House.
 CONTENTS

Page No.
PART—A

I. THE MACROECONOMIC BACKDROP 1

The Immediate Past: Where We Were in 2003-04 1
The Present: Where We Are in 2004-05 2
The Year Ahead: Where We Want To Be in 2005-06 3
The Big Picture 3

II. ASSAULT ON POVERTY AND UNEMPLOYMENT 3

Empowering the People 3
Employment 4
National Rural Employment Guarantee Scheme 4
National Rural Health Mission 4
Antyodaya Anna Yojana 4
ICDS 4
Mid-day Meal Scheme 5
Sarva Shiksha Abhiyan 5
Drinking Water and Sanitation 5
Scheduled Castes and Scheduled Tribes 5
Women and Children 6
Minorities 6
Backward Regions Grant Fund 7
Bihar 7
Jammu & Kashmir 7
North Eastern Region 7
Rural Infrastructure 8

III. BHARAT NIRMAN 8

IV. INVESTMENT 8

V. AGRICULTURE 9
Roadmap for Agricultural Diversification 9
National Horticulture Mission 9
Plantation Sector 9
Agricultural Marketing Infrastructure 10
Water Resources, Flood Management and
Erosion Control 10
Micro Irrigation 10
 (ii)
Page No.
Rural Credit and Indebtedness 10
Farm Insurance 11
Micro Finance 11
Micro Insurance 12
A Knowledge Centre in Every Village 12
Agricultural Research 13

VI. MANUFACTURING 13
Textiles 13
Sugar industry 14
Pharmaceuticals and Biotechnology 14
Small and Medium enterprises 14
Skills Training 15
Foreign Trade 15
Foreign Direct Investment 15

VII. INFRASTRUCTURE 16
Telecommunications 16
National Highway Development Project 16
Rural Electrification 16
Indira Awas Yojana 16
Special Purpose Vehicle 17
PURA clusters 17
National Urban Renewal Mission 17

VIII. FINANCIAL SECTOR 18

Banking 18
PFRDA 18
Capital Market 19
Over the Counter (OTC) Derivatives 19
Stamp Duty on Stock Exchange Corporatization 19
Stamp Duty on Commercial Paper 20
Mumbai - A Regional Financial Centre 20
Gold Units 20

IX. OTHER PROPOSALS 20

Institutions of Excellence 20
VAT 21
Twelfth Finance Commission 21
Defence Expenditure 21
 (iii)
Page No.
X. FISCAL CONSOLIDATION 22
Outlays versus Outcomes 22
Subsidies 22

XI. BUDGET ESTIMATES FOR 2005-06 23

Plan Expenditure 23
Non-Plan Expenditure 23
Revenue Deficit and Fiscal Deficit 23

PART—B

XII. TAX PROPOSALS 24

Indirect Taxes 24
Direct Taxes 28

XIII. CONCLUSION 32
 1

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 Government’s
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
 2
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
 3
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. Hon’ble Members will note that in each of these areas the focus of the
Government’s 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
 4
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, Hon’ble 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 Government’s 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,
 5
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
Government’s 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
 6
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. Hon’ble 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.
 7
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 year’s 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 Udhampur—Baramulla 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
Kumarghat—Agartala and Lumding—Silchar—Jiribam—Imphal projects will
 8
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 Government’s 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
 9
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 Government’s 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.
 10
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
 11
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
 12
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.
 13
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
 14
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
 15
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
India’s 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 Hon’ble Members to
take a pragmatic view. At the recent meeting of the Finance Ministers of G-7
 16
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
 17
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.
 18
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
 19
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 India’s 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.
 20
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.
 21
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). TFC’s 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 Government’s 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.
 22
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
 23
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.
 24
PART – B

XII. TAX PROPOSALS

109. Mr. Speaker, Sir, I shall now present my tax proposals.
110. I had articulated the UPA Government’s 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 Government’s 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 Government’s 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
 25
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. Government’s 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.
 26
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
 27
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 committee’s 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. Hon’ble 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,
 28
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. Hon’ble 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.
 29
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.
 30
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. Hon’ble 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.
 31
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 anyone’s feathers. This nominal rate of increase will
apply to all categories.
175. As Hon’ble 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
 32
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 India’s 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.
 Budget 2004-2005

Speech of
P. Chidambaram
Minister of Finance

July 8, 2004

PART A
Mr. Speaker, Sir.

I. INTRODUCTION
1. I rise to present the budget for the year 2004-05.
2 . Every five years, or sometimes sooner, the people of India speak in their collective
voice. The message is usually unambiguous and clear. Elections 2004 were no
different. The people’s vote against one coalition – and the vote in favour of another
coalition – was a vote for change. As the Prime Minister, Dr. Manmohan Singh, said
in his address to the Nation two weeks ago, the people have sought “a change in the
manner in which this country is run, a change in national priorities, and a change in
the processes and focus of governance.” I shall make every effort to be true to that
mandate.

II. NATIONAL COMMON MINIMUM PROGRAMME:

THE GUIDING LIGHT
3 . The United Progressive Alliance (UPA) has given to itself, and to the people of
this country, a Common Minimum Programme. The Government has since adopted
it as the National Common Minimum Programme (NCMP). The programme spells
out seven clear economic objectives:
(1) maintaining a growth rate of 7 - 8 per cent per year for a sustained period;
(2) providing universal access to quality basic education and health;
(3) generating gainful employment in agriculture, manufacturing and services,
and promoting investment;
(4) assuring 100 days’ employment to the breadwinner in each family at the
minimum wage;
1
 2
(5) focusing on agriculture and infrastructure;
(6) accelerating fiscal consolidation and reform; and
(7) ensuring higher and more efficient fiscal devolution.

4 . The UPA government began its journey in May this year. However, I may note
that one-quarter of the year has elapsed and, by the time the Budget is passed and
the President gives his assent to the Finance Bill, nearly one-half of the year will be
over. There is also an Interim Budget left behind by my predecessor.
5 . The Government has to shift gears; and even if we are able to do so quickly, it
would leave us only about six months to achieve our objectives for this year. We
have therefore decided to adopt an innovative approach. The Planning Commission
has advised the ministries and departments to redefine their priorities and redraw
their programmes in accordance with the NCMP. This will necessarily involve some
changes in the allocations under each head of expenditure. Besides, new programmes
or schemes may have to be launched, and old ones restructured. Under the
circumstances, it was considered optimal to allow the ongoing programmes to continue
until the Planning Commission completes an exhaustive review and reorients the
expenditure pattern to conform to the NCMP objectives. One thing, however, is
clear. The Plan resources made available in the Interim Budget will be insufficient.
Hence, in addition to the Gross Budgetary Support (GBS) of Rs.135,071 crore provided
in the Interim Budget, I propose to provide a sum of Rs.10,000 crore. This, and
some other additional allocations, will raise total plan expenditure to Rs.145,590
crore in the Budget Estimates for 2004-05.

III. FRBM AND THE MACROECONOMIC BACKDROP

6 . The Fiscal Responsibility and Budget Management Act (FRBM) 2003 has
streamlined the Budget presentation process. The Government has demonstrated
its commitment to prudent fiscal and financial policies by notifying the Act and the
Rules with effect from July 5, 2004. Along with the Budget, a medium-term fiscal
policy statement, a fiscal policy strategy statement and a macroeconomic framework
statement are being presented to the House.
7 . Under the FRBM Act, I am obliged to wipe out the revenue deficit by 2007-08.
However, the NCMP has proposed that we do so by 2008-09. In my view, 2008-09 is
a more credible terminal year; it will also coincide with the term of this Government.
Hence, I propose to move an amendment to this effect through the Finance Bill. I
am committed to implementing the FRBM Act. The elimination of revenue deficit
will open up fiscal space up to 3 per cent of GDP for enhanced public investment
without undermining fiscal prudence.
8 . The economic fundamentals appear strong and the balance of payments is robust.
Although there are short term pressures on prices, the outlook for the year is benign
and the Government is fully alert. Growth will be sustained by increased production
and value addition in agriculture, a marked improvement in industrial production,
and continued buoyancy in the performance of the services sector.
9 . The Government will follow a 5-year road map to achieve the NCMP objective of
bringing about rapid growth with stability and equity. Sequencing the measures
 3
in an appropriate fashion and continuing the reform process, which ushered in
the era of rapid growth, are the main challenges. The Government is committed to
strike a fine balance among the three mutually reinforcing objectives of growth,
stability and equity.

IV. ASSAULT ON POVERTY AND UNEMPLOYMENT

1 0 . One of our greatest assets is our human resources, our people. Empowering
the people, especially the poor, with universal access to education and health, and
facilitating their full participation in the growth process through gainful employment,
will enhance their welfare. It will also reinforce the growth process itself. This win-
win strategy is the keystone of the economic policy framework of the Government.
Plan reorientation
1 1 . I have the benefit of the wise counsel of the Prime Minister, Dr Manmohan
Singh. In our scheme of things, the poor will have a first charge not only on the
additional sum of Rs.10,000 crore of GBS that I propose to provide today, but also
on the entire Plan funds that the Planning Commission will reallocate.
1 2 . The poor want basic education for their children: we shall provide it, and we
shall make sure that the child remains in school for at least eight years. We shall
also make sure that the child is not hungry while she or he is at school. The poor
want drinking water: we shall ensure that every habitation has an assured source of
drinking water. The poor want basic health care, medicines at fair prices and a
doctor within a reasonable distance: we shall ensure that the public health system
has adequate human and financial resources to provide basic medical care. The
poor want jobs for their children: we shall ensure that through higher investments,
and through targeted intervention, jobs are available to them.
1 3 . While the Planning Commission will make the final allocations, I may assure
the House that crucial programmes such as Food for Work, Sarva Shiksha Abhiyan,
Midday Cooked-Meal Scheme, basic health care, railway moderanisation and safety,
Accelerated Irrigation Benefit Programme, drinking water, investment in agriculture,
Provision of Rural amenities in Urban Areas (PURA), roads, and science and
technology, including bio-technology, will receive priority and will be provided with
additional funds.
Antyodaya Anna Yojana
1 4 . I propose to continue, and expand, the Antyodaya Anna Yojana. At present, 1.5
crore families are covered. These families are provided with 35 kg. of foodgrains per
family per month at a highly subsidized price of Rs. 2 per kg. for wheat and Rs.3 per
kg for rice. 20.76 lakh tonnes of rice and 17.48 lakh tonnes of wheat were distributed
under the Scheme in 2003-04. In the current year, I propose to cover 2 crore families.
I expect that the off-take of rice and wheat will increase. Consequently, the Antyodaya
Anna Yojana will receive a subsidy of nearly Rs.3500 crore. A provision for this level of
expenditure has been included in the allocation for food subsidy of Rs.25,800 crore.
Public distribution system
1 5 . Fair price shops constitute the backbone of the food security system for the
poor. We shall address the weaknesses in the system and strengthen public
distribution. I shall return to this subject a little later.
 4
Food for Work Programme
1 6 . Investment and growth will create new job opportunities for our young men and
women. Nevertheless, currently there is a need to ensure that unemployment does
not take a heavy toll on the poor people. Work has begun on the National Employment
Guarantee Act. The object is to guarantee 100 days of employment in a year to one
able-bodied person in every poor household. The Bill will take into account the
experience gained in Maharashtra. Government will also take care to avoid the
pitfalls pointed out by responsible critics. My colleague, the Minister of Labour,
expects that he would be able to introduce the Bill in Parliament shortly. Pending
the enactment of the new law, I propose to launch a new Food for Work programme
in 150 districts classified as most backward and identified as areas in immediate
need of such a programme. Allocations under different schemes will be pulled together
to support the Food for Work programme. There are substantial funds totaling over
Rs.6000 crore under SGRY, SGSY, SJSRY, REGP and PMRY. Depending on the
demand for such work, more funds will be allocated in the current year. I expect to
increase the allocations substantially over the next four years. Special care will be
taken in laying down the guidelines for the programme so that the money and labour
expended result in durable and visible assets benefiting the whole community.
Scheduled Castes and Scheduled Tribes
1 7 . The welfare of the Scheduled Castes and Scheduled Tribes is close to my heart.
The allocation for programmes concerning the Scheduled Castes is Rs.1180 crore
(an increase from Rs.1137 crore) and for Scheduled Tribes is Rs.1146 crore (an
increase from Rs.1087 crore). Other plan schemes such as SGSY, SGRY and IAY
also contain specific reservations for beneficiaries belonging to the Scheduled Castes
and Scheduled Tribes. The reservations range from 50 per cent to 60 per cent.
Minorities
1 8 . Particular attention will be paid to the welfare, especially education, of the
minorities. Hence, an additional allocation of Rs.50 crore has been made for the
National Minorities Development and Finance Corporation.
Self-help groups
1 9 . Microfinance initiatives are a cost-effective way to take the banking system to
the poor. The Self-Help Group (SHG) – bank linkage programme, initiated in 1992,
has come a long way. Until March 31, 2004, 1.67 crore families had benefited
through 10.79 lakh SHGs financed by banks. While the SHG concept will be promoted
vigorously, I am of the view that matured SHGs may be in a position to graduate
from consumption or production credit to starting micro-enterprises. An indicative
target of credit linking 5.85 lakh SHGs during the period up to March 31, 2007 has
been set for NABARD, SIDBI, banks and other agencies.

V. THRUST AREAS
2 0 . Before I deal with other areas of concern on which the Budget will have an
impact, let me give you a snapshot of the goals that I have set for myself :
♦ Doubling agricultural credit in three years, accelerating the completion of
irrigation projects and investing in rural infrastructure;
 5

♦ Providing farm insurance and livestock insurance;

♦ Improving agricultural product markets, and promoting agri-businesses;
♦ Drinking water for all;
♦ Expanding water harvesting, watershed development and minor- irrigation
and micro-irrigation schemes;
♦ Enhancing investment in industry – public and private, domestic and
foreign – to create new jobs;
♦ Creating space for small-scale industry to thrive and grow;
♦ Electricity for all;
♦ Universal access to telecommunication facilities;
♦ More housing for the poor;
♦ Access to medical care through health insurance; and
♦ Encouraging savings, and protecting the savings of senior citizens;

2 1 . I believe that the key to growth is investment – public and private, domestic and
foreign. It is therefore my intention to considerably enhance investment in all sectors
of the economy. However, fiscal prudence and financial discipline will remain the
overarching objective. I shall also take into account the availability of resources and
the absorptive capacity of various sectors.

VI. EDUCATION AND HEALTH

Education
2 2 . In my scheme of things, no issue enjoys a higher priority than providing basic
education to all children. The NCMP mandates Government to levy an education
cess. I propose to levy a cess of 2 per cent. The new cess will yield about Rs.4000 -
5000 crore in a full year. The whole of the amount collected as cess will be earmarked
for education, which will naturally include providing a nutritious cooked midday
meal. If primary education and the nutritious cooked meal scheme can work hand
in hand, I believe there will be a new dawn for the poor children of India.
2 3 . I am concerned about the quality of technical education in the country. Lest I
be misunderstood, I am not referring to the IITs but to the ITIs. ITIs are the training
ground for skilled manpower. The skills imparted by ITIs must keep pace with the
technological demands of industry and the expanding universe of knowledge. There
is only one benchmark for our technicians – and that is the world standard. In order
to produce technicians of world standard, Government proposes to launch a
programme in the Central sector to upgrade 500 ITIs over the next 5 years at the
rate of 100 ITIs a year. Appropriate infrastructure and equipment will be provided,
the syllabi will be upgraded and new trades will be introduced. This is an area
where I welcome Chambers of Commerce and Industry to join hands with the
Government and create a public-private partnership model for designing and
implementing the scheme. The selection of the ITIs will be done in consultation with
the State Governments.
 6
2 4 . An education loan scheme has been in operation since April 2001 under which
loans up to Rs.7.50 lakh and Rs.15 lakh are available for professional courses within
the country and abroad, respectively. The requirement of collateral was dispensed
with for loans up to Rs.4 lakh. I am happy to say that commercial banks have now
agreed to waive the need for collateral for loans up to Rs.7.5 lakh, if a satisfactory
guarantee is provided on behalf of the student. Thus, no student admitted to any
professional course, including courses in IITs, IIMs and medical colleges, will be
deprived of the opportunity to study because of lack of funds.
Health
2 5 . Access to medical care is not easily available to the poor. The Universal Health
Insurance Scheme (UHIS) now in operation is skewed in favour of the non-poor. As
a result, only a very small number of families below the poverty line (BPL) – actually
11,408 till May, 2004 – have been covered. Although the premiums are low, BPL
families seem to avoid the scheme due to their inability to pay the premium. In its
present design, the scheme may not be sustainable. I, therefore, propose to redesign
the scheme and make it exclusive for persons and families below the poverty line.
The revised premium would be Rs.165 for individuals, Rs.248 for a family of five and
Rs.330 for a family of seven, without any reduction in benefits. To offset the reduction
in premium, I propose to enhance the premium subsidy from Rs.100 at present to
Rs.200 for an individual, Rs.300 for a family of five and Rs.400 for a family of seven.
The cost to the exchequer will be Rs.40 crore in a full year. If the money is fully
spent, the number insured will rise to about 10 lakh.
2 6 . In addition to the above, I propose to introduce a new Group Health Insurance
Scheme through public sector non-life insurance companies. The insured will be
members of Self-Help Groups (SHGs) and other credit linked groups (CLGs) who
avail of loans from banks or cooperative institutions. Under the group health
insurance scheme, the premium will be Rs.120 per person, but the insurance cover
would be for a sum of Rs.10,000.
2 7 . The NCMP also rightly emphasizes the need for an accelerated AIDS control
programme. Bold and determined efforts need to be made to achieve zero-level
growth of HIV/AIDS. These will include improved surveillance through the setting
up of more sentinel sites and use of primary health centres to monitor HIV/AIDS,
public awareness campaigns, promotion of safe sex through the use of condoms,
prevention of drug abuse and distribution of disposable syringes. The allocation for
prevention and control of HIV/AIDS is Rs. 259 crore.

VII. AGRICULTURE AND THE RURAL ECONOMY

2 8 . Boosting agricultural growth through diversification and development of agro-
processing is one of the objectives of the NCMP. The Prime Minister, in his address
to the Nation on June 24, 2004 promised a “New Deal” for rural India. This New
Deal is not only essential for rural development and welfare, but also essential for
achieving sustained overall annual growth of 7-8 per cent and generating employment.
2 9 . The agriculture sector requires massive investments. Such investments have
to be through credit-enabled private investment and enhanced public investment. I
also intend to use fiscal instruments to boost investment in agriculture.
 7
Credit
3 0 . It is my intention to double the flow of agricultural credit in three years. We
have made a beginning by announcing a comprehensive policy on agricultural
credit on June 18, 2004. The policy has been received well and will be fine-tuned,
if necessary.
3 1 . Government has entrusted the implementation of the policy to the public sector
and private sector banks, the regional rural banks (RRBs) and the cooperative banks.
3 2 . Each RRB has a sponsor bank. I propose to hold each sponsor bank squarely
accountable for the performance of RRBs under its control. RRBs that adopt a new
governance standard and that abide by the prudential regulations will qualify for
receiving funds from the Government for their restructuring.
3 3 . The third arm for delivering farm credit is the cooperative banking system.
Unless cooperative banks are healthy and creditworthy, it would not be possible to
reach credit to every farmer in need of credit. The situation is grave. In order to find
a durable solution, I propose to appoint a Task Force to examine the reforms required
in the cooperative banking system including the appropriate regulatory regime. The
Task Force will be requested to act with all deliberate speed and submit its report by
October 31, 2004.
Irrigation, Rural Infrastructure
3 4 . The Accelerated Irrigation Benefit Programme (AIBP) was introduced in 1996-
97 and was allotted large funds year after year. Yet, out of 178 large and medium
irrigation projects that were identified, only 28 have been completed. The programme
is being restructured. Truly last mile projects that can be completed by March 2005
will be given overriding priority, and other projects that can be completed by March
2006 will also be taken up in the current year. Next year we shall move the goal-post
to March 2007, the year after to March 2008, and so on. I have provided a sum of
Rs.2800 crore to the AIBP this year.
3 5 . The Rural Infrastructure Development Fund (RIDF) was established in NABARD
in 1994-95. Five months ago, a decision was taken to close the RIDF and establish,
in its place, another Fund with slightly different objectives. Many State Governments
and many honourable Members have opposed the closure of RIDF. In deference to
their wishes, and in tune with my own thinking, I have decided to revive the RIDF.
RIDF’s guidelines have been revised, and a corpus of Rs.8000 crore will be provided
for RIDF during 2004-05.
Restoring water bodies
3 6 . I now turn to one of my big dreams. Water is the lifeline of civilization. We have
been warned that the biggest crisis that the world will face in the 21 st century will be
the crisis of water. Water is indeed a renewable resource but, in any given year, it is
not inexhaustible. The crisis of water has affected the lives of millions of our fellow
citizens. In some cities, whole households keep awake to receive one or two buckets
of water well past midnight. In rural areas, the girl child is often pulled out of school
in order to fetch water. I am deeply concerned about the impending crisis. I therefore
propose an ambitious scheme. Through the ages, Indian agriculture has been
sustained by natural and man-made water bodies such as lakes, tanks, ponds and
 8
similar structures. It has been estimated that there are more than a million such
structures and about 500,000 are used for irrigation. Many of them have fallen into
disuse. Many of them have accumulated silt. Many require urgent repairs.
3 7 . I therefore propose to launch a massive scheme to repair, renovate and restore
all the water bodies that are directly linked to agriculture. In the current year, we
shall begin with pilot projects in at least five districts, and we shall select at least one
district in each of the five regions of the country. The estimated cost is Rs.100 crore.
Funds for the five pilot projects will be drawn from existing programmes such as
SGRY, PMGJSY, DPAP, DDP and IWDP. Once the pilot projects are completed and
validated, Government will launch the National Water Resources Development Project
and complete it over a period of 7 to 10 years.
3 8 . Funds will not be a constraint for implementing the Project. For instance, Life
Insurance Corporation of India invests, on an average, Rs.3000 crore per year in
water-related programmes. I also intend to pose this Project to multilateral agencies
for funding. It is my hope that by the beginning of the next decade all water bodies
in India will be restored to their original glory and that the storage capacity of these
water bodies will be augmented by at least 100 per cent.
Water harvesting
3 9 . Water harvesting schemes, specific to an area or village, have been found to be
extremely useful. Such schemes are supported by a number of credit institutions.
However, farmers belonging to the Scheduled Castes and Scheduled Tribes rarely
benefit from such schemes. In order to help these farmers, Government will launch
a nationwide water harvesting scheme. The scheme will cover one lakh irrigation
units at an average cost of Rs.20,000 per unit. NABARD will lend the money on
easy terms and no margin money will be charged from the borrower. Government
will provide a 50 per cent capital subsidy through NABARD, and the estimate for the
scheme is Rs.100 crore.
Flood control
4 0 . Thousands of lives and thousands of head of cattle are lost every year due to
floods. Floods are perennial in States like Assam, West Bengal, Bihar and Uttar
Pradesh. The NCMP envisages full Central support to flood control works in inter-
State rivers and international rivers. The Brahmaputra Board has prepared a plan
for anti-erosion and flood control works in the Brahmaputra and Barak valleys. A
programme of flood control and anti-erosion will be launched in the current year. A
similar programme is being implemented in the Ganga-basin States of Uttaranchal,
Uttar Pradesh, Bihar, Jharkhand and West Bengal. Rs.30 crore has been allotted
in the current year and additional funds will be provided to keep pace with the
progress of works.
Diversification
4 1 . India is self-sufficient in wheat and paddy but deficient in other agricultural
produce. The time has come to encourage our farmers to diversify into areas such
as horticulture, floriculture and oilseeds. The Anand model has been a great success
in milk and milk products. Government proposes to launch a National Horticulture
Mission. The goal is to double horticulture production from the current level of 150
million tonnes to 300 million tonnes by 2011-12. I invite States to join hands with
 9
the Government in launching this mission. One of the steps that States will be
encouraged to take is to emulate the Anand model and establish a State Level
Cooperative Society for promoting horticulture.
4 2 . Oilseeds is another critical area. Last year, we produced 25 million tonnes of
oilseeds, but we also imported US$ 2.5 billion of edible oil. Government will facilitate
farmers to diversify into oilseeds by promoting superior seed-technology and through
an appropriate policy of price support.
4 3 . India must become a single market for all products, particularly agricultural
produce. The existing Acts governing agricultural produce marketing committees
have outlived their utility. The Government has circulated a model law. So far, ten
States have initiated legal or administrative action for ‘direct marketing’ and ‘contract
farming’ arrangements in line with the model law. I urge all States to enact the
model law at an early date.
Research and Development
4 4 . Agricultural research and development is an area which deserves special
attention. The Indian Council of Agricultural Research (ICAR) is a beneficiary of the
scheme under which every commercial rupee earned by ICAR, incrementally, is
matched by another rupee from the Budget. Besides, ICAR receives funds from the
Technology Development Board in respect of projects that are commercially viable.
Agricultural research must be expanded rapidly to new frontiers such as bio-
technology, vaccines and diagnostics. There must be a special focus on farming in
drylands and unirrigated areas. The allocation for 2004-05 is Rs.1000 crore (which
is an increase from Rs.775 crore in BE 2003-04), and I propose to make further
allocations during the course of the year.
Agri-business
4 5 . The Small Farmers Agri-business Consortium (SFAC) was set up in 1994.
Although SFAC started functioning from 1998, its corpus stands at a meagre Rs.10.95
crore. In my view, SFAC should provide venture capital to projects and must be run,
preferably by a banker, on purely business lines. The MS Swaminathan Research
Foundation has identified 13 districts where there is a huge potential for agri-
businesses and an appetite for investment of nearly Rs.170 crore. The Ministry of
Agriculture has initiated action to improve the governance of SFAC, including the
appointment of a banker as the chief executive. For my part, I propose to provide
the necessary additional capital that SFAC will require to aggressively promote
agri-businesses.
Risk mitigation
4 6 . The Agricultural Insurance Company (AIC) was incorporated in December 2002.
The National Agricultural Insurance Scheme (NAIS) which insures the yield or crop
is in operation since Rabi 1999-2000. AIC is redesigning the scheme. We shall
continue with the scheme and make another evaluation. Meanwhile, a pilot scheme
insuring farm income (as opposed to crop) has been launched in 19 districts across
12 States during Rabi 2003-04. Government has decided to extend the scheme to
Kharif 2004 in order to assess its feasibility. I wish to add that a weather insurance
scheme appears to be more promising, at least in the design. AIC is introducing the
scheme on a trial basis in 20 rain gauge stations in the current crop season. It is
 10
difficult to tell at this stage which of the three schemes will be successful. Agricultural
insurance as well as livestock insurance are complex products and have to be designed
with care. I wish to re-affirm Government’s commitment to provide insurance cover
to farming and livestock.

VIII. INFRASTRUCTURE
4 7 . Sustainable growth depends upon the availability of efficient infrastructure.
Government is committed to removing the inadequacies in infrastructure facilities
through a mix of policy and fiscal measures.
Inter-Institutional Group
4 8 . An Inter-Institutional Group in the power sector has succeeded in bringing 6
power projects to financial closure. Another 10 projects are on the verge of achieving
financial closure. The concept can be extended to some other infrastructure sectors.
I am glad to announce that IDBI, IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and
Punjab National Bank have formed an Inter-Institutional Group (IIG). They will pool
their resources on a callable basis, and a sum of Rs.40,000 crore will be made
available as and when necessary. The IIG will ensure speedy conclusion of loan
agreements and implementation of infrastructure projects. Initially, airports, seaports
and tourism will be the target sectors of the IIG.
Water supply
4 9 . The Rajiv Gandhi Drinking Water Mission was intended to be implemented in
the mission mode. In recent years, however, new programmes have sprung up
obscuring the original mission. More than 75,000 habitations are yet to be provided
adequate drinking water. Government intends to bring all drinking water schemes
under the umbrella of the Rajiv Gandhi Drinking Water Mission.
5 0 . The Accelerated Rural Water Supply Progamme (ARWSP) has been allocated
Rs.2610 crore in the current year. It will focus on renewal of water sources and on
serving uncovered and partially covered habitations. Panchayati raj institutions will
be encouraged to plan, implement, own, operate and maintain the rural water supply
schemes in consultation with the State Governments. Funds will be devolved on
Panchayati raj institutions to implement the ARWSP.
5 1 . Likewise, the Urban Water Supply Programme is in operation in urban areas.
2151 towns qualify for consideration under the programme. In the current year a
provision of Rs.151.25 crore has been made.
5 2 . The city of Chennai and other cities suffer from acute scarcity of drinking water.
It is proposed to install the first large desalination plant near Chennai in the State
sector, and more such plants will be installed along the Coromandel coast. A
desalination plant with a capacity of 300 million litres per day (MLD) is estimated to
cost Rs.1000 crore, and there will be other costs for transmission pipelines and a
captive power plant. It is proposed to implement the project through public-private
partnership.
Sethusamudram Ship Canal Project
5 3 . The Sethusamudram Ship Canal Project is a longstanding demand – nay
dream – of the people of peninsular India. I am happy to inform the House that the
 11
Environmental Impact Assessment study of the project has been completed by the
National Environmental Engineering Research Institute (NEERI), Nagpur. NEERI is
now preparing the techno-economic feasibility report and the report is expected to
be submitted shortly. The Ministry of Shipping proposes to establish a special purpose
vehicle (SPV). The SPV will raise funds for the project and Government will participate
in the funding through a mix of equity support and debt-guarantee.
International Container Transshipment Terminal (ICTT) at Vallarpadam
5 4 . Government attaches high priority to the development and expansion of port
infrastructure. Presently, because of inadequate draft and cargo handling
infrastructure, and partly due to locational disadvantages, mainline vessels often
skip Indian ports. Containers from India are carried to their final destination after
transshipment at Colombo, Dubai and other neighbouring ports. Kochi has locational
advantages compared to other major Indian ports since it is closer to the main sea
routes. Government will facilitate the construction of an International Container
Transshipment Terminal (ICTT) at Vallarpadam in Kochi port on Build, Operate and
Transfer (BOT) basis.
Rural housing
5 5 . Indira Awas Yojana (IAY) has been the main instrument to provide housing to
Scheduled Castes and Scheduled Tribes as well as to the non-SC/ST rural poor.
Built into IAY is a credit-cum-subsidy scheme for rural households. A subsidy upto
Rs.10,000 and loan upto Rs.40,000 are provided to eligible households. The allocation
for IAY in BE 2003-04 was Rs.1710 crore. In the current year, I propose to raise the
allocation to Rs.2247 crore and, if more money is needed, it will be found within the
enhanced Plan outlay.
5 6 . In order to complement IAY, the Golden Jubilee Rural Housing Finance Scheme
was launched in August 1997 to give a boost to rural housing. The response has
been encouraging, and 10.26 lakh dwelling units have been financed so far. However,
the number appears to have stagnated at about 180,000 per year in the last three
years. The scheme deserves a further stimulus. I am happy to announce that the
National Housing Bank has offered to reduce the rate of refinance by 25 basis points
this year. RBI has agreed to revise the norms of re-payment for rural housing loans
by banks, so that the instalments coincide with crop cycles. A major impediment to
credit for rural housing is absence of proper title to the land. The Government of
West Bengal has made a law to simplify the creation of security. It appears to me
that the law deserves to be emulated by other States. With these changes, I believe
it is possible to set a higher target of 250,000 rural housing units per year.

IX. INDUSTRY
5 7 . It is my goal to make the environment in India attractive for investors. In order
to achieve that goal, I propose to establish an Investment Commission. The
Commission will have the broad authority of the Government to engage, discuss
with and invite domestic and foreign businesses to invest in India. It will be chaired
by an eminent person. The Foreign Investment Promotion Board (FIPB) has played
a useful role, and even now it serves as a one-stop centre for securing the nod of
different ministries and departments to a proposed investment. Government believes
 12
that many of the functions of FIPB could be put on the automatic route, and leave
FIPB as a one-stop service centre and facilitator. The function of wooing domestic
and foreign investors will be performed by the proposed Investment Commission.
5 8 . Government proposes to set up a National Manufacturing Competitiveness
Council. The Council will be a continuing forum for policy dialogue to energise
and sustain the growth of manufacturing industries. The Council will be asked to
suggest measures for enhancing competitiveness in the manufacturing sector. The
Council may also recommend industry-specific or sector-specific policy initiatives
to enhance competitiveness.
5 9 . Foreign Direct Investment (FDI) has the potential to add a competitive edge,
especially in the industrial sector. The NCMP declares that FDI will continue to be
encouraged and actively sought, particularly in areas of infrastructure, high
technology and exports. Three sectors of the economy fully meet this description.
They are telecommunications, civil aviation and insurance. There is an urgent need
for infusing huge amounts of capital in these sectors. I, therefore, propose to raise
the sectoral cap for FDI in telecommunications from 49 per cent to 74 per cent; in
civil aviation from 40 per cent to 49 per cent; and in insurance from 26 per cent to
49 per cent.
Capital Markets
6 0 . Government is committed to the orderly development and functioning of the
capital markets. A number of steps have been taken to broaden and deepen the
capital markets as well as to strengthen the regulatory regime. There are some
signs that retail investors are returning to the capital market. Foreign Institutional
Investors (FIIs) have shown a marked preference for India over other emerging
markets. In order to carry forward the process of making the Indian capital market
strong and attractive, I propose to –
♦ Make the procedures for registration and operations simpler and quicker
for FIIs;
♦ Raise the investment ceiling for FIIs in debt funds from US$ 1 billion to
US$ 1.75 billion;
♦ Allow banks with strong risk management systems greater latitude in their
exposure to the capital market;
♦ Create an alternative trading platform for small and medium enterprises
(SMEs) to raise equity and debt from the capital market; and
♦ Initiate steps to integrate the commodities markets and the securities
markets.

RBI and SEBI will announce the necessary measures in respect of these matters. I
am also happy to announce that SEBI has been able to resolve the longstanding
issue of brokers’ fees, and brokers may expect an announcement shortly.
6 1 . Many genuine foreign institutional investors (FIIs) are professional bodies of
asset managers and financial analysts who can enhance the flow of equity capital
and lend depth to the capital markets. An inter-ministerial committee has
 13
recommended liberalization of FII limits in certain specified sectors. I propose to
examine and implement these recommendations in consultation with the
Ministries concerned.
Public sector
62. The NCMP has declared the Government’s policy on public sector enterprises
(PSEs). While sick or ailing public sector enterprises have stirred a debate, not
enough attention is paid to the healthy PSEs. I am happy to announce that in 2004-
05 the Government will provide equity support of Rs.14,194 crore and loans of
Rs.2,132 crore to Central PSEs (including Railways). Major investments will be
made in PSEs falling in the sectors of power, telecommunications, railways, roads,
petroleum, coal and civil aviation. I am sure Hon’ble Members will appreciate the
deep commitment of Government to a strong and effective public sector operating in
a competitive environment.
6 3 . There is, of course, another side to the public sector. This side is beset with
problems, and we must address them with responsibility and courage. Disinvestment
and privatization are useful economic tools. We will selectively employ these tools,
consistent with the declared policy. As a first step, I propose to establish a Board for
Reconstruction of Public Sector Enterprises (BRPSE). The Board will advise the
Government on the measures to be taken to restructure PSEs, including cases where
disinvestment or closure or sale is justified.
6 4 . One of our Navaratna companies, NTPC, has filed a prospectus with SEBI to
raise capital through a public issue. Consequently, Government’s holding in NTPC
will be marginally diluted. In order to extract value for its holding and to compensate
the effect of dilution, Government intends to piggy-back on the public issue of NTPC
and disinvest approximately five per cent of its holding. This and some other cases
which are under examination are expected to yield a sum of Rs.4000 crore in the
current year. While the disinvestment revenues will be part of the Consolidated
Fund of India, I shall, while presenting the Budget for 2005-06, report to the House
the manner in which the said revenues have been or will be applied for specified
social sector schemes.
6 5 . The NCMP contains clear policy guidelines regarding disinvestment in PSEs.
As long as Government retains control over the PSE, and its public sector character
is not affected, Government may dilute its equity and raise resources to meet the
social needs of the people. I propose to ask the BRPSE to examine each case objectively
and make recommendations on disinvestment, consistent with the NCMP.
6 6 . I am also happy to announce that I have taken the business of restructuring
quite seriously. Hindustan Antibiotics Limited will be given financial support for
restructuring. A rescue package has been worked out for Indian Telephone Industries
(ITI), and ITI will be given Rs.508 crore to remain out of the net of the BIFR.
Small scale industry
6 7 . Small scale industry is, and must be regarded as, an engine of growth. At the
same time SSI units must also be given the space to grow into medium enterprises.
World over, policies are devised to meet the requirements of small and medium
enterprises (SME). Keeping in mind the twin objectives, the Ministry of Small Scale
 14
Industry has identified 85 items that can be safely taken out of the reserved list.
Furthermore, it is felt that technology upgradation of SSI units is the most urgent
requirement to do business in a competitive environment. I have reviewed the Capital
Subsidy Scheme, and I propose to raise the ceiling for loans under the scheme from
Rs.40 lakh to Rs.1 crore. The rate of subsidy will also be raised from 12 per cent to
15 per cent. The scope of the scheme will be enlarged by adding more sub-sectors
and technologies eligible for assistance. SSI units will be encouraged to obtain
credit rating. With these measures, I expect that many more SSI units will benefit
from the restructured scheme. A provision of Rs. 135.24 crore has been made for
“Promotion of SSI Schemes”, and within that amount funds will be found for the
Capital Subsidy Scheme.
Regeneration of traditional industries
6 8 . Some of our traditional industries, namely coir, handloom, handicrafts,
sericulture, leather, pottery and other cottage industries not only contain great potential
for growth and exports, but are integral for the maintenance of our cultural heritage.
Accordingly, a Fund for the Regeneration of Traditional Industries, with an initial
allocation of Rs.100 crore will be set up. The details, including mechanism for utilization
of the fund will be worked out in consultation with the industries concerned.

X. OTHER PROPOSALS
VAT
6 9 . Value-added tax is a tax that has been tested and tried, and found beneficial
throughout the world. The country needs a modern and efficient trade tax system
that incorporates the international best practices. At the June 18, 2004 meeting of
the Empowered Committee of State Finance Ministers, to which all Finance Ministers
were invited, and chaired by my distinguished friend Dr. Asim Das Gupta, there was
a broad consensus among the States to implement VAT. April 1, 2005 has been set
as the date for implementation. I welcome the decision and warmly congratulate the
State Governments. I urge all States that have not yet passed the relevant VAT
legislation to do so before the end of 2004. International experience, as well as the
experience of the State of Haryana, suggests that VAT will lead to an increase in
revenue and not a loss in revenue. Nevertheless, in order to give comfort to the
States, I propose to evolve a formula for determining the compensation for the loss
of revenue, if any. I have offered the States the services of a Technical Experts
Committee. The Committee will work with the States closely, and help them move
steadily towards the stage of implementation.
Pension Reform
7 0 . A ‘defined contribution’ pension scheme has been introduced with effect from
January 1, 2004 for the Central Government employees recruited on or after that
date. A suitable legislation to provide a regulatory framework for the scheme will be
introduced in Parliament.
Export promotion
7 1 . My colleague, the Minister of Commerce and Industry, will place before Parliament
by the end of this month a new trade policy. Government is of the view that Special
Economic Zones (SEZs) are growth engines that can boost manufacturing, exports
 15
and employment. The private sector has shown considerable interest in the
development of SEZs. Five SEZs have started functioning. SEZs require a special
fiscal and regulatory regime. The Commerce Minister will, shortly, introduce a Bill
for regulating Special Economic Zones, and it is my belief that the passing of such a
law would be a significant milestone in our quest to become a major hub for
manufacturing and exports.
Securitisation Act
7 2 . The constitutional validity of the provisions of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 has been upheld
by the Supreme Court, except Sub-Section (2) of Section 17. In the wake of this
judgement, many banks have pointed out practical difficulties likely to arise in speeding
up the recovery of non-performing assets. It is proposed to amend the relevant
provisions of the Act to appropriately address the Supreme Court’s concerns regarding
a fair deal to borrowers while, at the same time, ensuring that the recovery process is
not delayed or hampered. Related amendments to the Recovery of Debts Due to
Banks and Financial Institutions Act, 1993, if necessary, will also be made.
Interest Rates
7 3 . The Central Government has saved considerably on interest on fresh borrowings
because of moderate interest rates. The States were also able to borrow at lower
rates and swap old high cost loans. Since 2002, States have benefited to the extent
of nearly Rs.2500 crore through the debt swap scheme. While borrowers are benefited
by moderate interest rates, there is a need to boost savings and to protect the savers.
I am convinced that, in the larger interests of the country, we should maintain a
benign interest rate regime that appropriately balances the legitimate claims of the
savers and borrowers.
7 4 . I believe that all interest rates should be aligned to the market, save for one or
two exceptions. There is a need for a savings instrument that will give a return to
senior citizens which is above the market-determined rate. There is also a need for
an instrument that will provide a risk-free avenue for all citizens to save for a longer
term, and such an instrument should bear a slightly higher rate of interest. Balancing
these considerations, I do not propose to make any change in the existing rates of
interest on small savings instruments. Consequently, PPF, GPF and the Special
Deposit Scheme will attract 8 per cent interest this year. For senior citizens, I propose
to introduce a new scheme called the Senior Citizens Savings Scheme offering an
interest rate of 9 per cent per annum. For all other citizens, I propose to continue
the Government Savings bond which will carry an interest rate of 8 per cent per
annum. The Varishta Pension Bima Yojana may no longer be necessary since the
new savings scheme will cover the senior citizens adequately.
Reform of Public Distribution System
7 5 . In the Tenth Plan document, the Planning Commission had suggested that a
system of distributing food stamps should be tested on a pilot basis. Every eligible
family will be entitled to collect its monthly quota of food stamps from a designated
distribution centre, and such stamps could then be used to buy foodgrains from any
food shop. I propose to introduce a pilot scheme for distributing food stamps, instead
 16
of distributing food through fair price shops, in two or three contiguous districts in
a selected State. I sincerely hope that one of the States will come forward to associate
with the Central Government in this experiment.
Gender budgeting
7 6 . Women’s groups have met me and urged me to consider gender budgeting. This
means that the budget data should be presented in a manner that the gender
sensitivities of the budgetary allocations are clearly highlighted. An expert group on
“Classification System of Government Transactions” has submitted its report on July
6, 2004. It has recommended appropriate systems for data collection and representation
in the budget. The group has also recommended introduction of periodic benefit-
incidence analysis. Government will examine the recommendations, and I hope it will
be possible for me to implement some of them in the Budget for 2005-06.
Subsidies
7 7 . Seven years ago, I placed before Parliament the first paper on subsidies. The
NCMP pledges that all subsidies will be targeted sharply at the poor and truly needy
like small and marginal farmers, farm labour and the urban poor. I have asked the
National Institute of Public Finance and Policy (NIPFP) to prepare a blue print to
accomplish these objectives. I expect to place the report before the House in the
next session of Parliament.

States’ Finances
7 8 . In order to support the States, a substantial proportion of the taxes
raised by the Central Government is transferred to the States. Besides, the Central
Government extends loans to the States. In the light of the Budget Estimates for the
current year, I am happy to report that the States’ share of Union taxes and duties
will increase to Rs.82,227 crore from Rs.63,758 crore in BE 2003-04. We are helping
the States in other ways too. One of them is the Debt Swap Scheme. I propose to
extend the facility of debt swap by allowing States to raise fresh loans and repay
their old high-cost loans to NABARD and some other agencies. I also propose to
consult the States on allowing them to increase their open market borrowings and
reduce their dependence on loans from the Central Government. I shall also consider
passing on external loans to the States on a back-to-back basis.
7 9 . We are moving in the direction of empowering the States through devolution of
larger resources. It is my fervent hope that States will accept the obligation to
observe fiscal prudence and financial discipline.
8 0 . Loans given by the Central Government to States carried an interest rate of
12.5 per cent. In 2003-04, the rate was reduced to 10.5 per cent. I am happy to
announce a further reduction. Loans to the States will now bear an interest rate of 9
per cent with effect from April 1, 2004. States are expected to benefit to the tune of
Rs.375 crore this year alone.
Special Economic Packages
8 1 . The NCMP promises that special economic packages for Bihar, Jammu & Kashmir
and the North Eastern States, announced in the past, will be implemented
expeditiously. Bihar, for example, has a number of projects pending for a long time,
including projects in power, roads, drainage and rehabilitation of displaced persons.
 17
I would like to assure the House that Bihar will be assisted through the Rashtriya
Sam Vikas Yojana. A provision of Rs.3225 crore has been made for the present and,
if necessary, this sum will be augmented.
North Eastern Region (NER)
8 2 . The Government is committed to the speedy development of the North-Eastern
States and Sikkim. Accordingly, all Ministries and Departments have been mandated
to allocate at least 10 per cent of their Plan budget for schemes and programmes in
the NER. This amounts to an allocation of Rs.5823 crore to be spent in the NER.
The amount remaining unspent from this 10 per cent allocation is transferred to a
non-lapsable Central pool of resources for development of the NER. In the current
year, Rs.650 crore have been provided from the Central pool of resources for specific
projects and schemes in this region, up from Rs.550 crore in 2003-04.
Jammu & Kashmir
8 3 . The Government will provide special assistance to the State of Jammu &
Kashmir to have a reasonable Plan size. It will also provide financial support for
the long pending Baglihar project. The Government has also agreed to provide a
grant of Rs.300 crore to the State to ensure smooth switch-over from the current
overdraft arrangement with the Bank of Jammu & Kashmir to the Ways & Means
scheme of the RBI.
Backward States’ Commission
8 4 . NCMP envisages the creation of a Backward States Grant Commission to be
used for creating productive assets in such States. It also envisages that all non-
statutory resource transfers from the Central Government will be weighed in favour
of poor and backward States, but with performance parameters as well.
8 5 . I am happy to announce that the Government will set up a Backward States
Grant Fund with a corpus of Rs.25,000 crore to be provided over a period of five
years. While the existing Backward Districts Initiative Scheme with an annual outlay
of about Rs.1,800 crore will be merged into this Grant Fund, the balance amount
required for the annual contribution of Rs.5,000 crore will be earmarked from out of
the total Central support to the Plan. It is expected that this will enable taking up
social and physical infrastructure programmes in the poorest and most backward
districts in the country within a given time frame. The Fund will become operational
from the financial year 2005-06. Further details will be worked out in consultation
with the Planning Commission.
Defence modernization
8 6 . As promised in the NCMP, the Government is determined to eliminate all delays
in the modernization of the Defence Forces. Having regard to the trend of defence
capital expenditure in recent years, it has become necessary to make a higher
allocation this year. Accordingly, I propose to increase the allocation for Defence to
Rs.77,000 crore (as against Rs.65,300 crore in BE 2003-04) which includes an
allocation for capital expenditure of Rs.33,483 crore (as against Rs.20,953 crore in
BE 2003-04).

Budget Estimates for 2004-2005

8 7 . Now, I turn to the budget estimates for the current year.
 18
Plan expenditure
8 8 . While preparing the Budget, I found that there is a plethora of Plan schemes.
The number, the variety and even the acronyms under which these schemes are
known are mind-boggling. I also found that there are many schemes with more or
less the same objectives. In some cases, all the schemes were located in one ministry
or department; in other cases, they were distributed among different ministries or
departments. Plan schemes can be broadly divided into three categories – Central
Sector, State Sector and Centrally Sponsored Schemes. The NCMP requires that all
Centrally Sponsored Schemes, except national priority areas like family planning,
shall be transferred to the States. Fortunately, a new Planning Commission is in
place, and I am confident that the Planning Commission will bring some order into
the tangled web of schemes.
8 9 . Plan expenditure for 2004-05 is estimated at Rs.145,590 crore as against
Rs.122,149 crore in the provisional actuals for 2003-04. While there is an increase
in plan revenue expenditure from Rs.78,537 crore in 2003-04 to Rs.91,843 crore,
there is an even sharper and welcome increase in plan capital expenditure from
Rs.43,612 crore in 2003-04 to Rs.53,747 crore.

Non-plan Expenditure
9 0 . Non-plan expenditure in 2004-05 is estimated to be Rs.332,239 crore, lower
than Rs.349,787 crore in the provisional actuals for 2003-04 which includes capital
expenditure of Rs.46,211 crore on repayment to the National Small Savings Fund.
The increase in non-plan expenditure from the interim Budget is mainly on account
of capital expenditure in defence (Rs.11,000 crore), and assistance to Indian Telephone
Industries Ltd.

Revenue Deficit and Fiscal Deficit

9 1 . Mr. Speaker, Sir, in the Budget Estimates for 2004-05, the total expenditure is
estimated at Rs.477,829 crore, of which Rs.145,590 crore is for Plan and Rs.332,239
crore for non-Plan. I estimate total revenue receipts of the Central Government at
Rs.309,322 crore and the revenue expenditure at Rs.385,493 crore. Consequently,
the revenue deficit is estimated at Rs.76,171 crore equivalent to 2.5 per cent of GDP,
which is one percentage point below the corresponding estimate of 3.5 per cent of
GDP in 2003-04 (according to the provisional actuals). The fiscal deficit is estimated
at Rs.137,407 crore, which is 4.4 per cent of the estimated GDP.

PART B

XI. TAX PROPOSALS

9 2 . I shall now deal with my tax proposals.
9 3 . Taxation is a key tool of fiscal policy. The NCMP has promised that “tax rates
will be stable and conducive to growth, compliance and investment”. Thanks to
policies initiated in the 1990s, direct tax rates are now moderate and require only
fine tuning from time to time. Indirect taxes have also been moderated through a
calibrated reduction in customs and excise duties. The proportion of direct tax
 19
revenues to GDP has increased from 1.9 per cent in 1990-91 to 3.8 per cent in 2003-
04. As expected, the proportion of indirect tax revenues to GDP has declined from
7.9 per cent in 1990-91, but the decline has been rather sharp with the proportion
at 5.3 per cent in 2003-04. The weak spot is central excise. Excise revenues are
stuck, rather stubbornly, at around 3.3 per cent of GDP. While reduction in excise
duty rates partly accounts for this situation, the expansion of the manufacturing
industry ought to have given us larger revenues.
9 4 . Through my policies on taxation, I wish to signal that we remain committed to
moderation and stability in tax rates; that we remain committed to increasing revenues
from direct taxes and excise duties; and that we remain committed to expanding the
service tax net because the services sector accounts for 51 per cent of GDP. I shall
also use tax policies to provide incentives to certain kinds of investment and to
influence certain kinds of behaviour in the market.
9 5 . I am a votary of tax reforms but it would be unwise on my part to attempt to do
tax reform in a hurried or piece-meal manner. Seven months from now there will be
another Budget, and there will be an occasion to visit the subject of tax reform.
Direct taxes
9 6 . I shall begin with my direct tax proposals. Let me give you the good news first.
No one with a taxable income of Rs.100,000 will be required to pay any income tax
any more. It was not easy to reach this decision. While the tax rates are moderate,
it is the tax slabs which cause concern. However, I am unable to alter the tax slabs
because I cannot afford to lose a large amount of revenue at a time when the
Government has assumed a larger responsibility for investment and welfare
programmes. Out of nearly 3.4 crore persons filing income tax returns, only 2.7
crore assessees are taxpayers. My proposal will give relief to 1.4 crore assessees.
The method that I have adopted is somewhat novel. While everyone will file his
return according to the current tax slabs and tax rates, and compute his taxable
income and the tax payable, any one with a taxable income of Rs.100,000 will
have his income tax liability automatically rebated. I cannot give more relief, or
relief across the Board, in this Budget. If compliance improves, I promise to revisit
the subject.
9 7 . I propose to give relief to certain sections of deserving tax payers. Accordingly,
I propose to exempt from income tax the family pension received by widows, children
and nominated heirs of members of the armed forces and the paramilitary forces
killed in the course of operational duties. This is my humble salute to their
supreme sacrifice.
9 8 . I propose to extend the benefit of Section 80DD and Section 80U in respect of
persons suffering from autism, cerebral palsy and multiple disability.
9 9 . Farmers have brought to my notice that agricultural land situated in certain
urban agglomerations fall under the definition of capital asset and the compensation
for acquisition of such land is subjected to capital gains tax. Such compensation
deserves to be exempted from capital gains tax. I propose to do so in cases where
the compensation or the enhanced compensation has been received on or after
April 1, 2004.
 20
1 0 0 . A new ‘defined contribution’ pension scheme for new entrants into Central
Government service has come into effect from January 1, 2004. The tax treatment
of contributions made to the scheme has engaged the attention of Government. I
propose to adopt the universally accepted formula of EET: that is, the contributions
will be excluded from income for tax purposes; the accruals will also be exempt
from tax; and only the terminal benefits will be taxed at the applicable rate in the
year of receipt.
1 0 1 . I propose to withdraw a few exemptions which have outlived their utility.
Interest earned from a Non-Resident (External) Account and interest paid by banks
to a Non-Resident or to a Not-Ordinarily Resident on deposits in foreign currency
will not be exempt from tax. Similarly, any payment made by an Indian company to
acquire an aircraft or an aircraft engine on lease from a foreign state or a foreign
enterprise will not be exempt from tax. These exemptions will cease prospectively
from September 1, 2004.
1 0 2 . Hon’ble Members are aware that I abolished the gift tax in 1997. That decision
remains, but a loophole requires to be plugged to prevent money laundering.
Accordingly, purported gifts from unrelated persons, above the threshold limit of
Rs.25,000, will now be taxed as income. Gifts received from blood relations, lineal
ascendants and lineal descendants, and gifts received on certain occasions like
marriage will continue to be totally exempt.
1 0 3 . In order to promote agro-processing industries, I propose to amend Section
80 IB of the Act to allow a deduction of 100 per cent of profits for 5 years and 25 per
cent of profits for the next 5 years in the case of new agro-processing industries set
up to process, preserve and package fruits and vegetables.
1 0 4 . Investment in the manufacturing sector deserves the Government’s attention.
Hence, I propose to continue with the additional depreciation of 15 per cent allowed
under Section 32(1)(iia) on new plant and machinery acquired or installed in an
existing undertaking; however, the required increase in installed capacity will now
be 10 per cent, and not 25 per cent.
1 0 5 . The automobile sector has done well and needs to be encouraged. I therefore
propose to notify the automobile industry as an industry entitled to 150 per cent
deduction of expenditure on in-house R&D facilities.
1 0 6 . The power sector also deserves tax concessions. The Electricity Act 2003
envisages unbundling of generation, transmission and distribution. In order to
promote renovation and modernization of existing transmission and distribution
lines, I propose to extend the benefit under Section 80 IA to projects undertaken
during the period April 1, 2004 to March 31, 2006.
1 0 7 . The shipping industry has demanded the levy of a tonnage tax to make it
intentionally competitive. Tonnage tax will also induce more ships to fly the Indian
flag. I propose to accept the request. Consequently, the concessional regime under
Section 33 AC will be withdrawn and shipping companies will now have only an
option to pay the tonnage tax or normal corporate tax on profits.
 21
1 0 8 . I propose to extend the benefit of Section 80 IB to new hospitals with 100 beds
or more set up in rural areas. Such hospitals will be entitled to a 100 per cent
deduction of their profits for a period of five years.
1 0 9 . The housing industry enjoys certain benefits under Section 80 IB for
projects approved before March 31, 2005. I propose to extend the time limit to
March 31, 2007.
1 1 0 . A small problem has plagued the reconstruction and development of existing
buildings under approved plans in the city of Mumbai. Perhaps the problem is there
in some other cities too. I, therefore, propose to relax the condition of minimum plot
size of one acre in the case of housing projects, as long as the projects are implemented
in accordance with a scheme for reconstruction or development approved by the
Central or State Government.
1 1 1 . Capital gains tax is another vexed issue. When applied to capital market
transactions, the issue becomes more complex. Questions have been raised about
the definitions of long-term and short-term, and the differential tax treatment meted
to the two kinds of gains. There are no easy answers, but I have decided to make a
beginning by revamping taxes on securities transactions. Our founding fathers had
wisely included entry 90 in the Union List in the Seventh Schedule of the Constitution
of India. Taking a cue from that entry, I propose to abolish the tax on long-term
capital gains from securities transactions altogether. Instead, I propose to levy a
small tax on transactions in securities on stock exchanges. The rate will be 0.15 per
cent of the value of security. Thus, a transaction involving securities valued at, say,
Rs.100,000 will now bear a small tax of Rs.150. The tax will be levied on the buyer.
In the case of short-term capital gains from securities, I propose to reduce the rate of
tax to a flat rate of 10 per cent. My calculation shows that the new tax regime will be
a win-win situation for all concerned.
1 1 2 . I propose to make a change in the tax on dividends distributed by mutual
funds. Equity-oriented mutual funds will continue to be exempt from tax. Debt-
oriented mutual funds are now required to withhold 12.5 per cent of the income
distributed to unit holders. Individuals and HUF unit holders will continue to enjoy
the benefit of this rate. However, in the case of corporate unit holders, I propose a
rate of 20 per cent. I am sure corporates will understand, because I am doing no
more than partially closing a window of arbitrage opportunity.
1 1 3 . I propose to put an end to bonus-stripping and dividend-stripping in units by
making a suitable amendment to Section 94 of the Act.
1 1 4 . I also propose some measures to widen the tax base and to plug revenue
leakage. I do not wish to take the time of the House detailing each measure.
1 1 5 . Tax deduction at source (TDS) and tax collection at source (TCS) are being
extended to some more activities. Amendments are proposed to Section 40(a)(i) and
Section 194 C.
1 1 6 . The telecom sector enjoyed certain benefits under Section 80 IA for services
commenced before March 31, 2004. Pending a detailed examination of the needs of
the telecom sector, I propose to extend the terminal date to March 31, 2005.
 22
1 1 7 . Companies carrying on scientific research and development and approved by
the Department of Scientific and Industrial Research before April 1, 2004 are entitled
to 100 per cent deduction of profits for 10 years. On the request of the Department
of Bio-Technology and pending a detailed examination, I propose to extend the
terminal date to March 31, 2005.
1 1 8 . New industrial undertakings in Jammu & Kashmir enjoyed 100 per cent tax
exemption if they commenced production before March 31, 2004. Pending a detailed
examination of the incentives required to promote industrial development in Jammu
& Kashmir, I propose to extend the date to March 31, 2005.
Indirect taxes
1 1 9 . Now, I turn to my indirect tax proposals. The policy signal that needs to be
reiterated is that customs duties will be brought down in a measured way. It is my
intention to align India’s tariff structure to those of ASEAN countries. Eventually,
there should be a uniform rate of tax on goods and services. During the last four
years, my predecessors had adjusted excise duties and moved them towards a Central
VAT rate. That process must continue. The most important goods in the
manufacturing sector must therefore bear an excise duty of 16 per cent.
1 2 0 . Another principle that requires to be emphasized is that where an excise duty
is levied, subject to only a few exceptions, like goods when imported should attract
an equivalent countervailing duty (CVD). In my tax proposals, I have, therefore,
removed the exemption from CVD enjoyed by some imported goods where there is
no corresponding exemption from excise duty on Indian made goods.
1 2 1 . I may also point out that customs tariffs and excise duties are inter-related.
While considering the tax regime for any sector, one must look at both customs
duties and excise duties applicable to that sector.
1 2 2 . The peak rate of customs duty was reduced to 20 per cent in January 2004. I
propose to maintain the peak rate for the rest of the current fiscal year.
1 2 3 . I shall now deal with specific sectors beginning with metals, minerals and
industrial raw materials. Steel is the leading metal. Normally, it should bear an
excise duty of 16 per cent. However, in February this year, excise duty on steel was
reduced from 16 per cent to 8 per cent, but with the caveat that the decision will be
reviewed when the regular budget is presented. Belying expectations, steel prices
have not moderated but have risen sharply. I propose to reduce the customs duty on
non-alloy steel from 15 per cent to 10 per cent and to increase the excise duty on steel
from 8 per cent to 12 per cent so that the countervailing duty will also be applicable to
imports. I hope to recoup some of the revenue losses since February 2004.
1 2 4 . Alloy steel, copper, lead, zinc and base metals are basic raw materials used in
a variety of industries. I propose to reduce the peak rate on such metals to 15 per
cent. I also propose to reduce the customs duties on refractory raw minerals and
mineral products like graphite, asbestos, mica and gypsum to 15 per cent. The
customs duty on all catalysts will also be 15 per cent.
1 2 5 I propose certain concessions to the agriculture sector. To encourage value
addition, while retaining customs duty on crude palm oil at 65 per cent, I propose to
 23
accept the recommendation of the Tariff Commission and increase the duty on refined
palm oil to 75 per cent.
1 2 6 . Some items of plantation machinery attract a customs duty of 5 per cent. I
propose to extend the concessional rate to more items pertaining to the tea and
coffee plantation sector.
1 2 7 . On the excise front, I propose to make a number of concessions. Tractors
attract an excise duty of 16 per cent. Hereafter, tractors will be fully exempt. Likewise,
dairy machinery which attracts an excise duty of 16 per cent will be fully exempt.
Hand tools such as spades, shovels, sickles etc, which currently attract a 16 per
cent excise duty will also be fully exempt.
1 2 8 . Excise duty on preparations of meat, poultry and fish will be reduced from 16
per cent to 8 per cent and excise duty on food grade hexane (used in the edible oil
industry) will be reduced from 32 per cent to 16 per cent.
1 2 9 . I propose to give some concessions to the health sector. A number of items for
the disabled are already exempt from import duties or attract a concessional duty of
5 per cent. I propose that rehabilitation aids such as talking books, braille computer
terminals, braille writers and typewriters, assistive listening devices, cochlear implants
and stair lifts be fully exempt from customs duty. They will also be exempt from
excise duty and CVD. Crutches, wheel chairs, walking frames, artificial limbs, etc.
for the disabled will also be fully exempt from customs duty. There are some
restrictions on institutions for the visually-impaired and the hearing-impaired availing
of import duty exemptions. I propose to remove these restrictions as well as enlarge
the list of exempted appliances. Ambulances used by government and municipal
hospitals alone have been allowed the concessional excise duty of 16 per cent. I
propose that all ambulances registered as such will be entitled to this benefit.
Diagnostic kits for detecting hepatitis B alone are exempt from excise duty. I propose
to extend the exemption to kits for detection of all types of hepatitis.
1 3 0 . In order to move toward the Cenvat rate, I propose to levy excise duty on
contact lenses and playing cards. I also propose to increase the excise duty from 8
per cent to 16 per cent on a few items including vaccum flasks, plastic insulated
ware, scented supari, prefabricated buildings, laboratory glassware, black and white
television sets, populated PCBs, imitation jewellery, candles and parts of clocks and
watches. Let me hasten to add that in all these cases the general SSI exemption will
continue to be available, and consumers and small manufacturers will not be affected
at all. Even other manufacturers will avail of Cenvat credit.
1 3 1 . In order to protect matches made in the non-mechanised sector, I propose to
increase the excise duty on matches made in the mechanized/semi-mechanised
sector from 8 per cent without Cenvat credit to 16 per cent with Cenvat credit.
1 3 2 . The Information Technology sector has, by and large, been kept out of the
reach of the tax collector. Under the Information Technology Agreement, customs
duty will be brought down to zero in 2005. Meanwhile, I propose to abide by the
bound rates under the agreement.
1 3 3 . I propose to exempt specified raw materials for manufacture of parts of cathode
ray tubes and specified capital goods for manufacture of mobile handsets, plasma
 24
display panels etc. from excise duty. Specified items for manufacture of telecom
grade optical fibres and cables are also proposed to be exempt from customs duty.
Mobile switching centres imported by cellular mobile telephone service providers are
now exempt from customs duty. I propose to extend the exemption to imports by
universal access service providers.
1 3 4 . Computers attract excise duty of 8 per cent. I propose to grant full exemption.
1 3 5 . I propose to give some excise relief to LPG gas stoves bearing an MRP up
to Rs.2000, footwear with MRP upto Rs.250 and writing instruments with MRP
upto Rs.200.
1 3 6 . I propose to reduce the excise duty on amusement rides from 20 per cent to
10 per cent.
1 3 7 . Having been Commerce Minister, export promotion is close to my heart. I
propose to extend the concessional customs duty of 5 per cent on capital goods
enjoyed by the leather industry to the non-leather footwear industry too.
1 3 8 . Finished leather of all kinds is exempt from customs duty. I propose to exempt
patent leather also.
1 3 9 . Platinum is a serious challenger to gold in the jewellery industry. Both should
be treated alike. Hence, I propose to reduce the import duty on platinum from
Rs.550 per 10 grams to Rs.200. I propose that rough coloured precious gemstones
should be exempt from customs duty just as rough semiprecious stones are.
1 4 0 . Area specific exemptions from excise duty have been granted from time to
time. The North Eastern States and J&K are in a class by themselves. The exemptions
enjoyed by them will continue. Sikkim, Uttaranchal and Himachal Pradesh were
also granted area-based exemptions. Hon’ble Members are fully aware of the
arguments in favour and the rival arguments against. I have to be fair to both sides.
Accordingly, I propose that area specific exemptions enjoyed by States other than
the North Eastern States and J & K will continue and be available to units set up or
expanded on or before March 31, 2007.
1 4 1 . I shall now deal with the most challenging tax problem that I faced this year.
This relates to the textile sector. Last year, handlooms and powerlooms were brought
into what is described as the Cenvat chain. The intention was good but, I am
afraid, the decision did not take into account the decentralized and fragmented
nature of production of fabrics in the country. Besides, the so-called Cenvat chain
had nearly 40 exemptions at different stages. In fact, two exemptions were added
after the decision.
1 4 2 . I am conscious that the Agreement on Textiles and Clothing will come to an
end on December 31, 2004. Our textile sector must, therefore, be made more efficient
and competitive. Those who can compete because of their organizational strength
should be allowed to compete; for the rest, we must allow more time to comply with
a mandatory tax regime. Meanwhile, there must be a level playing field.
1 4 3 . If I have understood correctly the mind of Hon’ble Members of Parliament, and
of the leaders of various political parties, I believe that there is a universal demand
 25
to free the handloom and powerloom sectors from the Cenvat regime. After giving
my anxious consideration to the complex issues, I propose to withdraw the
mandatory Cenvat duty. Instead, I propose to introduce a new tax regime for the
textile sector and, in this exercise, I am happy to say that I have the full support of
the Minister of Textiles.
1 4 4 . Let me now explain briefly the new regime.
♦ Firstly, the mandatory Cenvat chain will stand abolished.
♦ Secondly, there will be no mandatory excise duty on pure cotton, wool and
silk, whether it is fibre, yarn, fabric or garment.
♦ Thirdly, blended textiles and pure non-cotton (polyester, viscose, acrylic
and nylon) will have a different tax regime.
♦ Fourthly, there will be a mandatory excise duty on man-made staple fibre
at 16 per cent; on polyester filament yarn (including textured yarn) at 24
per cent; and on other man-made filament yarn (including textured yarn)
at 16 per cent.
1 4 5 . Every manufacturer – be it handloom or powerloom or composite mill – will
have the option to choose between two routes. One will be the exemption route and
the other will be the Cenvat route. Under the exemption route, no excise duty will be
payable at any stage (except on man-made fibre and filament yarn). Under the
Cenvat route, credit can be taken for all excise duties paid at earlier stages. For the
purposes of the optional Cenvat route, it is necessary to specify in the Tariff schedule
the applicable excise duty rates. For the pure cotton sector, the uniform rate will be
4 per cent on yarn, fabrics, garments and made-ups. For the blended textiles sector
and pure non-cotton sector, the uniform rate will be 8 per cent.
1 4 6 . It is my firm belief that the millions of handloom weavers and powerloom
weavers will welcome the new regime. As far as the composite mills are concerned,
there is no cause for worry. They are also free to take the exemption route, but if
they choose to opt for the Cenvat route, they may do so and claim Cenvat credit for
all duties paid at earlier stages. Garment exporters should give the new regime a
fair chance. I expect that prices of fabrics will moderate and garment exporters will
stand to benefit. Their concerns, if any, can be addressed through the drawback or
DEPB mechanism.
1 4 7 . In course of time, it is possible that some manufacturers of handlooms and
powerlooms will take advantage of the low uniform rates of duty and opt for the
Cenvat route.
1 4 8 . There remains the service tax. I propose to take a major step towards
integrating the tax on goods and services. Accordingly, I propose to extend credit of
service tax and excise duty across goods and services. In order to neutralize the
revenue impact of such extension, and keeping in mind the mean Cenvat rate, I
propose to enhance the rate of service tax from 8 per cent to 10 per cent.
1 4 9 . 58 services have been brought under the net so far. I propose to add some
more this year. These are business exhibition services; airport services; services
provided by transport booking agents; transport of goods by air; survey and exploration
 26
services; opinion poll services; intellectual property services other than copy right;
brokers of forward contracts; pandal and shamiana contractors; outdoor caterers;
independent TV/radio programme producers; construction services in respect of
commercial or industrial constructions; and life insurance services to the extent
of the risk premium. I may clarify that there is no intention to levy service tax on
truck owners or truck operators. Nor, as was clarified by my predecessor, is
there any intention to levy service tax on the savings part of the premium collected
by an insurer.
1 5 0 . I also propose that some currently taxable services should be redefined to
cover all service providers falling under the same category, but I do not wish to
burden this speech with the details. Exemptions granted in the case of some taxable
services are proposed to be removed. The administration of service tax will be made
more tax-payer-friendly. I propose to do away with the mandatory verification of self
assessment and the mandatory penalty for non-registration.
1 5 1 . Finally, there is the tax mandated by the NCMP. That is an education cess on
all taxes. I propose to levy a cess of 2 per cent on income tax, corporation tax, excise
duties, customs duties and service tax.
1 5 2 . Besides my tax proposals, I have looked at another source of revenue. There
are large recoverable arrears both in direct taxes and indirect taxes. Even the
undisputed arrears are quite substantial. I have, therefore, assumed that I would
be able to recover a tidy sum this year. A special, multi-pronged drive will be made
to recover these arrears, the details of which will be announced later.

1 5 3 . My tax proposals on direct taxes are expected to yield a gain of Rs.2000 crore.
On the indirect taxes side, they are broadly revenue neutral.

XII. CONCLUSION
1 5 4 . Mr. Speaker, Sir. The countries of the world, India included, have set for
themselves the Millennium Development Goals. Our date with destiny is not at the
end of the millennium, but in the year 2015. Will we achieve those goals? In the
eleven years that remain, it is in our hands to shape our destiny. Progress is not
always on a linear path, nor is it inevitable. Two thousand years ago, Saint Tirvalluvar
said:
“Aran Izhukkathu Allavai Neeki Maran Izhukka
Maanam Udayathu Arasu”
(They are good rulers who observe ethics, commit no crime and walk
the path of honour and courage)
If we bring thought and passion to our goverance, and walk the path of honour and
courage, we can make the future happen. And this century will be India’s century.
1 5 5 . Sir, with these words, I commend the Budget to the House.
 Interim Budget 2004-2005

Speech of
Jaswant Singh
Minister of Finance

February 3, 2004

I. INTRODUCTION
Mr. Speaker,
1. I rise to present an Interim Budget, for part of the fiscal year 2004-05. This
seeks a Vote-on-Account to enable the Government to discharge its responsibilities
and to meet all essential expenditure during the first four months of 2004-05. The
Demands for Grants and the Annual Financial Statement presented are, however,
for the full financial year, though, these could be revised, as is normal, at the time of
presentation of the regular Budget. I am also introducing a Finance Bill, seeking to
continue the existing tax structure for the present.
2. Under the premiership of Shri Atal Bihari Vajpayee, this is the seventh
successive budget of the Government of the National Democratic Alliance (NDA). On
this occasion I share with the country and the House a sense of great satisfaction at
the robust showing of our national economy, and also express our sincere gratitude
for the cooperation, support and encouragement that the people of India have so
consistently and so ungrudgingly given to the NDA and to its Government. The
country’s macro-economic situation is better than it has ever been in the last fifty
years. Internationally, too, there is now much greater, and a much more widespread
recognition that India is progressing in all spheres of national endeavour, that it has
evolved into a stable economy, with assured growth, and enhanced national prosperity.

II. NDA: ECONOMIC POLICY – APPROACH AND ACHIEVEMENTS

3. This Government has consistently placed the citizens’ well being at the
core of its responsibilities. Our adherence to ‘Panch priorities’ remains. The
objectives of the life-time concerns of our citizens: enhanced employment, and
eradication of poverty; a second green revolution in agriculture; infrastructure
development; fiscal consolidation; and greater manufacturing sector efficiency, are
our solemn commitments.
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4. We believe, Sir, that both are necessary: a vision for a resurgent India and,
simultaneously an awakening so that the disadvantaged of our land are lifted beyond
poverty. We hold that economic development is not about economics alone, it is
always, simultaneously, a political statement too, for ‘development’ devoid of
compassion is a misnomer. Of course, growth statistics are very important; they are
vital inputs, but they must also be the indices that assist us in designing distributive
justice. It is for this reason that ‘gross national contentment’ is so important, as the
catalyst that motivates redoubled national endeavour. It is from seeking national
contentment that objectives are born: “Garib ke pet me dana, Grihini ki tukia mein
anna.” Sir, India must be amongst the leading economies of the word, that simply
put is our national destiny; to be in service of the country’s destiny is the Government’s
honour and its bounden duty. From this directly flow our national economic
objectives.
5. Economic growth indices, in the current year, Mr. Speaker, are very
encouraging. With inflation at 4 to 4.5 per cent, this year we expect the growth rate
of our GDP to be between 7.5 and 8 per cent. Though, there are higher growth
estimates that have been made, for the present, we prefer to remain with the cited
figures. This level of growth is a matter of great satisfaction. Sir, employment has
increased, but so have expectations. We must meet this challenge. Bold initiatives
in infrastructure have already generated several layers of immediate employment,
simultaneously laying the foundation for additional quality employment across a
broad spectrum of economic activity. The objective of enhancing job opportunities
will be pursued vigorously. Our foreign exchange reserves crossed US$100 billion
on December 19, 2003. They continue to grow, liberating us from the mentality of
want. For greater openness and to share necessary information with citizens, the first
ever Report of the Reserve Bank of India (RBI), on Foreign Exchange Reserves is being
released today. It can be accessed on the Ministry’s, as well as the RBI’s website.
6. Sir, a combination of moderate inflation, declining interest rates, and healthy
capital markets has set our economy on the path of accelerated growth. To further
encourage this is our responsibility. Preserving the strength of our macroeconomic
fundamentals has, therefore, to be much more focused. Management of the economy
is a continuing responsibility, governance can neither pause nor cease, and measures
to fully consolidate, and continuously enhance the growth momentum must always
be adopted in time. Only in that manner can we realise the vision of economic and
social progress that we have cherished since independence.

III. INITIATIVES AND THE ROAD AHEAD

Reform Measures
Antyodaya Anna Yojana
7. Antyodaya Anna Yojana, launched by the Prime Minister in December 2000,
currently covers 1.5 crore families below the poverty line (BPL). This is a highly
successful programme, widely acclaimed. It directly addresses poverty alleviation
and nutritional adequacy. This programme is now being extended by increasing its
coverage to 2 crore BPL families. Whilst doing so, it will be ensured that tribal states,
districts, or belts receive added allocations. This will be effective from April 1, 2004.
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Pradhan Mantri Swasthya Suraksha Yojana
8. Poverty and disease are interlinked. Specialty hospitals in the private sector
remain beyond the reach of many of our citizens. The Prime Minister had, therefore,
last Independence Day, announced the establishing of six hospitals, in the
Government sector, on the pattern of All India Institute of Medical Sciences(AIIMS).
This ‘Pradhanmantri Swasthya Suraksha Yojana’ envisages six new AIIMS like
hospitals, one each in the States of Bihar, Chhatisgarh, Madhya Pradesh, Orissa,
Rajasthan, and Uttaranchal. Hon’ble Members are doubtless aware that no additional
hospital on the pattern of AIIMS has been set up by any Government, since 1956. I
would also like to mention that under this Pradhanmantri Swasthya Suraksha Yojana,
one medical college each in the six States of Andhra Pradesh, Jammu & Kashmir,
Jharkhand, Tamil Nadu, Uttar Pradesh, and West Bengal will also be upgraded to
the level of AIIMS.
9. I am happy to announce that a provision for both these schemes has been
made in this Budget itself.
Rural
10. The Government is committed to ensuring the availability of timely credit
at affordable rates to our farmers, and to other citizens in rural India. For this
objective, the following additional measures will be taken:
♦ In July, 2003, a reduction in the rate of interest for crop loans by public
sector banks to 9 per cent was announced. The NABARD Act was also
appropriately amended. I have been urging the Indian Banks’ Association
to further lower the interest rates for agricultural purposes. Some public
sector banks have already done so. I am confident that other banks will
also respond by offering loans at rates lower than those prevailing currently.
♦ Traditionally, banks have sought relatively higher security on credit for
agriculture. To illustrate, banks insist on mortgaging the entire land
holding of a farmer borrower, as security for advances for agricultural
purposes. Banks are, therefore, now being advised to assess individual
credit-worthiness and to not routinely insist on additional collateral through
a mortgage of the entire land holding. As a principle, collateral security
should be proportionate to the value of the loan.
♦ Prescriptions relating to Non-Performing Assets (NPAs), in relation to crop
loan accounts, have posed problems in the provisioning of credit to farmers
where seasonality and uncertainty of farm incomes are not fully captured.
A Committee has been set up under Dr.V.S. Vyas, an eminent agriculture
economist, to address this issue. Suitable remedial measures will be
recommended within 90 days.
♦ I expect all eligible farmers to be in receipt of their Kisan Credit Cards
(KCC) by March 31, 2004. To extend the benefit of technological
developments in the banking industry to rural India, the existing Kisan
Credit Card will hereafter be modified, upon individual request, for use on
ATM machines, wherever such facility exists.
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♦ A Farm Income Insurance Scheme has been introduced by the Ministry

of Agriculture in 20 districts, on a pilot basis. This will be extended to 100
districts, of the country from the forthcoming Kharif season. Details will be
announced by the Ministry of Agriculture.
♦ Self Help Groups (SHGs) have been a remarkable success story, but only
in some states of the country. NABARD has, therefore, been asked to take
up a special promotional campaign in the States where this programme is
yet to gather momentum. In the first phase, an intensive programme will,
therefore, be launched in the states of Uttar Pradesh, Rajasthan and Madhya
Pradesh. Public Sector Banks will also supplement this effort in other
States.
♦ Tea is an important agro-processing industry, employing a large number
of our citizens in North Bengal, Assam, the North-East and some of the
Southern States. Currently, this industry is beset by many problems. I
had, therefore, tasked the Indian Banks Association to prepare a revival
package. This has now been finalized. Special Tea Term Loan, repayable
in five years, with a moratorium of one year, shall be provided. In case of
small tea growers banks have agreed to extend fresh working capital limits
up to Rs.2 lakh, at an interest rate of 9 per cent.
♦ In addition, steps will be undertaken to examine the feasibility of a debt
amelioration scheme in the tea sector, too.
♦ Sugar, another major agro-processing industry of the country, generating
substantial employment, currently faces a complex web of problems.
Government will, therefore, prepare a package for the revitalisation of this
industry, in consultation with all the stakeholders. In the meantime, as a
measure of temporary relief, restructuring of loans taken by sugar factories
will be examined by the lending agencies, including banks, in consultation
with RBI and NABARD.
11. Cooperative banks have played a vital role in the delivery of rural credit.
They, too, have a variety of problems hampering their capacity to deliver credit at
reasonable rates of interest. A scheme to revitalize the cooperative credit structure,
envisaging an outlay of about Rs.15,000 crore, to be shared between the Central
and State Governments, in an appropriate ratio, has been prepared. It is proposed
to initiate this scheme as soon as the revised regulatory framework has been put
in place.
Cattle Development
12. Cattle are a vital integral of our rural economy. To give a boost to the entire
gamut of this economic activity, such as animal husbandry, dairying and sheep
rearing, the Government will consider the setting up of a National Cattle Development
Board with appropriate budgetary support.
Laghu Udyami Credit Cards
13. To further encourage the development of small-scale and self-employed
ventures steps have been taken to liberalise Laghu Udyami Credit Card scheme,
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providing small and medium enterprises easier access to bank credit. It has now
been decided, in consultation with IBA, that the public sector banks will increase
the credit limit of their cards, for borrowers who have a satisfactory track record,
from Rs.2 lakh to Rs.10 lakh. Banks are being advised to make the modified scheme
operational from March 1, 2004.
Stamp Duty Reform
14. A comprehensive reform of the entire stamp duty regime is being addressed
in consultation with State Governments, as high stamp duty increases transaction
costs, restricting economic activity. The Government has, in the meantime, decided
to reduce stamp duty on all such instruments where the authority to fix rates is of the
Central Government. As a first step, and as the first reduction, the existing stamp
duty structure is being halved, that is, being reduced by 50 per cent on all Central
Government stamp papers. As for duty on Receipts, here too, the threshold for payment
of stamp duty is to be increased from Rs.500 to Rs.50,000. As, however, this last
reform requires an amendment to the Act, it can not be taken up at this stage.
Special Areas
Island territories
15. The district of Nicobar, in the Andaman and Nicobar Islands, is one of our
remotest districts. These islands, separated by vast distances across the sea are
relatively inaccessible. Therefore, in the Nicobar group of islands, a hard area
allowance at the rate of 25 per cent of basic pay will, with effect from April 1, 2004,
be paid to all Government employees posted there.
16. Due to high cost of construction, consequently the high rentals prevailing
in this region, and as directed by the Prime Minister it has been decided that the
status of Port Blair be raised from a ‘C’ to a ‘B-1’ class city, for purposes of house
rent allowance (HRA). Simultaneously, rural areas of the Union Territory of Andaman
and Nicobar Islands and the entire Union Territory of Lakshadweep will also stand
upgraded from their existing status of ‘unclassified’ to ‘C’ class city, for the purpose
of payment of this allowance. Consequently, HRA will also be raised from 7.5 per
cent to 15 per cent of the basic pay in all other areas of the Union Territory of
Andaman and Nicobar Islands, as well as in the Union Territory of Lakshadweep.
The status of State of Goa is also being raised from ‘C’ to ‘B-1’, from April 1, 2004, for
the purposes of HRA.
Desert areas
17. The desert areas of the country are under a variety of stresses. Most of
them are also either border districts or are contiguous to it. Last year, I had announced
the ‘Maru Gochar Yojana’, a special programme for rehabilitation and development
of traditional pasture lands in the desert districts of Rajasthan. I am glad to inform
Hon’ble Members that implementation of this programme has commenced. I now
propose to establish a Task Force for Integrated Development of Desert Areas, with
a mandate to address the problem of sustainable livelihood in our deserts. This Task
Force will review all relevant current programmes, identify gaps, define thrust areas,
and make appropriate recommendations. It will also examine the establishment of a
Rural Technology Centre, in one of the desert districts, and give its recommendations
in this regard.
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18. The Indira Gandhi canal project has languished for decades, slowly inching
its way, year after year, through the desert. Considering the inordinate delay in its
completion and the critical importance of water in our desert areas, this canal project
will, hereafter, be accelerated through a fresh Centre-State initiative, including
additional, innovative funding. Similarly, for an extension into Rajasthan of the
Narmada Canal too, the Ministry of Finance will work with the Government of
Rajasthan and assist it in financing an early completion.
Kutch and adjoining districts
19. At present, new industrial units in the Kutch Districts of Gujarat, established
during the period from July 31, 2001 to July 31, 2004 and which start commercial
production on or before July 31, 2004 are exempt from excise duty. In order to give
some more time for completion of such projects, I am extending the last date, for
setting up of such new units, from July 31, 2004 to December 31, 2004. The period
of exemption from excise duty will continue to be five years from the date of start of
commercial production.
Water Scarcity in Metropolitan Cities
20. Several initiatives have been taken by this Government to address the vital
question of providing an assured supply of potable water to rural India. Metropolitan
cities have until now had to address this shortage through either their own municipal
resources or on the strength of support received from their respective State
Governments. The need and demand for water has grown much faster than additional
supply measures. The Prime Minister has, therefore, decided to initiate an accelerated
drinking water supply scheme for mega cities, such as Bangalore, Chennai, Delhi
and Hyderabad. The provision for existing Central scheme for infrastructure
development in mega-cities will be augmented by accessing the Infrastructure Fund,
the Life Insurance Corporation and other such funding sources. Details will be
finalised by the Ministry of Finance to ensure that the scheme is operational by
March 1, 2004.
Convention Centres
21. Government has now decided upon the venues for four global standard
international convention centres, to be established through private-public
partnership. I am glad that two of these will be located in the metropolitan cities of
Delhi and Mumbai, and one each in Goa and Rajasthan. Both Goa and Rajasthan
have great tourism potential, but need more infrastructural facilities. Goa will thus
also be enabled to provide suitable facilities for holding international film festivals.
So that the convention centre in Jaipur functions effectively, the airport in Jaipur
will be converted into an international airport. Details of all these will be announced
shortly.
Development Finance
22. There is no alternative to development finance. Steps to revive and re-
structure the Industrial Development Bank of India (IDBI) are already in hand. In
accordance with the mandate of the Parliament, the Ministry of Finance is committed
to preserving and strengthening the IDBI’s role as a development financial institution.
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23. The current economic growth pattern requires continuous and added
investment. For this, finance has to be made available timely, at reasonable rates
and in a coordinated manner. Since the restructured IDBI has the requisite expertise,
also experience in project appraisal, funding and coordination, it has been decided
to designate IDBI as the lead developmental finance institution. Government will
provide necessary support to IDBI for this task. IDBI’s effort will be complemented
by other premier institutions and banks such as the Infrastructure Development
Finance Corporation and the State Bank of India.
24. Similarly, the Industrial Finance Corporation of India (IFCI) will be
restructured through transfer of its impaired assets to an Asset Reconstruction
Company and merger with a large public sector bank. Both these institutions, the
IDBI and IFCI, should be functional in the new financial year after their
transformation.
Other Schemes
25. The Agricultural Infrastructure and Credit Fund, the Small and Medium
Enterprise Fund, and the Industrial Infrastructure Fund will be operational shortly.
All the three funds will, without compromising the norms of financial prudence,
provide credit at highly competitive rates, which is expected to be 2 percentage points
below the Prime Lending Rate (PLR).
26. I wish to reiterate that the Agricultural Infrastructure and Credit Fund will
provide credit support to infrastructure facilities such as wasteland development,
completion of existing but incomplete minor irrigation projects plus new minor
irrigation works, grading, certification, and storage of agro-products, and construction
of modern abattoirs. This Fund will be called ‘Lok Nayak Jai Prakash Narayan
Fund’. Similarly, the SME Fund will address the problem of inadequacy of financial
resources, at highly competitive rates for the small-scale sector, and a lack of SIDBI
coverage for some of the medium-sized enterprises. The Industrial Infrastructure
Fund will provide credit at highly competitive rates for power generation, seaports,
airports, roads, tourism, telecommunication, and urban infrastructure like municipal
services, water supply, sewage disposal and environmental projects.
Defence Modernisation Fund
27. The process of defence procurement often extends to over three years.
Adequate and a committed availability of funds, over such a period, for defence
modernisation and weapons systems acquisition needs a satisfactory resolution. It
has accordingly been decided to establish a non-lapsable, Defence Modernisation
Fund of Rs.25,000 crore. This will commit availability of adequate funds for the
purpose. The Fund will be made available to the Ministry of Defence from the new
financial year.
Employee Welfare
28. The Fifth Central Pay Commission had recommended that Dearness
Allowance (DA) should be merged with basic pay whenever the DA exceeds 50 per cent
of pay. At present, DA is at 59 per cent of pay. The Government having re-examined
this recommendation in depth has therefore, decided that DA, to the extent of 50 per
cent of pay, will be merged with basic pay. This will take effect from April 1, 2004.
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Direct taxes
29. Some necessary changes in Income Tax procedures require the amendment
of the Income Tax Act. While changes in the Act are currently not being proposed, it
is the conviction of the Government, also our commitment that
♦ Fiscal benefits available to new projects in the power sector should be
extended up to 2012, instead of 2006, and also be available to cases of
take-over from State Electricity Boards.
♦ The regime of listed equities acquired on or after March 1, 2003 being
exempt from long-term capital gains tax should be extended for a further
period of three years, so as to provide stability.
♦ More than 90 per cent of world shipping tonnage is subject to very low
levels of taxation. To provide a level playing field so that Indian shipping
becomes internationally competitive, a tonnage tax scheme, with notional
income at a fixed rate, on the basis of net registered tonnage should be
considered.
♦ Farmers face hardship on account of levy of tax on capital gains, and accrued
interest on enhanced compensation, when their agricultural land is acquired
by the Government. The Government believes that capital gains on such
acquisition should be exempt from tax. There should also be no deduction
of tax at source on the interest earned on enhanced compensation for
acquisition of such land.
30. Business Process Outsourcing (BPO) has scope for employment generation.
It has been clarified that if outsourced services are ancillary and auxiliary in nature
and adequate remuneration is paid to the Indian call centre, then there shall be no
tax on such foreign company as has outsourced its activity to India. This policy is
on the lines of OECD norms and double taxation avoidance agreements.
31. It is also the conviction of the Government that for the salaried class, which
doubtless has the best track record of tax compliance, the issue of revising the
standard deduction for Income Tax purposes has now to be revisited. Furthermore,
the tax treatment of family pension of war widows merits a review so as to enable
them to live a life of dignity. We also need to revisit the present exemption limits and
to realign them appropriately.
Indirect taxes
32. For consolidating the growth process, the Government has already
announced some measures on January 8, 2004. These steps were timely and
necessary. I shall not repeat them.
Capital goods
33. To enable our domestic industry to compete with imported capital goods,
which are currently subject to a 10 per cent basic customs duty, I have already
reduced such duty on a number of raw materials, intermediates and components for
their manufacture. This has removed an anomaly.
34. A suggestion has been made that wherever there is exemption from
countervailing duty on an imported capital good, deemed export benefits ought to be
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given to the very same capital good, indigenously manufactured. There already exists
a scheme for giving deemed export benefits for specified projects, where procurement
is through international competitive bidding. Ministry of Finance, in consultation
with Ministry of Commerce, will nevertheless, examine this suggestion in order to
provide a level playing field to domestic manufacturers.
Power
35. The Task Force on Power Sector Investment and Reforms has recommended
exploring the possibility of making countervailing duty for the power sector cenvatable.
This suggestion, too, will be examined.
36. In the last budget, exemption from excise duty on residual fuel oils for
generation of power, available only to units licensed under the Electricity Act 1910,
was extended to generating companies licensed under the Electricity Supply Act
1948. It has been requested that this exemption, for units licensed under the 1948
Act, may now be made applicable retrospectively, whenever electricity was supplied
to State Electricity Boards, and the cost of generation was governed by power purchase
agreements. I believe that a suitable legislative measure for a retrospective exemption
of this nature should be considered.
Baggage rules
37. To further reduce congestion at the customs counters in the arrival halls of
our international airports, free baggage allowance is being raised from Rs.12,000 to
Rs.25,000. Customs duty on such baggage is also being reduced from 50 per cent to
40 per cent. This will be effective from today.
User-friendly tax administration
38. The move towards an improved tax administration through greater
application of IT, and a discretion-free, impersonal system with lower compliance
costs must continue. It is with this objective in mind, that I am pleased to announce
♦ round the clock electronic filing of customs documents for clearance of
goods, presently available in 9 customs formations will be extended to 23
customs formations by March 31, 2004;
♦ customs clearance will be based on self-assessment and selective
examination from June 30, 2004;
♦ an 8-digit code classification of goods for the levy of excise will be adopted
by September 30, 2004, to bring greater transparency, avoid classification
dispute, and harmonise excise classification with customs and EXIM Policy
nomenclature;
♦ compounding of offences under Union excise rules, for quick settlement of
disputes, will be introduced from June 30, 2004; and
♦ e-filing of excise returns will be introduced from June 30, 2004 to enhance
excise automation and for better reconciliation of revenue accounts.
Service tax
39. To enable levy of tax on services as a specific and important source of
revenue, an amendment to the Constitution is already in progress. In the interim,
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the service tax was extended to seven new services in the last Budget. To facilitate
the filing of returns and to reduce the compliance cost under this important source
of revenue, I am glad to announce that from January 2, 2004
♦ only a simple verification is being made for grant of registration for
service tax;
♦ there is a single registration and single return for assesses providing more
than one taxable service; and
♦ service tax automation has been enhanced by extending e-filing of
returns and also their electronic scrutiny from 10 services to all the 58
taxable services.

IV. REVISED AND BUDGET ESTIMATES

40. I must now inform the House about the essentials of our book-keeping for
the current year, as also for 2004-05.
Revised Estimates for 2003-2004
41. The Revised Estimates show a net decrease in expenditure of Rs.11,143
crore as compared to the Budget estimates. This reduction in expenditure has
been achieved despite additional expenditure on Rural Development, the Sarva
Shiksha Abhiyan, the Delhi Metro Rail Project and additional budgetary support
for the Railways.
42. Net tax revenues for the Centre are estimated at Rs.187,539 crore compared
to the Budget estimate of Rs.184,169 crore, an increase of Rs.3,370 crore. Non tax
revenue is estimated at Rs.75,488 crore, Rs.5722 crore more than the estimated
level of Rs.69,766 crore. Disinvestment receipts, at Rs.14,500 crore, are also higher
than the budget estimate of Rs.13,200 crore.
43. The revised revenue receipts of the Centre are estimated at Rs.263,027
crore, the fiscal deficit at Rs.132,103 crore which is 4.8 per cent of the estimated
GDP and the revenue deficit at Rs.99,860 crore which is 3.6 per cent of the
estimated GDP.
44. I trust Sir, that Hon’ble Members would observe, and approve of the fact
that the Government has demonstrated its resolve about fiscal consolidation by
performing better than the budgeted targets.

Budget Estimates for 2004-2005

45. In the budget estimates for 2004-2005, the total expenditure is estimated
at Rs.457,434 crore, of which Rs.135,071 crore is for Plan and Rs.322,363 crore
for non-Plan.

Plan expenditure
46. In order to strike the right balance between the developmental needs on
one hand and fiscal stability on the other, the Gross Budgetary Support (GBS) for
Plan 2004-05 has been fixed at Rs.135,071 crore. This is Rs.14,097 crore more than
last year, indicating an increase of 11.6 per cent. Out of this, an amount of Rs.81,367
 11
crore is being provided as Budget support for Central Plan. This is an increase of
Rs.9,215 crore, or 12.8 per cent, over the last year. Similarly, the Central Assistance
for State Plans is Rs.53,704 crore, which is Rs.4,882 crore more than last year. Should
need arise for new schemes, such as Providing Urban Amenities in Rural Areas (PURA),
the Government will then provide additional allocations for such schemes.

Non-plan Expenditure
47. The budget estimates for 2004-2005 show a net increase of Rs.16,218 crore
in non-plan expenditure. The increase is mainly in interest payments and debt
servicing (Rs.4,945 crore), defence (Rs.5,700 crore), grants and loans to State
Governments (Rs.4,110 crore) and food subsidy (Rs.2,600 crore).

Revenue estimate and Fiscal deficit

48. Mr. Speaker, Sir, with these proposals I estimate total revenue receipts of
the Centre at Rs.290,882 crore, the fiscal deficit at Rs.136,452 crore, which is 4.4
per cent of the estimated GDP and the revenue deficit at Rs.89,860 crore, which is
2.9 per cent of the estimated GDP.

V. CONCLUSION
49. Sir, I had the honour of being given the responsibility of the Ministry of
Finance in July, 2002. I have served here for just about a year and a half. During this
period it has been my privilege to see the Indian economy enter onto a sustained and
robust growth path of around 7.5 to 8 per cent per year. This has been possible only
because of the reforms pursued by the NDA, as well as by earlier Governments, of the
contribution in this Ministry of my distinguished predecessor, Shri Yashwant Sinha,
and above all, of the support and leadership provided by Prime Minister Vajpayee.
50. Under the stewardship of Shri Vajpayee, the NDA Government, since March
19, 1998, has not only successfully weathered the post-Pokhran economic sanctions;
East Asian crisis; at least two major destructive cyclones; an unprecedented drought;
the devastating Bhuj earthquake; two border stand-offs; the challenge of terrorism
and insurgency; the gulf war; a global downturn; uncertainty in oil prices, all these
and much else. Despite these multiple challenges, the Government, during this
period, brought down the fiscal deficit to 4.8 per cent of GDP, the revenue deficit to
3.6 per cent, and contained annual average inflation at around 4.8 per cent. Our
revenue collection in the period 1998-2004, has gone up by about 83 per cent, our
capital markets are healthy, the UTI is a market leader again, our foreign exchange
reserves have nearly quadrupled to the never ever achieved level of over $100 billion,
our GDP, in this period, has increased by almost 40 per cent, and to my belief,
national contentment, national confidence, and our collective resolve for achieving
even higher growth has now taken firm root.
51. Sir, I commend this interim budget to the House.
 Budget 2003-2004

Speech of
Jaswant Singh
Minister of Finance and Company Affairs

February 28, 2003

I. INTRODUCTION
Mr. Speaker,
1. I am greatly honoured to present the sixth successive budget of the
Government of the National Democratic Alliance (NDA), under the premiership of
Shri Atal Behari Vajpayee.
2. I wish to place on record high appreciation of my distinguished predecessor,
Shri Yashwant Sinha, who so ably steered the country’s finances in the earlier
budgetary exercises. That has made my task so much easier today.
II. THE CHALLENGE AND THE RESPONSE
3. At the core of our economic endeavour and management of the country’s
finances are the interests of our citizens; all this effort is for their total well being.
That is our central objective, towards which the NDA government has a non-negotiable
commitment. Through Budget 2003-2004, the Government, therefore, addresses
the following five objectives, as ‘Panch Priorities’, for our citizens and for the
economic security of our country, though these are not listed in any hierarchial
order of importance:
a) poverty eradication; addressing the ‘life time concerns’ of our citizens,
covering health, housing, education and employment;
b) infrastructure development;
c) fiscal consolidation through tax reforms and progressive elimination of
budgetary drags, including reform of the additional excise duty, introduction
of service tax, and introduction of Value Added Tax (VAT) from April 1,
2003 at the State level.
d) agriculture and related aspects including irrigation; and
e) enhancing manufacturing sector efficiency, including promotion of exports
and further acceleration of the reform process.
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4. Permit me to share the conceptual underpinning of these ‘panch priorities’.
Let us, to start with readily acknowledge that the essential entrepreneurial character
and the creative genius of our citizens is our greatest asset. This energy has to be
released. For that, and for converting the liability of want into the asset of ability,
eradication of poverty is crucial; that is the moral and economic issue of our times.
Too often it is observed that budgetary exercises float over the wide mass of India,
relating only to a few. This is not so here. And that is why a closely interrelated
concern is renewed progress on the front of agriculture; our nation’s life blood. A
second revolution, to follow the earlier Green Revolution is the vital need of today.
5. But neither in agriculture, nor in industry, shall we be able to attain our
objective, if infrastructure, both physical and social, is not rapidly and efficiently
developed. For this, private and public interest must combine so as to generate
maximum social welfare. Upon these foundations, and through encouraging specific
manufacturing sectors, particularly activities where knowledge is industry, we will
enhance growth, improve incomes, generate employment and promote exports. For
our growth to be sustained, fiscal consolidation is the basis; it is the central pillar.
Government has to totally eliminate budgetary drags, and be rid of the self-laid
traps; they retard both the pace and the robustness of our growth. What is needed
is a continuous and self-reliant progression of accelerating, all round growth, with a
wider distributive spread of national wealth and greater spending power in the hands
of all our citizens. We have to recognise the need to address a reduction of not just
our social but economic inequalities, too. This cannot be postponed. That is why
reforms are so critical. And, our reform agenda must not be held hostage; either to
yesterday’s debates, or to subjective and selective interpretations of it. This is a
collective need, for the nation’s growth, which all of us have to address together.
6. Mr. Speaker, there is palpable impatience in the country for progress and
growth. The nation can not afford the luxury of prolonged periods of reflection, or a
leisurely implementation schedule. The world will otherwise pass us by. Beyond
deregulation, it is more and ever more de-bureaucratisation that is needed, as much
of systems as of the mind. Of course, institutions matter, correct design and
application of rules, too, but all in the service of our national objectives; not either as
obtuse abstractions or as partisan goals. The core need in the country is of releasing
national creativity. The Budget 2003-2004, of the NDA Government endeavours to
do just that. This is our economic and social compact.
III. THE BACKDROP
7. I want to now briefly share with Hon’ble Members the backdrop in which
we address our responsibilities.

Geo-politics
8. The circumstances in which we meet are defined by the current global
uncertainties; their vortex lies over the Gulf, and Iraq is at the very core of it, even as
the Israel-Palestine conflict smoulders. Vast naval armadas crowd the waters of the
North Arabian Sea, and land and air forces prepare for battle. Nearer, our neighbour
Afghanistan, torn by decades’ old violence, continues to struggle with post-Taliban
tremors. In North-East Asia, old animosities are flared to near criticality through
 3
irresponsible external assistance. And, our immediate western neighbour, riven
internally by multiple fault lines, spews venomous terrorism from the cauldron of its
compulsive hostility for India.

Macroeconomic circumstances
9. Despite all this, and despite the present volatility in international oil prices,
alongside a continuing sluggishness in global recovery, uncertain markets, a 9-
month long military stand-off on our borders; the simultaneous challenge of
combating externally aided and abetted terrorism; and the worst drought that we
have faced in three decades; objectively, the country’s macroeconomic circumstances
have never been better for attaining our developmental objectives of enhanced and
sustainable growth, poverty eradication, employment generation, and improving
the quality of life.

Economic performance: 2002-03

10. Sir, the overall economic performance in 2002-03 has been reported in
detail in the Economic Survey. I do not wish to repeat all that except to highlight
that despite the agricultural GDP decline of an estimated 3.1 per cent, caused
entirely by a large decline in crop output, the country, registered a real growth of
4.4 per cent in GDP, net of inflation. Growth rates of industry (6.1 per cent) and
services (7.1 per cent) accelerated very encouragingly, as did exports by a healthy
20.4 per cent.
11. From 1956 onward, continuously, we have endured serious foreign exchange
constraints. Not any longer. After a gap of 24 years, our current account turned
into a surplus in 2001-02, and continued to be in surplus during the first two quarters
of the current year. Our reserves’ build up during the last year has been the highest
ever in a single year, with reserves crossing $75.5 billion in the third week of February.
In early-February, the Government decided to prepay $3 billion of its external loans.
India is now an exporter of grain to 15 countries, and donor of hard currency aid to
a dozen, alongwith rupee aid to another dozen countries. The rupee, with foreign
assets to currency ratio of 124.8 per cent, is stable. Gross domestic savings, as a
proportion of GDP at market prices, have also improved and stand at around 24 per
cent. In the course of the last four years, our interest rates on Government securities,
have rapidly gone down from 12 to around 7 per cent, thus setting the stage for
growth of investment.

The Tenth Five-year Plan

12. The National Development Council, in December 2002, approved the Tenth
Five Year Plan, with a bold and ambitious target of 8 per cent annual growth on the
average. One of the crucial aims of the Tenth Plan is to promote a balanced and
equitable regional development and to advance the necessary policy and
administrative reforms at the State level. The allocation for 2003-04 includes several
additional initiatives such as promoting infrastructure by leveraging public money
through private sector partnership, provision of 2 lakh hand-pumps in water-scarcity
areas and schools, rejuvenation of 1 lakh traditional water sources in villages,
research and development (R&D) support in pharmaceuticals, wind and solar
energy, among others.
 4
13. Permit me, Sir, to now address the ‘Panch Priorities’.

IV. ANTYODAYA AND LIFE-TIME CONCERNS

Antyodaya Anna Yojana
14. For eliminating poverty, it is only reforms that result in sustained growth
and high employment that are the durable solution. However, given our comfortable
food stock, there is both scope and a need for a direct attack, too.
15. Mr. Speaker, Sir, I am sure you agree that the disadvantaged must always
be the first charge on our exchequer. This is our belief, it is our creed; this is also at
the heart of ‘integral humanism’. Therefore, it has been decided, and I want this to
be the first announcement that is made, that the Antyodaya Anna Yojana will be
expanded from April 1, 2003, to cover an additional 50 lakh families raising the
total coverage to more than a quarter of all BPL families during the year 2003-04.
The additional budgetary expenditure on this account will be Rs.507 crore.
16. Sir, may I, in humility, say that this does cover the first part of my assurance:
“Garib ke pet me dana,….”.
17. Rural development, rural industries and artisans, and poverty alleviation
in urban areas are addressed severally through various schemes in different
ministries. A need has, therefore, been felt for sometime that all these schemes, of
the same genre, be rationalised. To do that, a Committee headed by the Deputy
Chairman, Planning Commission, is proposed. It will examine all schemes having a
bearing on poverty alleviation and rural development, and recommend their practical
convergence.

Life-time concerns
18. The Prime Minister had on Independence Day, 2002, announced the
Government’s commitment to improving national well-being by addressing the ‘life-
time concerns’ of our citizens, a noble and holistic objective.

Housing
19. Of these, I take housing first. It is a basic necessity. While promoting the
all important employment-generating activity of construction, it also stimulates
demand for core industries like steel and cement. To maintain its present momentum
of growth, it is proposed that interest deductible under income tax up to Rs.1,50,000,
for construction or purchase of a self-occupied house property, be continued. In
addition, it is proposed that income from housing projects for construction of
residential units, of prescribed specification, approved by the local authorities up to
March 31, 2005, will now be exempt from income tax. Thus, not only has the limitation
with regard to the year of sanction, earlier frozen at March 31, 2001, now been
extended, but the benefits of the scheme also made available irrespective of the year
of completion. The Finance Ministry is further examining what additional incentives
can be given to basic infrastructural developments that must accompany slum
upgradation, sewerage system laying and green-field housing projects.

Education
20. Education is the central vein of our ‘life-time concerns’. Therefore, at the
level of the citizen taxpayers, as a first step education expenses up to Rs.12,000 per
 5
child for two children, will be made eligible for rebate under Section 88 of the Income
Tax Act.
21. India is a highly creative, knowledge-based society; but authorship of books
has never been sufficiently rewarded, certainly not monetarily. Therefore, royalty
income up to Rs.3 lakh per annum, received by authors of literary, artistic and
scientific books shall henceforth be fully exempt; as will be royalty received by
individuals from exploitation of patents. This is in addition to the other existing
exemption benefits.
22. I declare, Mr. Speaker, a possible, personal benefit here as an author of
some books, with variable but always modest royalty income. There, however, is no
conflict of interest, Sir, because this measure has not been announced with any
personal benefit in mind.

Games and sports

23. Games and sports are a necessity, as much for recreation as for developing
sound bodies and minds. They must be encouraged. But, for a nation of a billion
plus, sports facilities available to our young are woefully inadequate. Therefore,
development of sports infrastructure will now be supported through direct funding
of public-private joint initiatives. Guidelines in this regard will be issued shortly.

Health
24. With three principal objectives in mind: to contribute to enhanced national
health; to promote India as a global health destination; and to enable easier access
to health facilities to our disadvantaged citizens, a number of additional measures
are now proposed.
25. In order to encourage private hospitals to either establish new or to expand
existing medical facilities, it is proposed to extend the benefit of Section 10(23 G) of
IT Act to such financial institutions as provide long-term capital to private hospitals
with 100 beds or more.
26. In view of the rapid strides made in R&D in medical equipment, there is
recognisable need to frequently upgrade and replace the existing equipment with
the more ‘state of the art’. It is therefore, proposed to increase the rate of depreciation
from the present 25 per cent to 40 per cent in respect of life saving medical equipment.
27. To assist citizens with impaired vision, the basic customs and excise duties
on rough ophthalmic blanks shall be reduced from 25 to 5 per cent, and from 16 to 8
per cent, respectively. To help people give up their addiction to tobacco and its products,
excise duty on Nicotin Polacrilex gum shall be reduced from 16 to 8 per cent.
28. It is also proposed to reduce the customs duty on specified life saving
equipment from 25 per cent to 5 per cent, and also exempt them from CVD (additional
duty of customs). In respect of life saving equipment already exempt from CVD, it is
proposed to exempt them from excise duty as well, so as to encourage indigenous
manufacturers.
29. A large number of life saving drugs are either exempt from customs duty or
attract a nominal 5 per cent duty. It is proposed to extend the concessional duty rate
of 5 per cent to some more drugs. Life saving drugs currently attracting nil or 5 per
 6
cent customs duty will also be exempt from excise duty. Basic customs duty on
glucometers and glucometer strips used by diabetics, will be reduced from 10 per
cent to 5 per cent; and they will be exempt from excise duty as well. Cyclosporine
will be exempted from excise duty. This reduction of excise duty to nil, wherever
imports are exempt from CVD, will certainly make our domestic industry more
competitive, as also better enable them to face the new intellectual property right
regime from 2005.

Health insurance
30. For a large majority of our less advantaged citizens, easy access to good
health services is just not there. In order to correct this and offer health protection,
of some choice, the public sector general insurance companies have been encouraged
to design a community-based universal health insurance scheme during 2003-04.
Under this scheme, a premium equivalent to Re.1 per day (or Rs.365 per year) for an
individual, Rs.1.50 per day for a family of five, and Rs.2 per day for a family of seven,
will entitle eligibility to get reimbursement of medical expenses up to Rs.30,000
towards hospitalisation, a cover for death due to accident for Rs.25,000, and
compensation due to loss of earning at the rate of Rs.50 per day up to a maximum of
15 days. To make the scheme affordable to BPL families, the Government has decided
to contribute Rs.100 per year towards their annual premium. Full details will be
publicized shortly.
31. I request Hon’ble Members to give this scheme the widest possible coverage
in their constituencies. The benefits Sir, are real.
32. In the first phase, at least an additional 50 lakh BPL families will be covered
during 2003-04.

Disabled and handicapped

33. The Government is committed to providing equal opportunities, protection
of rights, and all-round development of persons with disabilities. A number of
initiatives have already been taken in this regard.
34. Now, for income tax purposes, it is proposed that the physically handicapped
or persons with such dependents be entitled to a deduction for permanent physical
disability of Rs.50,000, and an enhanced deduction of Rs.75,000 in case of severe
disability.
35. I also propose to reduce the customs duty on hearing aids, crutches, wheel
chairs, walking frames, tricycles, braillers and artificial limbs to 5 per cent without
Special Additional Duty (SAD). They will be exempt from CVD, and the domestic
manufacturers will also be exempt from excise duty. I also propose to reduce the
customs duty on parts of hearing aids and wheel chairs to 5 per cent without CVD
and SAD.
36. The Government will establish a college of rehabilitation sciences at
Gwalior, and a national institute for empowerment of persons with multiple
disabilities at Chennai.

The salaried
37. A constant refrain of the salaried has been limited standard deduction for
income tax purposes. It is asserted that as a group they consistently demonstrate
 7
the best tax compliance. I agree, they do. It is, therefore, proposed that the standard
deduction for such employees be raised to 40 per cent of salary, or Rs.30,000,
whichever is less, for salary income up to Rs.5 lakh; and allow a deduction of Rs.20,000
for salary income above Rs.5 lakh. It is also proposed that relief be provided to
employees opting for voluntary retirement scheme (VRS), by exempting VRS payments
up to Rs.5 lakh, even when taken in instalments.
38. The Government will restore the Leave Travel Concession (LTC) facility
to its employees. Mr. Speaker, Sir, permit me to hope that the consequential
additional outgo from the exchequer on this account, will at least benefit some in
our tourism industry.

Senior citizens and pensioners

39. India will shortly become home to the second largest number of elderly
persons in the world. The population of our elderly, at present estimated at 76 million,
is expected to increase to 100 million in 2013. The interests of the pensioners and
senior citizens are, therefore, a particular responsibility of the NDA Government.
40. To enable them to live their life of retirement in dignity, the tax rebate to
senior citizens is proposed to be increased to Rs.20,000. As a result, their income
up to Rs.1.53 lakh will henceforth become fully exempt from income tax. In the case
of senior citizens on pension, the effective exemption limit may hereafter be actually
higher and become Rs.1.83 lakh, because of standard deduction. They can get
further relief by taking advantage of the tax rebate available under Section 88. In
addition, to reduce their cost of compliance, but of much greater importance to them
– to reduce bureaucratic hassles – I propose to accept self-declarations filed by our
senior citizens, in regard to no deduction of tax at source from interest income,
income from units, and such other sources.

Insurance pension scheme

41. Nevertheless, in the context of the declining rates of interest, I do take on
board the difficulties that are often voiced and could be faced by our senior citizens
and others. In order to provide relief to them, the Life Insurance Corporation of
India (LIC) will launch a special pension policy, guaranteeing an annual return of 9
per cent, in the form of a monthly pension scheme.
42. This scheme will be called: Varishtha Pension Bima Yojana, through which
a pensioner, or any citizen above 55 years of age, could on payment of a lump-sum
amount get benefits calculated at 9 per cent per annum. For this scheme, and with
pensions in mind, any citizen above the age of 55 years of age will qualify, and will
get a monthly return in the form of a pension for life. Upon demise, the initial
amount deposited will be returned to the spouse/nominee under the policy. The
minimum and maximum monthly pensions proposed are Rs.250 and Rs.2,000 per
month. This monthly pension will start from the month following the payment of the
lump-sum amount by the citizen. The difference between the actual yield earned by
the LIC, on the funds invested under the scheme, and the assured return of 9 per
cent, will be reimbursed to the LIC annually, by the Government. Other details of
this scheme will be announced shortly by the LIC.
 8
Ex-servicemen: our veterans
43. For ex-servicemen, whose welfare is so close to my heart, I propose to grant
income tax exemption to corporations set up under a Central or State Act for their
benefit. It is a matter of great personal satisfaction to me, that of the Prime Minister’s
scheme for establishing 227 ex-servicemen medical (XSM) facilities in the country,
the first will be inaugurated in April this year. The Ministry of Finance fully supports
this scheme.

Restructured pension scheme

44. My predecessor in office had, in 2001, announced a road map for a
restructured pension scheme for new Central Government employees, and a scheme
for the general public. This scheme is now ready. It will apply only to new entrants
to Government service, except to the armed forces, and upon finalisation, offer a
basket of pension choices. It will also be available, on a voluntary basis, to all
employers for their employees, as well as to the self-employed.
45. This new pension system, when introduced, will be based on defined
contribution, shared equally in the case of Government employees between the
Government and the employees. There will, of course, be no contribution from the
Government in respect of individuals who are not Government employees. The new
pension scheme will be portable, allowing transfer of the benefits in case of change
of employment, and will go into ‘individual pension accounts’ with Pension Funds.
The Ministry of Finance will oversee and supervise the Pension Funds through a
new and independent Pension Fund Regulatory and Development Authority.

V. PHYSICAL INFRASTRUCTURE
46. I now come to the second of the ‘panch priorities’ – physical infrastructure.
Demand generated by enhanced public investment in infrastructure has been a key
stimulant underlying our current industrial recovery. In October 1998, the Prime
Minister launched the National Highway Development Project (NHDP), one of the
most ambitious highway projects in the world, providing strong backward linkages
for our steel and cement industries. There is simply no alternative to providing
quality roads, railroads, ports, airports, reliable and reasonably priced power supply,
safe drinking water and sanitation. Without these India can not take full advantage
of the opportunities now offered by technology and competition.
47. In developing infrastructure, there is need to encourage public-private
partnership, so that public funds are leveraged, and the quality of service delivery
improved, thus yielding better value for money.
48. Accordingly, Budget 2003-04 undertakes to provide a major thrust to
infrastructure, principally to roads, railways, airports, and seaports, through
innovative funding mechanisms. This comprehensive initiative will cover the following:
- 48 new road projects at an estimated cost of around Rs.40,000 crore; with
a quarter of them being made of cement concrete;
- National Rail Vikas Yojana projects worth Rs.8,000 crore;
- Renovation/modernisation of two airports, and two seaports at an
estimated cost of Rs.11,000 crore; and
 9
- establishing two global standard international convention centres at
an estimated cost of Rs.1,000 crore.
49. The total estimated cost of the above projects is about Rs.60,000 crore. In
addition, the North-South and East-West corridors will be funded through the
additional levy of a cess of 50 paise per liter of diesel and motor spirit. This levy will
contribute a further Rs.2,600 crore for road development.
50. The essence of the new funding mechanism is to leverage public money
through private sector partnership, wherever possible. The three critical components
of the scheme are: release of public funds only when linked to specific and well-
defined milestones in completion of the project, in physical terms; a sharing of the
risks with the private promoters and financiers; and no open-ended Government
guarantees at any stage.

Roads
51. These 48 projects, with a total length of over 10,000 kms., are over and
above the NHDP. They have been identified where the traffic volume justifies four-
laning. These projects will be funded on a build-operate-and-transfer (BOT) basis,
with the Government providing a subsidy in the form of an annuity flow to meet only
the shortfall between anticipated revenue and loan repayment liabilities. In the first
year, 2003-04, at least 3,000 kms., of roads, or almost a third of the total of these 48
projects, will be taken up for four-laning.

National Rail Vikas Yojana

52. Ministry of Railways has established a special purpose vehicle (SPV) to
take up projects worth Rs.8,000 crore for the Golden Quadrilateral. Their projects
will be funded through Rs.3,000 crore worth of equity, provided by the Government,
and Rs.5,000 crore worth of loans. This SPV will raise debt from the market.
Repayment of debt will be done by earmarking Railway receipts over the period of
amortisation. Further, safety upgradation programme on the Golden Quadrilateral
will be taken up simultaneously under this mechanism.

Airports
53. In addition to the existing initiatives for leasing of major airports, as well as
of setting up two private airports in Bangalore and Hyderabad, it has now been
decided to take up the Delhi and Mumbai airports, as the principal hubs of
international travel to India, for modernisation to international standards. Two
separate companies will be formed with initial equal equity participation from the
Airports Authority. These two companies could also take joint venture partners. On
completion, the management will be leased out.

Seaports
54. It is proposed to facilitate the implementation of comprehensive
modernisation projects for Jawaharlal Nehru Port Trust (JNPT), Navi Mumbai and
Cochin Port, designed to bring them up to international standards. JNPT and Cochin
ports need dredging and modernisation. These projects are expected to cost over
Rs.7,500 crore. The user charges levied by the two port authorities, and the additional
 10
custom flowing in after dredging and modernisation is completed, are expected to
cover the debt service obligations. Here, too, the Government will provide only the
viability gap funding to bridge any possible shortfall.

Convention Centres
55. To redress the lack of convention centres of international standards in
the country, the Government will enable the establishment of two such centres
through public-private partnership; with the Government covering the viability
funding gaps only.
56. For the 48 road projects, National Rail Vikas Yojana, the two airports, the
two sea-ports, and the two convention centres, a sum of Rs.2,000 crore is being
provided as initial contribution from the Government. On a flow basis, the average
annual commitment for all these projects, under the viability gap funding basis, is
expected to be around Rs.2,000 crore per annum in the medium-term, to be met
annually from the budgets of the Railways and the Government.

Rural roads
57. Encouraged by the success of the scheme of funding rural roads under the
Pradhan Mantri Gram Sadak Yojana by earmarking 50 per cent of the cess on diesel,
it is proposed that the resources for rural roads be augmented. Accordingly, apart
from allocating the anticipated Rs.2,325 crore from the existing cess on diesel for
2003-04, additional funds will be made available for rural roads from the proposed
additional cess on diesel of 50 paise.

Power
58. As Hon’ble Members know, the Electricity Bill, 2001 was introduced in the
Lok Sabha in August, 2001 and subsequently referred to the Standing Committee
on Energy for examination. The report of this committee has been received. This
Bill seeks to provide a legal framework for our reforms and restructuring of the
power sector, also in simplification of administrative aspects. We should take up this
Bill now for early consideration.
59. Simultaneous to the emphasis on improvement in power distribution, our
attention on capacity addition remains. The Government had earlier, in 1999, notified
18 power projects as mega projects, conferring upon them various duty and licensing
benefits. The Government now proposes to liberalise the mega power project policy
further by extending all these benefits to any power project that fulfills the conditions
already prescribed for mega power projects.
60. Given the importance of transmission in the power sector, it is proposed to
reduce customs duty on specific equipment for high voltage transmission projects
from 25 per cent to 5 per cent.
61. To further research in solar energy, wind turbines, and hydrogen fuel as
alternatives to fossil fuels, the Government is especially allocating Rs.20 crore to the
Council for Scientific and Industrial Research, for launching incentive-driven research
in these three fields.
 11
Drinking Water
62. Supply of safe drinking water is an essential component of infrastructure
development. Orders have been issued to grant depreciation at the rate of 100 per
cent on plant and machinery, and buildings that house such plant and machinery,
forming part of a water supply project or a water treatment system. Water supply
projects are now totally exempt in regard to capital goods and machinery, both from
customs and excise duties. In addition, pipes have been exempted from excise duty
for bringing raw water from source to the treatment plant and for conveying treated
water to the storage place. I do hope that this will provide further incentive to new
water treatment and supply projects for augmenting the supply of safe drinking
water in the country.

VI. FISCAL CONSOLIDATION AND DEBT RESTRUCTURING

63. Mr. Speaker, Sir, I have already said that for our growth to be sustained
fiscal consolidation is essential. The Government has nurtured macroeconomic
stability – held inflation low, and maintained a strong balance of payments position –
while promoting growth. It has done so not only in the face of an unprecedented
drought, but also in a global economy where growth is ‘tepid’, uncertainty great, and
oil prices high. We have carefully balanced the need for fiscal consolidation with the
need for a contra-cyclical policy stance. Simultaneously, as I said, Government is
committed to totally eliminating budgetary drags, be rid of the self-laid traps; and go
forward with fiscal consolidation through revenue enhancement under a modern
tax administration, and expenditure rationalisation.

Cash Management
64. Appropriate cash management is integral to expenditure management.
There is, at present, no effective cash management in our system as cash is available
to the Ministries up to the budget ceiling as soon as the Appropriation Bill is passed
by Parliament. The Government, therefore, now proposes to initiate cash
management, on a pilot basis, in some major spending ministries, releasing budgetary
allocations in a time-sliced manner to permit convergence with available resources
within the year. Monthly or quarterly cash limits, based on the actual requirements
of the Ministries will be prescribed. This will avoid mis-matches between receipts
and expenditure and avoid rush of expenditure and the associated possible waste of
resources in the last quarter.

External debt prepayment

65. At the Central level, interest payments in 2002-03 are estimated at
Rs.115,663 crore, equivalent to 48.8 per cent of the Government’s revenue receipts.
The average interest rate on Government of India’s outstanding debt has come down
from 11 per cent in 1999-2000 to 9.4 per cent in 2001-02. But, Mr. Speaker, because
of the legacy of high cost debt from the past, this reduction in the interest cost is not
enough; it does not keep pace with the decline in the market rates of interest. The
Government has, therefore, already started to act on three fronts.
66. First, taking advantage of our comfortable foreign exchange reserves and
lower domestic interest rates, the Government has effected premature repayment of
 12
‘high-cost’ currency pool loans of the World Bank, and of the Asian Development
Bank totalling around $ 3 billion. We intend to continue with this policy of prudently
managing the external liabilities and of proactively liquidating relatively higher cost
component of our external debt portfolio.

Domestic debt of the Central Government

67. Second, a large proportion of the banks’ holding of Central Government
domestic debt, contracted under the high interest regime of the past, is thinly traded.
With the softening of interest rates, ordinarily, such loans should command a premium
over their face value. In effect though, banks are often unable to encash this because
of limited liquidity. The Government therefore, now proposes to offer a buy back of
such loans – entirely on a voluntary basis – from banks that are in need of liquidity,
or of encashing the premium for making provisions for their non-performing assets
(NPAs) thereby improving their balance sheets, or otherwise. The premium to be
offered will be set on a transparent basis. If the banks declare the premium received
as business income, for income tax purposes, they will be allowed additional deduction
to the extent such income is used for provisioning of their NPAs.

State Governments’ debt

68. Third, is the restructuring of State Governments’ debt. Mr. Speaker, Sir,
the XII Finance Commission will also be making an assessment of the debt position
of the States and suggest such corrective measures as are necessary. Meanwhile,
the Central Government and the State governments have mutually agreed to introduce
a debt-swap scheme. Out of the total stock of debt of Rs 2,44,000 crore owed by the
States to the Government of India, a little over Rs1,00,000 crore bear coupon rates
in excess of 13 per cent per annum, a rate that is far in excess of the current market
rates. In consequence the interest burden of the States now constitutes a major
item of expenditure for them; leaving little for even routine purposes.
69. The debt swap scheme introduced by the Government of India will enable
States to prepay high cost debt and substitute them by current, low-coupon-bearing
small savings and Open Market Loans. Twenty-six of the twenty-eight States have
consented to participate in the scheme from the current year itself, while the remaining
two States will join from 2003-04.
70. Over a three-year period ending in 2004-05, all State loans to the
Government of India bearing coupons in excess of 13 per cent will have been swapped.
In consequence, the States will save, at the very minimum, an estimated Rs 81,000
crore in interest, and deferred loan repayments, over the residual maturity period of
the loans. Furthermore, and equally importantly, this scheme will restrain the debt
build-up in States through the small savings scheme.

VII. AGRICULTURE
71. Agriculture, the life-blood of our economy, after giving the country adequate
food security, is now again at the cross roads, as it prepares to diversify and move
up the value chain. It also needs to respond robustly to second generation issues
such as land degradation and water logging. Diversification, resonance with market-
forces, and a swift adoption of sunrise technologies are the other needs.
 13
72. Mr. Speaker, Sir, India has the largest irrigated, arable landmass in the
world; our gross arable land being second only to the United States of America. We
must acknowledge the vital import of these facts: they are both an unrecognized,
and an unused asset; it is our great reserve. We now need to give it full
encouragement.

Diversification into horticulture, floriculture, etc.

73. Promising gains from remunerative agricultural diversification into
horticulture, this significant contributor to both GDP, and food and nutritional
security, will have to be sustained. With this in view, during the current year, it is
proposed to introduce a new Central Sector Scheme on Hi-tech Horticulture and
Precision Farming. Major components of the scheme will be use of hi-tech
interventions like fertigation, use of biotechnological tools, green food production,
and hi-tech green houses. Deployment of precision farming technology aimed at
judicious utilisation of resources like land, water, sunlight as well as time, including
demonstration of these technologies will also be part of the scheme. I propose to
provide, initially, a sum of Rs.50 crore under this scheme.

Sugar
74. The state of the sugar industry is a matter of serious concern for the
government. There is accumulation of stocks in factories, simultaneously with growing
arrears of payment for cane supplied by farmers, partly in consequence of soft market
conditions. This has both economic and social consequences. In order to provide
relief to both the farmers and industry, the Reserve Bank of India has already issued
instructions to Cooperative Banks for the conversion of shortfall in margins into
medium-term working capital loans, subject of course, to their furnishing adequate
security or State Government guarantees. The Reserve Bank of India has also issued
instructions to extend the repayment period of medium-term loans to 9 years. In
addition, the Ministry of Food and the Ministry of Finance will jointly address the
problems of the sugar industry and propose a comprehensive scheme for this
important agro-industry soon.

Plantations
75. Our plantation sector, a hundred and fifty year old agro-industry, is passing
through a rough patch, because of price instability in international markets. The
Government has already introduced a series of measures to provide relief to small
and marginal farmers of plantation crops like tea, coffee and rubber, and help these
sectors negotiate the difficult period.
76. With a view to providing stability in terms of income for the small growers,
from 2003-04 onwards, Government has announced a Price Stabilisation Fund of
Rs.500 crore for the benefit of tea, coffee, and natural rubber growers. The Fund will
become operational in 2003-04.
77. In addition, I propose to abolish the excise duty of Re. 1 per kg. on tea and
replace it by a cess of Re.1 per kg., for creating a separate fund for development,
modernisation and rehabilitation of the tea plantation sector. This measure, Mr.
Speaker, will not impose any additional burden on the tea industry, but it will redesign
 14
the duty to help the industry. Further, coffee plantations will henceforth be eligible
for income tax deduction of sums deposited in a development account, as in the
case of tea.

Animal husbandry and veterinary medicine

78. India has the world’s largest cattle wealth; it produces more milk than any
other country in the world, it has the second largest number of goats and third
largest number of sheep in the world. These are great assets. In addition, animal
husbandry provides employment to about 20 million, directly and indirectly. But
our live-stock quality has deteriorated. Therefore to promote the health of our livestock
and give a fillip to animal husbandry and dairying, I propose to reduce the basic
customs duty on specified veterinary drugs from 15 per cent to 10 per cent. To
promote marine food industry, I propose to reduce the customs duty on shrimp
larvae feed from 15 per cent to 5 per cent, and exempt it from CVD.

Credit availability
79. Timely availability of adequate credit is of utmost importance for the
development of the rural economy and agriculture. At present Regional Rural Banks,
commercial banks and credit cooperatives, encouraged mainly by the Government,
undertake this function. I am not satisfied with this arrangement. We can not have
a system wherein credit for motor cars is on easier terms than for farm equipment or
tractors. Therefore, subject to the Reserve Bank of India’s prudential norms and
approvals, private banks will hereafter be encouraged to open branches in rural
areas, to service both farm and non-farm sectors there. I will also examine afresh
this whole question of franchising agricultural credit, including through Post Offices.
80. The full benefits of the declining rates of interest have not percolated to
critical sectors such as agriculture and small-scale industry. This has to be rectified.
Therefore, in order to pass on the benefits of lower rates of interest to agriculture
and the SSI sector, the State Bank of India has announced an interest rate band of
2 per cent above and below its prime lending rate (PLR) for secured advances. The
Indian Bank Association (IBA) is now advising all its member banks to adopt a similar
interest rate band. This is a welcome move. Agriculture and SSI will hereafter have
to pay no more than an extra 2 percentage points than the best bank customers.
81. The Self-Help Group (SHG)-Bank Linkage Programme being propagated by
NABARD, for the last ten years, has been recognized as the largest and fastest growing
micro-finance programme in the world. Our expectations of providing bank credit to
1.25 lakh SHGs during the current year have been surpassed once again, and by
January 2003, bank credit of Rs.598 crore has already been provided to about 25
lakh poor families through 1.50 lakh new SHGs. The programme has also set in
motion the process of women empowerment. However, the spread of the programme
across the country has been uneven and has largely remained confined to a few
States. I urge all States to vigorously join in our endeavour to make the SHG-Bank
Linkage Programme a widespread success.

Fertiliser subsidy
82. Hon’ble Members no doubt appreciate that despite the grave uncertainties
on the oil front, the Government has by and large absorbed the crude price rise.
 15
Now, in view of the likely increase in naptha and gas feed-stock, at least the fertilizer
subsidy has to be contained. Therefore, the issue price of fertilizers will be raised by
a modest amount of Rs.12 for urea, and Rs.10 for DAP and MOP, per 50 kg bag. The
price of complex fertilizers will also be suitably modified.

Water management and irrigation

Drip irrigation
83. The recent drought again brings into sharp focus the need for conserving
our water resources. A number of initiatives have already been taken to conserve
land and water resources. States are also encouraged to promote drip and sprinkler
irrigation through supply of equipment at subsidized rates. But these efforts have
to be intensified. Therefore, a bipartisan Task Force, headed by the Chief Minister of
Andhra Pradesh, and with a Minister of Agriculture from another State, as one of the
members, will be constituted to recommend measures needed to be adopted firstly,
to expand the coverage of such irrigation, thereafter to also suggest safeguards so
that the intended benefits actually reach the target groups.

River-interlinking
84. Despite major developments in the water resource sector since
Independence, the country has not really come out of the flood-drought-flood
syndrome. This is principally on account of, among other reasons, three major
factors: faulty water management practices, unbalanced development of irrigation
sources in the country, and a highly uneven distribution of water resources.
85. To expedite the proposal for inter-linking of rivers, the Prime Minister has
appointed a Task Force, which will suggest modalities for arriving at a consensus
amongst the States on transfer of water to deficit areas and for identifying the priority
links which could be implemented early, as well as a mechanism for their clearance
and funding. Adequate outlay is being provided to support this Task Force.

Desert pasturage development

86. A special programme, Maru Gochar Yojana, is proposed to be taken up for
the desert districts of Rajasthan. This programme will provide for rehabilitation of
traditional pastures – ‘Oran’ or ‘Gauchar’ – by developing at least one large pasturage
nursery in each of the identified districts, as a Central scheme, for restoration of
traditional water courses, and other measures so as to provide effective drought
proofing. A Task Force will be established for working out modalities for its
implementation. Rupees 100 crore will be provided for this purpose, over a period of
three years, with only a quarter of the contribution coming from the State Government.
Provision for 2003-04 for this purpose will be Rs.50 crore.

VIII. INDUSTRY
87. As Hon’ble Members know, in the current year so far, industry has
stimulated overall growth, despite a decline in agriculture. We must, therefore,
consolidate these gains and build on the robust industrial growth demonstrated in
the last few quarters.

Promoting investment: tax treatment of dividends and capital gains

88. For this, we need to promote investment in the industrial sector, and improve
the debt and equity markets. Mr. Speaker, I am also committed to bringing the
small investors back to the equity markets by restoring their confidence.
 16
Dividend distribution tax
89. From April 1, 2003, it is proposed that dividends be tax free in the hands of
the shareholders. Correspondingly, there will be a 12.5 per cent dividend distribution
tax on domestic companies. While mutual funds, including UTI-II, renamed UTI
Mutual Fund, will also pay dividend distribution tax, it is proposed to exempt equity
oriented schemes from the purview of the tax for one year. UTI-I, however, will be
exempt from the dividend distribution tax.

Long-term capital gains tax

90. In order to give a further fillip to the capital markets, it is now proposed to
exempt all listed equities that are acquired on or after March 1, 2003, and sold after
the lapse of a year, or more, from the incidence of capital gains tax. Long term
capital gains tax will, therefore, not hereafter apply to such transactions. This proposal
should facilitate investment in equities. I will, however, reexamine the effects of this
exemption in the next Budget, and the Scheme will be in force until then.

Stock markets
91. My predecessor had already announced that stock exchanges will have a
corporate structure. To enable this, necessary amendments to the Securities Control
and Regulation Act will be proposed in the current session. With a view to enhancing
investor confidence, it is necessary to separate the ownership of these stock exchanges
from their management; resulting in demutualisation. In the process of
corporatisation or demutualisation, it is possible that capital gains accrue. Therefore,
as a one time measure, at the time of corporatisation or demutualisation of the stock
exchanges, in accordance with a scheme approved by the SEBI, should gains arise,
then the consequential transactions shall be fully exempt from capital gains tax.

Research and development

92. Hon’ble members, as I have already said, knowledge is industry; and this
is particularly so when our imperative is to be the best, in all aspects in general, but
particularly in product design and quality. To encourage R&D, it is proposed to
extend the tax holiday to R&D companies established up to March 31, 2004.

Te x t i l e s
93. In industry, textiles is the largest employment provider in the country. It
also contributes substantially to our exports. The main thrust of my proposals for
the textile sector, therefore, is to have a moderate rate structure; to complete the
CENVAT chain to promote compliance; to encourage modernisation; and, to eliminate
evasion. Keeping these objectives in view, as a package of incentives, the following
measures are proposed:
♦ reduce excise duty on polyester filament yarn from 32 per cent to 24 per
cent;
♦ reduce excise duty on all spun and other filament yarns from 16 per cent
to 12 per cent;
♦ retain the 8 per cent excise duty rate for pure cotton yarn only;
♦ reduce excise duty on all knitted cotton fabrics and garments from 12 per
cent to 8 per cent;
 17
♦ reduce excise duty on all woven fabrics and other knitted fabrics from 12
per cent to 10 per cent;
♦ reduce excise duty on garments from 12 per cent to 10 per cent;
♦ withdraw exemption for all knitted and unprocessed woven fabrics;
♦ remove the scheme of deemed credit so as to complete the CENVAT chain;
♦ retain exemption for hand processed fabrics but only if no power or steam
is used in any process;
♦ continue the existing exemptions for handloom fabrics, silk, khadi and
polyvastra; and
♦ reduce the basic customs duty on paraxylene from 10 per cent to 5 per cent.
94. The procedure for the decentralized sector will be simplified so as to exempt
job workers from maintaining any central excise records or even from central excise
registration. Garments and fabrics manufactured by non-profit charitable institutions
will, however, be exempt from excise duty.
95. As for customs, the duty on apparel grade raw wool shall now be reduced
from 15 per cent to 5 per cent. Further, to encourage modernisation of the textile
industry, it is proposed that the customs duty on a large number of textile machinery
and their parts be reduced from the existing 25 per cent to just 5 per cent.
96. Simultaneously, it is necessary to give a helping hand to the power-looms.
For this decentralized sector, it is proposed to strengthen the existing programme
for Induction of Technology in the Weaving Sector further by offering a ‘Power-loom
Package for Modernisation’. This package will have the following three features.
97. First, the Technology Up-gradation Fund Scheme will be enlarged to cover
modernisation of power-looms.
98. Second, to create a better working environment and obtain higher
productivity, a new Power-loom Workshed Scheme will be introduced by the Ministry
of Textiles together with the State Governments. Improvement of other infrastructure
of existing power-loom clusters will be taken up under the revised Textile Sector
Infrastructure Development Scheme.
99. Third, as a welfare measure, all powerloom workers will be covered under
the Special Insurance Scheme, which will provide them insurance cover against
death, accident and disability.
1 0 0 . Recognising the need to prevent sickness in the textile industry, Government
is considering a mechanism for restructuring the debt portfolios of viable and
potentially viable textile units. The details will be decided in consultation with all
the stake holders.

Pharmaceuticals
1 0 1 . All the benefits listed under health-care will also promote pharmaceutical
industry. Besides, income tax concessions to pharmaceuticals, bio-technology and
information technology are at par. All drugs and materials imported or produced
domestically for clinical trials will be exempt from customs and excise duties. Customs
 18
duty on import of Reference Standards by the industry has been reduced from 25
per cent to 5 per cent.

Information technology (IT)

1 0 2 . IT is India’s showpiece success story. We have to not just maintain its
momentum of growth, but continuously encourage it. Therefore, it is proposed that
the concessions extended to IT under Sections 10A and 10B of the Income Tax Act
will continue as originally envisaged. As per law such companies as are currently
covered by these tax exemptions lose the benefits upon change in their ownership
or shareholding. This is not logical. I am, therefore, removing these restrictions;
the benefit of such tax exemptions will remain even in the case of amalgamation or
d e - m e r g e r.
1 0 3 . Another anomaly is levy of excise duty on pre-loaded software in the case of
computers. As software is already exempt from excise duty, I see no reason why this
benefit should be denied simply because it gets loaded in a computer. From now,
the value of pre-loaded software will be excluded for the purpose of charging excise
duty on computers.
1 0 4 . Customs duty on specified electronic components for IT industry is being
reduced in conformity with our WTO commitment.
1 0 5 . In addition, customs duty on a number of capital goods used by the telecom
and IT sector for manufacture of components will be reduced from 25 per cent to 15
per cent. For optical fibre cables, used widely for networking to provide bandwidth
to the IT community, the customs duty is also being reduced from 25 per cent to 20
per cent. To help the domestic industry to manufacture e-glass roving used for
making optical fibres, it is proposed to reduce the import duty on specified raw
materials for the manufacture of e-glass roving from 30 per cent to 15 per cent.
1 0 6 . Telecom and domestic satellite service companies enjoy the benefit of tax
holiday. Since it takes quite some time for such projects to materialize, I propose to
extend the deadline of setting up the units by one more year to March 31, 2004.

Bio-technology
1 0 7 . Biotech is our today’s sunrise, tomorrow’s showpiece industry. The
Government, to facilitate units engaged in R&D in bio-technology and the
pharmaceuticals sector, has decided to remove the existing restriction of minimum
export obligation of Rs.20 crore for availing exemption from customs duty for specified
equipments. Further, the restriction of full exemption being limited to only 1 per
cent of last year ’s export turnover is also lifted for R&D units. Moreover, in respect
of R&D units with manufacturing facilities, the benefit of full customs duty exemption
for specified equipment will also be available for their manufacturing activity to the
extent of 25 per cent of the previous year ’s export turnover.
1 0 8 . So far as benefits under direct taxes are concerned, biotech enjoys the
same tax incentives as the IT or pharmaceuticals industry.
 19
To u r i s m
1 0 9 . Tourism, in addition to generating incomes, is amongst the most effective
employment creating sectors. To provide a set of incentives to this industry, the
following proposals will be implemented:
a) withdraw the expenditure tax;
b) extend the benefit of Section 10(23G) to financial institutions that advance
long-term capital to hotels in three-star and above categories;
c) the benefit of set-off of unabsorbed loss and depreciation on amalgamation
will henceforth be available to hotels under Section 72A of the Income Tax
Act;
d) continue the exemption for the hotel industry from the levy of service tax;
and
e) reduce basic customs duty on imported equipment for ropeway projects to
5 per cent without payment of CVD and SAD.
1 1 0 . It is our hope and expectation that the States, on their part, will now
give a commensurate boost to the tourism sector by abolishing the luxury tax
that they charge.

Gems and jewellery

1 1 1 . Traditionally, India has always excelled in the field of diamond and gem
cutting, polishing and in the craft of gold smithy. With a view to nurturing this
industry, it is proposed to reduce the customs duty on rough, coloured gem stones
from 5 per cent, and on semi-processed, half-cut or broken diamonds from 15 per
cent to nil. Customs duty on cut and polished diamonds and gem stones will also be
reduced from the present 15 per cent to 5 per cent.
1 1 2 . As for gold, it is proposed to reduce the customs duty on imported gold to
Rs.100 per 10 grams from the present level of Rs.250 per 10 grams, but only when
it is brought in the form of serially numbered bars, or in the form of gold coins, not
as ‘tola’ bars, please. It is my hope and expectation that this will become the first
step in enabling India to shortly emerge as the gold-trading capital of the world.
1 1 3 . The gems and jewellery industry has also been quite apprehensive about
withdrawal of benefits under Sections 10A and 10B of the Income Tax Act. I would
like to assure them that no such step is contemplated. Keeping in view the substantial
value addition that takes place in the case of cutting and polishing of diamonds and
gems, it is also proposed to extend the benefits under Sections 10A and 10B of the
Income Tax Act to these activities.

Strengthening ECGC
1 1 4 . Export Credit Guarantee Corporation of India Ltd. (ECGC) has been playing
a crucial role by providing credit insurance cover for exports from the country. There
is great potential for project exports from India with our exporters winning bids
against intense international competition. In order to enable ECGC to provide
adequate underwriting support to such projects, the Government has decided to
increase its share capital to Rs.80 crore.
 20
Small-scale industry (SSI)
1 1 5 . A vibrant small-scale industry, contributing to both industrial and export
growth, is critical for sustained growth in income and employment.
Mr. Speaker, as I have already said, the full benefits of the declining rates of interest
have percolated neither to agriculture, nor to small-scale industry. The recent
announcement by the State Bank of India and the decision by the Indian Bank
Association about an interest rate band of 2 per cent above and below PLR for secured
advances will help the SSI sector in obtaining bank finance at moderate rates of
interest. In addition, benefits and entitlements available to this sector shall be
placed on the Ministry’s website, for ready reference.
1 1 6 . Accessing the global market with consumer goods of quality, at competitive
prices, produced in both large- and small-scale establishments operating under
flexible conditions, is the goal that we need to target. Members will recall that last
year, Government had announced the dereservation of over 50 items. After
consultations with stakeholders in respect of certain other items in the reserved list,
it is now proposed to withdraw SSI reservation from another 75 items of laboratory
chemicals and reagents, leather and leather products, plastic products, chemicals
and chemicals products and paper products. The Minister of Small Scale Industries
will announce the details of these items separately. To help further investment in
the SSI sector, Government will examine the question of a limited partnership act.

Promoting India: India Development Initiative

1 1 7 . An initiative to promote India as both a production centre and an investment
destination, called ‘India Development Initiative’, shall be established in the Ministry
of Finance, with an allocation of Rs.200 crore for 2003-04. This initiative will also
leverage and promote our strategic economic interests abroad.

Disinvestment
1 1 8 . Disinvestment receipts for the current year are estimated at Rs.3360 crore.
I am confident that the pace of disinvestment will accelerate in the coming year. I
wish to also state that details about the already announced Disinvestment Fund
and Asset Management Company, to hold residual shares post disinvestment, shall
be finalized early in 2003-04. Mr. Speaker, Sir, disinvestment is not merely for
mobilizing revenues for the Government, it is mainly for unlocking the productive
potential of these undertakings, and for reorienting the Government, away from
business and towards the business of governance.

IX. OTHER REFORMS

Banking
1 1 9 . Foreign direct investment (FDI) in the banking companies in India is
presently capped at 49 per cent from all sources under the automatic route. For
facilitating the setting up of subsidiaries by foreign banks, as well as for inviting
investment in private banks, this limit will be raised to at least 74 per cent.
1 2 0 . The voting rights of any person holding shares of a banking company are
restricted to 10 per cent irrespective of his/her shareholding. The Banking Regulation
Act, 1949 will be amended to remove this limitation.
 21
1 2 1 . I now also extend the benefit of Sec. 72A of Income Tax Act to nationalized
banks. Any banking company can now merge with a nationalized bank with
consequential tax benefit.
1 2 2 . As the Hon’ble Members know, the Government is determined to contain
the problem of non-performing assets (NPA) and ensure a credit market that functions
efficiently. Following the Budget announcement last year, the Credit Information
Bureau has already been established. It is proposed to provide the necessary
legislative support to this Bureau.

Interest rate
1 2 3 . High rates of interest, in a low inflation regime, clearly act as disincentive
to investment. It is, therefore, important that administered interest rates on public
provident fund and other small saving schemes be adjusted in line with the market
rates. Accordingly, rates of interest on public provident fund, and small savings
schemes, etc. will be reduced by one percentage point with effect from March 1.
Interest on relief and savings bonds will also be reset accordingly. Hon’ble Members
may, however, note that the real returns – adjusted for inflation – offered on these
instruments are still a remunerative 6.3 per cent per year; higher than what they
were between 1991-92 and 1995-96.

Capital account
1 2 4 . Over the last few months, Government has taken a number of steps to ease
restrictions on capital account mobility. After careful assessment,
I would like to announce the following additional steps:
♦ To enable diversification, overseas investment under the automatic route
will be permitted to corporates with a proven track record, even where the
investment is not in the same core activity. Further, the current restriction,
limiting such investment to 50 per cent of the net worth of the Indian
company, will now be raised to 100 per cent.
♦ Prepayment of ECB dues under the automatic route will be permitted by
removing the current ceiling of US $100 million.
1 2 5 . The Government is already considering a major review of sectoral limits for
investments by Foreign Institutional Investors. In order to facilitate their easy entry
into the stock markets, the process of their registration will be further streamlined.
Several steps have recently been taken to ease flows of Capital. There will be more
initiatives in this regard.

External aid
1 2 6 . Mr. Speaker, Sir, a stage has come in our development where we should
now, firstly, review our dependence on external donors. Second, extend support to
the national efforts of other developing countries. And, thirdly, reexamine the line of
credit route of international assistance to others. Having carefully weighed all aspects,
I propose the following measures:
a) While being grateful to all our development partners of the past,
I wish to announce that the Government of India would now prefer to provide
 22
relief to certain bilateral partners, with smaller assistance packages, so
that their resources can be transferred to specified non-governmental
organisations (NGO’s) in greater need of official development assistance.
The current agreed programmes will, however, continue and reach their
completion. Of course, there will be no more ‘tied aid’ any longer.
b) Having fought against poverty, as a country and a people, we know the
pain and the challenge that this burden imposes. For the Heavily Indebted
Poor Countries (HIPCs), owing overdue payments of substantial sums to
India, I am happy to announce that we will be considering a debt relief
package. This will be announced shortly in consultation with the Ministry
of External Affairs.
c) I am also happy to announce that the Government proposes to generally
discontinue the practice of extending loans or credit lines to fellow developing
countries. Instead, in future, I propose to utilize the ‘India Development
Initiative’, which I have already announced, for providing grants or project
assistance to developing countries in Africa, South Asia and other parts of
the developing world.
Reform and reorganisation of the Ministry of Finance
1 2 7 . Responsibilities of the Department of Company Affairs, the Foreign
Promotion Investment Board (FIPB), and the regulation of the new Pension Funds
Scheme have recently been added to the Ministry of Finance. There is, therefore,
need to reorganize the Ministry, also to go back to the simpler and more direct name
as the Ministry of Finance. The Department of Company Affairs is now being absorbed
as a Department – and will sadly no longer stand shoulder to shoulder with Finance.
1 2 8 . In the Ministry of Finance, the Department of Economic Affairs will be
restructured and have separate divisions dealing with economic policy; analysis:
international and national; capital markets; budget; banking; trade and aid concerns;
and infrastructure and coordination.
1 2 9 . To remain better abreast of agriculture, an Expert Advisory Council, to
advise the Ministry of Finance, will be set up for agriculture.

X. TAX REFORM, REVISED ESTIMATES AND

BUDGET ESTIMATES
1 3 0 . I now come to taxes, tax reforms, and the book-keeping of the current year,
as also 2003-04. Mr. Speaker, I want to emphasise six important aspects in this
regard. First, the coming year will be historic with the States switching over to a
Value Added Tax (VAT). The Central Government has been a partner with the States,
in the highest tradition of cooperative federalism, in this path-breaking reform. This
will also involve an amendment to the Additional Excise Duty Act. Second, it is
proposed to make 2003-04 the year when a long-overdue Constitutional amendment
to integrate services into the tax net in a comprehensive manner is enacted and
implemented. This will give a boost to revenues, and help implement VAT. Third,
there will be major improvements in tax administration through greater application
of IT, and a discretion-free, impersonal system. Fourth, excise duties are being
 23
rationalised further. Fifth, the momentum of reducing customs duty is being
maintained so as to improve the competitiveness of Indian industry in international
markets. And, sixth, Government shall continue to strive towards fiscal consolidation
through expenditure reprioritisation, and revenue augmentation.

State-level Value Added Tax (VAT)

1 3 1 . The Conference of State Chief Ministers, presided over by the Prime Minister,
held on October 18, 2002 confirmed the final decision that all States and Union
Territories would introduce VAT from April 2003. The Empowered Committee of
State Finance Ministers, on February 8, 2003, has again endorsed the suggestion
that all State legislations on VAT should have a minimum set of common features.
Apart from avoiding cascading of taxes, the introduction of VAT is expected to increase
revenues as the coverage expands to value addition at all stages of sale in the
production and distribution chain. However, in view of the apprehensions expressed
by a large number of States, about possible revenue loss, in the initial years of
introduction of VAT, the Central Government has agreed to compensate 100 per
cent of the loss in the first year, 75 per cent of the loss in second year and 50 per
cent of the loss in the third year of the introduction of VAT; this loss being computed
on the basis of an agreed formula.
1 3 2 . The Government of India considers the introduction of VAT, at the State
level, to be a historic reform of our domestic trade tax system, It will assist the States
to transit successfully from the erstwhile sales tax system to a modern domestic
system, at present in use in over 120 countries.

Additional excise duty (AED) in lieu of sales tax

1 3 3 . While continuing to give States the additional 1.5 per cent of all shareable
taxes and duties, in order to enable them to generate more revenues, the Additional
Duties of Excise (Goods of Special Importance) Act, 1957 is being amended, from a
date to be notified. This will allow the States to levy sales tax on textiles, sugar and
tobacco products at a rate not exceeding 4 per cent. This will also enable the States
to integrate these three important products in the VAT chain.

Service tax: a proposed Constitutional amendment

1 3 4 . To enable levy of tax on services as a
revenue, an amendment to the Constitution is
amendment, and the consequent legislation would
power to levy the tax and both the Central and
powers to collect the proceeds.
specific and important source of
proposed. This Constitutional
give the Central Government the
the State Governments sufficient

Central Sales Tax

1 3 5 . With the introduction of VAT, there is need to now phase out the CST, and
move to a completely destination-based system. This can not be done in one step.
We must let VAT stabilize; but also recognize that these two – VAT and CST – cannot
remain in tandem, in perpetuity. Therefore, in the first instance, the ceiling rate of
CST for inter-State sale between registered dealers will be reduced to 2 per cent
during 2003-04, with effect from a date to be notified. The Government of India will
 24
compensate the States for loss of revenue from this reduction of the CST. This will be
done, as all these steps have been undertaken, only after arriving at a consensus
with the Empowered Committee of State Finance Ministers.
1 3 6 . I do wish to place on record my high appreciation of the cooperation
that I have received from this Committee. Without that, I simply could not have
reached here.

Task Forces
1 3 7 . As the Hon’ble Members are aware, in September 2002, three Task Forces
were set up: one each on Direct and Indirect Taxes, and the third on Corporate
Governance.
1 3 8 . These were chaired respectively by Dr. Vijay Kelkar and Shri Naresh
Chandra. The former also issued preliminary proposals in November, in the form of
consultative papers for public comment. After evaluating all these comments, final
reports were given in December, 2002.
1 3 9 . Public response to these Task Forces and their Reports has been
overwhelming. This is a tribute to the excellent work done by Dr. Kelkar and Shri
Naresh Chandra and their selfless and dedicated teams.
1 4 0 . By opening up the budget-making process, the Kelkar Committee Reports
have more than fulfilled my basic purpose of involving, as far as practical, our citizens,
in the annual budgetary exercise. I have personally benefited very greatly from
these Reports, as also from this open debate. I take this opportunity to express my
sincere gratitude to the two Chairmen and all members of the Task Forces, as also
members of the public for their valuable comments and suggestions.
1 4 1 . With regard to the Naresh Chandra Committee Report, corporate governance
is high on the Government’s agenda. There will be a set of regulations that does not
inhibit managerial initiative while instituting a mechanism for early detection of
frauds and their prevention. For this purpose, a Serious Frauds Office has already
been set up.
1 4 2 . Now, let me deal with the two reports on taxation. The Ministry has analysed
them fully.
1 4 3 . The basic philosophy of these reports is sound. For a modern, forward-
looking and in the long run, revenue-beneficial taxation system the proposals that
have been mooted may be the most appropriate. There is need to, eventually, move
away from an exemption and discretion based system to a different, more current
order. That is the ideal that the Task Forces, particularly in respect of direct taxes
have suggested; a radically new approach to taxation.
1 4 4 . This ideal is difficult to achieve in one leap, and I can scarcely cross the
existing conceptual chasm in two. We cannot ignore the commitments made, or
wish them away. That is why I choose to bridge the divide. We will, therefore, stay
with the basics of the present system of taxation, but we will, indeed have already
accepted, most of the suggestions made by the Task Forces designed to eliminate
procedural complexities, reduce paper work, simplify tax administration and to
 25
enhance efficiency, also integrate such tax proposals as the system can, at present,
absorb, with one overriding thought: Mr. Speaker, Sir, this will be a move away from
a suspicion-ridden, harassment generating, coercion-inclined regime to a trust-based,
‘green channel’ system. I do this entirely on the basis of my faith in my countrymen
and women.
1 4 5 . I now come to the tax proposals proper. What I describe below are the
major changes proposed, not every detail of change, apart from those already described
in the portion dealing with specific sectors. Details are contained in the Finance Bill
and the relevant notifications, which will be laid on the Table of the House in due
course. Moreover, as the Hon’ble Members are aware, Budget Day restrictions in
respect of clearance of goods have been revoked to allow economic activity to continue
without any hindrance.

Direct taxes
Rates
1 4 6 . Rates of income tax, both corporate and non-corporate, have remained
largely stable since 1997. As stability and continuity are commended as virtues in
tax regimes, I intend to be virtuous. Corporate tax structure will, therefore, be left as
it is; except that the 5 per cent surcharge, levied last year in connection with the
security of India, will be halved in the case of corporate assessees, firms, foreign
companies, cooperatives, and local authorities. In the case of individuals, Hindu
Undivided Families (HUF), and Association of Persons etc., this surcharge will be
removed entirely, except in the case of those earning an income above Rs.8.5 lakhs.
From them, that is those earning above Rs.8.5 lakh, I will collect a 10 per cent surcharge
on the tax, which works out to less than 3 paise out of an income of a rupee. But, I
have provided some relief to them, as well, for example, in standard deduction.

Standard deduction
1 4 7 . There are more salaried taxpayers at income levels of Rs.2 lakh and above
than the non-salaried. I do often wonder, why? That is why the salaried always
complain, saying they do not have – that cliché phrase – a level playing field; I agree,
they do suffer a more exacting regime. Therefore, as already announced, their standard
deductions are raised.
1 4 8 . Individual taxpayers having income from dividends, interest, etc. are given
a general deduction of Rs.9,000. As promised by me earlier, this deduction has now
been increased to Rs.12,000. An additional deduction of Rs.3,000 is allowable in
respect of interest from Government securities. Thus, the total deduction available
under Section 80L will be Rs.15,000. Though dividend will not be taxable in the
hands of the recipient from next year, I propose to retain this deduction at Rs.15,000
for next year also.

Tax deduction at source

1 4 9 . A lot of unintended difficulties are caused by certain provisions dealing
with tax deductible at source (TDS); much too tedious to elaborate here. I want to
correct this. Therefore, in simple terms, it is now provided that individuals and HUF
carrying on business or profession need not deduct tax at source, from payments
made by them for personal purposes.
 26
Not ordinarily resident
1 5 0 . There is a category of taxpayers in India ordinarily not found elsewhere –
the ‘not ordinarily resident’. They do not normally have to pay tax on their foreign
sourced income. There has been confusion on this provision in the past due to
differing legal interpretations. To set matters at rest, the relevant definition has
been suitably amended so that the benefit will now be available to persons for two
years in case they remain non-residents for the last nine out of 10 years.

Administrative reform
1 5 1 . In the area of tax administration, Government has initiated a whole basket
of reforms, mainly on the basis of the recommendations of the Kelkar Committee.
Some of the principal ones are:
(a) outsourcing of non-core activities of Income Tax Department, namely
allotment of PAN, and creation of data bank of high value transactions
through tax information network;
(b) immediate abolition of present discretion-based system for selection of
returns for scrutiny; this will be replaced by a computer generated,
intelligent, random selection of only 2 per cent of the returns, annually;
(c) expanding the scope of taxpayer services, including extension of interactive
voice response system to more cities and software for preparation of returns;
(d) direct crediting of all refunds to the bank account of the taxpayer, through
electronic clearance system; but obviously only if the taxpayer furnishes a
bank account number;
(e) reduce the compliance cost of the taxpayer, through halving the number of
forms presently used in furnishing of applications, returns, etc., for the
purposes of tax deduction and tax collection at source, from the present 42
to just 22. Hon’ble Members, if in only one attempt I could halve this headache,
please reflect upon the immense possibilities that lie on this route;
(f) immediate introduction of a one-page only return form for individual tax
payers, having income from salary, house property and interest, etc. This
has already been devised, and will come into operation from April 1 onwards;
(g) the Income Tax Act is being amended to enable electronic filing of returns;
(h) abolition of tax-clearance certificates currently needed by a person leaving
India, or any person submitting a tender for a government contract.
Henceforth, only expatriates who come to India in connection with business,
profession or employment, would have to furnish a guarantee from their
employer, etc. in respect of the tax payable before they leave India. An
Indian citizen, before leaving India, will only have to give his/her permanent
account number, and the period of his/her intended visit abroad to the
emigration authorities; and
(i) simplifying the procedure and methods employed during search and seizure,
and during survey by the Income Tax department. First, hereafter, stocks
found during the course of a search and seizure operation will not be seized
under any circumstances. Second, no confession shall be obtained during
such search and seizure operations. Third, no survey operation will be
 27
authorized by an officer below the rank of Joint Commissioner of Income
Tax. Finally, books of account impounded during survey will not be retained
beyond ten days, without the prior approval of the Chief Commissioner.
1 5 2 . These, Hon’ble Members, are only a few steps on this long road called
simplification and rationalisation of taxation. It is not for nothing that even Albert
Einstein had ruefully observed that he found ‘Income Tax the most difficult thing
upon Earth to understand’.
1 5 3 . Mr. Speaker, please sympathize with me. I endeavour to make easy that
which Einstein found so difficult.

Indirect taxes: excise

Rationalisation and relief
1 5 4 . Rationalisation of excise rate structure and reduction of the multiplicity of
rates are integral to the total tax reform process. In this regard, I propose to prescribe
a 3-tier excise duty structure of 8 per cent, 16 per cent and 24 per cent. These rates
would, however, not apply in the case of petroleum and tobacco products, pan masala,
and items attracting specific duty rates. I have already announced a separate package
for textiles, and some changes in the duty structure relevant for some other key
sectors while dealing with those sectors. I will now refer to the changes proposed in
various other commodities.
1 5 5 . Currently, tyres, aerated soft drinks, polyester filament yarn, air-
conditioners and motor cars attract excise duty of 32 per cent. I propose to reduce
the duty on these items to 24 per cent.
1 5 6 . Certain exempt items were brought under the tax net during the last two
years with an optional duty of 4 per cent without CENVAT, or 16 per cent with
CENVAT. I propose to eliminate the 4 per cent duty without CENVAT. However, keeping
in view the number of representations received for exemptions, I propose to fully
exempt the following items of the ordinary citizen’s use, currently attracting 4 per
cent excise duty:
♦ Unbranded surgical bandages
♦ Registers and account books
♦ Umbrellas
♦ Kerosene pressure lanterns
♦ Articles of wood
♦ Imitation zari
♦ Adhesive tapes
♦ Tubular knitted gas mantle fabrics
♦ Walking sticks
♦ Articles of mica
♦ Bicycles and parts
 28
♦ To y s
♦ Mosaic tiles
♦ Utensils and kitchen articles
♦ Knives, spoons and similar kitchenware/tableware
♦ Glasses for corrective spectacles
1 5 7 . Rest of the items attracting 4 per cent without CENVAT will now attract
duty at 8 per cent with CENVAT.
1 5 8 . I also propose to fully exempt from excise duty matches made by the non-
mechanized sector. However, matches made by semi-mechanized and mechanized
sector will attract an ad-valorem duty of 8 per cent without CENVAT.
1 5 9 . I also propose to reduce the excise duty chargeable under the Medicinal
and Toilet Preparations Act, on medicines and toilet preparations containing alcohol,
from the present high rates of 20 to 50 per cent to a uniform rate of 16 per cent, at
par with the rates on similar items not containing alcohol. However, exemptions on
ayurvedic and unani medicines, containing self-generated alcohol, will continue.
1 6 0 . I propose to reduce the excise duty on items like pressure cookers,
ophthalmic blanks, biscuits, boiled sweets and dental chairs from 16 per cent to 8
per cent. Recorded audio compact discs (CDs) will be fully exempt from excise duty.
1 6 1 . It is my conviction, Mr. Speaker, that these measures will result in “Grihini
ki tukia mein anna”: the second part of my assurance.

Transpor t
1 6 2 . As I have earlier stated, efficient transportation is critical for rapid
development. I have already announced major reduction in excise duty on motor
cars and tyres. Further, on environmental considerations, I propose to reduce the
duty on electric vehicles from 16 per cent to 8 per cent.
1 6 3 . Presently, there is an inequitous duty structure between buses and trucks,
manufactured by an integrated unit, vis-à-vis independent body builders, who are
exempt from excise duty. To reduce the duty differential and to promote body building
by integrated bus and truck manufacturers, as a measure of road safety, I propose
to increase the duty on chassis from 16 per cent, to 16 per cent plus Rs.10,000 per
chassis, cleared for outside body building. The body building activity in the
unorganized sector would, however, continue to remain exempt.
1 6 4 . It is an accepted principle that while taxation should be moderate, the tax
base has to be large, so that every sector contributes moderately to the national
economy. Following this principle, I propose to impose fresh excise levy of 8 per cent
on the following items, with the CENVAT credit facility available to them: branded
refined edible oil and vanaspati packed in sealed containers for retail sale – this will
not apply to unbranded oil; lay flat tubing; chemical reagents; wood-free particle or
fibre board made from agro base; paper and paper board made from non conventional
raw material; and populated printed circuit board for black and white TV sets.
1 6 5 . Considering that specific rates on cement and clinker have remained
unchanged for a considerably long period of time, I propose to now increase these
 29
rates by Rs.50 per tonne. This will mean a modest increase of Rs.2.50 per 50 kg.
bag of cement.
1 6 6 . I also propose to impose additional excise duty of Rs.1.50 per litre on light
diesel oil to further discourage its use as an adulterant.

Trade facilitation measures

1 6 7 . For trade facilitation, I propose to take the following measures,-
(a) The present system of fortnightly payment of excise duty will be liberalized
to permit payment of duty at the end of the month. Further, the excise duty
will be considered to have been paid on the date the cheque is presented to
the bank subject to realisation.
(b) Deduction from the transaction value is allowed on actual freight incurred,
provided that is clearly shown in the invoice. This facility will now be
extended to cases where freight is worked out on an equalized basis also.
(c) Over the years, the Maximum Retail Price (MRP) based excise levy has
proved to be an effective measure of simplification by reducing valuation
disputes. I propose to extend the MRP-based excise levy to chewing tobacco
and insecticides.
National Calamity Contingency Fund
1 6 8 . Unfortunately, the Nation has been facing a severe drought this year. The
funds raised earlier under the National Calamity Contingent Duty are not sufficient.
It is, therefore, proposed to impose a 1 per cent National Calamity Contingent
Duty on polyester filament yarn, motor cars, multi utility vehicles and two-wheelers.
Similarly, crude, domestic or imported, will also be subjected to a duty of Rs.50
per metric tonne for this purpose. However, these new levies will be limited to one
year only.
1 6 9 . While the Small Scale Exemption Scheme aims at providing a distinctive
advantage to labour-intensive units, there are reports of misuse of this facility in
certain sectors. I propose to withdraw this facility in case of a few items and rationalize
the eligibility limit of Rs.3 crore under the general SSI scheme.

Service tax
1 7 0 . I propose to enhance the general service tax rate from 5 per cent to 8 per
cent, and also impose service tax on 10 new services. While the increase in the tax
rates will come into effect on enactment of the Finance Bill, the levy of tax on the
new services will take effect from a date to be notified.
1 7 1 . Last year credit of service tax on input services were extended for payment
of service tax, provided the input and the final services fell within the same category.
I propose to extend this facility across all services. Thus, the credit will now be
available even if the input and the final services fall under different categories.

Indirect taxes: customs

External liberalisation
1 7 2 . Rate rationalisation and reduction of peak rates of customs duties has
been an integral part of economic reform in the country. The economy has not only
 30
‘weathered’ the removal of quantitative restrictions on imports and the reduction in
customs duty rates, but has responded by improving its competitiveness and
demonstrating the inherent strength of its external balance of payments. As a part
of this continuous process, and in line with the pronouncements made by several of
my predecessors, I now propose to reduce the peak rate of customs duty from 30 per
cent to 25 per cent, excluding agriculture and dairy products.

Rationalisation and relief

1 7 3 . It has been our policy to minimize sector-specific and end-use based customs
duty exemptions. This policy will continue. Metallurgical coke and nickel attract
customs duty rates at 15 per cent and 5 per cent, depending upon their usage. I,
therefore, propose to rationalize the customs duty on these two items to a uniform
rate of 10 per cent.
1 7 4 . Conch shells and seed lac are really handicraft items. Their duty will come
down from 30 per cent – why was it ever 30 per cent – to 5 per cent.
1 7 5 . Import duty on oleo pine resin, a raw material for rosin shall be reduced
from 15 per cent to 10 per cent.
1 7 6 . Value limit for a full customs duty exemption, for bona fide commercial
samples and gifts, however, shall be raised from Rs.5,000 to Rs.10,000.
1 7 7 . I also propose to reduce the customs duty on passenger baggage from 60
per cent to 50 per cent.
1 7 8 . Phosphoric acid, an input for fertilizers, is exempt from the Special Additional
Duty of Customs (SAD). For the sake of uniformity, I propose to exempt rock phosphate
and crude sulphur, inputs for phosphoric acid, also from SAD.
1 7 9 . The basic customs duty on alcoholic liquor will come down to 166 per cent
in conformity with our WTO commitments. I also propose to rationalize the
countervailing duty in respect of imported alcoholic beverages including wines.

Capital goods and infrastructure

1 8 0 . Considering higher usage levels of Liquified Natural Gas (LNG),
I propose to reduce the customs duty on LNG regassification plants from 25 per cent
to 5 per cent.
1 8 1 . There is need to support cleaner and environment-friendly technologies.
With this end in view, I propose to reduce the customs duty on components of
membrane cell technology used in the caustic soda industry from 15 per cent to
5 per cent.
1 8 2 . Safety and modernisation are key issues before Indian Railways. I propose,
therefore, to reduce customs duty on spares for diesel locomotives, parts for conversion
of locomotives from DC to AC from 25 per cent to 15 per cent, and loco simulators
for training of drivers from 25 per cent to 5 per cent.
1 8 3 . Given the importance of promoting food-processing and transporting
agricultural products, I propose to reduce the customs duty on refrigerated trucks
from 25 per cent to 20 per cent.
 31
Trade facilitation
1 8 4 . I assure Hon’ble Members of faster clearance hereafter of cargo and fewer
procedures, by reducing the transaction cost, thus facilitating exports and imports.
For this, a number of measures have been taken to simplify and modernize the
customs clearance procedures, with the main emphasis being on cutting down contact
of trade with the officers, to the extent possible, and introducing computerisation in
customs clearances. While these efforts will continue, as a further trade facilitation
measure, I propose to increase the interest-free period for warehoused goods from
30 to 90 days and to reduce the rate of interest for the period beyond 90 days to
reflect the market rate of interest.
1 8 5 . To bring our customs clearance procedures at par with best international
practices, I propose to introduce, this year itself, a self-assessment scheme for
importers and exporters. Briefly stated, under the self-assessment scheme, the
importer himself/herself will determine the classification of goods, including claim
for any exemption benefit, and the system will calculate the duty based on his/her
declaration. Physical inspection of imported goods will be done by using risk-
assessment and management techniques on a computer-based system and not on
the orders of customs examining staff. Further, the existing system of concurrent
audit of import documents will be replaced by post-clearance audit, as prevalent in
developed countries.
1 8 6 . Sir, my proposals made in this budget on the Direct Taxes will result in a
revenue loss of Rs.2,955 crore while the proposals relating to indirect taxes will
result in a gain of Rs.3294 crore.

Revised Estimates for 2002-2003

1 8 7 . The revised estimates for the current fiscal year show a decrease in
expenditure of Rs.6,296 crore as compared to the Budget estimates. This reduction
in overall expenditure has been achieved despite additional expenditure on drought
relief, food subsidy, and the Delhi Metro Rail Project.
1 8 8 . Net tax revenues for the Centre are estimated to be Rs.164,177 crore
compared to the Budget estimate of Rs.172,965 crore, thereby reflecting a shortfall
of Rs.8,788 crore. Non tax revenue is estimated at Rs.72,759 crore, Rs.619 crore
more than the estimated level of Rs.72,140 crore. However, disinvestment receipts,
at Rs.3,360 crore are lower than the Budget estimate of Rs.12,000 crore.

Budget Estimates for 2003-2004

1 8 9 . In the budget estimates for 2003-2004, the total expenditure is estimated
at Rs.438,795 crore, of which Rs.120,974 crore is for Plan and Rs.317,821 crore
for non-Plan.

Plan expenditure
1 9 0 . In order to strike the right balance between the developmental needs on
one hand and fiscal stability on the other, the Gross Budgetary Support (GBS) for
Plan 2003-04 has been fixed at Rs.120,974 crore. This is Rs.7,474 crore more than
last year, indicating an increase of 6.6 per cent. Out of this, an amount of Rs.72,152
crore is being provided as Budget support for Central Plan. This is an increase of
 32
Rs.5,281 crore, or 7.9 per cent, over the last year. Similarly, the Central Assistance
for State Plans has been pegged at Rs.48,822 crore, which is Rs.2,193 crore more
than last year.

Non-plan Expenditure
1 9 1 . Non-Plan expenditure in 2003-2004 is estimated to be Rs.317,821 crore
compared to Rs.289,924 crore in Revised estimates for 2002-2003. The increase in
non-plan expenditure is mainly in interest payments (Rs.7,560 crore), subsidies
(Rs.7,162 crore), and defence (Rs.9,300 crore). Government is fully committed to
modernizing the armed forces, and equipping them with the best available. This is
non-negotiable. Therefore, during the next year, any additional requirement that
may emerge on account of modernisation needs of the three defence services, or on
account of the Married Accommodation Project, will be fully met. There will be no
shortage of funds for defence.

Revenue estimate and Fiscal deficit

1 9 2 . Mr. Speaker, Sir, with these proposals I estimate total revenue receipts of
the Centre at Rs.253,935 crore and the fiscal deficit at Rs.153,637 crore, which is
5.6 per cent of the estimated GDP.

XI. CONCLUSION
1 9 3 . Sir, in formulating the Budget for 2003-04, the Government has had to
carefully and delicately balance the need for accelerating growth, while simultaneously
making progress on the front of fiscal consolidation. I know that what Government
has done is the most judicious under the circumstances.
1 9 4 . This budget is about addressing the problem of poverty and life-time
concerns of our citizens; of giving a major boost to infrastructure; and laying the
foundations for balanced, accelerated growth of agriculture and industry, plus tax
reform. I have tried to address the ‘Panch Priorities’, and I hope, that after this year
of drought, our economy will respond favourably to the Budget package and
demonstrate impressive growth in 2003-04.
1 9 5 . Let me end, Mr. Speaker, by reiterating that this Budget is of an “India that
is on the move.” An India, that now rapidly advances to prosperity. It is about an
India that banishes poverty, and builds on its great resource base, the strength of its
human capital and the immense reservoir of its knowledge.
1 9 6 . Sir, I commend the Budget to the House.
 1

Budget 2002-2003

Speech of

Shri Yashwant Sinha

Minister of Finance

28th February, 2002

PART A

Sir,
I rise to present the budget for the year 2002-03.
2. The year 2001, the first year of the millennium, was a year of many tragic
events. It started with the Gujarat earthquake on January 26, and ended with the
terrorist attack on our Parliament on December 13, punctuated by the September
11 incident in the United States and the October 1 outrage in Srinagar. I salute the
brave members of our security forces who defended this Parliament and made the
supreme sacrifice. On the economic front too it has been a difficult year. World
economic growth is estimated to have slowed down to 2.4 per cent in 2001 after
seven consecutive years of higher growth. International terror and the global economic
slowdown have been the saddest features of the past year.

ECONOMIC CONTEXT
3. Despite the hostile economic and security environment, the economy has
performed relatively well this year. After irregular monsoons in the previous two
years an agricultural recovery was enabled by a relatively well distributed monsoon
this year. Economic growth this year is expected to be about 5.4 per cent: higher
growth being constrained by the industrial slowdown. The basic fundamentals of
the economy remain strong: inflation has fallen to a record low of 1.1 per cent,
foreign exchange reserves have crossed US $50 billion, and our food stocks have
risen to almost 60 million tonnes. The fall in petroleum prices has provided further
relief to the economy as a whole.
4. While the country is economically secure there are still many challenges
facing us. These have been described in detail in the Economic Survey presented to
this House on February 26. My effort is to devise a budget strategy to meet these
challenges.
1
 2
BUDGET STRATEGY
5. In my last budget I had laid out a comprehensive agenda of the second
generation economic reforms. I had also deepened tax reforms aimed at providing a
modern tax regime. My aim this year is to consolidate and implement these policies
at all levels. I propose to take this process further at the State level through a
strategy of reform linked public funding.
6. The broad strategy of the budget, therefore, is to:
Š Continue the emphasis on agriculture and food economy reforms.
Š Enhance public and private investment in infrastructure.
Š Strengthen the financial sector and capital markets.
Š Deepen structural reforms and regenerate industrial growth.
Š Provide social security to the poor.
Š Consolidate tax reforms and continue fiscal adjustment at both the
Central and State levels.
7. The implementation of the announcements made in the last budget has
been closely monitored throughout the year. I started the practice last year to submit
to Parliament an Action Taken Report on the previous year ’s budget. Accordingly, I
am presenting a detailed ATR on last year’s budget announcements. Some of the
highlights are: deregulation of controls on agricultural commodities; progress towards
decontrol of sugar; substantial reduction in the span of price control of drugs; decision
to amend existing legislation governing revival and/or winding up of companies,
along with abolition of SICA; substantial progress in privatization; progress in the
implementation of Expenditure Reforms Commission’s recommendations and
announcement of VRS for surplus government employees.
8. These decisions demonstrate the resolve of this Government to carry forward
the process of economic reforms, and to ensure that the benefits reach the common
man. This will require improved implementation and governance. We shall put in
place measures to effect improvement in these areas with the objective of eliminating
poverty and improving the quality of life of our citizens.

AGRICULTURE AND RURAL DEVELOPMENT

D e re g u l a t i o n
9. Having achieved great success with the Green Revolution and then the
White Revolution, the country is now ready for its third revolution of agricultural
diversification and food processing. This requires policy changes, a renewed thrust
on agricultural research and extension, and a new climate that encourages much
greater investment in both the public and private sectors. Removal of the remaining
regulatory and procedural rigidities that still exist and improved rural infrastructure
is essential for this new revolution. Freedom to the farmer, Kisan Ki Azaadi is the
overarching goal of our policy.
10. Even though agriculture is a State subject, there are a number of Central
Government policies that influence this sector. The Government has reviewed the
operation of the Essential Commodities Act, 1955. Restrictive orders inhibiting
 3
storage, selling and movement of food and agricultural products are being removed.
We can now look forward to a countrywide integrated market for agricultural products.
To continue this initiative, I am proposing further decontrol and deregulation of
agriculture along the following lines:
Š Amendment of the Milk and Milk Products Control Order (MMPO) to remove
restrictions on new milk processing capacity, while continuing to regulate
health and safety conditions.
Š Removal of small scale industry reservations related to various agricultural
equipment items.
Š Decanalization of the export of agricultural commodities and phasing out
of remaining export controls.
Š Expansion of futures and forward trading to cover all agricultural
commodities.
11. A multiplicity of regulations for food standards under the Prevention of
Food Adulteration Act, the Food Products Order, the Meat Products Order, the Bureau
of Industrial Standards and the MMPO, affect the food and food processing sectors.
They need to be modernised and converged. The Prime Minister has decided to set
up a Group of Ministers (GOM) to propose legislative and other changes for preparing
a modern integrated food law and related regulations.
12. This process of providing freedom to the farmers now needs to be carried
forward by State Governments. Amendment of the Agricultural Produce Marketing
Acts to enable farmers to sell directly to potential processors would help them to
receive better prices and to access potential new markets. In addition, the remaining
State control orders which are acting as barriers to inter-State trade need to be
lifted. I am proposing that additional allocations in respect of centrally sponsored
schemes would be linked to decontrol and deregulation of the agricultural sector by
the States.
13. In 2000-01, I had announced a Credit Linked Subsidy Scheme for
construction of cold storages. I am happy to report that sanction has already been
given for the creation of 21 lakh tonnes capacity in cold storages, much higher than
the target of 12 lakh tonnes. The rural godown scheme announced last year has also
become operational. With the removal of various control orders much greater
investment would be forthcoming under both these schemes. Accordingly, I propose
to allocate Rs 70 crore to each of these subsidy linked credit schemes in 2002-03.

Agricultural Credit
14. As Finance Minister I feel particularly responsible for the flow of adequate
credit to the agriculture sector. I am glad to report that the total credit flow to the
agriculture sector through institutional channels is expected to reach the targeted
level of Rs 64,000 crore this year. It is expected to increase to
Rs 75,000 crore in 2002-2003. I propose the following steps to further improve the
delivery of agricultural credit:
Š The funds for RIDF VIII will be enhanced from Rs 5000 crore to
Rs 5500 crore next year, while the rate of interest will be reduced from
 4
10.5 per cent to 8.5 per cent. Henceforth it will be fixed at the prevailing
bank rate plus 2 per cent. Assistance to the States from RIDF will be linked
to reforms in the agriculture and rural sectors.
Š Kisan Credit Cards introduced in 1998-99, have been a resounding success
and have helped our farmers considerably in their access to agricultural
credit. An additional 63 lakh KCCs have been issued upto December 31,
2001 taking the total to 2.07 crore. The personal insurance package linked
to KCCs has also been operationalised.
Š Similarly, the scheme of micro credit through Self Help Groups is progressing
well. The target of one lakh additional self-help groups during the current
year is expected to be achieved taking the total so far to more than 3.5 lakh
covering more than 70 lakh families, making it the largest micro credit
programme in the world. I am raising the target to 1.25 lakh for 2002-03.
Š A one-time settlement scheme for small loan accounts with outstanding
principal balance upto Rs 25,000 as on March 31, 1998 is already in
operation. A special OTS scheme for small and marginal farmers will be
announced by RBI to cover loans upto Rs 50,000.
Crop Insurance
15. The National Agriculture Insurance Scheme is already in operation. To
subserve the needs of farmers better and to move towards a sustainable actuarial
regime I propose to set up a new Corporation for Agriculture Insurance to be promoted
by the existing public sector general insurance companies.

Irrigation
16. I propose to increase the allocation for the Accelerated Irrigation Benefit
Programme (AIBP) from Rs 2000 crore this year to Rs 2800 crore in 2002-03. This
will assist the States to accelerate the completion of unfinished medium and major
irrigation projects, and also to undertake reforms by revising user charges and setting
up of water users associations.

Agriculture Extension and Research

17. The accelerated diversification and modernization of agriculture will require
a new approach to research and extension services. I therefore propose to enhance
the allocation for 2002-03 for agriculture research to Rs 775 crore from Rs 684 crore
in the current year. A full review of the governance of agricultural research is also
proposed so that the system can serve the new needs creatively.
18. Linkages between research and extension will be strengthened to improve
quality and effectiveness of research and extension systems. The extension system
will be revitalised and broad-based through Krishi Vigyan Kendras (KVKs), NGOs,
farmers organisations, cooperatives, the corporate sector and agri-business clinics.
KVKs will be designated as nodal agencies for quality certification including organic
products, bio-fertilizers, and bio-pesticides. The supply of inputs, agro-processing
and trade through such cooperatives/companies will be encouraged through the
availability of credit with the help of NABARD. The Companies (Second Amendment)
Bill 2001, already introduced in Parliament will enable the conversion of existing
producer cooperative businesses into companies.
 5
Agricultural Exports
19. Promotion of agricultural exports is important for creating conditions for
providing remunerative prices to farm produce. For this purpose Agri Export zones
are being promoted in different States and 15 such zones have been approved so far.
APEDA will catalyse development of infrastructure and flow of credit to the units in
these Agri Export zones.

RURAL DEVELOPMENT
Rural Roads
20. The Pradhan Mantri Gram Sadak Yojana (PMGSY) initiated to provide
connectivity through all weather roads to all our villages is making considerable
headway. A further allocation of Rs 2,500 crore for the year 2002-03 is being made
over and above Rs 5,000 crore provided so far. Depending on the accelerated
implementation of these works I intend to find additional resources including those
from multilateral sources in the course of the year.

Rural Electrification
21. During my last budget speech I had announced a package of initiatives for
electrification of 80,000 villages that have no access to electricity. Considering the
fact that SEBs find it difficult to service debt, the Government proposes to introduce
a new interest subsidy scheme called the Accelerated Rural Electrification Programme.
An outlay of Rs 164 crore has been provided for this scheme in 2002-03.

Rural Employment
22. The Sampoorna Grameen Rozgar Yojana (SGRY) announced by the Prime
Minister in his Independence Day speech of 2001 was launched on September 25,
2001 by merging the ongoing Employment Assurance Scheme (EAS) and the Jawahar
Gram Samridhi Yojana (JGSY). Since the launch of the scheme, release of 30.6 lakh
tonnes of food grains to States has already been authorised, out of the 50 lakh
tonnes allocated. This scheme will be continued next year. I urge upon all the States
to come forward to take full advantage of the free foodgrains being offered under this
scheme.
23. Lok Nayak Shri Jai Prakash Narayan always had a special concern for the
disadvantaged. In his birth centenary year I propose to launch the Jai Prakash
Rozgar Guarantee Yojana (JPRGY) to provide employment guarantee to the
unemployed in the most distressed districts of the country. A Task Force headed by
my colleague, the Minister of Rural Development, will be set up to design and
implement a massive programme for employment generation in these districts. KVIC,
DC (SSI), and other agencies will be fully involved in the implementation of this
scheme.
24. The promotion of rural industrialisation would be helped greatly through
capacity building and technology upgradation in Khadi and Village Industries. To
help in this effort I propose to upgrade the Wardha Institute started by Mahatma
Gandhi in 1935 as a national institute to be called Mahatma Gandhi Institute for
Rural Industrialisation.
 6
25. The diversification of agriculture will not succeed without appropriate
infrastructure for marketing. For this purpose, rural local bodies, cooperatives and
NGOs will be assisted to set up rural produce marketing centres and sub-centres at
the district and block levels and to upgrade village haats under a special scheme of
the Swaran Jayanti Gram Swarozgar Yojana (SJGSY).
26. Some parts of our country have been particularly afflicted with natural
calamities. Additional allocation of Rs 480 crore was provided under the Indira
Awas Yojana for the affected States. Houses constructed by the poor under the Indira
Awas Yojana (IAY) in such disaster prone areas will henceforth be provided insurance
cover through a Master Policy.

Management of the Food Economy

27. I had drawn attention last year to the severe policy and fiscal difficulties
arising from the growing mismatch between the unprecedented level of procurement
of wheat and rice by FCI and the much lower PDS and buffer stock needs in the last
few years. The current situation of open-ended procurement by FCI at a high price
and disposal at a heavily subsidised price is not sustainable. The concept of
decentralised procurement has not yet found favour with the States. The report of
the High Level Committee on Long Term Grain Policy is expected to be submitted
shortly. We shall formulate a more durable approach for better management of our
food economy after considering this report.
28. A number of steps have been taken by the Government to reduce the high
food grain stocks that are posing serious problems of storage and disposal. These
measures include: increased allocations for BPL familiies; launching of a major food
for work programme under the SGRY; allocation of 30 lakh tonnes of free foodgrains
to States for relief works in areas affected by natural calamities; open market sales
of 30 lakh tonnes this year compared to 5.5 lakh tonnes in 2000-2001; and enhanced
incentives for export of food grains.

INFRASTRUCTURE
29. Provision of efficient and world class infrastructure is critical for our growth
aspirations. A key issue that bears repetition is the imposition of appropriate user
charges necessary to provide adequate returns on investment. Some success has
been achieved in areas such as telecom, roads and ports where appropriate user
charges exist. With the tariff rationalization and other bold measures introduced by
my colleague, the Minister of Railways, we can expect the Railways to serve well the
key transportation needs of the country in the years to come. Other areas such as
power, urban infrastructure, other transportation and the like continue to experience
great difficulty because of the lack of appropriate user charges.

Power
30. Restoration of financial viability in the power sector remains crucial. The
average rate of return for all SEBs is about minus 40 per cent and their combined
losses continue to increase. Hence, this is one of the foremost challenges not only in
the power sector but also for the fiscal health of the state governments and the
overall performance of the economy.
 7

31. In recognition of these severe problems the Prime Minister held a meeting
with State Chief Ministers on March 3, 2001. While broadly agreeing with the
desirability of power sector reforms to achieve commercial viability of State Electricity
Boards, the conference placed special emphasis on distribution reforms and
elimination of theft of electricity. Subsequently, the high level empowered group of
Chief Ministers and Union Ministers has agreed to a one time settlement scheme in
regard to SEB overdues to the Central Public Sector Utilities through securitisation
and issue of tax free bonds by the respective State Governments, subject to the
achievement of specified performance milestones and full payment of current dues
in the future. I would urge upon the States to come forward and implement the
scheme speedily.
32. The Ministry of Power has already signed Memoranda of Understanding
(MOUs) with 20 States and is expected to complete the exercise with the remaining
States soon. To redouble our effort in this direction APDP is being redesigned as the
Accelerated Power Development and Reform Programme (APDRP), with an enhanced
plan allocation of Rs 3,500 crore for 2002-03, up from Rs 1,500 crore this year.
Access of the States to the fund will be on the basis of agreed reform programmes,
the centre piece of which would be the narrowing and ultimate elimination of the gap
between unit cost of supply and revenue realisation within a specified time frame.
Accordingly, the focus of reform has shifted from generation to transmission and
distribution.
33. A high level monitoring group will oversee the progress of this programme.
Allocation for this programme will be augmented by loans on concessional terms
from the Power Finance Corporation (PFC).

Roads
34. I am glad to inform the House that the Prime Minister ’s National Highway
Development Programme (NHDP) launched three years ago is progressing well. It
now promises to achieve a totally new scenario in the road sector. The Golden
Quadrilateral will be completed substantially by December 2003, a year ahead of
schedule. The North-South East-West corridors have a length of 7300 kms., of
which 716 kms. have already been four-laned. With the assistance of multilateral
funding, other borrowings by the National Highway Authority of India (NHAI) with
government guarantee, and other innovative financing schemes, the funding for this
phase will be fully tied up in 2002-03.

Ports
35. The present Port Trust structure does not allow Indian major ports to have
the flexibility needed for efficient management and for raising institutional funding.
It is therefore proposed to corporatise major ports in a phased manner. Private sector
investments have been facilitated and 17 projects worth more than Rs 4,500 crore
have already been approved and another 8 projects worth more than Rs 3,200 crore
are under consideration. With corporatisation of the existing ports and new private
sector ports coming up, the regulatory structure will be strengthened.
 8
Civil Aviation
36. The Government has already announced its decision to upgrade the
international airports at Delhi, Mumbai, Chennai and Kolkata to the standards of
world class airports by inducting private sector management and investment through
long term leasing systems. Modalities for inviting offers have been finalised and the
leasing process will be completed in 2002-03.
37. Private sector participation in greenfield airports will be encouraged through
a package of concessions:
Š Availability of land and related infrastructure from the State Governments.
Š Exemption from levy of Inland Air Travel Tax (IATT) and Foreign Travel Tax
(FTT) on departing passengers for projects located in States that charge
sales tax on Aviation Turbine Fuel (ATF) at Central Sales Tax (CST) rate.
Š Charging of Advance Development Fee (ADF) by way of additional Passenger
Service Fee (PSF) at the existing airports for help in financing of the greenfield
airport.
Š Levy of User Development Fee (UDF) at the new airport.
Š Financial assistance/equity participation by Airports Authority of India.

The proposed new airports in Bangalore and Hyderabad will benefit from these
concessions.

Urban Development
38. The 2001 census shows that the urban population in India is now about
285 million, greater than the total population of the United States. The number of
cities with more than one million population has increased from 23 in 1991 to 35 in
2001. We are aware of the sad plight of most of our towns and cities. This needs to be
changed if they have to act as engines of growth, and if they are to provide a healthy
environment for our citizens. Hence, we can no longer afford to delay reforms in this
s e c t o r.
39. I propose to set up an Urban Reform Incentive Fund (URIF) with an initial
allocation of Rs 500 crore to provide reform linked assistance to States. The Fund
will seek to incentivise reforms in the following areas:
Š Reform of Rent Control Laws and repeal of Urban Land Ceiling Acts.
Š Rationalisation of high stamp duty regimes.
Š Revision of bye-laws to streamline the approvals process for construction
of buildings, development of sites, etc.
Š Revision of municipal laws in line with model legislation prepared by the
Ministry of Urban Development and Poverty Alleviation.
Š Simplification of legal and procedural frameworks for conversion of
agricultural land for non-agriculture purposes.
Š Levy of realistic user charges and resource mobilization by urban local
bodies.
 9
Š Initiation of public private partnership in the provision of civic services.
40. A City Challenge Fund (CCF) will also be set up as an incentive based
facility that will support cities to fund transitional costs of moving towards sustainable
and creditworthy institutional systems of municipal management and service delivery.
It will assist in the partial financing of the cost of developing an economic reform
programme and financially viable projects to be undertaken by urban local bodies. It
is also proposed to set up a Pooled Finance Development Scheme to provide credit
enhancement to assist local bodies to access market borrowing on a creditworthy
basis. To provide a further incentive for urban local bodies to become credit worthy
and to invest in urban infrastructure I am providing for the issue of municipal tax
free bonds upto Rs 500 crore in 2002-03, up from Rs 200 crore this year.

To u r i s m
41. Tourism constitutes a priority area in view of its beneficial impact on growth
of employment, generation of foreign exchange, and the promotion of greater national
integration through domestic tourism. It is therefore proposed to implement a
comprehensive tourism development package:
Š 6 tourism circuits would be identified for development to international
standards during 2002-03.
Š Special Purpose Vehicles (SPVs) will be permitted to raise resources from
both public and private sectors for infrastructure development in these
circuits.
Š One special area, the World Heritage Site of Hampi, will be developed as an
international destination for tourism based on an integrated master plan.
42. The Plan Outlay for tourism has accordingly been increased by 50 per cent
to Rs 225 crore for 2002-03. I will have more to say on the fiscal measures relating
to tourism in part B of my speech.

Infrastructure Finance
43. Members are aware of the continuing effort that we have made to attract
private sector investment in the infrastructure sector to supplement public
investment. The flow of investment has however been slow except in the telecom
sector. I therefore propose to take the following measures to facilitate faster private
investment in infrastructure facilities:
Š An Infrastructure Equity Fund of Rs 1000 crore will be set up to help in
providing equity investment for infrastructure projects. Contributions to
the Fund to be managed by the Infrastructure Development Finance
Company Limited (IDFC), would initially be made by public sector insurance
companies, financial institutions and some banks.
Š An institutional mechanism is being set up to coordinate the debt financing
by financial institutions and banks of infrastructure projects larger than
Rs 250 crore. IDFC will act as the coordinating institution with primary
responsibility for different sectors being shared with the IDBI and ICICI.
Š Public private partnerships will be encouraged for the provision of
infrastructure facilities, the modalities for which are being worked out by a
Task Force.
 10
Public Investment
44. Public Investment in key infrastructure sectors is also being sharply stepped
up. Plan outlay inclusive of internal and extra budgetary resources in power, roads
and national highways and railways is being increased by 22 per cent, 39 per cent
and 23 per cent respectively, to a total of Rs 37919 crore.

FINANCIAL SECTOR AND CAPITAL MARKET

Debt Market
45. Substantial progress has been made on the proposals made last year for
the development of a transparent and active debt market in general and the
government securities market in particular. Primary issuance of government
securities is now being facilitated by an electronic Negotiated Dealing System (NDS)
and efficiency of trading in government securities is being enhanced by the new
Clearing Corporation of India Limited (CCIL). To help investors plan their investments
better and to add transparency and stability in the market RBI will announce an
issuance calendar for dated government securities. Having now received the
concurrence of all state legislatures I also propose to introduce a new Government
Securities Bill to replace the old Public Debt Act 1949 within this Parliament Session.

Capital Market
46. In view of the various disturbances that have occurred in the capital market
it is important to boost investor confidence and to strengthen market integrity. The
following measures are being taken.
Š The process of demutualisation and corporatisation of stock exchanges is
expected to be completed during the course of the year, to implement the
decision to separate ownership, management and operation of stock
exchanges. The Securities and Exchange Board of India (SEBI) has already
prohibited the induction of broker members in management positions in
stock exchanges.
Š Legislative changes will be proposed, during the Budget Session, in the
SEBI Act, 1992 for investor protection, and to enhance the effectiveness of
SEBI as the capital market regulator.
Š Following certain developments overseas, and within the country, regarding
accounting standards and effectiveness of auditors, it is proposed to
strengthen regulation in this area.
Š Foreign institutional investors (FIIs) can invest in a company under the
portfolio investment route beyond 24 per cent of the paid up capital of the
company with the approval of the general body of the shareholders by a
special resolution. I propose that now FII portfolio investments will not be
subject to the sectoral limits for foreign direct investment except in specified
sectors. Guidelines in this regard will be issued separately.
47. Further measures have been taken to develop and deepen the capital market:
Š Badla trading has been banned and practically all trading of stocks is now
in the rolling settlement mode.
 11
Š Exchange traded derivatives have become wider with a greater choice of
instruments and deeper in terms of liquidity.
Š Individual stock options and index stock options were introduced in July
2001, and individual stock futures in November 2001.
Š Foreign Institutional Investors (FIIs) are now permitted to trade in all stock
traded derivative products within specified trading limits.
Š An Investor Education and Protection Fund has been set up from October
1, 2001 to credit certain unclaimed and unpaid amounts.
48. A package of measures for reforming the US-64 scheme and the Unit Trust
of India (UTI) has been announced which seeks to balance investors’ interest while
ensuring systemic safety. The long overdue reform for making US-64 NAV based
has been implemented. Further legislative changes in the UTI Act to put in place
other needed reform measures will be proposed during the year.

Banking Sector
49. Reforms in the banking sector will be continued to enhance the efficiency
and competitiveness of the sector. The following measures have either been taken or
are being taken:
Š Public sector banks recovered Rs 12,860 crore in 2000-01 as compared
with Rs 9,883 crore in the previous year and net NPAs as percentage of net
advances came down to 6.7 per cent as on March 31, 2001 as compared to
7.4 per cent in the previous year.
Š 29 Debt Recovery Tribunals and 5 appellate tribunals have been set up.
As on September 30, 2001 the DRTs had disposed of 18703 cases involving
Rs 14,026 crore. Recovery made was Rs 3,527 crore.
Š To help banks and financial institutions to make provisions for NPAs as
required by the RBI, additional fiscal relief is being offered, details of which
will be given in part B of my speech. This will enable banks to review their
lending rates.
Š A new Bill on Banking Sector Reforms is proposed to be introduced in
Parliament to strengthen creditor rights through foreclosure and
enforcement of securities by banks and financial institutions. This Bill will
also enable securitisation for money locked up in long term loans.
Š A pilot Asset Reconstruction Company will be set up by June 30, 2002 with
the participation of public and private sector banks, financial institutions
and multilateral agencies. This company will initiate measures for taking
over non performing assets in the banking sector and also develop a market
for securitised loans.
Š The Deposit Insurance Credit and Guarantee Corporation (DICGC) will be
converted into the Bank Deposits Insurance Corporation (BDIC) to make it
an effective instrument for dealing with depositors’ risks and for dealing
with distressed banks. Appropriate legislative changes will be proposed for
this purpose.
 12
Š Reforms in the financial sector have posed new challenges for the
development finance institutions (DFIs) like IDBI. It is proposed to make
legislative changes to corporatise IDBI within the coming year to provide it
appropriate flexibility. Meanwhile IDBI’s tier one capital is being
strengthened by conversion of existing IBRD and NIC (LTO) loans in to
appropriate long term instruments.
Š Consequent to certain amendments made in the year 2000 in the Companies
Act, 1956, directors incur disqualification for election in the case of certain
defaults by the company. It is proposed to exempt nominee directors of
public financial institutions and banks from this provision.
Š Three public sector banks had been classified as weak banks on the basis
of criteria suggested by the Committee on Banking Sector Reforms in 1997-
98. Two of these banks namely UCO Bank and United Bank of India have
turned around and have started making profits. Though the Indian Bank
has also shown improvement, its capital adequacy ratio remains deficient.
A provision of Rs 1300 crore is proposed for re-capitalisation support to
this bank, on the basis of a commitment to Government for implementing
monitorable reform measures.
50. In the banking sector foreign banks are permitted to operate in India as
fully owned branches with specific permission of the Reserve Bank of India. As
recommended by the Committee on Banking Sector Reforms, it has now been decided
to give an option to foreign banks to either operate as branches of their parent banks
or to set up subsidiaries. A foreign bank will have to choose only one of the two
options. Such subsidiaries will have to adhere to all banking regulations, including
priority sector lending norms, applicable to other domestic banks. Necessary
amendments will be proposed in the Banking Regulation Act 1949 to relax the
maximum ceiling of voting rights of 10 per cent for such subsidiaries.
51. The cooperative credit structure, which is critical for the agriculture sector,
has low capital adequacy and high NPAs, is in urgent need of reform. I had appointed
a Committee under the then Deputy Governor of RBI to examine its functioning
closely. The recommendations of this Committee have been discussed widely by
Chief Ministers and in a joint committee of Cooperation Ministers under the
chairmanship of my colleague, Shri Vikhe Patil. Reform measures such as the
adoption of a Model Cooperative Act, removal of dual control between State
Governments and the RBI, regular conduct of elections, larger stake of the members,
professionalisation of management etc. have been recommended. The recapitalisation
formula suggested is 60:40 between the Central and State Governments along with
increases in share capital of members. States will have to consider and accept their
funding share and implement the suggested measures for reform. Even though this
is a state subject the Government of India will go out of its way to help in the process.
To start the process I am making a token provision of Rs 100 crore and depending
on the pace of reform, provision of additional funds will be considered.

Housing Finance
52. The initiatives taken in the housing finance area in the last four years have
shown positive results. Total disbursement from housing finance institutions in
 13
2000-01 was Rs 26,300 crore, a growth of about 28 per cent in the year. This
amount financed the construction of about 28 lakh houses, much higher than the
annual target of 20 lakh houses. In the current year the growth rate is expected to
be around 35 per cent. To further strengthen housing finance the following measures
are being taken:
Š Consequent to the amendment to the National Housing Bank Act, NHB has
commenced securitisation of housing loans and is operationalising
foreclosure of mortgages.
Š The NHB will launch a Mortgage Credit Guarantee Scheme, which would
be provided to all housing loans thereby fully protecting lenders against
default. This will make housing credit more affordable thereby also
increasing access to housing credit in rural areas.
Š The target under the Golden Jubilee Rural Housing Finance Scheme is
proposed to be increased to 2.25 lakh for 2002-03, up from 1.7 lakh in the
current year. About 1 lakh units have already been financed up to December
2001.
Š The allocation of the Indira Awas Yojana is being increased by 13 per cent
to Rs 1725 crore for 2002-03.
I will have more to say on housing in Part B of my speech.

Capital Account Liberalisation

53. Capital account convertibility has been on our agenda for quite some time.
In view of the many disturbances that have taken place in international capital
markets in recent years I propose to continue with our policy of liberalisation with
caution. Accordingly, I propose to take the following steps to further liberalise the
capital account:
Š There will be full convertibility of deposit schemes for Non Resident Indians.
The existing Foreign Currency Non-Resident (FCNR(B)) scheme and the
Non-Resident External rupee (NRE) scheme will continue to be repatriable.
Š The schemes which do not offer full convertibility to NRIs will be discontinued
from April 1, 2002. The existing balances in the non-resident (non-
repatriable) rupee accounts will be allowed to be credited on maturity to
the convertible NRE account.
Š NRIs will be free to repatriate in foreign currency their current earnings in
India such as rent, dividend, pension, interest and the like based on
appropriate certification.
Š Indian companies wishing to invest abroad may now invest up to US $ 100
million on an annual basis through the automatic route, up from the existing
limit of US $ 50 million.
Š Indian companies making overseas investment in joint ventures abroad by
market purchases may now do so without prior approval up to 50 per cent
of their net worth, up from the current limit of 25 per cent.
 14
Š Corporates with proven track record will be allowed to contribute funds
from their foreign exchange earnings for setting up chairs in educational
institutions abroad and for other welfare measures, likely to benefit the
community abroad, on a case by case basis by the RBI.
Š Indian mutual funds will now be allowed to invest in rated securities in
countries with fully convertible currencies, within the existing limits. Earlier
such investment was only permitted in ADR/GDRs issued by Indian
companies in overseas markets.
Š Pre-payment of ECBs is permissible to the extent of balances available in
EEFC accounts, which are currently restricted to 50 per cent of export
proceeds. To enable ECB holders to benefit from lower interest rates,
utilisation of higher amounts from export proceeds will be considered by
RBI.
Š With a view to further liberalising the capital account transactions it is
proposed to put the Foreign Currency Convertible Bond (FCCB) scheme
under the automatic route upto US $ 50 million.
The Reserve Bank of India will be issuing guidelines for each of these measures
separately.
54. While liberalising the capital account is necessary we have to exercise careful
vigilance in curbing illegal capital flows. Recent evidence indicates transfer of large
sums of money through various channels in support of terrorist activities in the
country. The Government, therefore, proposes to bring suitable legislation during
the current session of Parliament to empower the enforcement agencies to arrest
and prosecute the hawala operators/money launderers suspected to be engaged in
financial transactions linked with terrorist activities.

STRUCTURAL REFORMS
Administered Price Mechanism (APM) for Petroleum
55. As decided by the Government in November 1997 and reiterated by me last
year, I am glad to announce the dismantling of the Administered Price Mechanism
(APM) in the petroleum sector from April 1, 2002. As a result, the following measures
are being taken:
Š The pricing of petroleum products will become market determined.
Š The Oil Pool Account will be dismantled on April 1, 2002 and the outstanding
balances will be liquidated by issue of oil bonds to the concerned oil
companies.
Š Private companies will be permitted in distribution subject to specified
guidelines.
Š A Petroleum Regulatory Board will be set up to oversee the sector.
Š Subsidies to refineries in the North-East will continue on a rationalised
basis.
Š Freight subsidies will continue to be provided for LPG and kerosene to far-
flung areas.
 15
Š As a result of the dismantling of APM, the price of diesel will come down by
around 50 paise per litre and of petrol by around Re 1 per litre. These
changes in prices will come into effect from March 1, 2002, initially as part
of the Oil Pool Account.
Š The 1997 Government decision on the dismantling of APM mandated the
subsidy on LPG and kerosene oil to be reduced to 15 and 33 per cent
respectively by April 1, 2002. Accordingly, the price of LPG is being raised
by about Rs 40 per cylinder and of kerosene oil for PDS by about Rs 1.50
per litre from March 1, 2002. These subsidies will be borne by the
consolidated fund from April 1, 2002.
Š The subsidies on LPG and kerosene will be on a specified flat rate basis
from April 1, 2002. The retail prices will then vary as the price of crude oil
changes in international markets.
Š These subsidies will be phased out in the next 3 to 5 years.
Š The post APM excise and customs duty changes will be spelt out in Part B
of the speech. Since the subsidy burden will be borne by the Union budget
from next year, the taxation measures have been designed to raise the
required resources.
56. I believe that this package of measures for dismantling of APM meets the
requirements of consumers and producers. It will also create a more competitive
environment in this vital sector.
57. Further details of the dismantling of APM will be announced separately by
my colleague, the Minister for Petroleum and Natural Gas.

Industrial Restructuring
58. To deal with forces of competition, industrial and other companies require
restructuring on a continuous basis. For this purpose it is essential to promote out
of court mechanisms for timely and transparent corporate debt restructuring of
viable entities, in addition to the use of legal avenues of financial restructuring. A
mechanism for Corporate Debt Restructuring (CDR) has been set up under the
guidelines issued by the Reserve Bank of India. I have decided to set up a small
group consisting of bankers and others, under the chairmanship of Deputy Governor,
Reserve Bank of India to suggest measures to make its operation more efficient.
59. In Part B of my speech I will provide for specific fiscal measures for
strengthening certain key industries including steel and textiles and other measures
for improving the competitiveness of the manufacturing sector.

Small Scale Industries

60. As Hon’ble Members are aware, small scale industries are now subject to
increasing competition with the completion of trade liberalisation. A new approach
to the promotion of small scale industries therefore, has already been adopted.
61. Adequate credit flow is essential for the small scale sector. The net bank
credit outstanding to small scale industries increased from Rs 45,789 crore on March
 16
31, 2000 to Rs 48,445 crore on March 31, 2001. In order to further increase the flow
of credit:
Š The limit for composite loans has been increased from Rs 2 lakh to Rs 5
lakh.
Š 391 specialised branches of public sector banks have been opened for small
scale industries as of September 30, 2001.
Š The exemption limit for collateral security has been increased from Rs 25,000
to Rs 5 lakh. The project cost limit under the National Equity Fund has
been increased from Rs 25 lakh to Rs 50 lakh.
Š The extension of credit to SSI has already been facilitated through the
Credit Guarantee Scheme and the Credit Linked Capital Subsidy Scheme
for Technology Upgradation.
Š Encouraged by the Kisan Credit Card Scheme, public sector banks have
now decided to introduce a scheme called Laghu Udyami Credit Card (LUCC)
Scheme for providing simplified and borrower friendly credit facilities to
small businessmen, retail traders, artisans and, small entrepreneurs,
professionals and other self employed persons, including those in the tiny
s e c t o r.
62. Members will recall that last year I had announced the dereservation of 14
items in the footwear, leather goods and toy sectors. The Government has been
engaged in discussions with stake holders in respect of certain other items in the
reserved list. Over 50 items of knitwear, certain agricultural implements, auto
components, some chemicals and drugs, and others will now be dereserved. My
colleague, the Minister of Small Scale Industries will announce the details of these
items separately.

Exports
63. The Government is committed to provide all assistance to accelerate export
growth. A key new initiative is the establishment of Special Economic Zones (SEZs).
I will announce a comprehensive package for SEZs in Part B of my speech.
64. To provide incentives to State Governments for export promotion through
the creation of new export promotion industrial parks and associated facilities, I
propose to increase the outlay for the scheme from Rs 97 crore this year to Rs 330
crore for 2002-2003. Overall outlay for the Department of Commerce for the year
2002-03 has been increased by 55 per cent to Rs 775 crore.

HUMAN DEVELOPMENT
Education
65. The 93 rd amendment of the Constitution has made free and compulsory
education for all children in the 6 to 14 age group a fundamental right. Necessary
infrastructure for making this possible will be created. Accordingly, the plan
allocation to the Department of Elementary Education and Literacy is being enhanced
from Rs 4,000 crore this year to Rs 4,900 crore for 2002-03.
 17
66. Last year I had announced a new comprehensive educational loan scheme
to cover all courses in schools and colleges in India and abroad. The scheme has
served the students well and loans amounting to about Rs 670 crore have already
been given to almost 50,000 students.

Social Security
67. Last year I had mentioned that the Insurance Regulatory and Development
Authority (IRDA) would be asked to provide a road map for a new pension scheme so
that the unorganised sector is provided adequate social security coverage. IRDA has
recommended a regulatory framework for setting up pension funds to enable
individuals to subscribe on a defined contribution basis to obtain the benefit of
pensions on their retirement. Action on these recommendations will be taken by
June 30, 2002.
68. Access to good and responsive health care is still a distant dream for the
majority of the rural population. An insurance scheme called “Janraksha” is being
designed by the public sector insurance companies to provide protection to the needy
population. With a payment of Re. 1 per day as insurance premium, a person will
be entitled to indoor treatment up to Rs 30,000 per year at selected and designated
hospitals. Out patient treatment upto Rs 2,000 per year will also be covered at
designated clinics which would include civil hospitals, medical colleges, private trust
hospitals and other NGO run institutions.

Women and Children

69. The year 2001 was celebrated as the Women’s Empowerment Year and
several policy, legislative and programme initiatives have been launched
to help in the empowerment of women. I am increasing the plan allocation for the
Department of Women and Child Development by 33 per cent to Rs 2200 crore.
70. In order to encourage the entry of large numbers of women into scientific
professions, the government intends to institute at least 100 scholarships a year to
be provided by the Department of Science and Technology to women scientists and
technologists.
71. Far too many children in our country continue to suffer from malnutrition.
Accordingly, the Prime Minister announced a National Nutrition Mission in his
Independence Day speech on August 15, 2001. Under this Mission food grains at
subsidised rates would be made available to adolescent girls and expectant and
nursing mothers belonging to below poverty line families through the ICDS structure.

Indian System of Medicine

72. The National Institute of Siddha at Chennai is being provided Rs 4 crore for
commencing its activities. A National Ayurvedic Hospital will be set up at Delhi with
private sector participation. I am further increasing the budgetary support for ISM
next year by 25 per cent to Rs 150 crore.

Scheduled Castes and Scheduled Tribes

73. The allocation for the welfare and upliftment of Scheduled Castes in the
Ministry of Social Justice and Empowerment has been increased from
 18
Rs 792 crore this year to Rs 879 crore in the coming year. The Ministry of Tribal
Welfare has launched a number of schemes to improve the social and economic life
of scheduled tribes. In order to meet the requirements of various schemes such as
scholarships and hostels for improved access to quality education, the establishment
of Grain Banks, and other support schemes under the National Scheduled Tribes
Finance and Development Corporation (NSTFDC), I have increased the plan outlay
for tribal welfare by 21 per cent to Rs 290 crore for 2002-03.

Development of the North Eastern Region

74. I am glad to inform the House that during the current year an additional
sum of Rs 500 crore was provided to the North Eastern States from the Central Pool
set up in 1998-1999. This is Rs 187 crore more than last year. The provision for
expenditure in North Eastern States out of the Central Plan of various Ministries
has also been increased from Rs 3,457 in the current year to about Rs 5,016 crore
next year.

Science and Technology

75. The plan allocation for the Department of Science and Technology is being
raised to Rs 625 crore in 2002-03, an increase of more than 52 per cent over the
current year.
76. A fund for the improvement of Science & Technology (FIST) was established
in 2000-01 for augmenting laboratory facilities in Universities. Encouraged by the
enthusiastic response to this fund I propose to increase the allocation for this
programme to Rs 75 crore in 2002-03, an increase of almost 115 per cent. Resources
from this fund can now also be used to augment library facilities in the Universities.
77. The National Innovation Foundation was set up in March 2000 with a
corpus of Rs 20 crore, in order to build a national register of outstanding traditional
knowledge and grass root innovations. This initiative has shown good results. In
the second annual campaign NIF has received more than 11,000 entries from all
over the country, up from 948 entries in the first year. Encouraged by this
enthusiastic response I propose to set up a micro venture capital fund for small
innovations to be initiated by the Small Industries and Development Bank of India
(SIDBI), in cooperation with the National Innovation Foundation, to facilitate the
transition of innovations into enterprises.

Entertainment
78. India’s global leadership in computer software must now be complemented
by another area of our core competence, the vast terrain of the entertainment industry.
Today, we are the world’s largest producer of films; we have a rapidly expanding
broadcasting sector; a huge reservoir of talent in music; and a promising potential to
become the international hub for all types of inputs for the entertainment industry.
Accordingly, the budgetary support for the Ministry of Information and Broadcasting
is being increased by 22 per cent to Rs 415 crore for 2002-03.
79. With the industry status to the entertainment sector brought into effect
last year, banks and financial institutions have sanctioned more than Rs 236 crore,
so far, for film and TV software production. Good money will certainly lead to good
 19
films. Film exports have been roughly doubling every year, during the last 3 years. It
is time we brought about a fiscal regime to usher in more “Khushi” and take away
the remaining “Gham” from the entertainment industry.
80. “Filhal” I shall have more to say on this in Part ‘B’ of my speech.

FISCAL CONSOLIDATION
8 1 . In every budget speech I have, at the risk of irritating repetition,
expressed my deep concern at the poor fiscal situation of the Central and State
Governments. Reflecting this concern I had introduced in Parliament the Fiscal
Responsibility and Budget Management Bill in December 2000. The
recommendations of the Parliamentary Standing Committee of Finance are
receiving our attention and I propose to bring the Bill for consideration in this
august House within the current session.
82. I had proposed to reduce the estimated fiscal deficit of 5.1 per cent in RE
2000-2001 to 4.7 per cent of GDP in BE 2001-02. The industrial slowdown
experienced in both 2000-01 and the current year has reflected itself in the much
lower than expected revenue collections from customs duties, excise duties and
corporate income tax. The Non-Plan expenditure, however, has been kept under
strict check: as a consequence, Mr. Speaker, Sir, you will be pleased to hear that
Non-Plan expenditure for the current year is lower by more than
Rs 10,000 crore over the budgeted amount. However, mindful of the industrial
slowdown, and the need for continued public investment, Plan expenditure has not
only been protected but is actually higher than BE. The GDP estimate for the year
has also been lowered. As a result fiscal deficit in now expected to be 5.7 per cent of
GDP in the current year.
83. Putting our fiscal house in order must remain our highest priority. We have
to make every effort to contain non productive expenditure and make substantive
improvements in our tax machinery so that revenue collections show higher buoyancy
in coming years. I will shortly outline my plans in this regard in Part B of my speech.
84. The fastest increasing component of expenditure is that of subsidies. It is
essential that they are reduced to a minimum over the next 3 to 5 years. However,
access of the poor to adequate levels of nutrition through a well targetted PDS will
have to be ensured along with employment generation programmes.

Expenditure Management
85. The success achieved in containing Non-Plan expenditure has encouraged
me to deepen the efforts in this direction. The recommendations of the Expenditure
Reforms Commission (ERC) provide a very useful framework for immediate moderation
in expenditure growth. The ERC completed its work in September 2001 and submitted
10 reports covering 36 Ministries/Departments that had a total sanctioned staff of
8.65 lakh. Of the identified surplus manpower of 42,200 in these Ministries/
Departments, nearly 12,200 posts are expected to be abolished by the end of March
2002. The remaining reports are at different stages of consideration. The decision to
limit fresh recruitment to 1 per cent of total civilian staff strength will continue to be
implemented over the next 4 years. The availability of a VRS package that has now
 20
been approved will help this effort to reduce staff strength while ensuring adequate
security to the affected employees.
86. We have made efforts to contain the fertiliser subsidy by plugging
inefficiencies in the production system which were earlier passed on to the
government by the producers and by periodical increases in the issue prices. The
ERC has recommended that the Government should increase prices by 7 per cent
every year and move towards decontrol over the next 5 years. Fertiliser prices
have not been increased for the last two years. I propose a modest increase in the
issue price of urea, DAP and MOP by about 5 per cent and to reduce the subsidy
for SSP by Rs 50 per tonne. The prices of complex fertilisers will also be suitably
modified. The Ministries of Agriculture and Chemicals and Fertilisers will notify
the specific increases.
87. In a further move towards price and distribution control, the compulsory
levy on sugar will be reduced from 15 to 10 per cent from March 1, 2002. Accordingly,
the retail price of PDS sugar will be Rs 13.50 per kg. from March 1, 2002.
88. Because of the rising cost of Postal Service, a modest increase in postal
rates is being proposed.

Small Savings and Interest Rates

89. Last year I had announced the setting up of an Expert Committee headed
by Deputy Governor, RBI to suggest rationalisation of administered interest rates.
The Committee has given its report, which has been examined by the Government.
Accordingly, I propose to take the following measures:
Š Administered interest rates will now be benchmarked to the average annual
yields of government securities of equivalent maturities in the secondary
market. Accordingly, most administered interest rates are being reduced
by 50 basis points from March 1, 2002. Such adjustments will henceforth
be made annually on a non-discretionary automatic basis. The benefit of
reduction in interest rates on small savings deposits will be fully passed on
to the States.
Š A corresponding reduction of 50 basis points will be made in the interest
rate applicable to Government of India Relief Bonds. Further, a ceiling of
Rs 2 lakh per year is being put on investment in these bonds.
Š The entire net proceeds of small savings will be transferred to State
Governments beginning April 1, 2002, up from the current transfer of 80
per cent. Consequently, additional loan assistance of about
Rs 10,000 crore will be available to the States along with the benefits of a
lower interest rate.
Š State Governments will be enabled to pre-pay their high cost debt of the
past from these additional resources which would be at a lower interest
rate. Modalities of this pre-payment of small savings debt of State
Government will be worked out in consultation with them and the Reserve
Bank of India.
Š The interest rate on the loans portion of Central assistance to State plans
is being reduced by 50 basis points.
 21
Š Alignment of interest rates on GPF by the State Governments with the
reduced GPF interest rates at the Centre will further reduce the interest
burden of State Governments.
Š Revisions are being made in the tax treatment of small savings, which will
be outlined in Part B of my speech.
90. The implementation of this long sought reform in the treatment of small
savings and administered interest rates is another step forward in the deregulation
of interest rates in the economy that has been carried out in phases over the last 10
years. This should help in reducing the interest burden on the government and
private sector alike in future.

Pension Reform
91. The present pension scheme for Government employees casts an open-
ended financial burden on the Government. I had announced the appointment of a
High Level Expert Group to develop a new pension scheme, based on defined
contributions, for new recruits entering government service. The Expert Group has
submitted its report to the Government. It has proposed a hybrid scheme that
combines contributions from employees and the Union Government on matching
basis, on the one hand, while committing to the employees a defined benefit as
pension. The report is being considered by the Government and the new pension
scheme for new recruits will be announced and implemented by June 1, 2002.

Privatization
92. With the streamlined procedure for disinvestment and privatization, I am
happy to report that the Government has now completed strategic sales in 7 public
sector companies and some hotel properties of the Hotel Corporation of India (HCI)
and the India Tourism Development Corporation (ITDC). The change in approach
from the disinvestments of small lots of shares to strategic sales of blocks of shares
to strategic investors has improved the price earning ratios obtained. We expect to
complete the disinvestment in another 6 companies and the remaining hotels in HCI
and ITDC this year. Disinvestment receipts for the present year are estimated at Rs
5,000 crore excluding the special dividend from VSNL of Rs 1,887crore. Encouraged
by these results, I am once again taking credit for a receipt of Rs 12,000 crore from
disinvestment next year.

Defence
93. Modernisation and upgradation of our Defence preparedness is an area of
highest national priority. I have made a provision of Rs 65,000 crore for defence
expenditure for next year. In case of need, I shall not hesitate to provide more funds
for this purpose. As a measure of welfare of the defence forces and their families,
and, as announced by the Prime Minister in his Independence Day speech, a major
programme of housing construction for defence personnel is also being taken up.

State Fiscal Reforms

94. The challenge of fiscal management is equally acute in the case of States.
We have been working jointly with the States through the Fiscal Reforms Incentive
 22
Fund set up on the recommendations of the Eleventh Finance Commission. Some
State governments have taken bold measures to bring down non-productive
expenditure to improve their fiscal situation. 12 States have so far drawn up medium-
term fiscal reform programmes in consultation with the Central Government in the
current year and have been provided assistance from the Incentive Fund. The reform
of small savings schemes together with interest rate reductions and debt swap facility
that I have already mentioned will also help the States. It will be our joint endeavour
to bring down the consolidated debt to GDP ratios to sustainable levels by 2005.
95. As I have mentioned earlier, we are now providing reform linked assistance
to States for a number of sectors like APDRP, AIBP, URIF, RIDF for which a total
amount of Rs 12,300 crore has been provided. In addition, a lump-sum amount of
Rs 2,500 crore has been provided for policy reforms in sectors which are constraining
growth and development. I am confident that with the joint efforts of Centre and the
States we will be able to put in place programmes and policies which will remove
barriers to growth, accelerate the development process and improve the quality of
life of our people.

BUDGET ESTIMATES
Revised Estimates for 2001-2002
96. The revised estimates for the current fiscal year show a decrease in
expenditure of Rs 10,787 crore as compared to the Budget estimates.
97. Net tax revenues for the Centre are estimated to be Rs 1,42,348 crore
compared to the Budget estimate of Rs 1,63,031 crore, thereby reflecting a shortfall
of Rs 20,683 crore. The major shortfall is due to lower collection of Customs and
Union Excise duties due mainly to the industrial slowdown. Non tax revenue is
estimated at Rs 70,224 crore, Rs 1,510 crore more than the estimated level of Rs
68,714 crore. However, disinvestment receipts, at Rs 5000 crore are much lower
than the Budget estimate of Rs 12,000 crore.

Budget Estimates for 2002-2003

98. In the budget estimates for 2002-2003, the total expenditure is estimated
at Rs 4,10,309 crore, of which Rs 1,13,500 crore is for Plan and Rs 2,96,809 crore
for non-Plan.

Plan Expenditure
99. The budget support for Central, State and UT Plans has been placed at
Rs 1,13,500 crore, an increase of Rs 18,400 crore over Budget estimates 2001-2002.
This amounts to an increase of 19.35 per cent over the last year, which is the highest
increase in over a decade. Gross budgetary support for the Central Plan is being
enhanced from Rs 60,276 crore in the revised estimates 2001-2002 to Rs 66,871
crore in 2002-2003. Central Plan assistance to States and Union Territories in 2002-
2003 is also proposed to be increased to Rs 46,629 crore from Rs 38,878 crore in the
revised estimates 2001-2002. While the increase in Central Plan outlay is about 11
per cent, the increase in central assistance to state plans is nearly 20 per cent.
 23
Non Plan Expenditure
1 0 0 . Non-plan expenditure in 2002-2003 is estimated to be Rs 2,96,809 crore
compared to Rs 2,65,282 crore in Revised estimates for 2001-2002. The increase in
non-plan expenditure is mainly in interest payments (Rs 10,133 crores), subsidies
(Rs 9,278 crore), defence (Rs 8,000 crore) and grants to State Governments (Rs
2,196 crore).
PART B

1 0 1 . Sir, I now present my tax proposals.

1 0 2 . I have formulated my tax proposals against the backdrop of the current
economic slow-down. My tax proposals are intended to revive demand, promote
investment, accelerate economic growth and enhance productivity. They are also
aimed at widening the tax base, rationalization and simplification of tax structures
and encouraging voluntary compliance.
1 0 3 . I present my indirect tax proposals first.
1 0 4 . Sir, in my earlier budgets I have made strenuous efforts to address the
issues of cascading, distortions, anomalies and inequities in the commodity tax
structure. I have achieved significant rationalization of tax structures relating to
both excise and customs duties. The number of rates are few, and procedures more
transparent than before. The service tax, though confined to limited number of
services, has gained ground.
1 0 5 . In 2000-2001, I had introduced the rate of 16% as the rate of Central
Value Added Tax (CENVAT) in the excise duty structure. Last year, I had reduced the
three rates of special excise duty to a single rate of 16%. This rationalization in the
duty structure has considerably reduced disputes and litigation and the cost of
compliance to the assessees. Above all, it has put in place a system, which is stable,
just and rational. We only need to refine it further.
1 0 6 . I propose to abolish the 16% special excise duty on a number of items.
Henceforth, the special excise duty shall be confined to the following
8 items only:
 Polyester Filament Yarn
 Motor cars
 Multi Utility Vehicles
 Tyres for replacement
 Aerated soft drinks and soft drink concentrates
 Air conditioners
 Pan Masala, and
 Chewing Tobacco & miscellaneous tobacco preparations

1 0 7 . I propose to do away with the concessional rate of 8% excise duty applicable

to LPG, kerosene, auto CNG and diesel engines upto 10 HP which will now attract
the CENVAT rate of 16%.
 24
1 0 8 . Mr. Speaker Sir, the rates of excise duty have now been considerably
moderated. However, several exemptions still continue. In my last budget I had
imposed excise duty at a moderate rate of 4% on a few items. I propose to increase
this rate from 4% to the next slab of 8% this year. Simultaneously,
I propose to impose excise duty at 4% on a few more items, which have remained
exempted so far.
1 0 9 . Cigars, cheroots and cigarillos of tobacco or tobacco substitutes which have
been exempt so far shall attract 16% CENVAT.
1 1 0 . In view of the abolition of Administered Price Mechanism on petroleum
products and in order to provide for the subsidy on LPG and kerosene oil, I propose
to make some changes in the duty structure of petroleum products. The rate of cess
applicable to indigenous crude oil under the Oil Industry (Development) Act will be
increased from Rs 900 per metric tonne to Rs 1800 per metric tonne with effect from
1st March 2002. I propose to reduce the ad valorem rate of excise duty applicable to
motor spirit from 90% to 32%. However, I propose to impose on it a surcharge of six
rupees per litre. But the surcharge on ethanol doped motor spirit will be five rupees
and twenty five paise per litre.
1 1 1 . Mr. Speaker, Sir, the Indian textile industry occupies an important place in
our economy. It is the second largest provider of employment after agriculture. The
Multi Fibre Agreement will be phased out by 2004. Domestic market has already
been opened up. Our textile industry has to prepare itself for the challenges ahead.
1 1 2 . I have carved out a special package of incentives for the textile industry.
1 1 3 . I propose to maintain the excise duty rates on yarns. At present, cotton
hank yarn is exempt from excise duty but is being widely misused. In order to
ensure that the benefit accrues only to the handloom weavers I propose to bring
hank yarn within the net of excise duty at 8%, but at the same time, provide for
appropriate subsidy on the price of hank yarn purchased by them. This will put an
end to misuse and target the subsidy better. The Ministry of Textiles would announce
the details of the subsidy scheme.
1 1 4 . In order to enable the weavers to avail of CENVAT credit scheme,
I propose to allow the weavers of grey fabrics to pay excise duty on an optional basis.
I propose to extend a similar option to the knitting sector.
1 1 5 . Mr. Speaker, Sir, in all humility, I can claim credit for introducing the
CENVAT rate of 16% in the excise duty structure. However, in the case of textiles, I
am making an exception and granting a remission of 4%. The rate of excise duty on
fabrics, made ups and garments would be 12%. This special dispensation shall
continue upto 28.2.2005. Industrial fabrics would however continue at 16%.
1 1 6 . At present, hand processing of textile fabrics by independent processors is
exempt from excise duty even if power is used on 12 specified processes in the case
of cotton fabrics or 7 specified processes in the case of man made fabrics. I propose
to confine this exemption to only 3 processes, namely, scouring, hydro-extraction
and calendering.
 25
1 1 7 . I propose to abolish the compounded levy scheme for independent power
processors as it is incongruous with the reduced rate of duty that I have proposed.
1 1 8 . Handloom sector is not affected by my budget proposals. Excise duty
exemption on handloom fabrics continues. I now propose to grant exemption to
handloom garments also from excise duty subject to certification by Handloom Export
Promotion Council.
1 1 9 . In order to enable the textile industry to modernize itself and acquire new
technology, I propose to exempt excise duty on automatic shuttleless looms. I also
propose to exempt excise duty on specified processing machinery and specified silk
reeling, weaving and twisting machinery. The customs duty on such machinery is
also proposed to be reduced from 25% to 10%. I also propose to exempt specified
jute machinery from excise duty. I hope this package will enable the textile industry
to face global competition.
1 2 0 . My proposals include special dispensation of excise duty structure for the
petroleum refineries located in the North East Region. With effect from 1st March
2002, the petroleum products produced by all these refineries shall be charged to
excise duty at half of the normal rates of excise duty otherwise applicable to petroleum
products.
1 2 1 . Inland Air Travel Tax is exempted for air travel within the North East States.
I propose to extend this exemption on air travel to and from North East States.
1 2 2 . Tea industry is currently facing a number of problems in the domestic as
well as international markets for a variety of reasons. In order to promote the interest
of tea growers, I propose to reduce the excise duty on tea from
Rs 2 per kg to Re.1 per kg.
1 2 3 . We have to face the menace of HIV-AIDS with determination.
I propose to exempt specified anti-AIDS drugs from excise duty with effect from 1st
March 2002.
1 2 4 . Specified cold chain equipment are exempt from excise duty.
I propose to add three more equipment to this list to promote the preservation of
fruits and vegetables.
1 2 5 . The excise duty exemption scheme for the small-scale sector is applicable
to granite. In view of the fact that it is not available to marble,
I propose to withdraw this exemption from granite also.
1 2 6 . The scheme of excise duty assessment based on Maximum Retail Price of
goods has resolved valuation disputes in a dramatic way. I propose to extend this
scheme to 9 more categories of items this year, thus raising the number to 92
categories of items.
1 2 7 . Mr. Speaker, Sir, the justification of taxing more services does not require
any elaboration. This year, I propose to extend the service tax to the following services:
 Life insurance, including insurance auxiliary services relating to life
insurance
 Inland cargo handling
 26
 Storage and warehousing services (except for agriculture produce and cold
storages)
 Event management
 Rail travel agents
 Health Clubs & Fitness Centres
 Beauty parlours
 Fashion designers
 Cable operators
 Dry cleaning services
1 2 8 . Service tax is applicable to specified services provided by banks and non-
banking financial companies. I propose to extend the service tax to corporate bodies
that provide similar services.
1 2 9 . The tax on these services shall come into force from a notified date.
1 3 0 . Our tourism industry has been adversely affected by recent events. In
December 2001, I had announced exemption from service tax on the services provided
by hotels. The exemption expires on 31st March 2002. I propose to extend this
exemption for one more year upto 31st March 2003.
1 3 1 . Sir, I now present my proposals relating to customs duties.
1 3 2 . The House may recall that, in my last budget, I had announced that I
would move progressively to reduce the peak rate of customs duty to 20% within
three years. I had also said that the modalities for this would be worked out in time
for the next budget. I had accordingly set up an Inter-Ministerial Working Group to
recommend the modalities. The Group has suggested a road map for this starting
with this year ’s budget. After careful consideration of the Group’s report, I have
decided that, by the year 2004-05, there would be only two basic rates of customs
duties, namely, 10% covering generally raw materials, intermediates and components
and 20% covering generally final products. The existing rates would be adjusted
and subsumed in these two basic rates with some exceptions on account of WTO
bindings or higher tariffs for agricultural products. In accordance with the road
map, I propose to reduce the peak rate from 35% to 30% this year. I also propose to
make some changes to take care of some current problems.
1 3 3 . Our steel industry has been affected by slowdown in demand and has
suffered large losses. In order to reduce its cost of production I propose to lower
customs duty on a number of refractory raw materials by 10%. These include natural
graphite powder, silicon metal, sintered alumina, fused zirconia and boron carbide.
I also propose to reduce the duty on graphite electrodes of above 24 inches diameter
from 25% to 15%.
1 3 4 . Ships imported for breaking are charged to customs duty at 5% along with
CVD and special additional duty. I propose to revise this by increasing the basic
duty on ships for breaking from 5% to 15% and exempting them from CVD and
special additional duty. This is to reduce the disparity between rolled products
produced by the steel plants and cheaper products produced from ship breaking.
 27
1 3 5 . The steel industry is troubled by imports of seconds and defectives at cheaper
prices. In order to address their concern I propose to increase the basic customs
duty on seconds and defectives of steel to the bound rate of 40%.
1 3 6 . Non-ferrous metals are used for large number of applications by different
segments of industry. I propose to reduce the customs duty on copper, zinc and
lead from 35% to 25% and on aluminium and tin from 25% to 15%.
1 3 7 . In the EXIM policy for the year 2000-2001, my colleague, the Minister of
Commerce and Industry announced the scheme of setting up Special Economic
Zones that are intended to provide comprehensive facilities at one place for export
production. Special Economic Zones would be entitled to procure duty free equipment,
raw materials, components, etc. whether imported or purchased locally. The benefit
of such exemption shall be applicable to both the developers of Special Economic
Zones as well as the units located therein.
1 3 8 . In order to encourage development of world class infrastructure facilities,
I propose to reduce the customs duty on specified equipment for Ports and Airports
to 10%.
1 3 9 . In view of the difficulties being faced by the civil aviation sector,
I propose to exempt duty on aeroplanes, helicopters, gliders, simulators of aeroplanes
and their parts and raw materials.
1 4 0 . Mr. Speaker, Sir, India is signatory to the Information Technology Agreement.
The House may recall that, in 1998, I had announced that zero duty regime on IT
products would be preponed and implemented by 2003. However, the local
manufacturers have urged me strongly that it may be made effective only from the
year 2005. This would give them an opportunity to gear up to meet the challenge of
international competition. I have decided to accept their demand. As a further
measure of assistance to indigenous industry, I propose to reduce the customs duty
on a number of hardware inputs to 5% and on certain capital goods to 15%. The
duty on certain IT items would be reduced to 10% or 5% as per the WTO binding.
1 4 1 . The use of cellular phones is increasing by leaps and bounds but import
through unauthorized channels is a matter of concern. I therefore, propose to exempt
cellular phones and pagers from CVD. The basic customs duty is, however, being
increased from 5% to 10%.
1 4 2 . Sir, I have repeatedly assured the House that our customs tariffs would be
pegged at appropriate levels to protect the interest of the farmers. In my last budget
I had increased the customs duty on tea, coffee, copra, coconut and desiccated
coconut to 70%. This year, I propose to increase the customs duty on tea and coffee
to 100% and on natural rubber, poppy seeds, pepper, cloves and cardamom to 70%.
I also propose to increase the duty on pulses from 5% to 10%.
143. I propose to reduce the customs duty on agricultural machinery and
implements from 25% to 15% to encourage our farmers to acquire new and efficient
technology.
1 4 4 . A number of drugs are exempt from customs duty. I propose to include
eight more drugs used for treatment of cancer and some other critical diseases in
 28
the list of fully exempted drugs. Vaccine for immunisation against Japanese
Encephalitis shall also be exempt from customs duty. It has been reported that
certain drugs that are presently exempted from customs duty are now made
indigenously. In order to provide reasonable incentive to the domestic manufacturers
of these drugs, I propose to impose a basic customs duty of 5% on these drugs.
1 4 5 . India has a large number of diabetic patients. They have to undergo frequent
blood sugar tests. In order to provide some relief to them, I propose to reduce the
customs duty on Glucometers and test strips from 25% to 10%.
1 4 6 . As a measure of rationalization and removal of anomaly I propose to reduce
the customs duty on non-PDS kerosene from 35% to 20% and increase the customs
duty on kerosene sold under the PDS scheme from 5% to 10%.
1 4 7 . In order to promote interest in science, I propose to reduce the customs
duty on planetarium equipments, parts and accessories to 15% and also exempt
them from CVD and special additional duty of customs.
1 4 8 . India has the technical capability to become an uplinking hub for television
channels for the SAARC countries. In order to promote state-of-the-art uplinking
facilities at competitive costs, I propose to reduce customs duty on certain earth
station equipment and studio equipment from 35% to 25%.
1 4 9 . I propose to reduce the customs duty on cement and clinkers from 25% to
20%. This should help in keeping the domestic prices under control.
1 5 0 . The customs duty on imported liquors is bound at 182% for the current
year under the WTO. Accordingly, I propose to reduce the customs duty on these
items from 210% to 182%. I also propose to rationalize the rates of CVD applicable
to liquors and wines to 75% for value upto US $ 25 per case and 50% for others.
1 5 1 . Passengers returning from abroad on transfer of residence are allowed
certain items of personal use on payment of customs duty at a flat rate of 35%. I
propose to reduce this rate to 30% and also add a few more items like lap top
computers, portable photocopy machines, digital video disc players, video cassette
disc players in the eligible list of items. The overall limit is also being raised from Rs
1.5 lakh to Rs 5 lakh.
1 5 2 . I propose to impose nominal customs duty of 5% on some of the items that
are exempt at present. I also propose to impose special additional duty on certain
other items that are currently subjected to 5% customs duty.
1 5 3 . I have proposed a few other changes that are of a minor nature.
I have also proposed some legislative changes with regard to customs, excise and
service tax laws that are contained in the Finance Bill. I do not wish to take the time
of the House in elaborating on them in detail.
1 5 4 . Mr. Speaker, Sir, the customs and excise duty structures have been greatly
simplified in the past few years. With the changes that I have proposed the revenue
from 16% CENVAT will be more than 85% of the total revenue from ad valorem
duties. In the next two years it can be reduced to one, namely 16%. The customs
tariff will also comprise of only two basic rates in three years’ time.
 29
1 5 5 . In my previous budgets, I have also made considerable efforts to simplify
procedures. However, the task is not yet complete. Our tax administration needs to
take full advantage of information technology. Our tax systems need to encourage
voluntary compliance, provide efficient service to the taxpayers, eliminate
unproductive work and enhance efficiency. The discretionary powers need to be
replaced by rule-based mechanism. All these aspects of tax administration deserve
to be examined in their entirety. I propose to set up an Expert Committee to make a
comprehensive study of these aspects.
1 5 6 . My proposals on the excise side are estimated to result in a revenue gain
of about Rs 6700 crore in a year. On the customs side my proposals are estimated to
result in a revenue loss of about Rs 2200 crore. However, I anticipate buoyancy in
indirect tax revenue and estimate that the total collection next year would be Rs
1,43,702 crore.
1 5 7 . Copies of the notifications issued to give effect to the changes in excise and
customs duties shall be laid on the Table of the House in due course.
1 5 8 . I now turn to Direct Taxes.
1 5 9 . Personal Income tax rates have been at 10%, 20% and 30% and corporation
tax at 35% for several years. They are reasonable and therefore,
I have left them unchanged in my last four budgets. I do not propose to change them
this year also.
1 6 0 . At the same time, it is important to recognise the need for specific
interventions to provide a stimulus for industrial growth. I outline these now.
1 6 1 . I have already mentioned the need to provide incentives for fresh investments
in the industrial sector. To give impetus to such investment, I propose to allow
additional depreciation at the rate of 15% on new plant and machinery acquired on
or after 1st April, 2002 for setting up a new industrial unit, or for expanding the
installed capacity of existing units by at least 25%.
1 6 2 . There is disparity between the rates of Corporation tax applicable to foreign
companies and domestic companies. This disparity arose in the past partly due to
certain levies like surcharge being applicable to domestic companies but not to foreign
companies. To correct this, I propose to reduce the rate applicable to foreign companies
from 48% to 40%.
1 6 3 . The small-scale industry sector has been making an important contribution
to economic growth, and deserves continued support. In order to enable the Small
Industries Development Bank of India (SIDBI) to augment its resources and provide
cheaper credit to the small scale sector, I propose to allow capital gains exemption
under section 54EC of the Income-tax Act to amounts invested in bonds issued by
SIDBI.
1 6 4 . In my Budget for 2000-2001, I had announced the setting up of a Credit
Guarantee scheme for small-scale industries. Accordingly, the Credit Guarantee
Fund Trust for Small Industries has been constituted. I propose to grant full exemption
from tax to the income of this Trust.
 30
1 6 5 . Continuing the thrust given to the housing sector over the last four years,
I propose to allow the deduction for interest payable on housing loans for self-occupied
houses even where such houses are acquired or constructed after 31st March 2003,
as long as the acquisition or construction is completed within three years from the
end of the financial year in which the loan was taken. For giving a further impetus to
investment in the housing sector, I propose to extend the capital gains exemption
provided in section 54EC of the Income-tax Act to bonds issued by the National
Housing Bank.
1 6 6 . The shipping industry in India is internationally competitive and is capable
of further growth. In my Budget for 2000-2001, I had provided for a deduction of the
entire profits of a shipping company if the amount deducted was kept in a reserve
for purchase of new ships. However, the aggregate of the amounts that can be
transferred to such reserve is limited to twice the amount of the paid up share
capital of the company. I propose to extend it to cover share premium reserve and
general reserve also. This reserve will not be considered while computing the book
profits and shipping companies would thus be out of the purview of minimum
alternate tax (MAT).
1 6 7 . Presently, banks are allowed to deduct upto 5% of their total income against
provisions made by them for bad and doubtful debts. In order to strengthen the
financial position of banks I propose to increase this allowance to 7.5% of the total
income. Further, in my budget for the year 1999-2000, I had granted an option to
banks to deduct upto 5% of their NPAs falling in the category of loss or doubtful
assets as on the last day of the accounting year. I propose to enhance this optional
deduction to 10%, and also allow a similar option of deduction upto 10% of loss or
doubtful assets to public financial institutions.
1 6 8 . There has been a persistent demand that the benefit of carry forward and
set off of past losses in cases of mergers of companies owning industrial undertakings,
should be extended to more sectors. The telecommunication sector, in particular, is
undergoing a phase of rapid consolidation and expansion. With a view to encourage
its growth, I propose to extend this benefit to companies providing telecom services
and eligible for deduction under section 80-IA. I also propose to constitute an expert
group to examine the extension of this benefit to other companies in the services
sector, including the financial services sector.
1 6 9 . In order to provide further fiscal relief to the tourism sector, I propose to
take the following measures:-
 Expenditure Tax on hotels will, henceforth, apply only to room charges,
and will be payable only where such charges are Rs 3,000 or more per day,
as against the existing threshold of Rs 2000 per day.
 The deduction available under section 80HHD of the Income-tax Act in
respect of foreign exchange earnings of hotels or tour operators will be
enhanced to bring it in line with the deduction available to exporters under
section 80 HHC.
 A deduction of 50% of the profits earned by units setting up and operating
large convention centres will be allowed for 5 years under section 80-IB.
 31
1 7 0 . I have emphasised the importance of the entertainment industry in Part A
of my speech. To give a further boost to this fast-growing sector, I propose to allow,
for the next five years, a deduction of 50% of the profits earned by units constructing
and operating multiplex theatres in non-metropolitan towns.
1 7 1 . As a measure for protection and regeneration of our environment,
I propose to provide for an incentive by way of tax deduction under section 35AC of
the Income-tax Act in respect of amounts paid to a company or institution approved
by the National Committee for Social and Economic Welfare, for carrying out projects
of softwood plantation on degraded non-forest land. A deduction under this section
will also be available in respect of payments towards conservation of natural resources
and afforestation.
1 7 2 . Last year, for ensuring a degree of transparency in the affairs of charitable
and religious trusts as well as certain other institutions claiming exemption under
section 10(23C), I had introduced provisions requiring them to publish their accounts
in a local newspaper, if their total receipts during a year exceeded Rs 1 crore. I have
received a large number of representations pointing out the possibility of misuse of
such information by anti-social elements. In view of these representations, I propose
to delete this requirement. I further propose to rationalise certain provisions relating
to these trusts and institutions so as to allow the accumulation of any part of their
income only upto a maximum period of five years and to clarify that inter-trust
donations may only be made either from the corpus or from the current year’s income.
1 7 3 . Following the Gujarat earthquake last year, I had granted a 100% tax
deduction to donations made to certain approved charitable trusts and institutions
that were to be applied before 31st March 2002 in relief work. As such relief work is
still going on in many areas, I propose to extend the terminal date for utilisation of
such donations from 31st March 2002 to 31st March 2003.
1 7 4 . Last year, I had rationalised the rules for valuation of perquisites on the
basis of their cost to the employer, except in respect of houses and cars where different
criteria are adopted for simplicity. To relieve the burden on lower salaried employees,
I propose to provide that no perquisites will be assessed for the assessment year
2002-2003 in the case of employees whose taxable salary, excluding perquisites, is
upto Rs 1,00,000. For subsequent years,
I propose to give an option to the employer to pay the tax on perquisites on behalf of
the employees.
1 7 5 . Under section 89 of the Income-tax Act, a tax relief is provided in case of
additional tax burden imposed in any one year due to receipt of arrears of salary. As
a welfare measure, I propose to allow this relief also in cases where family pension is
received in arrears.
1 7 6 . In continuation with the taxpayer friendly measures brought about by me
in my earlier Budgets, I propose to abolish the provisions of Chapter XXC of the
Income-tax Act, which require a clearance to be obtained from the Appropriate
Authority before registering a transfer of an immovable property.
177. Sir, some of the exemptions and deductions currently provided in the
Income-tax Act have become redundant and are not in harmony with the moderate
 32
tax regime that we have in India. The Advisory Group on Tax Policy and Tax
Administration for the 10th Plan has recommended deletion of a number of such
exemptions. I have carefully examined each recommendation of the Group and have
come to the conclusion that some of these exemptions are indeed unnecessary. I,
therefore, propose to withdraw or discontinue the exemptions, which are not required
any longer.
1 7 8 . The Advisory Group has also recommended deletion of various exemptions
granted to incomes of approved or notified bodies or institutions, including educational
and medical institutions. I do not think that the exemptions allowed to these
institutions and bodies, which are fulfilling social objectives, should be withdrawn.
However, I propose to require all such bodies and institutions to file returns of income
every year so as to enable a periodical verification of whether the prescribed conditions,
which primarily relate to application of the income, are being fulfilled and also to
enable the prescribed authority to withdraw the approval or notification of such
entities if they are found to have violated any such conditions.
1 7 9 . Last year, I had withdrawn the tax-exemption allowed to income earned by
NABARD, National Housing Bank and SIDBI, since these institutions have come of
age and are working on commercial lines. For the same reasons, I propose to withdraw
this year the exemption allowed to income of the National Dairy Development Board,
Prasar Bharati and the Oil Industry Development Board.
1 8 0 . Various amendments made over the years in the rules relating to
depreciation have given rise to a plethora of such rates for different types of assets.
The relevance and the need to continue with these rates, and whether they should
be scaled down to a maximum rate of 60%, should be a matter for open discussion.
The relevant details will be put up on the website of the Finance Ministry. After
taking into account the views expressed, a revised schedule of depreciation rates
will be notified.
1 8 1 . Under the present system of taxation of dividends and income from units,
the company or the mutual fund pays a 10% tax, and the income is exempt in the
hands of the recipient. Such a system not only taxes income in the hands of a person
to whom it does not belong; it also militates against the pass-through status which
is the very essence of a mutual fund. There is also an inherent inequity in the present
system, which allows persons in the high-income groups to be taxed at much lower
rates than the rates applicable to them. These issues have been troubling me over
the past four years, and I am now convinced that the existing system must go. I,
therefore, propose to abolish the distribution tax of 10% on companies and mutual
funds on the dividends or income distributed by them. Such income will henceforth
be taxed in the hands of the recipients at the rates applicable to them, and will be
subject to tax deduction at source at the rate of 10%. In order to avoid a cascading
effect, companies receiving such income will be entitled to claim a deduction for the
amount in turn distributed by them as dividends. To continue the support given by
me to equity oriented funds of the UTI and other mutual funds, the income received
during the financial year 2002-2003 by unit holders of such funds will be taxed only
at 10% as at present.
 33
1 8 2 . A tax rebate of 20% of the amount invested in certain instruments specified
in section 88 of the Income-tax Act is presently allowable to all individuals and
HUFs, as an incentive for retaining a part of their earnings in the form of savings.
Taxpayers in the higher tax brackets, however, do not require fiscal incentives to
save through the various designated instruments. I therefore propose to allow the
rebate at the existing rate of 20% only to persons having taxable income upto
Rs 1,50,000. Persons having taxable income between Rs 1,50,000 and Rs 5 lakhs
will henceforth get a rebate of only 10% of the amount invested, and no rebate will
be allowed where taxable income exceeds Rs 5 lakhs. The special rebate of 30% for
persons having taxable salary income upto Rs 1 lakh will, however, continue. Further,
while the existing limits on the qualifying amounts of investment will remain, I propose
to provide a clarification in the law that the rebate will be allowed on investments
made at any time during the year, as long as the amount invested is less than the
taxable income of the year.
1 8 3 . Presently, tax exemption is available to certain categories of employees
receiving amounts upto Rs 5 lakhs as VRS compensation. I propose to extend this
exemption to employees of certain institutions of national or State-level importance
to be notified in this behalf.
1 8 4 . I am also making some procedural changes which are included in the
Finance Bill.
1 8 5 . A Scheme called “Sampark” is being launched by the Income Tax
Department, which will enable taxpayers to obtain information and forms through
the Internet. User-friendly software will be made available by the Department to
enable taxpayers to prepare their returns of income.
1 8 6 . Effective use of information technology will depend critically on strict
compliance with the requirements relating to permanent account number (PAN). I
propose to make a specific provision in the Income-tax Act for imposing a penalty of
Rs 10,000 in all cases where a false PAN is quoted in documents relating to specified
transactions.
1 8 7 . In 1998, I had prescribed certain high-value transactions such as purchase
or sale of motorcars and expenditure incurred in hotels and restaurants, in which
the permanent account number is to be compulsorily quoted. I propose to extend
this list of transactions provided in rule 114B of the Income-tax Rules to include
expenditure exceeding Rs 25,000 incurred in cash on foreign travel, purchase of
bank drafts exceeding Rs 50,000 in cash and making cash deposits exceeding Rs
50,000 in any bank account. I further propose to introduce rules to provide that any
transaction specified in rule 114B which is incurred in cash must be reported within
a certain period to the Income-tax Department.
1 8 8 . Sir, I have already stated that national security is an overriding concern.
Its cost has to be shared by all of us. I therefore propose to impose a modest surcharge
of 5% across-the-board on all categories of taxpayers, except individuals and Hindu
Undivided Families having total income upto Rs 60,000. The 2% surcharge imposed
last year in the wake of the Gujarat Earthquake is being abolished and hence the net
additional impact would be only 3%. I also propose to restrict the 100% deduction of
 34
export profits allowed to certain units under sections 10A and 10B of the Income-tax
Act to a 90% deduction for the assessment year 2003-2004.
1 8 9 . To sum up, Sir, my proposals made in this Budget on the Direct Taxes will
result in a revenue gain of Rs 6,000 crore, including the component of surcharge of
Rs 2,750 crore. I estimate that the direct tax revenue in 2002-2003 would be
Rs 91,585 crore.
1 9 0 . Mr. Speaker, Sir, with these proposals I estimate total tax revenue receipts
for the Centre at Rs 1,72,965 crore and the fiscal deficit at Rs 1,35,524 crore or
5.3% of GDP.
1 9 1 . Mr. Speaker Sir, this is a budget for consolidating, widening and deepening
the reform process. This is a budget devoted to development. This is a budget to
further promote partnership with the States for a better tomorrow for the people of
India.
1 9 2 . Mr. Speaker, Sir, with these words, I commend the budget to this august
house.
 1

Budget 2001-2002

Speech of

Shri Yashwant Sinha

Minister of Finance

28th February, 2001

PART A

Sir,
Sir, I rise to present the Budget for the year 2001-2002.
2. I do so in all humility. The challenges we face this year are awesome, made
more so by the tragedy and devastation caused by the Gujarat earthquake. I hope I
shall get the understanding and support of the whole House in my endeavour to
meet these challenges.

ECONOMIC CONTEXT
3. The Indian economy has continued to exhibit both growth and resilience
that have characterized its performance in the past few years. Overall economic
growth this year is expected to be about 6 per cent despite a series of unexpected
setbacks. We have had a second successive year of irregular monsoon resulting in
low agricultural growth. World petroleum prices have continued to stay at high levels
placing strains on the economy as a whole, and have led to a significant increase in
inflation over the past year. Fortunately, despite the increase in energy prices, the
prices of essential commodities, and of manufactured products as a whole, have
remained stable. Inflation, excluding energy, was around 4 per cent during the year.
The economy remained secure with record levels of foreign exchange reserves and
public food stocks. The creditable export performance recorded last year improved
further: exports grew by over 20 per cent in dollar terms in April-December 2000.
4. It is now 10 years since economic reforms began in 1991. During this
period, 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.
1
 2
5. While economic reforms have placed the country on a much more secure
and sustained growth path, we still have some serious concerns and cannot afford
to be complacent.
· Agricultural reforms have been inadequate and our agriculture continues
to be subject to the vagaries of the monsoon.
· Despite major industrial sector reforms, industrial growth has not
accelerated to the double-digit level as expected.
· Inadequate fiscal adjustment has remained the most intractable problem
over the past decade.
¨ Interest payments now constitute over 69 per cent of the Centre’s tax
revenues.
¨ Subsidies continue to increase to unaffordable levels and do not
necessarily reach the deserving beneficiaries.
¨ The pension liability of the Government is becoming onerous.
· Public investment in infrastructure and social sectors is inadequate due to
falling total public sector savings.
· Private investment is constrained due to high real interest rates and
inadequate infrastructure.

BUDGET STRATEGY
6. Thus, despite the many achievements of economic reforms over the past
decade, much remains to be done if we have to achieve our full potential. There is
urgent need to further deepen reforms to set the stage for higher growth over the
next decade. We have to intensify our effort in fiscal adjustment so that the generations
to come are not burdened by our borrowing excesses. The economy has achieved
significant acceleration in growth over the last 20 years. Our aspiration must be to
achieve still higher growth in the next 20 years.
7. The broad strategy of the budget, therefore, with this objective of growth in
mind is to ensure:
· Speeding up of agricultural sector reforms and better management of the
food economy.
· Intensification of infrastructure investment, continued reform in the
financial sector and capital markets, and deepening of structural reforms
through removal of remaining tiresome controls constraining economic
activity.
· Human development through better educational opportunities and
programmes of social security.
· Stringent expenditure control of non-productive expenditure, rationalisation
of subsidies and improvement in the quality of Government expenditure.
· Acceleration of the privatisation process and restructuring of public
enterprises.
· Revenue enhancement through widening of the tax base and administration
of a fair and equitable tax regime.
 3
AGRICULTURE AND RURAL DEVELOPMENT
8. As I have noted, reforms in the agriculture sector have been inadequate
and must be speeded up. The Government has already announced the first ever
National Policy in Agriculture.
9. The provision of adequate credit flow is critical for agricultural production.
Total credit flow to agriculture through institutional channels of commercial banks,
cooperative banks and regional rural banks is estimated to have reached a level of
Rs 51,500 crore this year, an increase of about 15 per cent over last year. It is
expected to increase to Rs 64,000 crore in 2001-2002 representing an increase of 24
per cent. In order to ensure continued healthy growth of the agricultural sector, I
propose the following steps:
* The operation of the Rural Infrastructure Development Fund (RIDF), set up
in 1995-96 with NABARD, has been very successful in upgrading rural
infrastructure with about 1,84,000 projects sanctioned so far. To help the
States, I have decided to reduce the interest rate charged by NABARD from
11.5 per cent to 10.5 per cent. The corpus of RIDF VII will be increased
from Rs 4500 crore to Rs 5000 crore next year.
* The innovation of Kisan Credit Cards has proved to be very successful.
Since the year of its introduction in 1998-99, almost 110 lakh of KCCs
have been issued. I am asking our banks to accelerate this programme and
cover all eligible agricultural farmers within the next 3 years.
* I am also asking the banks to provide a personal insurance package to the
KCC holders, as is often done with other credit cards, to cover them against
accidental death or permanent disability, upto maximum amount of Rs
50,000 and Rs 25,000 respectively. The premium burden will be shared by
the card issuing institutions.
* NABARD and SIDBI were asked to link one lakh Self-Help Groups during
the current year. NABARD by itself is well poised to exceed this target by
the end of next month. I expect NABARD to link 1 lakh additional Self Help
Groups during 2001-02, which would help in providing access to credit to
an additional 20 lakh families. Share-croppers and tenant farmers will
also become eligible for this scheme and special attention will be given to
SC/ST groups. A micro finance development fund has also been set up in
NABARD with contribution of Rs 40 crore each by NABARD and RBI.
* I had permitted NABARD to issue capital gains tax exemption bonds last
year. This has helped NABARD to mobilise more than Rs 1000 crore at
lower than normal interest rates thereby reducing its cost of funds. I propose
to continue with this tax exemption.
* The resources from the Watershed Development Fund set up in NABARD
would be used to promote people’s participation and also enable water
users’ associations to implement, operate and maintain irrigation schemes.
10. In 1999, I had announced a credit linked subsidy scheme for construction
of cold storages for perishable commodities. So far, NABARD and NCDC have provided
Rs 161 crore of credit for creation of additional capacity of 9.69 lakh tonnes. A
 4
subsidy of Rs 78 crore for setting up these cold storages was provided during 2000-
2001. I now propose to extend the coverage of this scheme to also cover rural godowns.
The subsidy to be provided by the Government would be suitably enhanced to take
care of increased coverage. The loans would carry an adequate long-term repayment
period and would enable individuals, cooperative societies and others to build godowns
by availing of loans from cooperative banks, commercial banks and RRBs.
11. This scheme will enable small farmers to enhance their holding capacity in
order to sell their produce at remunerative prices. NABARD proposes to reduce its
rate of interest for funding the storage of crops, from 10 per cent to 8.5 per cent.
Small farmers will particularly benefit from this scheme by avoiding distress sales.
12. With the diversification and modernisation of agricultural practices, there
is a need to augment support and extension services for agriculture. For this purpose,
a scheme for setting up Agriclinics and Agribusiness Centres by agricultural graduates
will be launched with the support of NABARD. These centres will provide a package
of soil and input testing facilities and other consultancy services, They will strengthen
transfer of technology and extension services and also provide self-employment
opportunities to technically trained persons. Loans on attractive terms for setting
up these centres will be provided by banks with refinance from NABARD.
13. There is a significant potential of improving crop productivity in the Eastern
and North Eastern regions through crop diversification and adoption of improved
technologies. These regions also have large untapped ground water resources. A
sum of Rs 61 crore has been provided for the Centrally Sponsored Scheme on “On-
Farm Water Management for Increasing Crop Production in Eastern India”.
14. I am also happy to inform the House that I have provided Rs 38 crore for
the “Technology Mission for Integrated Development of Horticulture in the North-
Eastern States”, announced by me last year.

Rural Roads
15. In my last Budget, I had announced the launching of a new scheme, the
Pradhan Mantri Gramodaya Yojana (PMGY) with the objective of undertaking time
bound programmes to fulfill the critical needs of the rural people. As a follow up,
particularly with the objective of achieving rural connectivity, the Pradhan Mantri
Gram Sadak Yojana has been launched by the Hon’ble Prime Minister on December
25, 2000. A Central allocation of Rs 2500 crore was provided for 2000-01. I am
providing another allocation of Rs 2500 crore for the coming year. 50 per cent of the
diesel cess is earmarked for development of rural roads.

Rural Electrification
16. It is a matter of concern that even after 50 years of planned development
there are still about 80,000 villages, which do not have access to electricity. A package
of initiatives is therefore being launched to improve the power distribution system in
rural areas. This includes:
* Completion of electrification of bulk of the remaining villages in the next 6
years.
* Extension of assistance to the States for village electrification works under
the PMGY whose funding is being augmented.
 5
* Stepping up credit support from Rural Electrification Corporation to SEBs
for speedy electrification of dalit bastis, households of scheduled tribes
and other weaker sections of society.
* Improving the quality of power supply in villages, augmentation of
distribution networks in rural areas supported by REC under the Accelerated
Power Development Programme.
* Earmarking a sum of at least Rs 750 crore out of RIDF for rural electrification
works.
* Augmenting the resources of REC, by allowing it to float capital gains tax
exemption bonds along with NABARD and NHAI under Section 54 EC of
the Income Tax Act.
Management of the Food Economy
17. Increased production and rising productivity makes the proper management
of the food economy more critical then ever before. Our policy has to be transformed
to deal with surpluses rather than only shortages. The present arrangement of
Government of India procuring foodgrains and States managing the PDS has led to
many problems. While the subsidy has increased from Rs 8210 crore at B.E. to Rs
12,125 crore at R.E. stage this year, the satisfaction level has gone down. I propose,
therefore, to give an enlarged role to the State Governments in both procurement
and distribution of foodgrains for PDS in their respective states. Instead of providing
subsidised foodgrains, financial assistance will be provided to the State Governments
to enable them to procure and distribute foodgrains to BPL families at subsidised
rates. FCI will continue to procure foodgrains for maintaining food security reserves
and for such State Governments who will assign it this task on their behalf. Details
for operationalising these arrangements will be worked out in consultation with the
State Governments at the earliest.
18. The agricultural sector continues to be constrained by the existence of a
number of inhibiting controls and regulations. The Essential Commodities Act, 1955
provides for the control of production, supply and distribution of certain commodities
identified as essential commodities under the Act to protect the interest of consumers.
State Governments have issued a large number of Control Orders under this Act
inhibiting free movement of some food and agriculture products. In the changed
present situation undue restrictions on movement and stocking of foodgrains and
agricultural produce is acting as a disincentive to farmers.
19. Government therefore proposes to review the operation of the Essential
Commodities Act, 1955 and remove many of the restrictions that have been imposed
on the free inter-State movement of foodgrains and agricultural produce and also on
the storage and stocking of such commodities. It will also review the list of commodities
declared as essential under the said Act and bring their number down to the minimum
required. My colleague the Food Minister will issue necessary directions in this regard
after consultations with the State Governments.

INFRASTRUCTURE
20. Rapid development of the economy depends on adequate investment in
infrastructure. A key issue here is imposition of appropriate user charges necessary
 6
to provide adequate returns on investment. Public resources have been invested in
the public sector over the last 50 years for the provision of infrastructure services in
the country. One consequence of this has been that user charges have inevitably
become politically determined. Over time non-merit subsidies inherent in such low
user charges have mounted to over 10 per cent of GDP, a figure similar to the total
fiscal deficit of the Central and State Governments combined. Hence they are a
major cause of the fiscal distress being experienced at all levels.
21. I believe that this issue is now so important that it needs urgent discussion
throughout the country. The challenge is to achieve a consensus on the imposition
of appropriate user charges in such a manner that the poor are protected while
those who can pay are made to do so. Only then will we be able to accelerate investment
in these essential services in both the public and private sectors. A prime example of
this is the power sector.

Power
22. The importance of power in fuelling economic growth cannot be over
emphasised. The total cost to the State Electricity Boards of implicit subsidies amounts
to about Rs 36,000 crore this year. After accounting for cross subsidy and State
subventions, actual commercial losses of all SEBs combined are estimated to be
about Rs 24,000 crore. Hidden in these loss figures are extremely high T&D losses.
23 Although all of these losses are borne by SEBs and State Governments, I
have to express my concern on this issue since this is a massive national loss and
affects Central Government undertakings also. The total dues owed to Central
Government utilities by SEBs and others now amount to over Rs 25,000 crore. If
these resources were available, the country would have no difficulty in investing
adequately in power sector expansion to the benefit of all. Theft of electricity must be
stopped and economic tariffs levied.
24. The most vital element of the reform process is the restoration of financial
viability of the State Electricity Boards (SEBs). On the basis of consensus that has
progressively emerged in the National Development Council Resolution of 1992, the
Common Minimum National Action Programme drawn up in 1996 and the Power
Ministers’ Conference of February 2000, the Central Government is accelerating the
programme of reforms in SEBs on the basis of specific milestones that are being
built into MOUs entered into with State Governments. These MOUs include specific
milestones such as:
· A time bound programme for installation of 100 per cent metering by
December 2001.
· Energy audit at all levels.
· A specific programme for reduction and eventual elimination of power theft.
· Tariff determination by SERCs and compliance thereof.
· Commercialisation of distribution and
· SEB restructuring.
To demonstrate the importance of this task, the Prime Minister will hold a meeting
of State Chief Ministers on March 3, 2001.
 7
25. MOUs have already been entered into with 5 States and we expect more
States to adopt the reform process. Accordingly, plan allocation to the Accelerated
Power Development Programme (APDP) has been stepped up to Rs 1500 crore next
year from a level of Rs 1000 crore this year. Priority under APDP would be given to
those states that undertake such reform. The key to restoration of financial viability
is reform of distribution. Assistance from the Fiscal Reform Incentive Fund
recommended by the 11 Finance Commission would also, inter-alia, be linked to
th

the achievement of power reforms. The reforming States would also receive support
from the Central Government in form of preferential allocation of power to SEBs
from CPSUs, additional investment by CPSUs in generation and transmission, and
preferential allocation of external aid.
26. In order to help accelerate the reform process in the power sector and to
unify all existing central legislations in the sector, my colleague the Minister for
Power will introduce the Electricity Bill 2001 within this session.
27. The Plan outlay for central sector power utilities is being raised from Rs
9,194 crore this year to Rs 10,030 crore for 2001-02. This demonstrates the
commitment of the Central Government to accelerate public sector power investment
along with power sector reforms.

Roads
28. The National Highway Development Programme (NHDP) represents a new
road vision for this country. Its unprecedented scale is symbolic of government’s
earnestness to provide connectivity and mobility of an altogether different order. The
key to government’s success in accelerating the road development programme lies
in its bold policy of levying a cess on petrol and diesel as a user charge for road
usage. Resources for Phase I, to be completed by December 2003, have already been
tied up. Work has already been awarded for more than 1500 Kms. of the golden
quadrilateral in addition to the completed sections totalling 600 Kms. The balance
portion is expected to be awarded by the middle of this year.
29. The cess has paved the way for integrated road development in the country,
including village roads, district roads, state roads, and national highways. Rs 962
crore from the cess fund is being made available to States for state roads. The total
plan outlay for this sector is being enhanced by 93 per cent to Rs 8727 crore in
2001-02.

Te l e c o m
30. Another area of success is in the telecommunications sector. Almost all the
policy measures announced in the New Telecom Policy 1999 regarding basic and
cellular services, national long distance, Internet services, and corporatisation of
Department of Telecom Services have been implemented. Competition is being
introduced in all service segments.
31. By March 2001, overall teledensity is expected to reach 3.5 per hundred,
about double the teledensity of only two years ago. Moreover, the new competition
has already reduced prices for consumers. There are now almost 800,000 STD/
ISD/Local booths around the country bringing telephone service within reach of
almost all consumers, apart from generating considerable employment.
 8
32. Looking ahead, having recognised the imperatives of technological change
in this area, the Government proposes to introduce the Convergence Bill to cover
telecommunications, information technology, and information and broadcasting
sectors in an integrated manner.

Ports
33. Coming to the port sector, I am glad to report that policy initiatives designed
to increase private sector participation in ports have also been successfully
implemented. Overall, capacity in Indian major ports is expected to go up to 314
million tonnes this year and further to 376 million tonnes by the end of 2001-2002,
along with substantial capacity addition in minor ports. There is now adequate capacity
in major ports. Ships no longer have to wait for berths as was the case before.
34. Ennore port has already been corporatised and Jawahar Lal Nehru Port in
New Mumbai is next, and with experience, other major ports can also be corporatized,
enabling them to raise resources in the market. Successful investment is being enabled
by the setting of economic tariff levels. With the formation of the Tariff Authority for
Major Ports, these tariffs are being rationalised further on a continuing transparent
and fair basis.

FINANCIAL SECTOR AND CAPITAL MARKETS

35. A great deal of progress has been made over the last few years in pursuing
reforms in the financial sector and capital markets. I propose to continue reform in
this sector.

Debt Market
36. The Indian equity market is the oldest in Asia. Since the creation of SEBI
much greater transparency as well as automaticity has been introduced in the working
of the equity market. The need now is to develop and deepen the debt market. This
will be of great benefit to small investors and institutional investors alike. The
infrastructure sector will be enabled to raise long term funds, particularly with the
opening of the insurance sector.
37. In order to further develop a transparent and active debt market in general,
and the Government securities market in particular, I propose to take the following
measures:
• A Clearing Corporation will be set up under the active encouragement of
the RBI, with State Bank of India as the chief promoter, and is expected to
be in place by June 2001. It will also enable settlement of forex transactions.
• Trading of Government Securities, through order driven screen-based
system will be implemented.
• An electronic Negotiated Dealing System will be set up by the RBI by June
2001 to facilitate transparent electronic bidding in auctions and dealings
in Government securities on a real time basis.
• In order to ensure smooth and quick movement of funds, the Electronic
Fund Transfer (EFT) and Real Time Gross Settlement Systems (RTGS) are
being put in place by the Reserve Bank of India within the next year.
 9
• Clarifications are being issued by CBDT to promote the issuance of STRIPS,
zero coupon bonds, deep discount bonds, and the like.
• The old Public Debt Act will be replaced by Government Securities Act.
• Comprehensive legislation will be introduced on securitization.
38. I propose to set up a small group comprising the Reserve Bank of India,
SEBI, the stock exchanges and Ministry of Finance to monitor and implement these
developments so that the debt market becomes active next year.

Banking Sector
39. Banking sector reforms have proceeded apace in a phased manner over the
past decade. However, the problem of non-performing assets with banks has
continued. Special attention is being paid to recovery of NPAs:
• Public Sector Banks have recovered Rs 800 crore of NPAs from 2 lakh
accounts in 2000-01.
• Net NPAs as percentage of net advances were almost half at
7.4 per cent in 1999-2000 compared to 14.5 per cent in 1993-94.
• 22 Debt Recovery Tribunals (DRTs) and 5 Appellate Tribunals have been
established.
• 7 more DRTs will be set up during 2001-02.

40. I also propose to bring in a legislation that will facilitate foreclosure and
enforcement of securities in cases of default in order to enable the intitutions to
realise their dues.
41. In the light of new competition in the banking industry it is necessary to
strengthen the management of the public sector banks. I propose to provide greater
autonomy to bank managements. It is also essential to provide greater independence
to bank managements in forming their own recruitment strategy and in implementing
it. I therefore propose to abolish the Banking Services Recruitment Boards. This will
be done in association with the Reserve Bank of India by July 31, 2001 or earlier. All
future recruitments will be done by banks themselves.

Capital Account Liberalisation

42. Until about 10 years ago, all foreign exchange transactions were tightly
controlled by the government and by the RBI. We have progressively loosened these
controls and made the current account completely convertible. We have also liberalised
the capital account for certain purposes. I propose to take further measures for
liberalising the capital account. These are:
• 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.
 10
• 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.
The Reserve Bank of India will be issuing these guidelines separately.
43. 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.

Foreign Investment
44. Progressive liberalization has taken place in the provisions relating to foreign
investment. I propose to take the following further measures:
• Foreign Institutional Investors (FIIs) can invest in a company under the
portfolio investment route up to 24 per cent of the paid up capital of the
company. This can be increased to 40 per cent with the approval of the
General Body of the shareholders by a special resolution. I propose to
increase this limit to 49 per cent.
• Foreign Direct Investment (FDI) in Non-Banking Financial Companies
(NBFCs) is permitted on a case by case basis upto 100 per cent but with a
condition that a minimum of 25 per cent of their holding is divested in the
domestic market. This condition is being removed, provided the foreign
investors bring in a minimum of US $50 million. FDI in NBFCs will now be
put on the automatic route subject to RBI guidelines.
STRUCTURAL REFORMS
45. In order to accelerate growth in the Indian economy, we have now to address
some of the difficult areas of reform that have not been tackled so far.
46. There are four significant areas where a price and distribution control regime
exists. These are the areas of petroleum, fertilizer, sugar and drugs.

Administered Pricing Mechanism (APM)

P e t ro l e u m
47. As Hon’ble Members are aware, Government had, in November 1997, notified
the details of dismantling of the Administered Pricing Mechanism (APM) in the
petroleum sector by March 2002. I propose to adhere to this deadline. A time bound
action programme is being prepared for the deregulation of APM by March, 2002.
My colleague the Minister of Petroleum and Natural Gas will be outlining the road
map for this separately.
 11
Fertilizer
48. Hon’ble Members will recall that I have in the past referred to the
rationalisation of fertilizer pricing with the objective of phasing out the existing
retention price scheme (RPS) in the medium-term. Government has now decided to
implement the recommendations of the Expenditure Reforms Commission for a
phased programme of complete decontrol of urea by April 1, 2006. The following
steps would be taken in the first phase commencing from April 1, 2001:
• The unit specific RPS will be replaced by a Group Concession Scheme. The
current MRP arrangement will be continued and the concession for each
group calibrated to enable the units to sell urea at the stipulated MRP.
• The rate of concession for urea units based on naphtha/FO/LSHS will be
linked to international prices of these feed stocks.
Sugar
49. Government is committed to complete decontrol of sugar. But this must be
irreversible. Government has decided to introduce futures/forward trading in sugar
within the coming year, a step that is necessary before full decontrol. Sugar under
the Public Distribution System will continue to be supplied to ration cardholders in
the special category states, hill states, island territories and to BPL families in other
states and UTs. Such supplies can even continue after sugar is completely
decontrolled. The retail issue price of sugar under the PDS is being revised to
Rs 13.25 per kg. with effect from March 1, 2001.

Drug Price Control

50. The domestic drugs and pharmaceutical industry needs support in order
to meet the challenges and to avail of the opportunities arising out of liberalisation of
our economy and the impending advent of the product patent regime. Government
has been considering measures to lessen the rigours of the present price control
mechanism where they have become counter productive. Towards this end, we have
decided that the span of price control will be reduced substantially. However, keeping
in view the interest of the weaker sections of society, Government will retain the
power to intervene comprehensively in cases where prices behave abnormally.
Changes in the Pharmaceutical Policy are being made accordingly.

Industrial Restructuring
51. Government had constituted a high level committee on law relating to revival,
reconstruction and/or winding up of companies. The Committee has submitted its
report and Government has accepted its key recommendations. It is proposed to
repeal the SICA and also to amend the Companies Act in order to set up a National
Company Law Tribunal. These legislative proposals are proposed to be introduced
during the current session by my colleague, the Minister for Law, Justice and
Company Affairs.

Labour Market
52. Along with these changes, it is also necessary to address the contentious
issue of rigidities in our labour legislations. Some existing provisions in the Industrial
Disputes Act have made it almost impossible for industrial firms to exercise any
 12
labour flexibility. The Government is now convinced that some change is necessary
in this legislation. Chapter VB of the ID Act stipulates that employers in specified
industrial establishments must obtain prior approval of the appropriate government
authority for effecting lay-off, retrenchment and closure, after following the prescribed
procedure. It is proposed that these provisions may now apply to industrial
establishments employing not less than 1000 workers instead of 100. The separation
compensation will be increased from 15 days to 45 days for every completed year of
service. The enhancement of compensation would act as a deterrent on employers to
take recourse to lay-off, retrenchment and closure in a routine manner.
53. Similarly, rigidities inherent in the existing legislation regarding Contract
Labour inhibit growth in employment in many service activities. Section 10 of the
existing Act envisages prohibition of contract labour in work/process/operation if
the conditions set therein like perennial nature of job etc. are fulfilled. Section 10
enables the contract labour engaged in prohibited jobs to become direct employees
of the principal employer. To overcome this difficulty and at the same time ensure
the protection of labour, it is proposed to bring an amendment to facilitate outsourcing
of activities without any restrictions as well as to offer contract appointments. It
would not differentiate between core and non-core activities, and provide protection
to labour engaged in outsourced activities in terms of their health, safety, welfare,
social security, etc. It would also provide for larger compensation based on last
drawn wages as retrenchment compensation for every year of service.
54. These measures will promote industrial investment in labour intensive,
and export oriented activities providing for renewed industrial growth, while, at the
same time safeguarding the interest of workers. My colleague, the Minister for Labour
will introduce appropriate legislation to amend the Industrial Disputes Act and
Contract Labour Act within this session.

Ashraya Bima Yojana

55. I am conscious of the short-term impact on organized labour force of the on-
going liberalization of the economy. I therefore propose to introduce a new scheme of
group insurance viz. “Ashraya Bima Yojana” to extend security cover to such affected
workers. The policy will provide compensation of up to 30 per cent of last drawn
annual pay for a period of one year to workers who lose their jobs. It is proposed that
the policy will initially cover all employees drawing a salary up to Rs 10,000 per
month. The four Government owned general insurance companies will administer
this policy on a “No Profit No Loss” basis and will announce full details including
premium rates of the proposed policy by the end of June 2001.

Small Scale Industries

56. Government’s commitment to the Small Scale sector has been repeatedly
demonstrated. A comprehensive policy package for this sector was announced by
the Prime Minister on 30, August, 2000.
57. In order to encourage production and employment in this sector, the
exemption limit has been doubled to Rs 1 crore from September 1, 2000.
58. The new Credit Guarantee Scheme of August 2000 has been provided
budgetary support of Rs 100 crore in the current year. The limit of loan without
 13
collateral which was earlier fixed at Rs 10 lakh has been raised to Rs 25 lakh under
this scheme. Already 7 banks have entered into an agreement with the Credit
Guarantee Fund Trust that has been created to implement the scheme. A credit
linked capital subsidy scheme for technology upgradation was launched in October
2000 envisaging 12 per cent capital subsidy. It is expected that loans to the extent of
Rs 5000 crore would be made available to the SSI sector over the next 5 years under
the scheme.
59. Our small-scale entrepreneurs have proved their competitiveness in
providing over 35 per cent of national exports. To enable further new investment
and technology upgradation in some of the key export oriented sectors, it is now
proposed to dereserve another 14 items related to leather goods, shoes and toys.

Te x t i l e s
60. The Government has recently announced a New Textile Policy aimed at
preparing industry for the new challenges of global competition. I am happy to
announce a textile package comprising the following schemes:
• A scheme for setting up Integrated Apparel Parks is being initiated. This
will enable the dereserved readymade garment industry to set up modern
units with the best infrastructure. A budget provision of Rs 10 crore has
been provided for the year 2001-02.
• A strong and modern weaving sector is very critical for this purpose. At
least 50,000 new shuttleless looms and the modernisation of 2.5 lakh plain
looms to automatic looms is expected to take place by 2004 through funding
from the Technology Upgradation Fund Scheme (TUFS). The budget
provision under TUFS is being raised from Rs 50 crore this year to Rs 200
crore in the next year.
• The Cotton Technology Mission is being continued and strengthened. The
budget provision is being increased from Rs 15 crore to Rs 25 crore.
• The budget allocation for Ministry of Textiles is being enhanced
substantially from Rs 457 crore in 2000-01 to Rs 650 crore in 2001-
02.
• I shall provide the details of the proposed fiscal changes in Part B of my
speech.

HUMAN DEVELOPMENT
Health and Family Welfare
61. Recognizing the need for increasing investments in social sectors, the Plan
allocation for the Ministry of Health & Family Welfare has been stepped up from Rs
4920 crore to Rs 5780 crore. This includes an allocation of Rs 180 crore for HIV/
Aids Control Programme.

Indian System of Medicine

62. There is now a great interest worldwide in herbal products as people look
for gentler forms of treatment devoid of side effects. We are establishing a Traditional
Knowledge Digital Liberary to bring the knowledge already in the public domain in
 14
international languages to prevent the grant of patents. We are also introducing a
new scheme for strengthening the State Drug Testing Laboratories and pharmacies.
We propose to provide Indian Systems of Medicine and Homeopathy benefits similar
to the pharmaceutical industry.

Education
63. An integrated National Education Programme – the Sarva Siksha Abhiyan
has been launched for universalising elementary education and a National Mission
constituted with the Prime Minister as Chairman. The programme aims to provide
eight years of quality elementary education for all children upto the age of 14 years
in a Mission mode with a thrust on community ownership, disadvantaged group and
girls’ quality education and alternative modes of education. All existing schemes on
elementary education will converge with this scheme after the Ninth Plan and it will
cover all districts in the country by March, next year.
64. We are determined to maintain and strengthen our competitiveness in the
field of technology education. A task force set up for this purpose under the HRD
Minister has made wide ranging recommendations to upgrade and expand this area
of education, The Roorkee Engineering College will be upgraded in to an IIT and
funding for IIT, Guwahati has been stepped up to ensure its early completion. The
base of IITs is to be expanded, regional engineering colleges are to be strengthened
and new institutes will be set up with public private partnership. The role of the
private sector will be encouraged. A new Centrally Sponsored Scheme for computer
literacy and studies in schools is being launched and other initiatives planned for
encouraging IT education from school to college levels.
65. Last year, I announced the availability of 100 per cent deduction from income
tax of payments made to institutions for vocational education and training by the
private sector set up in rural areas and small towns. I propose to make the same
deduction available for payments to engineering institutions also.
Educational Loans for Students
66. Mr Speaker Sir, I have personally experienced poverty and faced problems
in pursuing higher studies. I, therefore, feel that no deserving student in the country
should be deprived of higher and technical education for want of finances. I am glad
that the Indian Banks Association (IBA) has formulated a new comprehensive
Educational Loan Scheme, which will cover all courses in schools and colleges in
India and abroad. Loans will be available under this scheme up to Rs 7.5 lakh for
studies in India, and Rs 15 lakh for studies abroad. No collateral or margin will be
stipulated for loans up to Rs 4 lakh, the interest of which will not exceed the prime
lending rate (PLR). The interest rate will not exceed PLR plus 1 per cent for loans
above Rs 4 lakh. The loans would be repaid over a period of 5 to 7 years with provision
of a grace period. I hope that this scheme will enable needy children to pursue
higher and technical studies both inside and outside India.

Wo m e n
67. The year 2001 is being observed as Women’s Empowerment Year. My
colleague, the Deputy Chairman of the Planning Commission is heading a Task
Force to review the programmes for women. Meanwhile I propose to:
 15
• Strengthen the Rashtriya Mahila Kosh for providing micro credit to poor
assetless women through NGOs.
• Launch an integrated scheme for women’s empowerment in 650 blocks
through women’s self help groups.
• Start a new scheme for women in difficult circumstances like widows of
Vrindavan, Kashi and other places, destitute women and other
disadvantaged women groups.
Scheduled Castes and Scheduled Tribes
68. In keeping with Government’s commitment to improve the Welfare of the
scheduled tribes, a separate National Scheduled Tribes Finance & Development
Corporation with an authorised share capital of Rs 500 crore has been set up. The
allocation for the schemes for welfare of scheduled tribes in the Ministry of Tribal
Affairs has been enhanced from Rs 786 crore this year to Rs 986 crore in the coming
y e a r.

69. Similarly, the allocation for the schemes for welfare and upliftment of
scheduled castes in the Ministry of Social Justice & Empowerment has been enhanced
from Rs 709 crore this year to Rs 790 crore in the coming year.

Social Security
70. Hon’ble Members may recall my announcement in the last budget, of a
new Group Insurance Scheme, the “Janashree Bima Yojana” to extend Social Security
cover to the poorest sections of society. The said scheme was launched by the Prime
Minister on 10, August, 2000 and has been well received. 332 schemes have been
approved so far covering 99,750 people in the BPL segment.
71. I believe that the Social Security cover needs to be widened to minimize the
miseries of our people below the poverty line. Accordingly, I propose to introduce two
more schemes during the next financial year:
(i) A special scheme for landless agricultural labourers, the Khetihar Mazdoor
Bima Yojana, which will provide benefits of insurance cover as available
under Janashree Bima Yojana and a pension of Rs 100 per month, to the
beneficiary on attaining the age of 60 years. In the case of beneficiaries
who join the scheme at a young age, some periodical payments at the end
of every ten years are also envisaged. The beneficiaries will be required to
make a small contribution towards the premium.
(ii) A Shiksha Sahyog Yojana, to provide an education allowance of Rs 100
per month to the children of parents living below the poverty line, to meet
the expenses of education during their studies from 9 th to 12 th standard, so
that a needy student is not deprived of the opportunity to continue his/her
education for want of funds. This will be available to subscribers of the
Janashree Bima Yojana.
These schemes will be managed by LIC.
72. Meanwhile, I have some good news for workers. The wage ceiling for coverage
under the EPF and MP Act, 1952 has been enhanced from Rs 5000 to Rs 6500.
 16
To promote the welfare of employees I propose to enhance the ceiling for Government
contribution of 1.16 per cent of monthly wage of employees to the Pension Fund
from Rs 5000 to Rs 6000 per month. The extra expenditure on this account is
estimated to be Rs 77 crore per annum.
73. Whereas the organised sector is at present covered by various pension,
provident fund and gratuity schemes, the unorganised sector does not have adequate
social security coverage. I am asking the Insurance Regulatory Development
Authority to look into all these issues and provide a road map for pension reforms
by October 1, 2001.

Journalists Welfare Fund

74. Journalists have to increasingly take greater risks in covering terrorist
and other violence prone incidents. As an acknowledgement of their services and
sacrifices, and with the expectation of a better treatment at their hands, I propose
to set up a Journalists Welfare Fund with a contribution of Rs 1 crore under the
grants of Ministry of I&B. My colleague the I&B Minister will announce the details
of the scheme.

Entertainment
75. Our entertainment industry, particularly the film industry not only provides
the much needed fantasy to millions of our people who live in an otherwise harsh
and cruel world, it has also emerged as an important segment of our economy and
holds great promise for the future. Two years ago, I provided for this industry the
same tax exemption that was available for merchandise exports. A few months ago,
the Government issued a notification under the IDBI Act whereby entertainment
industry including films has been declared as an industrial concern. Banks are in
the process of finalising guidelines for financing such projects that are bankable. I
hope that the film industry will take full advantage of these measures to bring about
a greater degree of professionalism and transparency in its operations, and will not
do things chupke chupke and certainly not chori chori.

FISCAL CONSOLIDATION
76. As I have already stated the most serious problem confronting the economy
is the poor state of the fiscal health of both the Central and State Governments. The
combined fiscal deficit of the two together is in the region of 10 per cent of GDP. I
have often been described as a fiscal fundamentalist. Some have gone to the extent
of calling me a fiscal terrorist. Why am I so concerned about the fiscal deficit? Let me
try to explain. The total receipts of the Central Government in the current year
according to BE are about Rs 281,000 crore. Of this amount, Rs 72,000 crore is
States’ share of the Central taxes and grants. The Central Government is, therefore,
left with Rs 209,000 crore. On the expenditure side, about Rs 101,000 crore was to
be spent on interest, Rs 59,000 crore on defence, Rs 23,000 crore on major subsidies
and Rs 16,000 crore on pensions. The net amount left for meeting all other
Government expenditure totalling Rs 123,000 crore was, therefore, only Rs 12,000
crore. I have, therefore, to borrow Rs 111,000 crore in the current year to make both
ends meet. The most worrisome aspect is that over 70 per cent of my borrowing, i.e.,
Rs 77,000 crore was for financing unproductive revenue expenditure. This will add
 17
to my interest burden next year forcing me to borrow more and ultimately fall into a
debt trap. I am deeply conscious of the burden which is being placed on future
generations, by our extravagance. I cannot allow this situation to continue.
77. As promised in my earlier Budget Speeches, I appointed the Expenditure
Reforms Commission last year and introduced the Fiscal Responsibility Bill in this
House in the last session. The bill seeks to reduce the fiscal deficit to 2 per cent and
completely eliminate the revenue deficit over the next five years.
78. A number of initiatives have already been taken to contain, in particular,
the growth of non-plan expenditure. I have not allowed any increase in non-plan
expenditure this year. Consequently, 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
the RE of the current year. The target of 3.6 per cent revenue deficit has also been
achieved.

Expenditure Management
79. I intend to carry forward the process of bringing about structural changes
in the composition of Central Government expenditure and effect economy in non-
plan revenue expenditure with greater vigour while improving the quality of plan
expenditure. For this, I propose to take the following initiatives:
• 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.
• Similarly, postal rates will be revised moderately to contain the rising postal
deficit.
• 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 of10 per cent in five years as
announced by the Prime Minister.
• The Surplus Pool under the Department of Personnel will be streamlined
and equipped to redeploy and retrain surplus staff. Employees in the Surplus
Pool will also be offered an attractive VRS package.
• Standard licence fee (rent) on government accommodation will be enhanced
by 50 per cent for Group A, 25 per cent for Group B and 15 per cent for
other categories of staff with effect from April 1, 2001.
• Facility of LTC to Central Government employees will be suspended for 2
years for the remaining part of the four-year block period except for
employees who are entitled to last LTC before retirement.
• 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.
 18
80. The Expenditure Reforms Commission, which was set up last year, has
presented reports concerning downsizing in 6 Ministries and Departments. These
include Department of Economic Affairs, Ministry of Information & Broadcasting,
Ministry of Coal, Department of Heavy Industry, Department of Public Enterprises
and Ministry of Small Scale Industries. Reports of the Commission concerning other
Departments will also be received within the next six months. These recommendations
will be implemented by July 31, 2001 and identified surplus staff transferred to the
Surplus Pool.
81. Charity, it is said, must begin at home. I believe austerity, too, must begin
at home. To lead by example, based on the recommendations of the Expenditure
Reforms Commission, I propose to abolish three secretary/special secretary level
and two joint secretary level posts in the Department of Economic Affairs. This will
be done in stages by 31, July. In addition, another 44 posts of directors and below
will be abolished, as against 31 recommended by the ERC. 1675 posts are being
abolished in the Currency and Coinage Division which will be restructured and
corporatised. The National Savings Organisation is to be downsized from a level of
1191 staff to about 25. I have asked ERC to provide their recommendations in respect
of the Departments of Revenue and Expenditure also. I am confident that this will
expedite the process of right sizing the establishments in all the Ministries/
Departments of Government.
82. The Planning Commission has commenced the task of preparing the Tenth
Plan. Given the severity of resource constraints, improvement in the quality of
government spending is of the essence. It has therefore been decided to subject all
existing schemes, both at the Central and State levels, to zero based budgeting and
to retain only those that are demonstrably efficient and essential. Furthermore, all
schemes that are similar in nature will be converged to eliminate duplication. Centrally
sponsored schemes that can be transferred to States will be identified. Resource
flows will be linked to performance. Necessary procedural changes will also be made
to speed up the decision making process for approval of schemes. Utmost importance
will be given to decentralized planning.

Pension Reforms
83. The Central Government pension liability has reached unsustainable
proportions: as a percentage of GDP, it has risen from about 0.5 per cent in 1993-94
to 1 per cent in 2000-2001. As such it is envisaged that those who enter central
government services after October 1, 2001 would receive pension through a new
pension programme based on defined contributions. In order to review the existing
pension system and to provide a roadmap for the next steps to be taken by the
Government, I propose to constitute a High Level Expert Group, which would give its
recommendations within 3 months.

Interest Rates
84. I have drawn your attention to the increasing share of debt service burden
in the expenditure budget caused by rising government debt and exacerbated by the
prevalence of high real interest rates. Most interest rates in the economy are now
market determined. But, their movement downward is constrained by the rigidities
 19
inherent in the administered interest rates governing the contractual saving sphere
i.e. Provident Fund and Small Savings Schemes. I have examined this issue very
carefully. I find that the interest rates provided in all these schemes seldom exceeded
consumer price inflation by more than 3 per cent between 1980 and 1998. Since
then, this difference has risen to 6 to 8 per cent. Not only are such high real interest
rates putting an unsustainable burden on both Central and State Governments but
the resulting high cost of capital is also inhibiting economic growth all round. I am
therefore reducing most administered rates by 1.5 per cent as of March 1, 2001.
Government guarantee and tax incentives for these schemes will continue. For the
future, I propose to explore a better system for the determination of these rates. I
propose to appoint an Expert Committee to provide recommendations on this issue.
85. The benefit of reduction in interest rates on Small Savings Deposits will be
fully passed on to the States. This will reduce their borrowing cost from Small Savings
by 100 to 150 basis points. In addition, I am also reducing the interest rate on loans
portion of Central assistance to State Plans by 50 basis points. Alignment of interest
rates on GPF by the State Governments along with the reduced provident funds
interest rates at the Centre will further reduce the interest burden of State
Governments. Moreover, because of the anticipated increase in gross tax collection
of the Centre, devolution of central taxes to States is expected to increase by over Rs
9000 crore in 2001-02 over the current year. All these measures will help in reducing
the debt burden of the States and improve their fiscal position.

State Fiscal Reforms

86. Along with fiscal consolidation at the Centre, it will be our endeavour to
work jointly with the States to reform their finances. Pursuant to the recommendations
of the Eleventh Finance Commission, an Incentive Fund of Rs 10,607 crore has been
earmarked for the next 5 years to encourage States to implement monitorable fiscal
reforms. These reforms will essentially be the States’ own programmes and
considerable flexibility has been provided for individual States to design their
programmes. In the fiscal year 2001-02, I have provided an amount of Rs 4243 crore
towards this Incentive Fund.

PUBLIC SECTOR RESTRUCTURING AND PRIVATIZATION

87. Our public sector has expanded in almost every area of economic activity.
In many ways, it has served the nation well; capability has been developed all round
and a strong industrial base built up. These enterprises must now be strengthened
to compete and prosper in the new environment. Last year I had defined government’s
policy in this regard clearly.
88. Financial and business restructuring plans of a number of PSUs including
SAIL and HMT have been approved. Since 1998 financial restructuring support to
viable and potentially viable PSUs amounting to more than Rs 13,000 crore has
been provided to 23 PSUs. Government has also decided to close down 8 non-viable
PSUs during the current year. A package of measures for revival and closure of the
various mills of National Textiles Corporation has also been approved.
89. The procedure for privatization of public sector enterprises has now been
considerably streamlined. The Department of Disinvestment has been set up to
 20
accelerate the privatization process. To maximise returns to government, our 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.
90. Given the advanced stage of the process of disinvestment in many of these
companies, I am emboldened to take credit for a receipt of Rs 12000 crore from
disinvestment during the next year. An amount of Rs 7000 crore out of this will be
used for providing restructuring assistance to PSUs, safety net to workers and
reduction of debt burden. A sum of Rs 5000 crore will be used to provide additional
budgetary support for the Plan primarily in the social and infrastructure sectors.
This additional allocation for the plan will be contingent upon realization of the
anticipated receipts. In consultation with Planning Commission I shall come up with
sectoral allocation proposals during the course of the year.

GUJARAT EARTHQUAKE
91. The earthquake in Gujarat has been a terrible and unprecedented tragedy
in terms of loss of life and damage to property. Although I am confident that the
inherent resilience and entrepreneurial spirit so characteristic of the people of Gujarat
will result in quick restoration of economic activity, I would like to assure the House
that we have the capacity to fully meet the challenges of such natural calamities
without deflecting from our path of pursuing our economic goals.
92. To enable the State Government to deal with the situation, Government of
India is extending the following assistance:
• Rs 500 crore was made available to the State immediately from the National
Calamity Contingency Fund.
• The National Calamity Contingency Fund, set up with initial corpus of Rs
500 crore as a result of the Eleventh Finance Commission recommendations,
is being augmented by the imposition of a 2 per cent surcharge on personal
income tax and corporate tax.
• Assistance will be provided to the State Government under various Centrally
Sponsored Schemes for reconstruction of roads, bridges, power installations,
school buildings, public utilities and other public infrastructure.
• Arrangements have been tied up with the World Bank and Asian
Development Bank for obtaining a line of credit of US $ 800 million. A joint
team has already visited Gujarat and substantial additional funds are
expected to be negotiated.
• RBI has instructed banks to make special arrangements for freezing of
recoveries and extension of new loans on a liberal terms for borrowers in
the affected areas.
• The National Housing Bank and HUDCO have set apart adequate funds for
housing reconstruction. I also propose to allocate a special quota of tax
free bonds of the order of Rs 2000 crore between the two institutions.
 21
• As was done after the Orissa cyclone, cement and steel used for construction
in the Indira Awas Yojana, by HUDCO and by agencies identified by the
State Government, would be exempt from excise duty.
• The Government of Gujarat will be enabled to raise funds by floating tax
free earthquake relief bonds which will be open to subscription in Rupees
to individuals and others including Non-Resident Indians through the
Reserve Bank of India.
• All goods intended for relief have been exempted from excise and customs
duties; direct tax assessees have been given extension of time for filing
their returns.
93. A natural calamity of this magnitude has also highlighted the need to set
up permanent institutional arrangements for management of national disasters.
The National Committee on Disaster Management under the Chairmanship of Prime
Minister will be making recommendations for laying down effective long term strategy
for this purpose.

BUDGET ESTIMATES
Revised Estimates for 2000-2001
94. We have been able to adhere to the Budget target of fiscal deficit despite
pressures on public finances on account of deceleration in disinvestment programme,
natural calamities and the relief to consumers of petroleum products. The revised
estimates for the current fiscal year show a marginal decrease in expenditure of Rs
2,965 crore as compared to the Budget estimates.
95. Net tax revenues for the Centre are estimated to be Rs 1,44,403 crore
compared to the Budget estimates of Rs 1,46,209 crore, thereby reflecting a shortfall
of Rs 1806 crore. The shortfall is mainly due to lower collection of Customs and
Union Excise duties which were reduced to provide relief to POL consumers. Non tax
revenue is estimated at Rs 61,763 crore, Rs 4299 crore more than the estimated
level of Rs 57,464 crore. However, disinvestment receipts are expected to be lower at
Rs 2500 crore against the Budget target of Rs 10,000 crore.
96. The fiscal deficit as a percentage of the GDP is expected to be on target at
5.1 per cent.

Budget Estimates for 2001-2002

97. In the budget estimates for 2001-2002, the total expenditure is estimated
at Rs 3,75,223 crore, of which Rs 100,100 crore is for plan and
Rs 275,123 crore for non-plan.

Plan Expenditure
98. The budget support for Central, State and UT Plans has been placed at Rs
100,100 crore, an increase of Rs 13,862 crore over revised estimates 2000-2001.
This amounts to an increase of 16 per cent. Gross budgetary support for the Central
Plan is being enhanced from Rs 48,269 crore in the revised estimates 2000-2001 to
Rs 59,456 crore in 2001-2002. Central Plan assistance to States and Union Territories
in 2001-2002 is also proposed to be increased to Rs 40,644 crore from Rs 37,969
crore in the revised estimates 2000-2001.
 22
Non Plan Expenditure
99. Non-plan expenditure in 2001-2002 is estimated to be Rs 2,75,123 crore
compared to Rs 2,49,284 crore in Revised estimates for 2000-2001. The increase in
non-plan expenditure is mainly in interest payments (Rs 11,633 crores), defence (Rs
7,539 crore) and Grants to State Governments (Rs 2,221 crore).
1 0 0 . In order to practice greater accountability and transparency, I am attaching
with the budget papers this year a new report on “Implementation of Budget
Announcements, 1999-2000 and 2000-01”.

PART B
1 0 1 . Sir, I now present my tax proposals, indirect taxes first.
1 0 2 . In my earlier budgets, I have endeavoured to ensure a continuity of approach
in framing my revenue proposals. The principles that have guided me have been the
need for growth in revenues, simplification and rationalization of the tax regime, and
effective tax compliance through measures, which are friendly for the honest taxpayer,
and a deterrent to the evader. I have reduced the number of rates in both customs
and excise duties, simplified procedures and introduced measures to improve tax
compliance. I have given up my discretionary power to grant excise and customs
duty exemptions in individual cases thus saving hundreds of crore of revenue for
Government. The policy of penalties against tax evaders has also been made non-
discretionary. With all these steps I have sought to put an end to a system that
pressure groups or lobbies could influence. My attempt this year is to take this
process to its logical conclusion.
1 0 3 . In my last budget, I had introduced the rate of 16% as the rate of Central
Value Added Tax (CENVAT). I had also rationalized the rates of special excise duty to
three, namely, 8%, 16% and 24%. The single rate of CENVAT now contributes
about 68% of the total excise revenues from ad valorem duties.
1 0 4 . I now propose to reduce the three rates of special excise duty to a single
rate of 16%. As a consequence, I propose to abolish the 8% special excise duty on
the following items:
(1) Glazed tiles
(2) Mattresses and articles of bedding
(3) Carpets and floor coverings
(4) Painted canvas, studio back cloth, etc
(5) Linoleum and textile wall coverings etc.
(6) Scooters and motorcycles, and
(7) Ta x i s
These items will now be charged to CENVAT only at the rate of 16%.
 23
1 0 5 . White cement and other special cements, yachts and pleasure boats, arms
and ammunition for private use and articles of fur skins, will attract SED of 16%
and a total duty of 32%.
1 0 6 . The special excise duty on aerated soft drinks, soft drink concentrates
supplied to vending machines, and motorcars will be reduced to 16%, thus putting
an end to the rate of 24% special excise duty. These items also will now bear a total
duty of 32%. There will be no change in respect of products, which already attract
this rate of 32%.
1 0 7 . There are a few items that currently attract CENVAT at half the rate, namely,
8%. All these items will henceforth be charged to the normal rate of 16% except
cotton yarn including sewing thread, LPG, kerosene and diesel engines up to 10 HP,
which I am leaving at 8% for the present in the larger public interest.
1 0 8 . After these rationalization measures about 80% of the revenue in respect
of ad valorem duties will come from the single rate of 16% and about 17% from the
combined rate of 32%.
1 0 9 . India is the world’s second largest producer of fruits and vegetables. However,
most of these are wasted in the absence of proper storage and processing facilities.
Food-processing industry dealing in perishable fruits and vegetables needs special
support. I, therefore, propose to exempt food preparations based on fruits and
vegetables completely from excise duty. This will include a very wide range of products
of common use like pickles, sauces, ketchup and juices, etc. This, along with the
support I have given to creation of better storage facilities will give a fillip to the food
processing industry and will go a long way in improving the rural economy of our
country.
1 1 0 . The Eleventh Finance Commission has recommended a special levy for the
replenishment of the National Calamity Contingency Fund. As an ad hoc measure,
this was provided for in the current year through a special surcharge on corporate
taxes. I propose to establish this funding on a regular basis through a special
surcharge of excise on a range of products the use of which should be discouraged
on health grounds. I propose to levy a surcharge of 15% on cigarettes. The duty on
biris would increase from Rs 6 to Rs 7 per thousand biris. The total duty on pan
masala would be 55%/60%. Miscellaneous tobacco products like chewing tobacco
would be charged to a total duty of 60%.
1 1 1 . Excise duty on High Speed Diesel was reduced from 16% to 12% in
September last year. I propose to restore it to the normal CENVAT rate of 16%. I also
propose to restore special excise duty on motor spirit to the previous rate of 16%.
The burden of increase in duty is not proposed to be passed on to the consumers
except for any technical corrections.
1 1 2 . LPG is charged to excise duty at 8%. I propose to apply the same rate of
duty to Compressed Natural Gas, which is exempt at present.
1 1 3 . A special scheme of charging excise duty from independent textile processors
on compounding basis was introduced in December 1998. The working of this scheme
has resulted in serious distortions. I have therefore decided to revert to the ad valorem
 24
duty structure for independent textile processors with effect from 1, March 2001.
Independent processors would be allowed to take CENVAT credit of the duty paid on
inputs on a deemed basis.
1 1 4 . There is no economic logic to continue with excise duty exemption on
garments sold under a registered trade name. I propose to impose a duty of 16% on
such garments.
1 1 5 . Products of SSI units are exempt from excise duty up to Rs one crore. This
exemption is intended to provide fiscal support to the genuinely small producers. I
propose to withdraw this exemption in respect of the following items, in which misuse
of the exemption is more than likely:
« Cotton yarn
« Ball or roller bearings
« Arms and ammunition for private use

1 1 6 . The excise duty structure on matches comprises rates of duty ranging from
25 paise to Rs 2.40 per hundred boxes of 50 sticks each. I propose to rationalise the
existing rates to a more rational structure with a duty rate of 50 paise for the
handmade sector, Re.1 for the middle sector, Rs 2 for the semi-mechanized sector
and Rs 3 for the mechanized sector.
1 1 7 . Mr. Speaker, Sir, in the matter of rates of duties of excise I have almost
achieved the ultimate with only one basic rate of CENVAT and one rate of special
excise duty. The procedures in excise have also been made modern. I can humbly
claim that excise duty is now a model of value added tax up to the manufacturing
stage.
1 1 8 . The only issue, which remains to be tackled now, is the issue of individual
exemptions. The regime of exemptions is incompatible with a simple, equitable and
rational tax structure that has now been put in place. I am not doing away with the
exemptions altogether, realizing that this may come as a sudden shock to those who
are accustomed to exemptions. However, I will like to give notice to them to be prepared
to pay duties like anyone else. For the present, I am making a modest beginning by
imposing a nominal duty of 4% on some items like goggles, imitation jewellery,
rubberized mattresses etc. which in four equal annual installments will be taken to
16%. More and more items will be put on this escalator every year.
1 1 9 . Structural changes have taken place in the economy with the service sector
growing faster than other sectors. I am expanding the net of service tax and I propose
to add the following services to the list of taxable services:
• Specified Banking and Financial Services
• Authorized Service Stations for servicing of vehicles including two wheelers
• Port Services
• Broadcasting Services
 25
• Photographic Services
• Convention Services
• Sound Recording Services
• Scientific and Technical Consulting Services
• Telex Services
• Telegraph Services
• Facsimile Services
• On-line Information & Data Base Retrieval services
• Video Tape Production Services
• Services auxiliary to Insurance

1 2 0 . I propose to bring the service provided to lease circuit line holders also in
the tax net.
1 2 1 . I now turn to my proposals relating to customs duties.
1 2 2 . In my previous budgets, I have reduced the total number of major customs
duty rates to four, that is, 35%, 25%, 15% and 5%. I do not wish to propose any
further reduction in the number of customs duty rates this year. However, I propose
to discontinue the surcharge of 10%. With this, peak level of customs duty will
decline marginally from 38.5% to 35%.
1 2 3 . All agricultural produce already attracts the peak rate of duty of 35% or
more. Current tariffs on major cereals are: Wheat (50%), Rice (70%/80%) and Maize
(50%). I now propose to increase the customs duty on tea, coffee, copra, and coconut
and desiccated coconut from the present 35% to 70%.
1 2 4 . Similarly, I propose to increase the rate of duty on crude edible oils ranging
from 35% to 55% at present to a uniform rate of 75% and on refined oils from 45%/
65% to 85%. A lower rate of 45% would apply to soyabean oil on account of WTO
binding. I also propose to enhance the rate of customs duty on the import of crude
palm oil by vanaspati manufacturers from 25% to 55% and restrict this concession
to sick vanaspati units only. The others will pay 75%. I wish to assure the House
that in order to safeguard the interest of our farmers we shall move swiftly whenever
any perceptible threat on account of imports is noticed.
1 2 5 . The House is aware that Government has committed itself to abolish customs
duty on IT and telecom products and their inputs and components under the ITA 1
Schedule by 2003. The customs duty on these products is proposed to be reduced to
15% from 1, March 2001 from current levels.
1 2 6 . Mr. Speaker, Sir, with the abolition of the remaining Quantitative Restrictions
in April this year second hand cars will also become freely importable. To allay the
fears of surge in import of second hand cars, the rate of basic customs duty on their
 26
import will be raised to 105%, which is three times the peak rate. The total duty now
applicable to second hand cars will be more than 180%. I propose a similar structure
of duty for the import of old multi utility vehicles, scooters and motor cycles.
1 2 7 . In order to provide a level playing field for domestic liquor producers, I
propose to levy CVD at a suitable rate on imported liquor, taking into account the
levies of state excise on domestic production.
1 2 8 . Our textile industry has to modernize itself and acquire the latest technology
in order to face global competition and attain high quality of production. I propose to
reduce the basic customs duty on specified textile machines, including shuttle-less
looms, from 15% to 5%. As a measure of further relief to the textile sector, I propose,
to reduce the customs duty on silk waste, cotton waste and flax fibre from 35% /
25% to 15%.
1 2 9 . There are some cases of anomaly in customs duty between raw materials
and intermediate goods on the one hand, and intermediate goods and final products
on the other. DMT, PTA, MEG and Caprolactum are raw materials for production of
man-made fibers and yarns. However, the customs duty on these materials is higher
than the rate applicable to fibers and yarn. I propose to reduce the customs duty on
DMT, PTA, MEG and Caprolactum from 25% to 20%, which is the WTO bound rate
for synthetic fibers and yarns. Similarly, soda ash is an input for the production of
glassware, detergents etc. and currently attracts the peak customs duty of 35%
along with the final products. I propose to reduce it to 20%. I also propose to reduce
the customs duty on polyester chips and nylon chips for the manufacture of fibers
and yarns from 35% to 25%.
1 3 0 . On the same analogy, the customs duty on high quality DBM, seawater
magnesia and fused magnesia is being reduced from 25% to 15%.
1 3 1 . Gems and jewellery have considerable potential for export. I propose to
reduce the customs duty on cut and polished coloured gem stones from 35% to
15%. I also propose to reduce the customs duty on specified equipment when imported
by training institutes sponsored by the Gem and Jewellery Export Promotion Council
from 25% to 15%. The rate of customs duty on rough diamonds would now be 5%.
1 3 2 . CNG kits and their parts attract low duty at 5%. I propose to extend the
same treatment to LPG conversion kits and their parts.
1 3 3 . LNG is not produced in India. The burden of CVD on the import of LNG
adds to the cost of LNG projects. I therefore propose to exempt LNG from CVD.
1 3 4 . For the same reason, I also propose to exempt wattle extract from the
application of CVD.
1 3 5 . I propose to reduce the customs duty on cement, and clinkers from 35% to
25%. I am confident that this reduction would help softening of domestic prices of
cement for the benefit of consumers.
1 3 6 . Mr. Speaker, Sir, accredited pressmen and cameramen are allowed to import
cameras, computers, fax machine etc. up to a value of one lakh rupees for their
professional use without payment of customs duty once in five years. In view of
 27
many good photographs they have taken of use, I propose to reduce this long waiting
period from five years to two years.
1 3 7 . In order to encourage better quality of cinematography I propose to reduce
the customs duty on cinematographic cameras, projectors and certain other related
equipment used by the film industry from 25% to 15%.
1 3 8 . In order to discourage smuggling I propose to reduce the duty on gold from
Rs 400 per 10 grams to Rs 250 per 10 grams.
1 3 9 . Several industry associations have pointed out that the CVD on the imported
consumer products should also be charged on the basis of maximum retail price;
otherwise it does not provide a level playing field. I accept the logic of their argument.
The Finance Bill contains the enabling provision to implement this decision.
1 4 0 . I propose to withdraw the exemption from customs duty on a few items and
impose on them a nominal duty of 5%.
1 4 1 . I have already promised that our customs tariff would be brought down to
East Asian levels. I will like to move progressively within three years to reduce the
number of rates to the minimum with a peak rate of 20%. The modalities for this
will be worked out in time for the next budget.
1 4 2 . Sir, a number of steps are also being taken for greater procedural and
administrative efficiency.
1 4 3 . A new Manual of Procedures and Instructions on Central Excise and
Customs would be brought out by 1, September 2001. The emphasis would be on
simplicity, brevity and transparency. I also propose to simplify the central excise
rules to make them user friendly.
1 4 4 . My proposals on the excise side are estimated to result in a revenue gain of
Rs 4677 crore in a year. On the customs side my proposals are estimated to result in
a revenue loss of Rs 2128 crore. I estimate that the indirect tax revenue next year
would be Rs 1,40,992 crore.
1 4 5 . Copies of the notifications issued to give effect to the changes in excise and
customs duties shall be laid on the Table of the House in due course.
1 4 6 . In Direct Taxes, my thrust during the last three years has been on providing
stability of tax rates, widening the tax base, rationalizing and simplifying the tax
laws and giving impetus to economic growth. These efforts have resulted in increasing
the direct tax revenue from Rs 46,428 crore in 1998-99 to an estimated Rs 74,467
crore this year. In addition, the number of assessees has increased significantly
from a little over one crore in March 1998 to 2.3 crore at the beginning of this year.
I, therefore, propose to continue with the same rates this year also. Co-operative
Societies, however, will henceforth pay 30% tax instead of 35%.
1 4 7 . While imposing the surcharge of 10 % on corporates and non-corporates in
my budget of 1999-2000, I had promised that this would be a temporary levy. However,
I was constrained to increase the surcharge on non-corporate tax payers at the
higher income levels to 15% due to the unexpected expenditure burden of Kargil.
 28
During the course of this financial year I had further levied a surchage of 1% on
corporates towards the National Calamity Contingency Fund and an additional 2%
on all tax payers for the Gujarat Earthquake relief. I now propose to remove all
surcharges payable by corporates and non-corporates except the surcharge of 2 %
for relief to quake hit areas of Gujarat. Individuals having an income of up to Rs
60,000/- will not be subject to this surcharge.
1 4 8 . As a welfare measure, Sir, I propose to allow 100% deduction for donations
to the National Trust for welfare of persons with autism, cerebral palsy, mental
retardation and multiple disabilities.
1 4 9 . Hon’ble Members are aware that the modified one-by-six scheme, which I
introduced in the Finance Act, 1998 to identify potential income-tax assessees and
to bring them into the tax net, has paid rich dividends. I, therefore, propose to
extend the one-by-six scheme to all urban areas in the country as defined by the
1991 Census. Changes arising out of the 2001 census will be incorporated
subsequently.
1 5 0 . Certain companies are not filing their returns of income, presumably on
the plea that they are not having any taxable income. These companies go out of
fiscal discipline and their financial transactions during the initial years escape
scrutiny. I therefore, propose that all companies should file their returns even if they
incur a loss.
1 5 1 . Sir, another effective measure of widening the tax base is to further enlarge
the scope of deduction of tax at source. Income tax at source will henceforth be
deductible at the rate of 10 % on income by way of commission or brokerage exceeding
Rs 2,500/-, except on transactions relating to shares and securities.
1 5 2 . Winnings from lotteries, crossword puzzles etc. are currently taxed at 40%.
As the marginal personal income tax rates have now stabilized at 30%, this income
will also now be taxed at 30%. Television game shows are very popular these days. I
wish the winners well. At the same time, I propose that income tax at the rate of 30%
will be deducted at source from the winnings of these and all similar game shows.
1 5 3 . At present, tax is deducted at source on income from interest on time
deposits only if such income exceeds Rs 10,000/- in respect of deposits with a Bank
or Housing Finance Company and Rs 5,000/- in other cases. These threshold limits
have led to the erosion of tax base and under-reporting of taxable income due to
splitting up of deposits. I, therefore, propose to lower this limit to Rs 2,500/- in all
cases.
1 5 4 . With economic liberalization, the pay package of salaried class is undergoing
many changes. It is being divided into various components and the forms of perquisites
and benefits or amenities provided by the employers are assuming new dimensions.
To align our tax system with the present structure of pay packages, I propose that
the value of perquisites, benefits or amenities shall be determined on the basis of
their cost to the employer, except in respect of houses and cars where different
criteria will be adopted for simplicity.
 29
1 5 5 . Sir, I also propose to provide relief to salaried persons in the lower income
range having income up to rupees one lakh. Such persons will get an enhanced tax
rebate at the rate of 30% in respect of their eligible investments under section 88 of
the Income Tax Act, as against 20% at present.
1 5 6 . In the case of Export Oriented Units, and units located in Export Processing
Zones, Free Trade Zones and Software Technology Parks 25% of their sales in the
domestic market are currently tax exempt. I propose to provide for the taxation of
profits from these domestic sales of such units.
1 5 7 . I.T. Sector continues to do well and should be encouraged to do better. I,
therefore, propose that profits derived by the units located in the software technology
parks from the export of “on-site” services will be eligible for deduction like their
other export income. Units located outside these zones will also get the benefit of tax
exemption on such export earnings. I further propose that the condition relating to
transfer of ownership of companies in sections 10A and 10B of the Income-tax Act
shall not apply in respect of companies in which public are substantially interested.
1 5 8 . The income of NABARD, National Housing Bank and Small Industries
Development Bank of India (SIDBI) was exempted from tax in order to provide fiscal
support in the initial years of their functioning. Now these institutions have come of
age and are working on commercial lines. I, therefore, propose to withdraw the tax
exemption available to these institutions.
1 5 9 . The interest payable on certain External Commercial Borrowings (ECBs) is
currently exempt from tax. Having regard to the fact that interest received by the
lender is taxable in the country of his residence and he would get a credit for any tax
paid by him in India, any exemption from tax liability in the host country does not
benefit the lender but only results in reducing our tax revenues. I, therefore, propose
that the tax exemption in respect of interest paid on such External Commercial
Borrowings will not be available for such borrowings made on or after the first day of
June 2001.
1 6 0 . Certain interest income up to a limit of Rs 12,000 is deductible at present
under section 80L. In addition, income from Government securities is also
deductible up to Rs 3,000. I propose to reduce the maximum limit of this deduction
to Rs 9,000.
1 6 1 . The tax payable on the distribution of dividends of domestic companies
and income in respect of Units of Mutual Funds and UTI was increased from 10% to
20% last year. To provide a stimulus to the growth of capital market, I propose to
reduce this tax to 10%.
1 6 2 . To help revive investor-interest in primary issues I propose to exempt long-
term capital gains arising from the sale of securities and Units if such gains are
reinvested in primary issues of shares of public companies.
1 6 3 . Sir, the tax incentives in the form of tax holidays for infrastructure facilities
are proposed to be further rationalized and enlarged. For the core sectors of
infrastructure namely, roads, highways, rail system, water treatment and supply,
irrigation, sanitation and solid waste management systems, I now propose a ten-
 30
year tax holiday which may be availed of during the initial twenty years. In the case
of airports, ports, inland ports and waterways, industrial parks and generation and
distribution of power, which also become commercially viable only in the long run, a
tax holiday of ten years is being proposed to be availed of during the initial fifteen
years. The period of commencement of business for power and industrial parks is
also being extended up to 31, March 2006.
1 6 4 . The five-year tax holiday and 30 % deduction for next five years was available
to the telecommunications sector till 31, March 2000. I propose to reintroduce this
concession retrospectively for the units commencing their operations on or before
31, March 2003. These concessions will also be extended to internet service providers
and broadband networks.
1 6 5 . Sir, in addition to the tax holiday proposed for development of infrastructure,
tax incentives have also been provided for the investors providing long-term finance
or investing in the equity capital of the enterprises engaged in infrastructure facility.
Any income by way of interest, dividends or long-term capital gains from such
investments is fully exempt. I propose to extend this concession to guarantee
commissions and credit enhancement fees earned by financial institutions from
infrastructure enterprises. Co-operative Banks will also be eligible for exemption of
their income from investments in approved infrastructure facilities.
1 6 6 . To be globally competitive, our companies need to increase their investment
and expenditure for Research and Development. Currently, a weighted deduction of
150% of the expenditure on in-house research and development in certain areas is
allowed to companies. Sir, I propose to extend this weighted deduction to biotechnology
as well for clinical trials, filing patents and obtaining regulatory approvals. I also
propose that the entire amount paid to specified projects under the India Millennium
Mission, 2020 will be eligible for 125 % weighted deduction.
1 6 7 . To encourage development of industrial infrastructure, I had provided
100% deduction of export profits for a period of ten years to units operating in the
Special Economic Zones last year. I now propose to give further tax incentives for
the development of these zones. 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.
1 6 8 . The storage of food grains and their transportation are our major concern.
Sir, I propose to provide a tax holiday for five years and 30% deduction of profits for
the next five years to the enterprises engaged in the integrated business of handling,
transportation and storage of food-grains.
1 6 9 . Sir, for promoting the industry that provides the cup that cheers, I propose
to increase the development allowance available for tea from 20% to 40%. This
additional allowance will be used only for re-plantation, rejuvenation, and
modernization of tea plantations and processing facilities.
1 7 0 There has been a long-standing demand from the Shipping Industry that
the rate of depreciation available in respect of ships and inland water vessels may be
increased. I propose to increase this rate of depreciation to 25%.
 31
1 7 1 . To encourage investments in weaving, processing and garment sectors of
the textile industry, I propose to allow accelerated depreciation at the rate of 50% on
plants and machinery purchased under the Technology Up-gradation Fund Scheme.
1 7 2 . In order to give a boost to the commercial vehicles sector presently facing
recession, I propose to allow accelerated depreciation at the rate of 50% on new
commercial vehicles for one year.
1 7 3 . Each of my past three budgets has provided for increasing tax incentives
for the housing sector. Sir, continuing with this practice, I propose to further increase
the maximum amount of deduction available for interest payable on housing loans
for self-occupied houses from rupees one lakh to rupees one and a half lakhs.
1 7 4 . For persons having income from house property, the present deduction of
25 % of annual value for repairs etc. is proposed to be enhanced to 30%. However,
there will be no further deductions, except for the expenditure incurred by way of
interest payment on housing loans.
1 7 5 . I propose to extend the tax incentives allowed by way of deduction or rebate
on payments of LIC premium to all insurance companies that have been approved
by the Insurance Regulatory and Development Authority
1 7 6 . 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. I had set up an
Expert Group in November 1999 to examine the issues relating to transfer pricing.
Their report has been received, proposing a detailed structure for transfer pricing
legislation. Necessary legislative changes are being made in the Finance Bill based
on these recommendations.
177. The foreign telecasting channels will henceforth be taxed in India, on their
income computed in accordance with the provisions of the Income-tax Act.
1 7 8 . Sir, I propose to bring about a number of measures that will be friendly to
the taxpayer. The time limits for issue of refunds, reassessment and reopening of
assessments by the Income-tax Department are proposed to be reduced. The
Department will also no longer have power to withhold the refund due to an assessee.
Similarly, there will be no requirement to obtain a Tax Clearance Certificate under
section 230A from the Assessing Officer before transfer of immovable property. I
also propose to remove the discretion presently available in deciding the quantum of
penalties. Henceforth, a fixed amount of penalty will be leviable for most of the
defaults.
1 7 9 . Certain educational and medical institutions are required to be approved
for claiming tax exemption. At present, these institutions have to file their application
for approval to the Central Board of Direct Taxes. Sir, I propose to delegate this
power to Chief Commissioners of Income-tax.
1 8 0 . To sum up, Sir, my proposals made in this Budget on the Direct Taxes will
result in a revenue loss of Rs 5,500 crore, which I propose to make up with tax
 32
buoyancy and increased voluntary compliance. I estimate that the direct tax revenue
in 2001-2002 would be Rs 84,800 crore.
1 8 1 . Mr. Speaker, Sir, with these proposals I estimate total tax revenue receipts
for the Centre at Rs 163031 crore and the fiscal deficit at Rs 116314 crore or 4.7%
of GDP. I could have managed a lesser fiscal deficit but that would have been possible
only at the cost of growth, which was unacceptable.
1 8 2 . 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.
1 8 3 . Mr. Speaker, Sir, with these words, I commend the budget to this august
house.
 1

Budget 2000-2001

Speech of

Shri Yashwant Sinha

Minister of Finance

29th February, 2000

PART A

Sir,
I rise to present the first budget of this millennium.
2. This budget for 2000-2001 has some other firsts to its credit also. It is the
first budget of the new Government which took office in October 1999 under the
visionary leadership of Shri Atal Bihari Vajpayee. It is also the first budget of the
second half century of our Republic and the first budget of the new century. I hope
it will add many more firsts to its credit as time goes by. I thank the Hon’ble Prime
Minister for entrusting me with this historic responsibility which I stand here to
discharge in all humility.
3. The year 1999-2000 has been a year of many challenges: the 50 day war in
Kashmir, the super cyclone in Orissa, long months of political uncertainty before the
general elections, a somewhat weak monsoon, a near tripling of world oil prices and
the continued fragility in world economic recovery. Nevertheless, we have met these
challenges resolutely, accomplished a great deal and the nation is stronger as a
result.
4. The economy’s performance is described in detail in the Economic Survey
I laid before the House yesterday. Let me just touch a few highlights. A broad-based
industrial recovery is under way. Despite lower growth of agriculture due to inclement
weather, overall economic growth this year is expected to be nearly 6%. The
infrastructure sector is performing much better. For the first time in 17 years the
inflation rate has stayed below 4% for 42 consecutive weeks. Even more remarkable,
the Consumer Price Index (Industrial Workers) in November 1999 showed zero
increase over the previous November. This is an enormous boon for the weakest
sections of our society. Public food stocks are at record levels. Exports have achieved
a remarkable turn around from negative growth last year to nearly 13% growth in
dollar terms in April-December, 1999. Our software exports are also booming.

1
 2
Although surging international oil prices have increased our oil import bill by more
than $6 billion, our foreign exchange reserves have nevertheless attained new record
levels. With the return of investor confidence our stock markets have also soared to
new heights.
5. In my last two budgets I have addressed the accumulated shortcomings in
our policies and freed our companies to compete globally. We have strengthened our
agricultural sector, energised our financial markets and laid the foundations of an
exciting new economy. With this, my third budget, I propose to put India on a
sustained, equitable and job-creating growth path of 7 to 8% per year in order to
banish the scourge of poverty from our land within a decade. The next 10 years will
be India’s decade of development. To achieve this objective our strategy must
encompass the following elements:
♦ Strengthen the foundations of growth of our rural economy, especially
agriculture and allied activities.
♦ Nurture the revolutionary potential of the new knowledge-based industries
such as infotech, biotechnology and pharmaceuticals.
♦ Strengthen and modernise traditional industries such as textiles, leather,
agro processing and the SSI sector.
♦ Mount a sustained assault on infrastructure bottlenecks in power, roads,
ports, telecom, railways and airways.
♦ Accord the highest priority to human resource development through
programmes and policies in education, health and other social services,
with special emphasis on the poorest and weakest sections of society.
♦ Strengthen our role in the world economy through rapid growth of exports,
higher foreign investment and prudent external debt management.
♦ Establish a credible framework of fiscal discipline, without which the other
elements of our strategy can fail.
6. In all these areas we must pursue thorough-going economic reforms to
unlock the creative energies of our people and thus reap the gains of productivity
growth. But our reforms must also be guided by compassion and justice. In his
Address to Parliament in October 1999 the President has set out the broad outlines
of our programme of second generation reforms. This budget carries forward the
process of implementation.
Fiscal Management
7. Today, we must squarely confront and overcome the critical challenge posed
by a weakening fiscal situation. A long history of high fiscal deficits has left us with
a legacy of a huge public debt and an ever-growing bill of interest payments. This
year we have incurred unanticipated expenditure on national defence, elections and
the super cyclone in Orissa. The residual impact of the Fifth Pay Commission and
the need for special fiscal assistance to the States have added to our burden. All
this, combined with shortfalls in receipts from disinvestment and revenue, has raised
our net borrowing requirements (our fiscal deficit) to over Rs.1,00,000 crore. This
will add about Rs.10,000 crore to our interest bill next year. We must also find
additional resources for Plan, Defence and for additional transfers to States under
the interim award of the Eleventh Finance Commission. If we do not raise the resources
 3
and instead take recourse to even higher borrowing next year, then we will jeopardise
our prospects for growth, reignite the flames of inflation, sow the seeds of another
balance of payments crisis and place an unfair burden on the next generation.
8. We must put our fiscal house in order. This means hard decisions and
sacrifices. At the same time we must preserve the intrinsic dynamism of our economy,
which alone can deliver sustained growth with social justice. For this reason, despite
the severe fiscal strain, the budget support to the plan is being increased by Rs.11,100
crore to a level of Rs.88,100 crore compared to Rs.77,000 crore in B.E. 1999-2000.
9. Similarly, there cannot be any compromise on Defence. Our forces have
once again demonstrated in Operation Vijay that they are second to none in the
world. Government is committed to enhance the quality of our defence preparedness
and to modernise our forces. In this budget I have made a provision of Rs.58,587
crore for defence, which is nearly Rs.13,000 crore more than in B.E. for the current
year. This represents the largest ever increase in the defence budget in any single
year. More will be provided whenever needed. We shall not shrink from making any
sacrifice to guard and protect every inch of our beloved motherland.
10. Over the years the composition of Central Government expenditure has
become highly rigid and prone to large, pre-committed increases. More than half of
the annual budget outlays are transfer payments. Interest payments, Defence, Internal
Security, Major Subsidies, Salaries, Allowances and Pensions and non-plan grants
to States account for about 95% of non-plan expenditure and about 70% of total
expenditure. To curb built-in expenditure growth and bring about structural changes
in the composition of our expenditure, I am introducing the following initiatives.
♦ All ongoing schemes will be subjected to rigorous zero base budgeting
scrutiny. I had announced this initiative last year and I am glad that this
exercise has been completed in 8 Departments. As a result 69 schemes
are to be discontinued or merged. This process will be completed in a
timebound manner in the remaining Departments.
♦ The manpower requirements of Government departments will be reassessed
by reviewing the norms for creation of posts.
♦ Fresh recruitment in Government departments and institutions will be
limited to minimum essential needs.
♦ The scheme for redeployment of surplus staff will be made more effefctive
and will provide facilities for retraining. A VRS scheme will also be introduced
for staff in the surplus pool.
♦ All subsidies will be reviewed with a view to bringing in cost-based user
charges wherever feasible.
♦ No new autonomous institutions will be created without approval of Cabinet.
Budgetary support to autonomous institutions will be reviewed and they
will be encouraged to maximise generation of internal resources.
♦ In order to align with the overall interest rate structure, the interest rate on
General Provident Funds is being reduced by 1% to 11% from 1.4.2000.
♦ Excessive domestic borrowings to finance current expenditure has resulted
in debt service payments approaching unsustainable levels. To reduce
expenditure on this account, a portion of the disinvestment proceeds will
be earmarked for retiring Government debt. An initial provision of Rs.1,000
 4
crore has been made in the budget for this purpose.
I will have something more to say on major subsidies a little later.
11. These measures are necessary and are only a beginning. We shall pursue
resolutely the objective of downsizing Government and prepare a roadmap for the
purpose. For medium-term management of the fiscal deficit we also need the support
of a strong institutional mechanism embodied in a Fiscal Responsibility Act. This
had been suggested in the Agenda for Governance of the National Democratic Alliance.
I have set up a committee to examine this issue and make suitable recommendations.
I hope to bring the necessary legislative proposals to the House during the course of
the year.
12. The challenge of fiscal management is not confined to the Central
Government. The financial position of the State Governments has deteriorated sharply
in the last few years. Revenue deficits have widened and borrowings are being
increasingly used to meet revenue expenditure. Fiscal reform at the State level has
acquired great urgency. While we have gone out of our way to help State Governments,
the determination shown by some States to deal with these issues has also helped
enormously. It will be my endeavour to take further collective measures in the next
year for promoting fiscal reforms in the States. The final report of the Eleventh
Finance Commission will provide valuable inputs for taking policy initiatives in this
regard.
Agriculture and Rural Development
13. It is my firm belief that sustained and broad-based growth of agriculture is
essential for alleviating poverty, generating incomes and employment, assuring food
security and sustaining a buoyant domestic market for industry and services.
14. We must take all necessary measures to strengthen the rural economy.
Credit flow to agriculture through institutional channels of commercial banks,
cooperative banks and Regional Rural Banks is estimated at about Rs.41,800 crore
this year. It is expected to increase by over 20 per cent to a level of Rs.51,500 crore
in 2000-2001. In my last two budgets we have launched a wide array of initiatives to
promote the flow of rural credit. In this budget I propose to strengthen the earlier
programmes and launch further initiatives:
♦ The Rural Infrastructure Development Fund (RIDF) managed by NABARD
has emerged as a popular and effective scheme for financing rural
infrastructure projects. Last year I had announced an enhanced allocation
of Rs.3,500 crore from the banking sector for RIDF V and extended the
repayment period of loans to 7 years. The scope of RIDF was also widened
to allow lending to Gram Panchayats, Self Help Groups, NGOs and other
eligible organisations for implementing village level infrastructure projects.
This year the corpus of RIDF VI will be increased to Rs.4,500 crore and the
interest charged on this lending will be reduced by half a percent.
♦ Micro finance has emerged as an effective tool for alleviating poverty in
many countries. In my last budget I had asked NABARD and SIDBI to
cover 50,000 Self Help Groups to develop micro enterprises. NABARD by
itself is likely to link 50,000 such Groups to banks during the current year.
NABARD and SIDBI will cover an additional one lakh Groups during 2000-
2001. To give a further boost to this programme a Micro Finance
 5
Development Fund will be created in NABARD with a start up contribution
of Rs.100 crore from RBI, NABARD, banks and others. This Fund will provide
start up funds to micro finance institutions and infrastructure support for
training and systems management and data building. Special emphasis
will be placed on promotion of micro enterprises in rural areas set up by
vulnerable sections including women, Scheduled Castes, Scheduled Tribes
and Other Backward Classes.
♦ The cooperative system is a crucial channel for credit in rural areas. However,
over time, problems have developed, mainly because of excessive
bureaucratization and the overlapping jurisdiction of State Governments
and NABARD. Some State Governments have already taken legislative action
to promote genuinely cooperative institutions. For rural credit, clear
delineation of the supervisory role of RBI/NABARD on banking matters is
also essential. To promote these two prerequisites for a more vibrant rural
cooperative credit system I propose to establish a Fund in NABARD. The
details will be worked out in the light of the forthcoming recommendations
of the Capoor Committee earlier constituted by Government. In the
meantime, RBI is advising the banks to accord priority to the credit needs
of those cooperatives which are entirely controlled by user-members and
managed by them prudently.
♦ The programme of Kisan Credit Cards is progressing very well. Cooperative
Banks, Regional Rural Banks and Commercial Banks together have so far
issued more than 50 lakh cards and card-cum-pass books to the farmers.
I am asking NABARD and Commercial Banks to redouble their promotional
efforts so as to issue an additional 75 lakh Kisan Credit Cards by March
2001.
♦ Due to our efforts at recapitalizing RRBs, 158 RRBs are posting operating
profits. Out of these, 48 RRBs have been able to wipe out their accumulated
losses. In view of the importance of the RRBs in rural financing, we will
continue with this programme of strengthening the RRBs.
15. The Planning Commission and the Ministry of Agriculture have worked out
modalities to integrate 28 ongoing separate Centrally Sponsored Schemes of
agricultural development into one comprehensive programme. This will weed out
duplication, enhance the productivity of the support programme and accord greater
flexibility to State Governments to develop and pursue activities on the basis of
regional priorities. This is a major step forward towards the goals of convergence
and decentralisation that I had outlined in my budget last year.
16. There is urgent need to review and coordinate our long-term strategy at the
National and the State levels on the pattern of land use in the country, development
of agriculture in relation to the agro-climatic conditions in the different regions and
preservation of our forest resources. We need to adopt an integrated approach to a
number of related subjects such as preservation and development of the forest wealth,
optimum utilisation of the wasteland, watershed development, safeguarding bio-
diversity etc. In view of the complexity of the issues involved, a National Commission
on Land Use Policy comprising of experts in the relevant fields will be set up to
 6
examine the various aspects and make appropriate recommendations to Government.
17. Our Government stands fully committed to ensure that the fruits of economic
reforms are shared by all sections of society, especially those living in rural areas
and more particularly the Scheduled Castes, Scheduled Tribes and Other Backward
Classes. Five elements of social and economic infrastructure are critical to the quality
of life specially in rural areas: health, education, drinking water, housing and roads.
18. Even after 52 years of Independence the provision of basic services in rural
areas remains very unsatisfactory. Forty per cent of our villages are without proper
roads; 1.8 lakh villages do not have a primary school within 1 km; 4.5 lakh villages
have drinking water problems; some estimates indicate a shortage of 140 lakh rural
dwelling units; rural health infrastructure suffers from large deficiencies. These large
gaps in basic services in rural areas are not acceptable and Government is committed
to removing them rapidly.
19. Universalisation of elementary education is one of our key objectives. A
new Department of Elementary Education and Literacy has already been created
under the Ministry of Human Resources Development to give a new thrust and focus
to these efforts. Some new initiatives include a scheme for universalisation of
elementary education called “Sarva Shiksha Abhiyan” which would enable all children
to enroll by 2003 and expansion of the District Primary Education Programme to
cover the remaining districts in Uttar Pradesh, West Bengal, Orissa and Gujarat. On
the literacy front the National Literacy Mission would be revamped so that the literacy
rate can be raised to 75% by the year 2005. The plan allocation for elementary
education has been increased from Rs.2,931 crore to Rs.3,729 crore next year. A
new Department of Drinking Water Supply in the Ministry of Rural Development has
been set up to intensify the efforts and accelerate the pace of coverage. Our objective
is to provide drinking water facilities in all rural habitations in the next five years. It
is proposed to cover around 60,000 habitations and 30,000 schools in the next year.
The outlay of the Department is being enhanced to Rs.2,100 crore from Rs.1,807
crore this year. The Reproductive and Child Health programme will receive Rs.1,051
crore as against an allocation of Rs.695 crore in 1999-2000. For rural housing
schemes a provision of Rs.1,710 crore has been made.
20. To impart greater momentum to these efforts I am announcing the launching
of a new scheme, the “Pradhan Mantri Gramodaya Yojana” with the objective of
undertaking time bound programmes to fulfill these critical needs of the rural people.
I am providing a sum of Rs.5,000 crore separately for this Scheme in the budget.
Out of this a sum of Rs.2,500 crore will be earmarked for launching a nationwide
programme of constructing rural roads and improving rural connectivity. Under the
Scheme, Central assistance will be provided to States for implementing specific
projects in these sectors. The concerned Ministries in the Central Government will
lay down the guidelines and monitor the implementation of these programmes. The
erstwhile Basic Minimum Services Scheme will be merged with the new Scheme.
Thus the overall provision in the budget for schemes concerning the five basic needs
of the rural population is more than Rs.13,000 crore.
Rural Housing
21. “Housing for All” has been identified as a priority area in the Agenda for
Governance. For the coming financial year, a goal of providing 25 lakh dwelling
units in rural areas has been fixed. Schemes for meeting the needs of different
 7
sections of society have been prepared.
(i) Under Indira Awas Yojana, it is proposed to provide more than 12 lakh
houses for the people below poverty line. For this purpose, an amount of
Rs.1,501 crore is being provided in the budget.
(ii) For families with an annual income of below Rs.32,000 per annum,
assistance will be provided for construction of 1 lakh houses under credit-
cum-subsidy Scheme. An amount of Rs.92 crore is being provided in the
budget for this scheme.
(iii) The National Housing Bank will provide refinance to banks and housing
finance companies for construction of 1.5 lakh houses under Golden Jubilee
Rural Housing Finance Scheme.
(iv) To further improve the availability of housing finance in rural areas,
Government have decided to provide equity support of Rs.350 crore to
HUDCO during the Ninth Plan period. Of this, Rs.200 crore have already
been released and it is proposed to release a further amount of Rs.100
crore in the next year. With this enhanced equity support, HUDCO will be
able to leverage these funds and raise further resources to facilitate and
provide finance for the construction of about 9 lakh houses in the rural
areas in the coming financial year.
(v) The cooperative sector and voluntary agencies etc. will support the
construction of another 1.5 lakh houses.
Social Security for the Poor
22. More than one third of our population still lives below the poverty line.
There is an imperative need to extend some social security cover to the poorest
sections of our society. I have decided to introduce a new scheme of group insurance,
“Janashree Bima Yojana”, under which beneficiaries will have insurance cover of
Rs.20,000 in case of natural death, Rs.50,000 in case of accidental death or total
permanent disability and Rs.25,000 for partial permanent disability due to accident.
Premia will be fixed on an actuarial basis. Below poverty line participants in this
Scheme will pay only half the premium, with the remainder being contributed from
earnings of LIC’s existing Social Security Fund, suitably augmented by Government.
On this basis, the monthly premium to be paid by the beneficiary is expected to be
Rs.10 or less. This scheme will lay a firm foundation for insurance cover to the
poorest in our country.
Empowerment of Women
23. There is an urgent need for improving the access of women to national
resources and for ensuring their rightful place in the mainstream of economic
development. Towards this objective, the Government will set up a Task Force under
an eminent person to review all existing legislation and Government schemes
pertaining to the role of women in the national economy. This Task Force will help
us chalk out specific programmes for observing 2001 as “Women’s Empowerment
Year”.
Population, Health and Environment
24. Government have recently announced a new National Population Policy a
key objective of which is to bring down total fertility rates to replacement levels by
2010. To operationalise this objective, the plan allocation of the Department of
Family Welfare has been increased from Rs.2,920 crore in B.E. 1999-2000 to Rs.3,520
 8
crore next year.
25. Recognising the role of the Indian systems of medicine and homeopathy in
our health care, the plan allocation for the concerned Department is being doubled.
Emphasis will be placed on drug standardisation, quality control, modernising the
colleges, drug testing laboratories and formulations. This will also help in boosting
exports of herbal formulations.
26. We must preserve and nurture our forests and environment for future
generations. Funds are being provided for regeneration of mangroves and creation
of shelterbelts along the coastal line, bamboo regeneration and afforestation
programme, encouragement of medicinal plants and eco-tourism. Preservation of
the rural environment will raise the living standards of millions belonging to the
weakest sections of our society.
Small Scale Industry
27. The SSI sector plays a vital role in industrial production, employment
generation and exports. In the context of growing domestic and international
competition, our strategy is to support this sector through promotional policies of
credit and technology. For improving credit flow to SSI units, I propose the following:
♦ The requirement of providing collateral security is a major bottleneck to
the flow of bank credit to very small units. RBI has recently issued
instructions to dispense with the collateral requirement for loans up to
Rs.1 lakh. The limit is being further increased for the tiny sector from Rs.1
lakh to Rs.5 lakh.
♦ The existing composite loan scheme of SIDBI and banks helps small
borrowers by providing working capital and term loans through a single
window. To promote credit flow to small borrowers, the composite loan
limit is being increased from Rs.5 lakh to Rs.10 lakh.
♦ I am asking the public sector banks to accelerate their programme of SSI
branches to ensure that every district and SSI clusters within districts are
served by at least one specialised SSI bank branch. Furthermore, to improve
the quality of banking services, SSI branches are being asked to obtain ISO
certification.
♦ Last year, I had announced that a credit guarantee scheme for SSI will be
launched. I am glad to inform the House that a new Central Scheme for
this purpose has been formulated and a provision for Rs.100 crore has
been made in the budget. The Scheme will be implemented through SIDBI
and will cover loans upto Rs.10 lakhs from the banking sector. The
guaranteed loans will be securitised and will be tradeable in the secondary
debt market.
28. SIDBI operates the National Equity Fund Scheme under which equity
support is provided for projects up to Rs.15 lakh. To further help SSI entrepreneurs,
this limit will be raised from Rs.15 lakh to 25 lakh.
29. SIDBI is presently administering the Technology Development Modernisation
Fund Scheme for assisting technology development and modernisation of SSI units.
The Scheme has certain concessional features including interest at prime lending
rate for direct assistance and refinancing at 2% below prime rate for indirect finance.
 9
The operation of this scheme is being extended by another 3 years.
30. The Khadi and Village Industries Commission (KVIC) has been playing a
very important role as an instrument to generate large scale employment in the
rural areas with low per capita investment. Government will continue to encourage
the Khadi and Village Industry Sector so that its products can become more
competitive. For intensifying marketing efforts, the KVIC will introduce a common
brand name for its products and also set up a professionally managed marketing
company for domestic as well as export marketing.
Industry and Capital Market
31. In earlier millennia, India led the world on the basis of knowledge. Today
history is repeating itself. Young Indian entrepreneurs are at the forefront of the
infotech revolution, whether in Silicon Valley, Bangalore or Hyderabad. They have
shown us how ideas, knowledge, entrepreneurship and technology can combine to
yield unprecedented growth of incomes, employment and wealth. Companies
unknown 5 years ago have become world leaders. We must do everything possible to
promote this flowering of knowledge-based enterprise and job creation.
32. A key ingredient for future success lies in Venture Capital Finance. After a
thorough review, I am proposing a major liberalisation of the tax treatment for venture
capital funds. I will describe the details later. To simplify the procedures, SEBI will
be the single point nodal agency for registration and regulation of both domestic and
overseas venture capital funds. Venture activity is not limited to dot.com companies!
Ideas and entrepreneurship, which merit venture finance, can be found in all sectors
of the economy. The tax laws and SEBI guidelines are being formulated accordingly.
I should add that this liberalisation will give a strong boost for Non Resident Indians
in Silicon Valley and elsewhere to invest some of their capital, knowledge and
enterprise in ventures in their motherland.
33. In recent months stock markets have been buoyant all over the world,
including India. Experience has taught us that there can be hard times as well. It is
in such difficult times that institutions like investor protection funds of stock
exchanges become really important. I will have something to say on this in part B of
my speech.
34. Thanks to our prudent macro-economic management and calibrated
approach to currency convertibility, we have successfully weathered the East Asian
crisis of the past two years. But we must not confuse caution with timidity. We must
encourage Indian firms and businesses to grow into strong, India-based
multinationals. To promote this trend, it is necessary to accord our firms increasing
flexibility to undertake capital account transactions, especially for acquisitions of
businesses abroad. Last month, Government had announced a policy to allow Indian
companies to raise funds for investments through issue of ADRs/GDRs without
prior Government approval. Up to 50% of these proceeds can be used by them to
acquire companies in overseas market. We had also announced on 27th December,
1999, a liberalized mechanism for acquisition of software companies in the overseas
market through stock swap options up to US$100 million on an automatic basis. I
plan to further liberalize this policy for acquisition of companies abroad to enable
Indian corporates, in knowledge-based sectors to grow rapidly and lay the foundation
for Indian multinationals in areas where we have comparative economic advantage.
 10
For acquisition in other sectors too, I propose to increase the ceiling under the
automatic route from existing US$15 million to US$50 million for Indian corporates
and beyond this, through approval by the Committee on Overseas Investment.
35. Under existing policy on portfolio investment, Foreign Institutional Investors
(FIIs) are permitted to invest in a company, upto an aggregate of 24% of equity
shares, which can be increased to 30% subject to approval by the Board of Directors
and a Special Resolution of the General Body of the Company. To give our best
companies greater access to foreign portfolio investment, I am increasing this limit
from 30% to 40%.
Science and Technology
36. The sustained growth of our knowledge-based industries will ultimately
depend on the quality and extent of scientific and technological progress and training
in our society. We must harness our potential in science and technology to realise
the dream of modern India envisioned by the Prime Minister in his address to the
Indian Science Congress last month. For taking up relevant technology vision projects
and for increasing cooperation between our Universities and R&D institutions, I am
making an additional provision of Rs.50 crore in the budget of the Technology
Information Forecasting and Assessment Council under the Department of Science
and Technology. I am also making a provision of Rs.50 crore in the budget of the
Department of Scientific and Industrial Research for launching a New Millennium
Indian Technology Leadership Initiative. It will focus on areas which fulfil national
objectives and will be based on partnership between the Government and private
s e c t o r.
37. To fully benefit from the new intellectual property rights regime, we need to
encourage our scientists and R&D institutions to maximise their patenting efforts.
Government have decided to allow Universities and Research Institutions to retain
the revenue generated from intellectual property rights through publicly funded
research and also share a part of the revenue with the inventor.
38. Modernisation of the Patent Office and the Trade Mark Register is long
overdue. Government have sanctioned a modernisation project of Rs.75 crore for
the Patent Office and we will strive to remove all impediments for early implementation
of this project.
Banking and Finance
39. The recent East Asian crisis has underlined the critical importance of
undertaking reforms to strengthen the banking sector. In recent years, RBI has
been prescribing prudential norms for banks broadly consistent with international
practice. To meet the minimum capital adequacy norms set by RBI and to enable the
banks to expand their operations, public sector banks will need more capital. With
the Government budget under severe strain, such capital has to be raised from the
public which will result in reduction in Government shareholding. To facilitate this
process, Government have decided to accept the recommendations of the Narasimham
Committee on Banking Sector Reforms for reducing the requirement of minimum
shareholding by Government in nationalised banks to 33%. This will be done without
changing the public sector character of banks and while ensuring that fresh issue of
shares is widely held by the public. The Committee had also expressed the view that
the Boards of the banks should have sufficient autonomy to take decisions on
 11
corporate strategy and all aspects of business management and be responsible to
the stakeholders, that is, the shareholders, the customers, the employees and the
public at large. In particular, the interests of the employees of the nationalised Banks
will be fully safeguarded. It is proposed to bring about necessary changes in the
legislative provisions to accord necessary flexibility and autonomy to the Boards of
the banks.
40. As Honourable Members are aware, the Report of the Working Group on
Restructuring Weak Public Sector Banks had suggested the constitution of a Financial
Restructuring Authority (FRA). It has been decided to have a modified version of the
FRA. Thus, in respect of any bank which is considered to be weak or potentially
weak, the statutes governing public sector banks would be amended to provide for
supersession of the Board of Directors on the basis of recommendations of the RBI
and constitution of a FRA for such a bank, comprising experts and professionals.
The amendments would also enable the FRA to exercise special powers including all
the powers of the Board of the bank.
41. Government will not close down any public sector bank. As responsible
owner of the banks, Government have decided to consider recapitalisation of the
weak banks to achieve the prescribed capital adequacy norms, provided a viable
restructuring programme acceptable to the Government as the owner and the RBI
as the regulator is made available by the concerned banks.
42. The high level of Non-Performing Assets (NPAs) in our public sector banks
is a cause for continued concern. Efficient and effective mechanisms for recovery of
bank dues are critically important for reducing NPAs. I am happy to inform the
House that comprehensive amendments have been carried out to the Recovery of
Debts Due to Banks and Financial Institutions Act, 1993 by issue of Ordinance. Five
more Debt Recovery Tribunals (DRT) and four more Debt Recovery Appellate Tribunals
have been set up or are in advanced stage of being set up. I further propose to set up
four more DRTs at Mumbai and one more DRT each at Calcutta, Delhi and Chennai
to facilitate expeditious adjudication and recovery of dues of banks and financial
institutions.
43. The growth of fresh NPAs can also be curbed through better institutional
mechanisms for sharing of credit related information on borrowers and potential
borrowers among banks and financial institutions. A Working Group constituted by
RBI to examine modalities for setting up a Credit Information Bureau has recently
submitted its report. Based on its recommendation a Credit Information Bureau will
soon be established.
44. In the fast changing world of modern finance it has become necessary to
accord greater operational flexibility to the RBI for conduct of monetary policy and
regulation of the financial system. Accordingly, I intend to bring to Parliament
proposals for amending the relevant legislation.
45. Similarly, to facilitate development of the Government debt market the
legislative framework needs to be strengthened and modernised through a
Government Securities Act, which I propose to bring to replace the old Public Debt
Act, 1944.
46. The Industrial Investment Bank of India is the only Calcutta-based
 12
development financial institution. To enable it to improve its viability and profitability
by diversifying and extending its business, Government will subscribe to the
preference capital of the company.
47. NBFCs perform a significant role as financial intermediaries and in
promoting growth of industry and services. Over the past 3 years RBI has taken a
number of measures for strengthening the regulation of this sector with a view to
ensuring that only financially sound and well run NBFCs are permitted to accept
public deposits. I propose to bring a new bill which will strengthen the hands of
depositors in situations of malafide or fraudulent actions of NBFCs.
Infrastructure
48. Infrastructure services remain a key bottleneck to rapid and sustained
growth of our economy. We have made substantial progress in encouraging private
infrastructure service providers and in establishing independent regulatory
frameworks in most infrastructure sectors. We have also sought to give greater
operational and commercial autonomy to existing public entities in these sectors.
We will be moving ahead with programmes for corporatisation of public sector service
providers in the areas of telecommunications, ports and airports during the course
of the coming year.
49. The Prime Minister has announced a major initiative for road development,
the National Highways Development Project (NHDP). The cost of the project is
estimated at around Rs.54,000 crore. In my earlier budgets, I had announced the
levy of cess of one rupee per litre on petrol and diesel and a substantial part of this
is expected to be available for funding the NHDP. To further augment resources, for
commercially viable components of this project, I shall have something more to say
in Part B of my speech.
50. The plan outlay for the Central PSUs in the power sector has been increased
from Rs.7,626 crore to Rs.9,194 crore. Increased budgetary support has been provided
for the Tehri Hydro and the Nathpa Jakhari Hydro projects so that both these projects
can be commissioned by March 2002. For commissioning of high priority projects by
SEBs/State generating companies, a provision of Rs.300 crore has also been made
for subsidizing interest on loans from Power Finance Corporation.
51. In order to give a fillip to the reform process in the power sector and for
undertaking investments on renovation and modernisation of old and inefficient
plants and for strengthening the distribution system, a new scheme for providing
assistance to State utilities will be introduced. Under this scheme, additional Central
Plan assistance of Rs.1,000 crore will be provided to State and Union Territory
Governments.
52. The State Electricity Boards have large overdues to the Central Sector Power
and Coal utilities. A Scheme for securitisation of these dues with the support of
Central Government has been finalized to assist the SEBs to clear these dues. Central
Government support will be linked to reforms in the operation of SEBs.
53. Hon’ble members are aware that the Sethu Samudram Ship Canal Project
has the potential of providing a shorter route between the East and West Coast
 13
Ports. I am glad to inform that Government have approved the undertaking of a
detailed feasibility study and environmental impact assessment of the project at a
total cost of Rs.4.8 crore. I have made necessary provision for this in the budget.
Disinvestment/Privatisation/Public Sector Restructuring
54. Government’s policy towards the public sector is clear and unambiguous.
Its main elements are :-
♦ Restructure and revive potentialy viable PSUs;
♦ Close down PSUs which cannot be revived;
♦ Bring down Government equity in all non-strategic PSUs to 26% or lower, if
necessary; and
♦ Fully protect the interests of workers.

55. In line with this policy during the last two years financial restructuring of
20 PSUs has been approved by Government. As a result, many PSUs have been able
to restructure their operations, improve productivity and achieve a turn around in
performance. Hon’ble members are aware that Government have recently approved
a comprehensive package for restructuring of SAIL, one of our Navaratna PSUs.
56. There are many PSUs which are sick and not capable of being revived. The
only remaining option is to close down these undertakings after providing an
acceptable safety net for the employees and workers. Resources under the National
Renewal Fund have not been sufficient to meet the cost of Voluntary Separation
Scheme (VSS) for such PSUs. At the same time, these PSUs have assets, which if
unbundled and realised, can be used for funding VSS. Government will put in place
mechanisms to raise resources from the market against the security of these assets
and use these funds to provide an adequate safety-net to workers and employees.
57. Government have recently established a new Department for Disinvestment
to establish a systematic policy approach to disinvestment and privatisation and to
give a fresh impetus to this programme, which will emphasize increasingly on strategic
sales of identified PSUs. Government equity in all non-strategic PSUs will be reduced
to 26% or less and the interests of the workers will be fully protected. The entire
receipt from disinvestment and privatisation will be used for meeting expenditure in
social sectors, restructuring of PSUs and retiring public debt.
The North-East Region
58. Government is committed to the speedy economic development of the North-
Eastern States and Sikkim. Priority is being given for development of infrastructure,
specially airports, railways, power and national highways so as to remove the sense
of isolation perceived in many parts of the North-East. To provide more facilities for
vocational education, 50 more Industrial Training Institutes and 446 Computer
Information Centres would be established in the North-Eastern States within the
next two years.
59. For realizing the potential for agricultural and horticultural development
in the North-East, schemes for minor irrigation and horticulture will be encouraged.
A Technology Mission for horticultural development in the North-Eastern States will
 14
also be launched.
Scheduled Castes and Scheduled Tribes
60. To promote literacy and to improve the education standards of persons
belonging to Scheduled Castes, a new thrust will be given to the Post-Matric
Scholarship Scheme. The budgetary provision for this Scheme is being increased
from Rs.72 crore to Rs.130 crore. Emphasis under this Scheme will be on female
literacy. Our Prime Minister has announced that it will be our national goal to liberate
and rehabilitate around 6 lakh Scavengers in the country. A new strategy will be
devised under which Scavengers will be organized into self-help cooperatives and
provided assistance from the Government and the concerned Finance Development
Corporations. To give a greater focus to the welfare of Scheduled Tribes, a new
Ministry of Tribal Affairs has been set up. The plan allocation of Tribal welfare has
been substantially stepped up from Rs.684 crore to Rs.810 crore.
Revised Estimates for 1999-2000
61. This has been a difficult year for the budget marked by expenditure over-
runs and some deceleration in tax collection. The increase in budgeted expenditure
has been 7% whereas shortfall in budgeted tax collection is estimated to be 4%. The
non-plan expenditure has increased by Rs.17,461 crore (8.4% over budget estimate
of Rs.2,06,882 crore) and the plan expenditure by Rs.2,395 crore (3.1% over budget
estimate of Rs.77,000 crore). Major increases in non-plan expenditure are on account
of pension payments (Rs.4,173 crore), interest payments (Rs.3,425 crore), Extended
Ways and Means Advances to States (Rs.3,000 crore), Defence (Rs.2,810 crore),
Interest subsidies (Rs.1,304 crore), food subsidy (Rs.1,000 crore), postal deficit (Rs.848
crore) and assistance to States from the National Calamity Relief Fund (Rs.1,064
crore). On the plan side, main increases are on account of National Highway
Development (Rs.1,900 crore), State roads (Rs.1,000 crore), Railway safety ( Rs.200
crore), special assistance to Jammu and Kashmir and enhanced assistance to States
for externally aided projects. About Rs.500 crore are expected to be released for
projects/schemes in the North Eastern Region and Sikkim out of the savings from
the budget of different Central Ministries.
62. Net tax revenues for the Centre are estimated at Rs.1,26,469 crore against
Rs.1,32,365 crore budgeted, reflecting a shortfall of about Rs.5,900 crore. The shortfall
is mainly due to lower customs revenue because of very low growth in the dollar
value of non-oil imports and lower excise revenue resulting from low inflation in
manufactured products for most of the year. Disinvestment receipts are expected to
be Rs.2,600 crore against Rs.10,000 crore budgeted.
63. The fiscal deficit is thus likely to increase to 5.6% of GDP from the budget
target of 4.0%.
Budget Estimates for 2000-2001
64. In the budget estimates for 2000-2001, the total expenditure is estimated
at Rs.3,38,487 crore, of which Rs.88,100 crore is for plan and Rs.2,50,387 crore for
non-plan.
Plan Expenditure
65. The budget support for Central, State and UT Plans has been placed at
Rs.88,100 crore, marking an increase of Rs.8,705 crore over revised estimates
 15
1999-2000. Gross budgetary support for the Central Plan is being enhanced from
Rs.43,661 crore in the revised estimates 1999-2000 to Rs.51,276 crore. Total Central
Plan outlay at Rs.1,17,334 crore will be more by Rs.21,024 crore from the last year ’s
level of Rs.96,310 crore, a hefty 22% increase. The plan for 2000-2001 focuses on
basic infrastructure with energy, transport and communications accounting for 60%
of total Central Plan Outlay. The Outlay for Social Services marks an increase of
21.5% over 1999-2000 R.E.
66. Central Plan assistance to States and Union Territories in 2000-2001 is
placed at Rs.36,824 crore as compared to Rs.35,735 crore in the revised estimates
1999-2000.
Non Plan Expenditure
67. Non-plan expenditure in 2000-2001 is estimated to be Rs.2,50,387 crore
compared to Rs.2,24,343 crore in Revised estimates for 1999-2000, showing an
increase of Rs.26,044 crore. The increase in non-plan expenditure is mainly in
defence (Rs.10,083 crore), interest payments (Rs.9,841 crore) and in grants to States
(Rs.9,392 crore). However, this increase is sought to be partially offset by reduction
in outgo on account of food and fertiliser subsidies.
68. Major subsidies, on food and fertilizer, constitute a significant portion of
our non-plan expenditure. The rate at which these subsidy payments are growing is
not sustainable. We need to target the subsidies to those who are poor and needy,
whereas others should pay for what they consume. Indeed, we want to expand the
access to subsidised food by Below Poverty Line (BPL) families so that they can meet
their basic nutritional needs. Accordingly, from next year, we are doubling the
allocation of foodgrains to BPL families, under the Targetted PDS, from 10 Kg. to 20
kg. This will result in an enormous gain in food security for our poorest families. The
issue price of foodgrains of BPL families is being fixed at 50% of economic cost in line
with the decision taken by Government in December, 1996. The net effect of these
measures will be to improve the monetary food budget of BPL families and vastly
enhance their food security. This achievement is possible only by simultaneously
fixing the PDS issue price for APL families at the economic cost. In respect of sugar,
no allocation will be made under PDS for income tax assessees. For others, keeping
in view the increase in the levy price of sugar, the issue price under PDS is being
fixed at Rs.13 per kg. As a result of these measures I expect to keep the expenditure
on food and sugar subsidy at Rs.8,210 crore in 2000-2001.
69. In the case of Fertilizer Subsidy, Members are aware that our present
Retention Price Scheme suffers from many shortcomings. Much of the subsidy goes
to producers and not to farmers. To encourage greater efficiency of our fertilizer
units, some rationalisation of the Retention Price Scheme, including capping of capital
related charges, will be implemented from next year. The Ministry of Chemicals and
Fertilizers will also bring out soon a road map for phasing out the Retention Price
Scheme in the medium-term. Separately, to take into account the rising cost of
inputs, the maximum retail price of Urea is being raised by 15%. The rate of concession
in the case of decontrolled fertilizer is also being reduced. However, to moderate the
impact on prices the MRP of DAP and MOP is being raised only by 7% and 15%
respectively. I expect that, because of these changes and some rationalisation of
 16
Retention Price Scheme, the expenditure on fertilizer subsidy will be Rs.12,651 crore
in 2000-2001.
70. The Eleventh Finance Commission has since submitted its interim report
for making provisional arrangements of tax devolution and grants to States for 2000-
2001. Government have accepted the devolution formula and quantum of grants to
States, as recommended by the Commission in its interim report. I have made
provisions in the budget accordingly.

PART B

71. Sir, I now present my tax proposals. I take up indirect taxes first.
72. Hon’ble Members are aware that both the Centre and the States depend
heavily on indirect taxes. While I did carry out a major restructuring of the excise
rates last year, the process needs to be taken further. We need to overhaul the rate
structure, rationalise and simplify the procedures to reduce the compliance cost for
the tax payer. We must ensure that we concentrate on increasing production and
absorbing new technologies rather than frittering away our energies on tax disputes.
73. Sir, my proposals in excise intend to establish a single rate Central Value
Added Tax (CENVAT) at the Centre. I am convinced that nothing short of this can
provide long term stability, remove uncertainties in the mind of industry, and
eliminate disputes of classification. This will also encourage the States to implement
their agreed programme for converting their sales taxes into VAT by 1.4.2001.
74. The House may recall that in my last budget, I had introduced three ad-
valorem rates of basic excise duty, viz., 8%, 16% and 24%. I propose to converge
these three ad-valorem rates to a single rate of 16% CENVAT.
75. The 8% excise rate is therefore being abolished and most of the items at
this rate are being moved to 16%. However, certain items, essentially covering medicare
and items of use by the common man, are being exempted from the excise duty.
These are:
Medical Items:
♦ Medicinal grade oxygen
♦ Medicinal grade hydrogen peroxide
♦ Anaesthetics
♦ Potassium iodate
♦ Medical and surgical gloves; and
Items of common use -
♦ Cutlery and knives
♦ House hold glassware, including glassware produced by mouth blown
process
♦ Electric bulbs of MRP up to Rs.20 per bulb
 17
♦ Clocks and watches of MRP up to Rs.500 per piece
♦ Tooth powder
♦ Sanitary towels, napkins for babies, etc, and
♦ Soap for distribution through PDS
76. I am including roasted chicory in the list of exempted items as coffee itself
is free from excise duty.
77. I have also decided to exempt specified cold chain equipment, which had
been provided a low rate of 8% in the last budget, from excise duty in the larger
public interest.
78. Some items, on account of their exceptional nature and sensitivity to price
increases, deserve special treatment, at least for the present. These are Kerosene,
LPG, Laundry soap, Cotton yarn, including cotton sewing thread, and some other
varieties of yarns and Diesel engines up to 10 HP. The rate structure for these is,
therefore, being so designed that there is no increase in the incidence of excise from
the current level of 8%, and thus there will be no price increase on this account.
79. I have not made any change in the list of items that are currently charged
to 16% excise duty.
80. In addition to the 16% CENVAT rate, I propose to have three rates of
special excise of 8%, 16% and 24%. Unlike the CENVAT rate, the special excise
duties will not generally be modvatable, that is, users will not be able to avail of
MODVAT credit of these duties.
81. For the items that are mainly in the nature of raw materials or intermediates,
the 16% CENVAT rate is appropriate. I, therefore, propose to include items like
plastic materials, films and sheets of plastic, tread rubber, cellular rubber, articles
of rubber, nylon filament yarn, transmission and conveyor belts of textile materials,
and sacks and bags made of synthetic textile materials in the list of 16% CENVAT,
from the current level of 24%. I am also including tyres for OE supplies and parts of
air conditioning and refrigerating machinery in the list of 16% CENVAT, without
subjecting them to any special excise duty, since they are intermediate goods in the
chain of production.
82. In addition, I am reducing the duty burden on a few other products that
are also currently charged to 24% duty. These items are sterile contact lens solution,
shikakai powder without additives, and cars for physically handicapped persons. I
feel that these items should not be loaded with a duty burden of more than 16%
CENVAT.
83. Ambulances purchased by registered hospitals are currently charged to a
concessional rate of excise duty of 16%. I am extending the same treatment to
ambulances purchased by Indian Red Cross Society.
84. The other items that are currently charged to 24% duty shall continue to
bear the same incidence, comprising 16% CENVAT and 8% special excise duty.
85. In my new design of excise duty structure, the items that are now charged
 18
to a total duty of 30% would be subjected to a total duty of 32%, composed of 16%
CENVAT and 16% special excise duty. This is only a marginal increase of 2%, which,
I am sure, the consumers of these commodities can afford to bear.
86. Items presently charged to a total duty of 40% will now be composed of
16% CENVAT and 24% special excise duty. However, soft drink concentrate supplied
to bottlers will be charged to CENVAT at 16% only, being modvatable.
87. Let me now take up the MODVAT scheme and the changes that I plan to
bring about. MODVAT scheme shall now be known as CENVAT scheme.
88. Over the years, disputes between the department and assessees on the
interpretation of MODVAT rules and procedures have plagued the system. I propose
to put an end to this situation. With effect from 1st April 2000, the plethora of
existing rules will be replaced by a small set of simple and transparent rules, which,
I am sure , shall reduce disputes to a minimum.
89. I also propose to expand and rationalize the scope of the MODVAT scheme.
All inputs and all capital goods are now included in the eligible list of MODVAT
scheme. The only exception will be High Speed Diesel Oil and Petrol. However, I
propose that the availability of MODVAT credit on capital goods will be spread over a
period of two years, with effect from 1st April 2000.
90. My proposals include full extension of MODVAT scheme to cigarettes for
the first time, which should cheer the industry. However, the good news for the
cigarette manufacturers ends here. I propose to enhance the rates of excise duty on
all categories of cigarettes by 5 %.
91. At present, MODVAT credit of CVD paid on project imports is restricted to
the extent of 75%. This has been an irritant. This credit shall now be available for
100% of the CVD. I have also decided to do away with the condition of installation as
a pre-requisite for taking credit on capital goods.
92. Now I shall deal with some sector specific proposals. I take up steel first.
93. Mr. Speaker, Sir, an ad-valorem structure of taxation is largely free from
distortions, equitable and automatically buoyant. For the present, I propose to
restore ad-valorem excise duty structure on steel produced by re-rollers and also to
steel produced by induction furnaces. These goods would be subjected to CENVAT
of 16%, with MODVAT benefit, from 1st April 2000. I may add that capacity based
tax applicable to re-rollers and induction furnaces has created more problems than
it has solved.
94. Under the existing law, excise duty on goods sold from the depots is charged
on the basis of depot price and not the factory gate price. I have received
representations that this has caused distortion in the marketability and distribution
of steel. Deliveries of steel by integrated steel plants, whether from the plant or
stockyard, will henceforth be assessed to duty at the factory gate price.
95. Sir, now I turn to the textile industry.
 19

96. I had introduced a compounded levy scheme for independent textile

processors in December 1998. This has not worked as well as expected and has led
to leakages and revenue losses; still, I do not wish to disturb the scheme abruptly.
However, to rectify the situation, I propose to raise the rates of compounded levy
from the existing Rs.1.5 lakhs per chamber per month to Rs.2 lakhs per chamber
per month and from Rs.2 lakhs per chamber per month to Rs.2.5 lakhs per chamber
per month. My proposals also include some modifications in the scheme in order to
plug the loopholes.
97. Units engaged in the texturising of duty paid polyester yarn would henceforth
pay specific rate of excise duty. This should reduce the valution disputes in respect
of these units.
98. Small scale units enjoy duty free exemption on clearances up to Rs.50
lakhs a year. I am unable to raise this limit. However, with effect from 1st April
2000, I propose to rationalize the special schemes prevalent for cosmetics and toilet
preparations, air-conditioning and refrigerating machinery and their parts, tread
rubber and articles of plastics to fall in line with the general scheme of exemption for
small scale units.
99. Sir, I now come to the next part of my proposals which relate to streamlining
and simplification of the system. These are aimed at unshackling the excise procedures
from the slavery of complexities and rigidities, and making them simple and user-
friendly. I may add that like my rate-related proposals, these also go much beyond
minor adjustments and mark a fundamental and even a dramatic departure from
the current practices.
1 0 0 . With effect from 1st July 2000, all statutory records in excise would be
dispensed with. Excise department would rely upon the manufacturer ’s records.
This completes the process initiated by me in my last budget in this regard.
1 0 1 . From 1st April 2000, excise assessees would be allowed to pay the excise
dues in fortnightly instalments. With this proposal I am putting an end to the age-
old practice of day-to-day payment system of excise duties. For the small scale
sector, the monthly payment scheme, that I had introduced last year, would continue.
1 0 2 . Next, I want to make the valuation mechanism simple, user-friendly and
along commercially acceptable lines. From 1st July, 2000, I propose to replace the
existing section 4 of Central Excise Act which is based on the concept of “normal
price” by a new section based on “transaction value” for assessment. This is a path
breaking departure from the traditional approach.
1 0 3 . The House is aware that several items are assessed to excise duty on the
basis of Maximum Retail Price. This system is largely free from disputes and has
been generally welcomed by the industry. I propose to extend MRP based assessment
to about two dozen new items. I also propose to extend this scheme to more items
during the course of the year.
1 0 4 . I also propose to rationalize the rates of duties applicable to medicines and
toilet preparations under the Medicinal and Toilet Preparations (Excise Duties) Act.
 20
The MRP-based assessment provisions are also being extended for assessment under
this Act. These measures would considerably simplify the collection of excise duty
by the States and improve their revenues from these duties. These changes will
come into force from a notified date.
1 0 5 . In addition to the above I am rationalizing the provisions relating to payment
of interest and penalty on default. The details are contained in the Finance Bill.
1 0 6 . This completes my package of restructuring and rationalisation on the excise
side. Trade and Industry should now breathe easy.
1 0 7 . I shall now deal with my proposals relating to customs duties.
1 0 8 . I am conscious that in this area, I face serious constraints. We have to
maintain a judicious balance between the need for providing adequate protection
and growth impulses to the domestic industry and calibrating tariffs to international
levels. We also need to carry the reform and rationalization process further.
1 0 9 . Taking all factors into consideration, I propose to reduce the peak rate of
basic customs duty from 40% to 35%, thereby reducing the total number of customs
duty rates from 5 to 4, i.e. 35%, 25%, 15% and 5%.
1 1 0 . The surcharge of 10%, which I am constrained to continue on revenue
considerations, will also apply to the new peak rate of 35%. Crude oil and petroleum
products, certain WTO bound items and gold and silver would continue to be exempt.
1 1 1 . The House may recall that I had imposed a special additional duty (SAD) of
customs in my budget proposals for 1998-99. This had made manufacturer-
importers quite sad. But traders were glad because they were exempted. I am
correcting the discrimination by withdrawing this exemption. Now all importers
would pay this duty. SAD would, however, not apply to petroleum products.
1 1 2 . Consequent to our international trade treaty obligations, several hundred
items will be placed on the free list for imports effective 1.4.2000. Most of these are
consumer goods and a number of them are agricultural products. To accord adequate
tariff protection for these items, they are being placed at the peak rate (35% plus
surcharge), except for a few items like capital goods. A number of agricultural and
horticultural products placed on the free list of import in earlier years are also being
brought to the peak rate to ensure adequate protection to our farmers.
1 1 3 . Furthermore, for a handful of sensitive agricultural products (wheat, rice,
sugar and edible oils), in which our experience with supply management has
underlined the importance of occasional tariff adjustments, I am making suitable
enabling provisions to fix the statutory tariff rates at appropriately high levels. This
will give the necessary flexibility for adjusting the applied rates.
1 1 4 . Customs is not all about raising revenues. It is also a powerful tool for
building our industrial capabilities and improving our international competitiveness.
I propose to take several measures in this regard, picking up three sectors for special
attention. These are integral parts of the “convergence revolution” which is fast
becoming a reality.
1 1 5 . First, and foremost, the Information Technology (IT) sector, which leads
the current excitement. I propose to reduce the customs duty on several items for
 21
the IT sector. These include:
♦ Computers, from 20% to 15%;
♦ Mother boards, from 20% to 15%;
♦ Floppy diskettes, from 20% to 15%;
♦ Specified capital goods for manufacture of semi conductors and ICs, from
15% to 5%.
♦ Microprocessor for computers, from 5% to Nil;
♦ Memory storage devices, from 5% to Nil;
♦ CD ROMs, from 5% to Nil;
♦ Integrated circuits and microassemblies from 5% to Nil; and
♦ Data graphic display tubes for colour monitors for computers from 5% to
Nil.
1 1 6 . Telecommunications is equally important. To become an economic
superpower we must get connected, domestically and globally. I, therefore, propose
to reduce the basic customs duty on specified raw materials for manufacture of
optical fibres from 15% to 5%. I also propose to reduce the duty on cellular phones
from 25% to 5% to improve their availability through proper channels and to curb
the menace of the grey market, and on their battery packs from 40% to 15%. I am
extending the concessional rate of 5% basic duty applicable to specified telecom
equipment to internet service providers also.
1 1 7 . The third is the entertainment industry, which is also an area of great
promise. To reduce the cost of cinematography for the film industry and provide
access to the latest technology, I propose to reduce duty on cinematographic cameras,
and other related equipment from 40% to 25%. I also propose to reduce the basic
customs duty on colour positive films in jumbo rolls and colour negative films in
rolls of certain sizes from 15% to 5%. They shall also be exempt from CVD.
1 1 8 . I would like to cover one more sector in this context.
1 1 9 . India can be a world leader in jewellery exports, as it is for gems. I propose
to reduce the basic customs duty on platinum and non-industrial diamonds from
40% to 15% in order to encourage production of quality jewellery and to provide a
fillip to jewellery exports.
1 2 0 . To give effect to our agreements with the European Union and the United
States, I propose to adjust the customs duties on fibres, yarns, textile fabrics and
garments. As a result, several varieties of fabrics and garments would henceforth be
subjected to the higher of ad-valorem or specific rates of duties prescribed for them.
1 2 1 . As far as petroleum sector is concerned, the international prices of crude
oil and petroleum products prevalent over some time now have been putting
considerable strain on our refineries and distorting the oil pool account. This is
accentuated by the fact that prices of petroleum products have not been fully
decontrolled so far. I, therefore, propose to reduce the basic customs duty on crude
oil from 20% to 15% and on petroleum products from 30% to 25%, except on kerosene
for parallel marketing, the basic duty on which is being raised to 35%, from 30%.
 22
1 2 2 . In several cases the bound rates are to be reduced as part of our international
commitment. I do not wish to take the time of the House by going into details. But
they do have some revenue implications.
1 2 3 . Mr. Speaker Sir, last year, I had proposed the abolition of Finance Minister’s
discretionery power to grant ad hoc exemptions of customs and excise duties except
for goods of strategic nature, or for charitable purposes. I am pleased to inform the
House that this self-denying rule has helped the Government save about Rs.500
crore this year.
1 2 4 . I shall now mention a few small, but significant, measures for procedural
improvements and redressal of the problems of taxpayers. To curtail the so called
“show cause notice Raj ” in customs and central excise, I have decided that henceforth,
show cause notices involving duty amount of more than Rs.1 crore would be issued
only with the approval of the Chief Commissioner of Customs and Central Excise.
Other show cause notices would require approval of the Commissioner of Customs
and Central Excise.
1 2 5 . It cannot be disputed that the tax due from a defaulter should flow to the
exchequer at the earliest in public interest. At present, penalty equal to 100% of the
duty evaded is payable, and this is mandatory, even if someone makes the payment
immediately after the adjudication order is passed. With a view to encouraging
payment of tax due, I have now proposed that if the amount of tax evaded is paid
along with interest within 30 days of the communication of the order, a penalty
equal to only 25% of the duty evaded would be payable. I hope this carrot will be
found preferable to the stick, which is bound to follow if tax is not paid in time.
1 2 6 . Service tax is emerging as an area of promise as well as problems. Many
experts advise me that the best way to deal with this tax is to make it applicable to
all services in one go. However, some others have suggested basic changes in the
very structure of the service tax. I have decided not to make any changes for the
present. I am setting up an Expert Group to go into all aspects of the matter, review
the experience so far, and give me its considered advice.
1 2 7 . My proposals on the excise side are estimated to result in revenue gain of
Rs.3,252 crore in a year. On the customs side, my proposals are estimated to result
in a revenue loss of Rs.1,428 crore.
1 2 8 . Copies of the notifications issued to give effect to the changes in excise and
customs duties shall be laid on the Table of the House in due course.
1 2 9 . I now turn to my Direct Tax proposals.
1 3 0 . Mr. Speaker, Sir, my edifice of Direct Tax proposals rests on four pillars of
stability, economic growth, rationalisation and simplification.
1 3 1 . Our existing rates of personal taxation at 10%, 20% and 30% are only
three in number and quite moderate. Although the basic exemption limit is Rs.50,000,
the real exemption limit goes much higher when the other exemptions and deductions
are taken into account. For example, salaried persons start paying tax only on crossing
Rs.75,000 per year because of the standard deduction. If the tax rebates and
 23
deductions available for savings are taken into account, the effective limit of exemption
gets close to Rs.1 lakh. Thus I feel that the present rates of taxation as well as the
exemption limit are reasonable. I, therefore, propose to maintain them at the same
levels.
1 3 2 . Although the 10% surcharge imposed last year was meant to be temporary,
I am constrained to continue with it, in view of the heavy and unexpected expenditure
burden, mainly on account of defence requirements and transfer to states mandated
by the Finance Commission.
1 3 3 . Having restrained myself from imposing any additional taxes during the
course of the year when there was much talk of a Kargil tax, I now propose increasing
the surcharge moderately from 10% to 15% on non-corporate tax payers having
total taxable income above Rs.1,50,000 per year. This will slightly increase their
marginal rate from 33% to 34.5%. I trust that these relatively better-off sections of
society would bear this additional burden cheerfully.
1 3 4 . Lest it is felt that I am being discriminatory in not increasing the surcharge
on corporates, let me clarify that they would also get their opportunity to contribute
to the national effort in other ways a little later.
1 3 5 . Despite the financial constraints, I would like to propose some positive
measures on personal taxation.
1 3 6 . As an expression of our gratitude to the contribution made by senior citizens
during their active years and taking into account the possible hardships that they
face in the advanced years of their life, I propose to raise the tax rebate available to
them from Rs.10,000 to Rs.15,000. At the marginal tax rate of 30%, this translates
into an exemption of an additional Rs.15,000 from their gross income, or substitutes
the need to save an additional Rs.25,000 to avail of a similar exemption under
section 88.
1 3 7 . I have always maintained that despite all challenges, my job as Finance
Minister in making a budget is easier than that of an average house-wife struggling
to balance the family budget. As a token of appreciation and recognition of women
as productive contributors to the economy, I propose an additional rebate of Rs.5,000
for women tax-payers from their tax liability. This would be subject to the overall
ceiling of Rs.15,000 if they also happen to be senior citizens.
1 3 8 . With a view to acknowledging the services rendered by the members of
defence forces and in token of our gratitude for their exceptional courage and valour,
I had provided exemption from tax for the pension and family pension of gallantry
award winners of these services. I now propose to extend similar benefits to gallantry
award winners of para military forces and other forces engaged in national and civil
defence.
1 3 9 . I now turn to the role of taxation as a facilitator of economic growth.
Knowledge-based industries are fast emerging as the front-runners of the Indian
 24

economy. To accelerate their growth, and encourage investment in them as mentioned

in Part A of my speech, I propose to introduce a new regime for venture capital
funds. The highlights of this would be:
(i) No approval of Venture Capital Funds by tax authorities would be required.
(ii) The principle of “pass through” would be applied in tax treatment of Venture
Capital Funds, whose income would be free of tax, except when not
distributed within the period that may be prescribed in the guidelines of
SEBI. Income in the hands of its investors, which would otherwise be taxable,
would also be kept tax free, and there would only be a one-time payment of
tax by the Venture Capital Fund at the rate of 20%, when the Fund
distributes its income to the investors. The same rate would apply to
undistributed incomes also.
1 4 0 . I hope these incentives will facilitate the coming together of Saraswati (i.e.
knowledge) and Laxmi (i.e. wealth) to bless entrepreneurs and investors.
1 4 1 . Various tax benefits are already available for the infrastructure sector. I
propose to extend these benefits to two additional and essential sectors of urban
infrastructure, viz. water treatment and solid waste management. I also propose to
include investments in public companies providing long term finance for urban
infrastructure as approved investments for charitable trusts. This will enable more
investment in projects for development of urban infrastructure.
1 4 2 . To provide a more focussed incentive for infrastructure development, I
propose to delete the existing provisions 54EA and 54EB and replace them with a
new provision, whereby tax exemption from capital gains would be available only if
investment is made in bonds to be issued by National Bank for Agriculture and
Rural Development (NABARD) and the National Highways Authority of India (NHAI).
These bonds will have a lock-in period of five years and their proceeds will be used
for providing finance to the agricultural sector and for the National Highway
Development Project (NHDP).
1 4 3 . I propose to continue the thrust given to the housing sector last year and
extend the benefits already available for two more years, i.e. for houses or projects
which are completed by 31st March 2003. I hope this will sustain and accelerate
house construction activity.
1 4 4 . To supplement the package of incentives of this sector, I also propose that
the 20% rebate of tax under section 88 of the Income-tax Act would now be available
for repayment of housing loans up to Rs. 20,000 per year as against Rs.10,000
earlier.
1 4 5 . Presently, the exemption from tax on long-term capital gains is not available
if the capital gain from transfer of capital assets is invested in a house, if one house
is already owned. I am removing this restriction. Even if they own one house, taxpayers
can make an investment in a new house and claim exemption from capital gains tax
on sale of capital assets.
 25
1 4 6 . Last year I had provided for 100% exemption on export profits to the
entertainment industry. However, this benefit was limited to corporate entities only.
I propose to extend the benefits available to corporates to non-corporate assessees
as well with effect from Financial Year 1999-2000. This will remove the perceived
discrimination to the non-corporate film makers, but I do hope that this industry
will move towards corporatisation and modernization rapidly which is possible without
in any way curbing individual creativity.
1 4 7 . To address a long-standing demand of the entertainment industry and with
a view to streamlining the procedures, I also propose to increase the limit of reporting
of payments made by a film producer, during production of a film, to the tax authorities
to Rs.50, 000 from the present level of Rs.25,000.
1 4 8 . I hope these concessions combined with what I have already done on the
indirect tax side, will reassure the entertainment industry that “Hum Saath Saath
Hain”.
1 4 9 . Shipping provides the transportation sinews to our international trade,
and has a strategic relevance also. To enable the Indian Shipping Industry, which is
facing serious challenges, to generate resources for strengthening and modernising
its fleet, I propose to allow deduction of their entire profits, against 50% as at present,
if these are kept in a reserve to be used for purchase of new ships. This 100%
deduction would be available for five years beginning from the next year.
1 5 0 . Investment in human resources is an essential precursor for sustainable
economic development. To enable meritorious students, especially those from not
so affluent backgrounds, to avail of opportunities for higher education, I propose to
increase the maximum amount of repayment of loan for higher education from
Rs.25,000 to Rs.40,000 as an allowable deduction. This would translate into loan
amounts exceeding Rs. 3 lakhs, which would help such students to defray the
increasing cost of higher education, especially in management and professional
courses.
1 5 1 . Availability of vocational training can go a long way in mitigating the problem
of unemployment. It can also bridge the paradoxical mismatch between wide spread
unemployment on the one hand and a shortage of properly trained manpower on the
other. In order to remedy the situation I propose to allow 100% deduction of payments
made for the establishment and running of institutions for vocational education and
training by the private sector in rural areas and small towns.
1 5 2 . Barring some significant but scattered achievements, we are not a major
force in the international sports arena. Like many other activities, modern sports
and athletics need money and infrastructure for their development. While some
sports have access to abundant funding, most others suffer for want of adequate
support. To rectify this situation, I propose that 100% deduction would be available
for donations made by corporate entities to the Indian Olympic Association for the
development of infrastructure and for the sponsorship of games and sports. I hope
that with this concession, IOC would be better equipped to promote sports in the
 26

country.
1 5 3 . Last year, my proposals on corporate restructuring were widely welcomed
by Indian industry. However, there have been persistent demands to clarify and
rationalise some of the provisions. I, therefore, propose to remove ambiguities in
this regard by making suitable changes in the provisions of the Income- tax Act. I
also propose that resulting companies as a consequence of splitting of statutory
bodies like SEBs will enjoy the benefits of demerger if they fulfil the conditions notified
by the Central Government.
1 5 4 . Last year, I had dispensed with the condition of continuity of the same
business for carry forward and set off of loss. I propose to liberalise the provisions
relating to carry forward and set off of unabsorbed depreciation on the same lines.
The condition of continuity of same business will be dispensed with and unabsorbed
depreciation may be carried forward and set-off even if the same business is not
continued.
1 5 5 . To give greater restructuring flexibility and freedom to the corporates,
including PSUs, I propose to make the conditions for tax exemption of voluntary
retirement benefits of employees more liberal and to simplify the procedure for tax
exemption of benefits given to employees of Public companies and Co-operative
Societies. It will not be necessary any longer to obtain the approval of the tax
authorities for their voluntary retirement schemes if these are formulated in
accordance with the prescribed guidelines.
1 5 6 . The various exemptions currently available while calculating Minimum
Alternate Tax (MAT) and the credit system has undermined the efficacy of the existing
provision and has also led to legal complications. To address these issues, I propose
that the Minimum Alternate Tax be now levied at the revised rate of 7.5% of the
“book profits” as determined under the Companies Act instead of the existing effective
rate of 10.5%. However, this will now be uniformly applied – barring one exception
that I will mention later. There will also be no credit for Minimum Alternate Tax
paid. This should bring all zero tax companies within the tax-net, which is also the
basic purpose of this tax. The new system has the virtue of a lowered rate of tax, a
simple method of computation, and an equitable spread.
1 5 7 . To promote industrialization in less developed areas, I propose to extend
the tax holiday available for new units set up in industrially backward States and
industrially backward Districts for another two years. Similarly, I also propose to
extend the existing tax benefit for new Small Scale industrial units for another two
years, i.e., till 31st March, 2002.
1 5 8 . To strengthen our capital market, I propose to provide 100% exemption to
the income of Investor Protection Funds of Stock Exchanges to give them incentives
for setting up of such funds.
1 5 9 . At present, no tax is payable in the hands of shareholders on the dividend
income received from a domestic company, only the company pays additional income-
 27

tax at the rate of 10% on the amount of dividends distributed by them. The large gap
in the tax treatment of dividend income and interest income has been widely criticized.
To reduce this anomaly, I propose to increase the rate of tax on dividends distributed
by domestic companies from 10% to 20%. I would clarify that dividend income in the
hands of share holders will continue to remain tax free.
1 6 0 . In a similar vein, to reduce the distortions arising out of the differing tax
treatment for interest incomes from mutual funds and other instruments, like bank
deposits and corporate deposits, I propose to increase the rate of tax on income
distributed by debt oriented Mutual Funds and UTI from 10% to 20%. However, I
would like to clarify that the income distributed under the US-64 and other open-
ended equity oriented schemes of UTI and Mutual Funds will continue to be exempt
from this tax, as at present.
1 6 1 . Currently, banks and financial institutions pay an interest tax of 2%, which
adds to their cost. To remove this impediment to financial transactions, I propose to
abolish this tax. This is a significant measure which will benefit the financial sector,
and consequently the depositors and users of the products and services of the banks
and financial institutions.
1 6 2 . The life insurance sector is now opened up and would no longer remain a
public sector monopoly. It is currently taxed at a special rate which is likely to need
a revision in the altered scenario. I would like to undertake such revision on the
basis of expert advice and in the light of international practice. I propose to constitute
an Expert Committee for this purpose and I hope to bring necessary amendments
based on its recommendations during the course of the year.
1 6 3 . One of the major initiatives towards better tax compliance has been the
introduction of the one-by-six scheme. This, along with other measures, has
contributed substantially to increasing the number of tax-payers, which had
languished at the level of just over a crore till 1996-1997, but has now crossed the
two crore mark, with the biggest boost coming over the last two years. The momentum
generated by this and other measures to widen the tax base needs to be sustained.
I, therefore, propose to extend the one-by-six scheme from the existing 54 cities to
an additional 79 cities in the country. With this, all the cities having a population of
two lakh and more on the basis of the 1991 Census would stand covered.
1 6 4 . In keeping with international practice, it is proposed to promote a common
Business Identification Number to be used by different agencies and departments.
In our context, the Permanent Account Number of income-tax would be that
instrument. To begin with, the CBEC and DGFT will use PAN for their assessees,
importers and exporters. I hope that in near future, the PAN card will replace the
ration card as the primary identification document for a sizeable number of people.
1 6 5 . With a view to intensifying the drive for PAN allotment, I propose to open
special counters in all cities where the one-by-six scheme will be in operation
(including 79 cities where the scheme is being extended) to issue PAN cards to the
taxpayers within 30 days of their filing the application. This facility will become
 28

operational with effect from the 1st of July, 2000.

1 6 6 . A large number of farmhouses have come up in the vicinity of metropolitan
and big cities. Many of these generate commercial income from being hired out for
residential accommodation and for holding functions and events. No tax is paid on
this income, which is mis-declared as agricultural. This blatant and visible misuse
of an exemption originally intended only for genuine farmers cannot be condoned or
allowed to continue. I, therefore, propose to make suitable changes in the law to
ensure that the income from farmhouse from anything other than genuine agricultural
operations will be brought in the tax net.
1 6 7 . It is my earnest desire to make the system of tax collection as user friendly
and efficient as possible. The tax payer should be able to pay taxes with speed,
convenience and dignity. With this in view, I propose to expand and revamp the
presently available facilities of tax collection to provide that taxpayers would be able
to pay their tax in any branch of nationalised banks where they maintain an account.
This facility would be available in all towns and cities covered under the one-by-six
scheme with effect from 1st August, 2000. For operational reasons, this facility would
initially be offered in computerised branches only, but would be expanded
continuously.
1 6 8 . I also propose to further streamline the system of refunds. While the present
practice of sending the refund cheques to the tax payers under advice to their banks
would continue, the Tax Department would also offer the facility of issuing refunds
directly on the bank accounts of assessees if the tax payers so desire. For operational
reasons, this facility would also initially be started from computerised branches of
banks, with continuous expansion as the banks get progressively computerised.
1 6 9 . With almost every sector of the economy expecting a special treatment, our
Income-tax Act has become a vast compilation of exemptions. Income is income and
should be taxed. There should be no permanent exemptions. With this in view, I
want to make a beginning towards rationalising the existing system of concessions
and exemptions. Export earnings of various kinds presently enjoy exemptions from
income-tax ranging from 50% to 100% of income. I have, therefore, decided to phase
out these concessions over a period of five years. To begin with, I am withdrawing
these concessions by 20% from the financial year 2000-2001, and by 20% each
subsequent year till they reach a zero level. I would add that exporters would continue
to enjoy exemption from MAT till the full phase out. The revenues garnered from this
rationalization measure will help to finance universalization of primary education
and other investments in human resources.
1 7 0 . My rationalisation measures also include the following:
♦ Trusts running educational institutions and hospitals will not be denied
exemption even if their trustees avail medical and educational facilities
from them. Such benefit alone will be taxed.
♦ Investments made by trusts in public sector companies will continue to be
eligible investments for a certain period, even after they cease to be PSUs
following disinvestment.
 29
♦ Interest for delayed payment of dividend tax and tax on distributed profits
by mutual funds and UTI will be reduced from 2% per month to 1.5% per
month.
♦ Exemption of allowances received by employees will be raised in conformity
with the recommendations of the Fifth Pay Commission.
♦ Limit of gross receipts for compulsory maintenance of books by professionals
will be enhanced from Rs.60,000 to Rs.1,50,000.
♦ Advisory limit for disposal of departmental appeals by Appellate Tribunal
will be provided for in law.
1 7 1 . To sum up, Mr. Speaker, Sir, as a result of various proposals made in this
budget on the direct taxes, the estimated revenue in 2000-2001 would be Rs.72,105
crore, including the component of additional resource mobilisation of Rs.5,080 crore.
1 7 2 . Mr. Speaker, Sir, with these proposals I estimate total tax revenue receipts
for the Centre at Rs.1,46,209 crore and the fiscal deficit at Rs.1,11,275 crore or
5.1% of GDP. I could have sought a deeper cut in the fiscal deficit, but a substantially
higher level of revenue mobilization would have hurt the industrial recovery under
way at present. Thus, in the short-run, I had to carefully balance the need for fiscal
consolidation with the need to nurture the recovery phase of a growth cycle. I hope
this august House will support the balance I have struck in this budget.
1 7 3 . Growth is not just an end in itself. It is the critical vehicle for increasing
employment and raising the living standards of our people, especially of the poorest.
Sustained, broad-based growth, combined with all our programmes for accelerating
rural development, building roads, promoting housing, boosting knowledge-based
industries and enhancing the quality of human resources, will impart a strong impetus
to employment expansion. There can be no better cure for the problem of poverty
than this in our country.
1 7 4 . Sir, the millennium has heralded the arrival of the Indian economy on the
global stage. In two short years, we have shown that Indian talent and Indian effort
is second to none. In two short years we have ensured that “made in India” is a
compliment for any product or service. In two short years we have sent notice to the
world that India will be an economic superpower in the 21st century. The world’s
eyes are now upon us, and we will deliver.
1 7 5 . Mr. Speaker, Sir, with these words, I commend the budget to this august
House.
 1

Budget 1999-2000

Speech of

Shri Yashwant Sinha

Minister of Finance

27th February, 1999

PART A

Sir,
I rise to present the budget for the year 1999-2000.
I n t ro d u c t i o n
2. For the first time after Independence with the enthusiastic support of all
political parties in Parliament, it has been possible for me to discard the long standing
tradition of British Raj of presenting the budget at 5 PM. A new beginning is being
made today as I present the last Budget of 1900’s. I assure you this is not the only
new feature. There are many more in this budget.
The Economic Context
3. The decade of the nineties has witnessed extraordinary changes. It began
with the collapse of the centrally planned economies; it is ending with market
economies facing a serious crisis.
4. The year 1998 particularly has been a year of unprecedented global turmoil.
The East Asian financial crisis took a heavy toll of important economies in the region
and spread to other countries. Japan continued in recession and in August 1998
severe crisis afflicted Russia. By January 1999, the contagion had spread to Brazil
triggering massive capital flight and a steep depreciation of the currency. World
output growth dropped below 2%, the growth of world trade decelerated sharply,
commodity prices fell steeply, currencies were savaged and capital flows to developing
countries declined sharply.
5. In India, we had to contend with the additional challenge of economic
sanctions imposed on us after the Pokhran nuclear tests. While we have not remained
unaffected by these developments, we have reasons to be satisfied at the way we
have withstood the impact of these challenges. Despite the hostile economic

1
 2
environment, our GDP growth in 1998-99 has accelerated to 5.8% compared to 5%
last year. Our farmers have led the way with 5.3% growth in agriculture and allied
sectors. Since the beginning of 1998-99, we have added $2 billion to our foreign
currency reserves as of February 23, 1999 and we have successfully curbed undue
volatility in the forex market. The current account deficit in the balance of payments
is estimated at a modest 1.4% of GDP compared to 1.6% in 1997-98. Although
inflation had risen sharply during the year, we have succeeded in bringing it down to
below 5% now. All this is described in detail in the Economic Survey presented to
Parliament a few days ago.
6. However, there is no room for complacency. The challenges before us, both
international and domestic, remain grave. The fiscal and revenue deficits of both
Centre and States are still too high and are undermining our ability to bring down
interest rates, stimulate investment and growth, curb inflationary potential, generate
resources for priority, non-interest expenditure needs and raise exports.
7. Above all, despite our continuing concern year after year, we have made
only a limited impact on the problems of poverty and unemployment. The various
schemes of the Government in this area lack focus and convergence. The delivery
systems need to be cost effective and community based. The fruits of economic
development should largely reach the poor and the vulnerable specially the Scheduled
Castes, Scheduled Tribes and Other Backward Classes who, in turn, need to be
empowered fully. Without this, I am afraid, our planning will be devoid of any direction.
8. The broad strategy of this Budget therefore is six-fold:
* Begin a medium-term process of revenue and fiscal deficit reduction, along
the lines indicated in the Ninth Plan, which will free more resources for
productive investment and growth and contain inflation.
* Undertake a major reform of indirect taxes to promote productivity and
employment.
* Deepen and widen economic reforms in all major sectors and accelerate
internal liberalization to release the productive energies and creativity of
our farmers, manufacturers, traders and service providers.
* Safeguard the economy from external shocks, revive exports and stimulate
the domestic engines for growth revival.
* Strengthen the knowledge-based industries and thus prepare ourselves
for the challenges of the new millennium.
Last but not the least
* Revitalise and redirect public programmes for human development,
encompassing food security, health care, education, employment and
shelter. Their focus should be on empowering the poor and the weaker
sections, especially those belonging to Scheduled Castes, Scheduled Tribes
and Other Backward Classes.
Agriculture and Rural Development
9. This year ’s growth performance has once again underlined the critical
importance of agriculture in our economy. I propose a multi pronged programme to
further strengthen our rural economy.
 3
10. On water, which is the lifeblood of agriculture, I propose the following
initiatives:
* It is important to unify the multiplicity of watershed development
programmes within the framework of a single national initiative - a National
Movement of Watershed Development that fosters implementation ability
at the local level and creates community infrastructure for micro watershed
projects through active involvement of Gram Panchayats, Local Self Help
Groups and NGOs. For this, a Watershed Development Fund will be
established with NABARD to cover 100 priority districts within 3 years.
The Central Government will provide necessary matching assistance to
NABARD. This will create income generating opportunities for the landless
and the poor; especially those belonging to the Scheduled Castes, Scheduled
Tribes and Other Backward Classes.
* The Accelerated Irrigation Benefit Programme aims to expedite the
completion of ongoing irrigation projects by providing matching assistance
to States. However, the water rates in most States do not even cover full
Operations and Maintenance costs. To encourage better management and
maintenance of costly irrigation assets, the Centre will provide larger
financial assistance to States that rationalise their water rates to cover at
least O&M costs.
* In order to promote farmer participation in water management, the Centre
will provide a one time management subsidy and recurring assistance over
an initial period of 3 years to all registered Water Users Associations, linked
to incremental water rate collection. This will supplement the States’ own
contribution.
11. Water and credit must flow together for maximum impact. Last year, I had
announced a number of initiatives for improving the flow of credit from the banking
sector to agriculture. I am happy to report to this House that institutional credit flow
to agriculture has shown a 20% increase in the current year, taking the level to
about Rs.38,000 crore as compared to Rs.31,698 crore in the previous year. I propose
to take the following further measures for improving flow of agricultural and rural
credit:
* The Rural Infrastructure Development Fund (RIDF) has emerged as an
important scheme for financing rural infrastructure projects of the State
Governments. Last year, I had announced an allocation of Rs.3,000 crore
from the banking sector under RIDF IV. I propose to continue the scheme.
The corpus of RIDF V will be raised to Rs.3,500 crore. The repayment period
is also being extended from five to seven years. The scope of RIDF will also
be widened to allow lending to Gram Panchayats, Self-Help Groups and
other eligible organisations for implementing village level infrastructure
projects.
* In line with my announcement last year, the Kisan Credit Card Scheme
has been launched by all public sector banks. These Cards provide timely
credit to farmers in a flexible and cost effective manner. So far, six lakh
Kisan Credit Cards have been issued. I am asking public sector banks to
 4
extend the coverage so that twenty lakh farmers can benefit from this scheme
in the coming year.
* The reform measures initiated to strengthen and restructure the Regional
Rural Banks will continue. A provision of Rs.168 crore is being made for
recapitalisation of RRBs.
* Micro enterprises have great potential for generating productive employment,
especially in rural areas. NABARD and SIDBI have launched schemes for
promotion of Self Help Groups and NGOs as a channel for flow of funds to
micro enterprises. Following last budget’s initiative, NABARD is likely to
cover about 15,000 Self Help Groups in 1998-99, as against the target of
10,000. I am asking NABARD and SIDBI to redouble their efforts in this
direction and ensure coverage of at least 50,000 Self Help Groups during
the course of the next year.
* To augment the flow of credit for food and agro processing industries, lending
by banks to this sector will be treated as priority sector lending.
12. Today, we have a very weak post-harvest storage and marketing
infrastructure. This causes tremendous national loss. To overcome this problem, I
propose to introduce a new credit-linked capital subsidy scheme for construction of
cold storages and godowns. This scheme, which will be implemented by the Ministry
of Agriculture with the help of NABARD, will help create additional cold storage
capacity of 12 lakh tonnes and will rehabilitate and modernise 8 lakh tonnes of
existing units over the next few years. We also propose to create 4.5 lakh tonnes of
onion storage capacity. This House, especially the main opposition party, can readily
appreciate our special concern for onions.
13. Fragmentation of agricultural land holdings undermines productive use of
land. Some States have lagged behind in attending to this important task of land
reforms. To accelerate reforms in this direction, the Central Government will provide
special financial assistance to States, which undertake this task.
14. One of the problems with effective distribution and use of fertilizer is the
mismatch between its demand and availability at the on-set of the sowing operations.
In order to tackle this problem, I propose to experiment with an incentive discount
to farmers for lifting fertilizer from the cooperative societies during the lean months
of April and May.
15. The on-going schemes for the development of degraded and wastelands
will be reoriented to permit local Self Help Groups and the landless poor, specially
Scheduled Castes, Scheduled Tribes and Other Backward Classes, to develop and
utilise such lands in each village. The whole programme will be based on participatory
management with the Gram Panchayat having a pivotal role. During 1999-2000, we
will earmark a total amount of Rs.50 crore to take up this scheme on an experimental
basis in those States that are prepared to put in a matching contribution.
National Programme for Rural Industrialisation (NPRI)
16. Rural Industrialisation is important for creating employment opportunities,
raising rural incomes and strengthening agriculture-industry linkages. Thus far, it
has been pursued by a multiplicity of government agencies. However, the impact of
 5
these programmes at the grass roots level has remained modest. We must integrate
the efforts of the various government agencies and ensure active community
participation. Accordingly, I propose a National Programme for Rural Industrialisation
(NPRI) with the mission to set up 100 rural clusters every year to give a boost to rural
industrialisation. This is being done for the benefit of rural artisans and unemployed
youth. In the long run, it will reduce rural urban disparities. The Small Industry
Development Organisation will coordinate this programme. The Khadi and Village
Industries Commission (KVIC) will play an important role in this. The marketing
infrastructure available with KVIC would be put to optimum use in this effort. It will
go a long way in the marketing of rural industrial products if KVIC could develop its
own brand name for the purpose. The proposed rural clusters will be spread
throughout the country, with a reasonable balance between high potential and
backward rural areas.
National Human Development Initiative (NHDI)
17. Even a half-century after Independence, the levels of human development
in India lag behind most other countries. The essence of human development should
be to empower vulnerable groups in society to take advantage of the process of
development. Empowerment, in my view, entails access to five basic requirements,
namely, Food, Health Care, Education, Employment and Shelter. It is our resolve to
make them available to the entire population of this country within a decade. With
this initiative for people-centred development, we will be implementing the Prime
Minister’s mandate for ‘reforming the reforms’.
Food: The Targeted Public Distribution System has been designed to provide food
security, especially to those below the poverty line, on the basis of susbidised foodgrain
prices. With greater involvement of Gram Panchayats in its supervision and
implementation, the Targeted Public Distribution System will be suitably strengthened
to ensure its proper coverage and make it efficient.
The Targeted Public Distribution System does not however adequately cover the
indigent senior citizens who have no income of their own and none to take care of
them in the village. I propose to launch a new scheme, “Annapurna” in 1999-2000,
to provide food security to such persons. “Annapurna” will provide 10 kg. of foodgrains
per month free of cost to all indigent senior citizens who are eligible for old age
pension but are presently not receiving it and whose children are not residing in the
same village. The number of persons benefitting from the scheme will not for the
present exceed 20% of the old age pensioners within that State. The Gram Panchayat
will be required to identify, prepare and display a list of such persons after giving
wide publicity.
Health Care: The expansion and improvement of health infrastructure and services
are key goals set out in the Special Action Plan announced by the Prime Minister.
While an extensive network for primary health care has been created in most rural
areas, inadequate community participation and supervision has constrained use of
these facilities to much below their capacity. Our goal is to integrate and synergise
the existing programmes for health care, family welfare, rural development and related
areas in different Central Ministries and to deploy the available resources so that
every household secures ready access to both primary health care and family welfare
 6
services. The Central Government will provide funds to such Gram Panchayats that
come forward with their own contribution to set up primary health care facilities in
their respective areas. This will match similar assistance from the concerned State
Government.
Education: Access to primary education is critical for empowering people. Several
States have recorded considerable success with their respective models of education
guarantee schemes. I propose to implement an Education Guarantee Scheme at the
national level. The aim will be to provide an elementary school in every habitation,
which does not have one within a radius of 1 km. Initially, the local community
would provide the premises and select a local person as a part time teacher. Teaching
material and other assistance will be provided by the Central and the State
Governments, while Gram Panchayats will mobilise contribution from the local
community in cash and kind for running the school for at least two years. After the
school has functioned successfully for two years, it will be upgraded on a permanent
basis. At least 1.8 lakh such schools will become operational during the next three
years of the Ninth Plan. The resources available under the existing Centrally sponsored
education schemes will be mobilised to support this important initiative. This initiative
will provide an opportunity to the rural poor, especially those belonging to the
Scheduled Castes, Scheduled Tribes and Other Backward Classes to secure education
for their children. This is the first and most important step towards their
empowerment.
Employment: At present, a variety of self-employment and wage employment
schemes are in operation. To enhance the effectiveness of these schemes in generating
income-earning opportunities for the rural poor, Government will follow a four-
pronged strategy with the common theme of ensuring greater involvement of
Panchayati Raj institutions:
* The existing scheme of Jawahar Rozgar Yojana will be modified to ensure
that all funds are placed at the disposal of Gram Panchayats for creation of
rural infrastructure. They will have the sole authority for preparation of
annual action plans and their implementation, including the power to
execute works with the approval of the Gram Sabha. The modified scheme
will be called “Gram Samridhi Yojana”.
* The wage employment programme of Employment Assurance Scheme will
be implemented at the district/block levels, with the selection of works
being decided by the Zila Parishads in consultation with the other elected
representatives. The Employment Assurance Scheme presently operates
through out the country. We will give special priority to areas suffering
from endemic labour exodus.
* The Gram Panchayat will maintain a live employment register available to
the Gram Sabha and public for scrutiny. To ensure that the funds under
the wage employment schemes are spent with the active involvement of the
elected Panchayati Raj institutions, it is proposed that while 80% of funds
would be released to implementing agencies as per normal procedure, the
remaining 20% will be released as an incentive only if the State has put in
place elected and empowered Panchayati Raj institutions.
 7
* The plethora of self-employment programmes for the rural poor will be
merged into a single programme called “Swaran Jayanti Gram Swa-Rozgar
Yojana”, which will have greater participation of the Gram Panchayats.
This will enable the implementing agencies to have greater flexibility in
execution to meet the needs of the local people.
These schemes will largely benefit the poor and the unemployed youth in the
rural areas, especially those belonging to the Scheduled Castes, Scheduled Tribes
and Other Backward Classes.
Shelter: The rural housing shortage at the beginning of 1997-98 was estimated at
nearly 140 lakh units, which included shelterless households and those with only
kutcha dwellings. Government’s priority will be to provide shelter to all shelterless
poor households by the end of the Ninth Plan. The task of upgradation of kutcha
dwellings of poor households will be completed by the end of the Tenth Plan.
Furthermore, to ensure integrated provision of shelter, sanitation and drinking water,
we propose to launch a comprehensive “Samagra Awas Yojana”, which will embrace
existing programmes including Indira Awas Yojana.
18. The National Human Development Initiative will go a long way in empowering
the weakest sections of the population and improving the quality of rural life. This
will minimise the rural-urban disparities. The effectiveness of this initiative will depend
critically on the extent to which the Gram Panchayat, as an elected body, can assume
a pivotal role in implementing the various components of the programmes. I propose
to declare 1999-2000 as the “Year of the Gram Sabha” to affirm our resolve to set the
process of decentralised democracy in motion, with human development as the core
objective of planning.
Housing
19. Turning to shelter in urban areas, we have already taken major steps for
encouraging housing development, including repeal of the Urban Land (Ceiling and
Regulation) Act. To improve the flow of credit for housing I propose the following
measures:
* To develop the primary and secondary market for housing mortgages, it is
necessary to simplify the present legal provisions for foreclosure and transfer
of property. I propose to make necessary changes in the foreclosure laws in
the housing sector through amendments in the National Housing Bank
Act.
* To strengthen housing finance companies, I will be proposing changes in
the tax treatment of the income earned on non-performing assets.
* To enhance the availability of banking funds to the housing sector, RBI will
be advising scheduled commercial banks to lend up to 3% of their
incremental deposits for housing finance.
* National Housing Bank is implementing the Golden Jubilee Rural Housing
Finance Scheme for which I announced a target of 1 lakh dwelling units
last year. Encouraged by the satisfactory response to this scheme, I propose
to increase this target by 25% to 1.25 lakh dwelling units during 1999-
2000.
 8
* The National Housing Bank has proposed a scheme, which entails a
reduction in the interest rates for small borrowers. The scheme will be
available in towns where Urban Land (Ceiling and Regulation) Act is not
applicable. We will provide necessary support to NHB for this purpose. The
details of the scheme would be announced by NHB.
20. The development of housing in urban areas also depends heavily on the
quality of urban services. Many of our municipal bodies are at present financially
too weak to provide basic services. To encourage these bodies to improve their
creditworthiness in financial markets, I propose to accord tax-free status to a limited
amount of municipal bonds issued each year. A little later, I shall be announcing far
reaching tax initiatives to promote housing.
Industry and Infrastructure
21. I am deeply conscious that the last two years have been difficult for Indian
industry in the context of growing integration with the world economy and the
inevitable uncertainties of the global market place. But we should also be proud of
the way Indian industry has surmounted difficult challenges and produced world-
class winners in a number of fields such as information technology and
pharmaceuticals. The process of corporate and industrial restructuring in the face
of new challenges is inevitable. To help this transition, I shall be announcing important
tax initiatives to facilitate corporate mergers and amalgamations.
22. The Industries (Development and Regulation) Act will be reviewed and
amended so that the primary focus is shifted to development of industry rather than
its regulation.
23. The Monopolies and Restrictive Trade Practices Act has become obsolete in
certain areas in the light of international economic developments relating to
competition laws. We need to shift our focus from curbing monopolies to promoting
competition. Government has decided to appoint a Committee to examine this range
of issues and propose a modern Competition Law suitable for our conditions.
24. The Prime Minister ’s Advisory Council on Trade and Industry has made
important recommendations regarding knowledge-based industries. The
pharmaceutical industry is one of the important knowledge-based industries where
we have comparative advantage. We must strengthen our drug industry’s research
and development capabilities. Government has decided to set up two High Level
Committees to review the present drug policy so as to reduce the rigours of price
controls where they have become counter-productive and also to identify required
support to Indian pharmaceutical companies to undertake domestic R&D. My
colleague, the Minister of Chemicals and Fertilizers will be making a separate
announcement regarding this initiative. Further, in order to promote foreign direct
investment in this sector, Government has decided to permit up to 74% equity
under the automatic route.
25. While we devote our attention to the new sunrise industries, we have not
neglected established industries like textiles, which employs 380 lakh workers and
accounts for about 20% of our manufacturing valued added. The Technology
Upgradation Fund Scheme has been approved by the Government and will become
 9
operational from April 1999. For the next five years it will provide a substantial
interest incentive of 5% on loans availed by textile units from financial institutions
and banks. It will cover weaving, knitting, processing and finishing units, garment
manufacturing, cotton ginning and processing and the jute industry. The scheme is
being extended to include the spinning industry also.
26. In the National Agenda for Governance, my Government has already
proclaimed our commitment to the Handloom sector for providing services, technical
and marketing facilities for handloom weavers. In the area of marketing, I propose to
introduce a new integrated handloom promotion scheme, Deen Dayal Hathkargha
Protshahan Yojana which would encourage processing facilities, new design inputs
to weavers and opening new avenues for marketing of handloom fabrics.
27. Government has already undertaken important legislative and other reform
initiatives in key infrastructure sectors such as power, telecom, roads and ports.
28. The Sethusamudram Ship Canal Project will provide a shorter sea route
between the Eastern and the Western ports of our country. I propose to provide
funds during 1999-2000 to examine the techno-economic feasibility of this much
awaited project.
Small Scale Industry
29. Last year, I had announced a number of initiatives to improve the availability
of credit to the SSI Sector. Credit delivery to this sector continues to pose challenges
to our banking sector. I propose the following initiatives to improve the delivery
system for credit to SSI units:
* The composite loan scheme of SIDBI and commercial banks is designed to
ease operational difficulties of the small borrowers by providing term loan
and working capital through a single window. The limit for composite loans
is currently Rs.2 lakh. I propose to increase this limit to Rs.5 lakh.
* To simplify the computation of working capital limits of SSI units, last year
I had announced that for SSI units having an aggregate turn over of Rs.4
crore, working capital limit would be fixed at 20% of the annual turnover. I
propose to increase this limit to Rs.5 crore.
* In line with the recommendations of a high powered committee appointed
by it, RBI had advised banks to delegate more powers to branch managers
to grant ad hoc limits, to simplify application forms, to fix their own norms
for assessment of credit requirement and open more SSI branches. These
measures should ease the flow of bank credit to SSI units.
* To increase the outreach of banks to the tiny sector, lending by banks to
non banking finance companies or other financial intermediaries for
purposes of on-lending to the tiny sector is being included within the
definition of priority sector for bank lending.
* Inability to provide adequate security to banks and low recovery are often
cited as a major constraint in flow of investment credit to SSI units. The
problem is more acute for export oriented and tiny sector enterprises. To
alleviate this problem, a new credit insurance scheme will be launched.
 10
Science and Technology
30. “Jai Vigyan” is the tribute so aptly paid by our Prime Minister to hail the
achievements of our scientists. The time has come to unleash the creative potential
of our scientists and innovators at grass roots level. Only then we can make India
truly self-reliant and a leader in sustainable technologies. I propose a national
foundation for helping innovators all over the country. This Fund, with an initial
corpus of Rs.20 crore, will build a national register of innovations, mobilise intellectual
property protection, set up incubators for converting innovations into viable business
opportunities and help in dissemination across the country.
31. Our research institutions have the capacity to evolve new vaccines that will
revolutionise the medical and health systems. We propose to set up a Technology
Mission on vaccines to provide a focus to the effort.
32. Our country is endowed with diverse and precious genetic resources, which
need to be prudently conserved and managed. Among the 18 hot spots of bio-diversity
in the world, two happen to be in India, in the Eastern Himalayas and the Western
Ghats respectively. To coordinate policies, research, documentation and legal
protection of the country’s rights in this important area, a National Bio-resources
Board (NBB) will be set up under the Chairmanship of the Minister of Science and
Technology.
Banking
33. Last year I had announced important decisions flowing from the
Narasimham Committee Report on Banking Sector Reforms. Subsequently, the
Reserve Bank of India has taken further follow up action. I propose to carry forward
the reform process:
* The high level of NPAs in our public sector banks continues to remain a
cause of concern. The Debt Recovery Tribunals, which were set up for
expeditious adjudication and recovery of debts due to banks and financial
institutions, have started showing encouraging results. Government has
decided to set up 5 more DRTs and 4 more Debt Recovery Appellate
Tribunals. I also propose to introduce a Bill in the current session of
Parliament to make certain amendments in the Recovery of Debts due to
Banks and Financial Institutions Act to strengthen its provisions.
* A Working Group has recently been set up by us to devise appropriate
strategies for dealing with the problem of restructuring weak banks including
their NPAs.
* The inability of banks to enter into timely compromise settlements of chronic
cases of overdue loans leads to locking up of banks’ funds and long drawn
litigation in recovery suits. Public sector banks will be encouraged to set
up Settlement Advisory Committees so that such chronic cases, specially
those relating to the small sector, are settled in a timely and speedy manner.
RBI will be issuing necessary guidelines to the banks in this regard.
* Our banks are required to observe RBI norms for maintaining provisions
against doubtful and non-performing assets. These norms have been
strengthened in recent years. To assist banks to come up to international
 11
standards of prudential norms I shall be announcing certain changes in
the tax deductibility of provisions made.
External Sector
34. To strengthen our external payments situation, we need to revitalise our
exports and encourage more non-debt inflows in the form of foreign investment. The
following steps will be taken:
* The existing scheme of export credit in foreign currency is being revamped
to make available pre-shipment and post-shipment credit at internationally
competitive rates and bring about major simplification of procedures. The
RBI will separately announce the details.
* Studies show that our exporters are handicapped by high transaction costs
related to foreign trade licensing, tax procedures and the banking system.
I am establishing a high powered committee under the Revenue Secretary
to go into this problem and make concrete recommendations for reduction
in such transaction costs within three months.
* In order to make inflows of foreign direct investment hassle free, the
Government has decided to expand the list of automatic approvals covering
important industrial and services sectors. The expanded list will be
announced separately by the Minister of Industry. Wherever FIPB clearance
is required, henceforth FIPB will give the decision within 30 days.
* There have been complaints about slow implementation of foreign direct
investment (FDI) approvals. To ensure that such approvals are quickly
translated into actual investment inflows and projects, Government has
decided to create a Foreign Investment Implementation Authority (FIIA)
within the Ministry of Industry, which may also include representatives of
State Governments.
* Households and various charitable and religious institutions hold a huge
amount of gold in the country. These are idle assets earning no income for
the holders, who often incur costs to ensure security. This is a somewhat
anomalous situation considering that the country spends thousands of
crore worth of foreign exchange each year to meet fresh demand for gold
holding. To mobilise this idle gold, I propose a new Gold Deposit Scheme.
Selected banks will be permitted to accept gold deposits and issue interest
bearing certificates or bonds which, on maturity, can be reclaimed in gold.
This would free depositors from the problems of storage, movement and
security for the gold in their possession, while providing them with a regular
source of income. For the country, by recycling idle gold, we should be able
to reduce our dependence on imported gold. To encourage this process, I
propose to exempt the interest on the gold deposit bonds/certificates from
Income Tax and the value of assets deposited in the gold deposit scheme
from Wealth Tax. Furthermore, any capital gains made on these gold bonds/
certificates through trading or at redemption will be exempt from capital
gains tax. I would also urge all State Governments to consider exempting
movement of gold covered under the scheme from octroi, sales tax, stamp
duty and similar levies. I must point out that the scheme will not enjoy
 12
amnesty. The Reserve Bank will take necessary steps to implement the
scheme.
* In my last Budget, I had proposed a set of initiatives to strengthen the
participation of Non-Resident Indians (NRIs) in the development of our
country. Encouraged by their response, I now propose a few more initiatives:
* We shall extend the facility of automatic approval for investment up to
100% by NRIs/OCBs for all items, except those which attract notified FDI
equity caps, or compulsory licensing or public sector reservation under the
Industrial Policy or are reserved for the small scale sector.
* Our major stock exchanges have screen-based automated trading in
securities. It is now technically possible for them to open trading terminals
abroad, which would facilitate the participation of NRIs in our capital
markets. I have asked the Securities and Exchange Board of India (SEBI)
to work out the modalities for this purpose.
* The existing RBI approval mechanism for NRI investment in Indian mutual
funds will be simplified to a post-facto reporting mechanism.
Capital Market
35. A vibrant capital market is essential for providing the much-needed funds
for our infrastructure sector. Infrastructure projects need long term funds, which,
in turn, require a deep and well-functioning debt market. With a view to modernising
the debt market and introducing paperless trading in this segment also, Government
proposes to abolish stamp duty on transfer of debt instruments within the depository
mode.
36. Lately, there has been considerable debate on the importance of good
governance of Indian corporates. It is increasingly being realised that if investors
have to be drawn back to the capital market, companies have to put their houses in
order by following internationally accepted practices of corporate governance. This
is necessary to enhance investor confidence. To help promote this trend, I propose
to institute a National Award for Excellence in Corporate Governance.
37. The Deepak Parekh Committee appointed by the UTI has made wide-ranging
recommendations, including for restructuring of the US-64 scheme and for granting
tax incentives. We are taking necessary action. I will come to the tax incentives
shortly. The details of the restructuring are being announced separately in a press
release. This should lift the cloud of uncertainty from the capital market and restore
confidence.
38. My tax proposals will also greatly strengthen mutual funds and thereby
help bring small retail investors back into the capital market. It has also been decided
to set up a joint mechanism between SEBI and the Department of Company Affairs
for taking stringent action against unscrupulous promoters who raise money from
investors and misutilise them.
Expenditure Management
39. The high rate of growth of non-developmental expenditure by Government
is a growing and critical source of concern. I propose the following initiatives:
* The most effective and lasting solution to this problem is to begin the process
of downsizing Government. We are making an immediate beginning by
 13
abolishing four Secretary-level posts through a process of merger and
rationalisation of Central Government departments. This will take effect
on April 1, 1999.
* To carry this process forward in a systematic way towards reducing the
role and the administrative structure of the Government, we will constitute
an Expenditure Reforms Commission headed by an eminent and experienced
person.
* In preparation for the next Budget, I propose to initiate a system of Zero
Base Budgeting.
* To promote transparency and curb the growth of contingent government
liabilities, Government has decided to establish a Guarantee Redemption
Fund with an initial corpus of Rs.50 crore. I encourage all State Governments
to set up similar Funds.
Public Sector Reform/Disinvestment/Privatisation
40. Government’s strategy towards public sector enterprises will continue to
encompass a judicious mix of strengthening strategic units, privatising non-strategic
ones through gradual disinvestment or strategic sale and devising viable rehabilitation
strategies for weak units.
41. The disinvestment programme of the Government draws primarily upon
the recommendations of the Disinvestment Commission. The Commission has so
far submitted 8 Reports containing recommendations for 43 Public Sector Enterprises
(PSEs). These recommendations are in various stages of implementation. Government
will be referring more PSEs to it for its valued opinion. In 1999-2000, I propose to
raise Rs.10,000 crore through the disinvestment programme. This will help the
Government to fund the requirements of social and infrastructure sectors. Equally
important, it will lead to improvements in productivity and profitability of these
enterprises and also to the further development of domestic capital markets.
42. Government have been providing budgetary support to Central PSEs for
rationalising manpower under the Voluntary Retirement Scheme (VRS). However,
such assistance has generally been restricted to loss making enterprises. There are
a number of enterprises which are marginally profit-making and which need to reduce
manpower to remain viable but do not have the resource to finance such
rationalisation exercises. Government would encourage such enterprises to raise
money from banks against Government guarantees and interest subsidy.
43. In order to reduce the burden on budget on account of the implementation
of VRS, Government will also encourage PSEs to issue bonds to the workers opting
for VRS. Government will guarantee the repayment of such bonds and also reimburse
fully the interest payments. RBI will be requested to issue necessary instructions to
banks to accept bonds as collateral for loans to workers who may need assistance.
44. The need for timely and reliable statistics for policy formulation and planning
cannot be over emphasised. There is reason to believe that with progressive
dismantling of the system of economic controls, the quality of data flows has weakened.
Government has decided to establish a National Statistical Commission to critically
examine the deficiencies of the present statistical system with a view to recommending
measures for a systematic revamping of the system.
 14
45. We stand today at the edge of the second millennium. We must, therefore,
prepare for the opportunities and challenges of the next century and millennium. It
is time to seriously debate and decide on the second generation reforms that we
must put in place to make India economically strong and fully capable of competing
successfully in the evolving world order. To further this process, I plan to bring a
discussion paper before Parliament before the end of this Budget Session. My goal is
to help build a consensus on the basic issues so that we can act more decisively to
raise the growth in income, output and employment in our economy to a higher,
sustainable level.
Revised Estimates for 1998-99
46. The non-Plan expenditure has increased by Rs.17,616 crore. There is a
shortfall of Rs.3,631 crore under Plan. The normal non-Plan expenditure of the
Government departments has increased only by Rs.2,539 crore. The other increases
are on account of loans to States and UTs against net Small Savings collections,
Rs.9,588 crore, pension, Rs.2,711 crore, interest payments, Rs.2,248 crore, and
postal deficit, Rs.530 crore.
47. Net tax revenues for the Centre are estimated at Rs.1,09,537 crore against
Rs.1,16,857 crore budgeted, reflecting a shortfall of Rs.7,320 crore. The shortfall is
mainly due to lower customs revenue on account of both lower volume and unit-
price of imports and lower excise revenue resulting from low industrial growth.
Disinvestment receipts are expected to be Rs.8,000 crore against Rs.5,000 crore
budgeted.
48. The fiscal deficit is thus likely to increase to 6.5% of GDP from the budget
target of 5.6% on the basis of comparable GDP estimates. However, if the increase
over budget in small savings loans to States and Union Territories is excluded, the
adjusted fiscal deficit would be 5.9%.
Budget Estimates for 1999-2000
49. In the budget estimates for 1999-2000, the total expenditure is estimated
at Rs.2,84,003 crore, of which Rs.77,000 crore is for Plan and Rs.2,07,003 crore for
non-Plan.
Plan Expenditure
50. The budget support for Central, State and UT Plans has been placed at
Rs.77,000 crore, marking an increase of Rs.8,629 crore over revised estimates
1998-99. Following the direction of the Prime Minister, the Plan for 1999-2000
focuses on basic human development needs such as education, health care,
social welfare, housing, and water supply. Thus, out of the total Gross Budgetary
Support of Rs.44,000 crore for the Central Plan 1999-2000, Rs.31,035 crore has
been provided to 18 Ministries/Departments covered by the Prime Minister’s Special
Action Plan. Total Central Plan outlay at Rs.1,03,521 crore will be more by Rs.15,039
crore from the last year’s level of Rs.88,482 crore. Gross budgetary support for the
Central Plan is being enhanced from Rs.38,263 crore in the revised estimates
1998-99 to Rs.44,000 crore.
51. Compared to revised estimates 1998-1999, outlay for Plan programmes
has been significantly increased in certain priority sectors. For example, the increase
is 34.5% in the Agriculture and Allied Activities and 21.9% in Social Services.
 15

52. Central Plan assistance to States and Union Territories in 1999-2000 is

placed at Rs.33,000 crore as compared to Rs.30,108 crore in the revised estimates
1998-99. Assistance for Basic Minimum Services and Slum Development Schemes
is proposed to be enhanced from Rs.3,684 crore to Rs.4,043 crore.
53. Last year, I had announced a non-lapsable pool for the North East. I am
glad to inform you that we have already released Rs.98 crore for projects in the
North East out of the savings from the budget of different Central Ministries.
Non Plan Expenditure
54. Non-Plan expenditure in 1999-2000 is estimated to be Rs.2,07,003 crore
compared to Rs.2,13,541 crore in revised estimates 1998-99. This would have actually
been Rs.2,32,003 crore but for a change in the system of accounting of loans to
States and UTs against net Small Savings collections with effect from 1.4.99. The
changeover, which is in the interest of transparency and viability of the Small Savings
schemes, is being made in deference to a suggestion in the Inter State Council in
December 1998 on delinking the small savings from Central Government’s fiscal
deficit concerns. A Committee set up under the chairmanship of Shri R.V. Gupta
has gone into the issue. Based on the Committee’s recommendations and with the
concurrence of the Comptroller and Auditor General of India, the transactions will
now be under a newly created National Small Savings Fund in the Public Account,
which will reflect the Treasury Banking nature of these operations. A copy of the
Committee’s report is being placed in the library of the Parliament for Hon’ble
Members’ information.
55. Major items of increase in non-Plan expenditure are Interest payments,
Rs.10,752 crore, Defence expenditure, Rs.4,494 crore, and grants to States, Rs.3,621
crore. A provision of Rs.1,735 crore has been made for non-Plan loans to public
sector enterprises mainly for payment of salaries and wages to the employees of sick
and convalescent PSUs.
56. Rs.45,694 crore are being provided for Defence expenditure against Rs.41,200
crore in revised estimates 1998-99. Further need based budgetary support will be
provided during the course of the year.
Revenue Receipts
57. Before I proceed to detail my tax proposals, I would like to highlight the
position of fiscal deficit in 1999-2000, if the existing rates of taxes and tariffs are
continued. Gross tax revenues would then be Rs.1,67,526 crore and the Centre’s
net tax revenue would be Rs.1,22,730 crore. Non-tax revenues are estimated to
increase from Rs.48,128 crore in revised estimates 1998-99 to Rs.50,475 crore this
year. The net revenue receipts for the Centre, including non-tax receipts, would
increase from Rs.1,57,664 crore in revised estimates 1998-99 to Rs.1,73,205 crore
in 1999-2000. After taking into account receipts of Rs.10,000 crore from disinvestment
of equity in public sector enterprises, the fiscal deficit would be Rs.89,713 crore.
This is unacceptably high. I shall now come to my proposals to reduce the deficit.
 16

PART B

58. Sir, I now present my tax proposals.

59. I will start with indirect taxes, with excise first. The multiple rates of indirect
tax are generally recognised to be a major source of misclassification, tax evasion
and avoidance and cumbersome litigation. The multiplicity also encourages inefficient
allocation of resources. Over a 100 countries in the world now enjoy the benefits of
a Value Added Tax (VAT) with very small number of rates in each case.
60. In my last Budget, I had clearly stated my resolve to rationalise the rate-
structure so as to reduce the multiplicity of rates and ensure convergence towards a
central rate with a merit rate and a demerit rate. Most of our major industry
associations have also called for a triple rate excise structure.
61. My excise proposals today largely fulfil my intent announced 9 months
ago. Specifically, I propose to reduce the existing 11 major ad valorem rates to 3,
namely, a central rate of 16%, a merit rate of 8% and a demerit rate of 24%. To
achieve this, I propose to:
* Merge the existing rates of 5%, 10% and 12% into the existing 8% rate;
* Create a new rate of 16% by merging the existing 13%, 15% and 18% rates
into it; and
* Fix a new rate of 24% in substitution of the existing rate of 25%.
Honourable Members may notice that I have reduced the previously announced
central rate of 18% to 16%. This means lower costs and prices. There is also a happy
coincidence that this rate is almost identical to the rate of one-sixth (Shadbhaga)
advised by Kautilya, the noble sage of Pataliputra, which also happens to be my
birthplace.
62. Considerations of revenue in this difficult year, however, persuade me to
fix 2 slabs of surcharge (special duty of excise) of 6% and 16% over the rate of 24%
on commodities which today carry a rate of duty of 30% and 40%. Thus total excise
on these commodities will remain unchanged. Petrol will continue to be taxed at
32%. The surcharge structure gives a clear indication that in future the Government
would gradually phase them down to the demerit rate of 24%.
63. As a result of these changes the excise rates for many commodities will
either come down, or remain unchanged or be adjusted marginally upwards by a 1%
point. In the one major area of machinery and capital goods where the basic rate is
rising from 13% to 16%, I must point out that excise on such products are eligible
for MODVAT credit in the hands of the buyer. Furthermore, to help the capital
goods sector, my customs duty proposals include removal of the long standing anomaly
by which the duty rate on the major input, steel, is higher than the duty rate on
finished capital goods. I must also emphasise that this major reform of the excise
rate structure is broadly revenue neutral. It does not impose additional tax burden
on industry as a whole. I am confident this major reform will stimulate productivity,
growth and employment.
 17
64. Mr. Speaker, Sir, I now move on to my next proposal. I propose to garner
additional revenue by way of an additional duty on High Speed Diesel Oil (HSD).
Currently, international and domestic prices of crude oil and petroleum products
are unusually soft, and it is felt that raising some additional revenue through this
commodity would be an equitable method of resource mobilisation. Therefore, I
propose an additional duty of Re. 1 per litre on imported and domestic HSD, the
revenue from which will accrue entirely to the Centre. Of this duty, I propose to
allocate half to support the initiatives in rural development and social sectors. The
other portion of 50 paise of this duty as also the duty of Re.1 per litre levied with
effect from 2.6.1998 will be converted into a statutory cess and transferred to the
Central Road Fund. 30% of the Fund will be transferred to the State Governments
for development and maintenance of State Roads. The balance amount will be utilised
for development and maintenance of National highways and expressways and by the
Ministry of Railways for construction of Railways over-bridges and Railways safety
works at unmanned Railways crossings. This will cover the gap in the plan resources
of the Ministry of Railways for the year 1999-2000. It is estimated that we will be
able to collect an aggregate amount of Rs.4,591 crore as additional duty of excise
and Rs.363 crore as countervailing duty on domestically produced and imported
HSD over the year. The Ministry of Petroleum & Natural Gas will announce
consequential changes in the price of HSD effective from midnight tonight. This will
also fulfil in a large measure the will of Parliament reflected in Resolution dated 13th
May, 1988, which contemplated earmarking a portion of the excise and customs
duties on petrol and diesel to raise resources for development of roads.
65. In the last budget the MODVAT adjustment allowed to manufacturing units
had been capped at 95%. I propose to lift this cap on MODVAT claims and restore it
to 100%.
66. Mr. Speaker, Sir, my budget proposals also contain a package for the Small
Scale Industry (SSI) sector consisting of the following components:
* Under the specific excise duty concession schemes for units manufacturing
cosmetics, refrigeration and air-conditioning equipment, I propose doubling
of the turn-over under the eligibility criteria from Rs.50 lakh to Rs.100
lakh; doubling of the duty free exemption slab from Rs.15 lakh to Rs.30
lakh; and, an increase from Rs.15 lakh to Rs.20 lakh in the clearances
eligible for duty at half the normal rates.
* I propose to extend the benefit of the SSI exemption limits to small-scale
units producing cotton yarn.
* I propose to exempt small job workers engaged in printing of glazed tiles
from the incidence of excise duty.
* Currently, SSI units are not eligible for exemption from excise duty on
products bearing the brand name of another manufacturer. I propose to
extend the SSI exemption to goods bearing a brand name of another
manufacturer, when produced by units located in the rural areas. The details
of the scheme will be announced shortly.
67. Under the current procedure, all manufacturing units are required to pay
excise duty at the time of clearance of goods from their manufacturing premises. As
 18
a measure of further simplification of administrative procedures, I propose to permit
SSI units to pay excise duty on a monthly basis with effect from 1.6.1999. Besides
constituting a significant step in the simplification of procedures, this change will
also improve the liquidity position of manufacturing units in the SSI Sector.
68. I am proposing a similar procedural relaxation in respect of the requirement
of maintenance of excise records by factories. Henceforth, factories paying more
than Rs.5 crore excise duty in a year, will not be required to maintain their records
in a specific format prescribed by the excise department; and, the records maintained
in the normal course of their functioning would be accepted as adequate. This
amendment will take effect from 1.6.99.
69. Currently, there are several commodities, which are enjoying either total
exemption from excise duty or are enjoying concessional excise duty. These
concessions were sanctioned in the past with reference to the specific circumstances
relating to that commodity prevailing at that point of time. With the lowering of
general rate of duties, the need for such exemptions and concessions has abated. I
propose to set up an Expert Committee to examine and advise on where the
exemptions should be retained and where they should be integrated into the new
rate structure. Their report should be available for consideration before the next
budget.
70. As Hon’ble Members are aware, Government is empowered to grant
exemptions from excise duty on an adhoc basis. I do not consider such wide discretion
necessary. Hence, I propose to abolish Government’s power to grant adhoc exemptions
of excise duty except for goods of strategic nature, or for charitable purposes. I
propose abolition of similar powers on the customs duty side also.
71. Mr. Speaker, Sir, I now turn to my proposals relating to customs duties. My
proposals here reflect a balance of differing considerations. On the one hand, we are
committed to a calibrated integration of our economy with the world economy. This
would entail further phasing down of our customs duties to Asian levels. On the
other hand, is the need to raise revenue and the fact that in a year of exceptional
turbulence and uncertainty in the world economy, our industry should be cushioned
against unusual surges of competitive pressure from imports.
72. Sir, a special customs duty of 2% was imposed in the budget of 1996-97,
and a further special customs duty of 3% was imposed on certain items in 1997-98.
The special customs duty of 5% is in force till 31.3.1999. I have in the course of
another discussion assured this House that the period of validity of this special
customs duty will not be extended. I announce the discontinuance of the 5% special
customs duty with effect from 28.2.1999.
73. After careful examination of various possibilities, and close interaction with
the apex organisations of Commerce and Industry, I propose to reduce the existing 7
major ad-valorem rates of customs duty to 5 basic rates. The new rates will be:
- 5% - which will remain unchanged;
- 15% by substituting the existing 10% rate;
- 25% by merging the 20% and 25% rates;
 19
- 35% by merging the 30% and 35% rates;
- 40% - which will remain unchanged.
74. The one industry in which a special regime of customs duty will apply is
the Information Technology sector. The Prime Minister has repeatedly emphasised
the importance of this sector for the country’s development in the new century and
millennium. Accordingly, I am proposing significant reduction in duty rates of a
number of critical inputs in this sector, such as ICs and micro assemblies, storage
devices and CD Roms, telecom equipment and optical fibres.
75. To garner revenue to meet the country’s irreducible needs, I propose a
uniform surcharge of 10% on all commodities, excluding the following categories:
- Crude Oil and Petroleum Products;
- Items attracting 40% rate of basic duty;
- Certain GATT- bound items;
- Gold and Silver;
The effect of the surcharge would be to raise the basic rate by 10%. Thus a basic
rate of 5% would become 5.5%, 15% would become 16.5% and so on.
76. Taking into account that special customs duty is being discontinued, and
that crude oil and petroleum products are exempt from surcharge, the effective
import duty rates on these products will stand reduced. This is consistent with the
Government’s established policy of rationalising indirect taxes on these products in
an agreed time-frame.
77. By exempting items attracting 40% rate of basic duty from the surcharge,
there is a modest but clear reduction in the peak rate of protective custom duty from
45% to 40%.
78. Mr. Speaker, Sir, conceptually, I am averse to zero custom duty, since our
domestic industry generally merits some minimal protection. I have reviewed the
entire list of such commodities and to begin with I am proposing the imposition of
5% rate of duty for some of these commodities. In order to mitigate the impact of the
incidence of 5% rate of duty on such items which have previously enjoyed exemption,
I propose to exempt this category from the existing 4% special additional duty.
79. I am rationalising the import duty structure of project imports. Under
this rationalisation, power generation, coal mining, refinery, telecom and fertilizer
projects will now attract a nominal basic customs duty of only 5%. However, they
will be subject to applicable rates of countervailing duty. The net impact of these
changes will not be significant in most cases. Mega Power Projects also will be an
exception to this.
80. Mr. Speaker, Sir, as a result of the various proposals made in this
budget on the indirect taxes, the estimated revenue in 1999-2000 would be
Rs.1,17,625 crore, including a component of net additional resource mobilisation
of Rs.6,234 crore .
 20
81. Last year, I had announced the setting up of an Authority for Advance
Rulings for Excise and Customs. The necessary legislation has been included in
this Finance Bill. Drawn on the lines of the Advance Rulings Authority on the Direct
Taxes, the proposed Authority would provide binding rulings on important issues,
so that intending investors will have a clear-cut indication of their duty liability in
advance.
82. The Central Board of Excise & Customs has adopted a “Vision Document”
and the “Citizens Charter” which together present a blue print for the future and the
service standards that can be expected of the Customs and Excise Department. The
compliance of the service standards set out in the Charter is being closely monitored.
The Commissioners of Customs and field level officers have been directed to enhance
the quality of their service and have also been told that any non-compliance would
be viewed adversely.
83. On the central excise side, the computerisation of assessment and audit
operations is being given focussed attention, and before long, electronic filing of
returns is proposed to be put into operation.
84. Copies of the notifications giving effect to proposed changes in customs
and excise duties will be laid on the Table of the House in due course.
85. Mr. Speaker, Sir, I now turn to the proposals on the direct tax side.
86. With growing liberalisation of the economy has come the need for industrial
restructuring so that companies can focus better on their core activities. The corporate
sector has been voicing the need for a flexible fiscal policy for regulating business re-
organisations. In response to this need, I propose a comprehensive set of amendments
to the Income Tax Act to make such business re-organisations fully tax neutral. In
the case of amalgamation of companies, the existing requirement of routing the
proposal through Board of Industrial and Financial Reconstruction is being removed.
The legal provision is proposed to be amended so that the eligibility for tax concessions
is only contingent upon a minimum of 75% of the fixed assets of the amalgamating
company being absorbed in the amalgamated company, and subject to the condition
that the amalgamated company will continue the business of the amalgamating
company for a minimum of 5 years. An enabling provision will be provided through
the amendment of the Income-Tax Act, for the detailed guidelines to be issued
subsequently under the powers available from the statutory provision.
87. In the case of de-mergers, I propose to introduce a legal provision so as to
permit the carry forward of accumulated losses and unabsorbed depreciation from
the de-merging company to the resultant company. I also propose to amend the
legal provisions so that, neither the companies involved, nor the shareholders, are
subject to capital gains tax as a result of the transactions. Further, it is proposed
that all fiscal concessions will survive for the unexpired period in the case of
amalgamation and de-mergers
88. Mr. Speaker, Sir, Government has been greatly concerned about the
persisting sluggishness in the capital markets. Government is also distressed to
note the negative perception of some sections of the investing public in regard to the
 21
schemes operated by the Unit Trust of India. Based on the recommendations of the
Committee headed by Shri Deepak Parekh, and also taking into account a large
number of suggestions offered by various experts in the field, I now propose a
substantial fiscal package to restore the confidence of the shareholders in the UTI,
and more generally to invigorate the capital markets.
89. First, I propose to fully exempt from income tax all income from UTI and
other Mutual Funds received in the hands of the investors. This will not only reduce
the incidence of tax, but will eliminate the inconvenience faced by small investors in
paying tax and claiming refund in connection with income derived from such
investments.
90. Presently if the income in the hands of the investors is fully exempt from
tax, this income is subjected to dividend tax under Section 115 (O) of the Income Tax
Act, at the stage of distribution of the dividend by UTI or mutual funds. As a departure
from the policy, and as the second element of the package, I propose to continue for
3 years the exemption for US-64, Scheme as also for all open-ended equity-oriented
schemes of UTI and mutual funds - with more than 50% investment in equity - from
dividend tax. However, income distributed by Mutual Funds, where the equity
investment is less than 50%, will become subject to the 10% dividend tax.
91. As a result of these two tax initiatives, investments in UTI and other Mutual
Funds will become much more attractive and equity-oriented schemes will be relatively
more attractive than schemes where equity investment is less than 50%. This should
encourage the return of small investor to the capital market and revive confidence.
92. A complaint has often been voiced that there is discrimination between the
rate of long-term capital gains tax on transfer of shares and securities as between
residents and non-residents. The current rate of long-term capital gains tax for
resident Indians is 20% linked to a notional value of capital gains, computed with
reference to a Cost of Inflation Index. However, the rate of long-term capital gains
tax for non residents is only 10%. In response to this complaint, I now propose to
amend the law so as to cap the long-term capital gains tax for resident Indians on
transfer of shares and securities, at the 10% rate.
93. In some of the ‘sunrise’ sectors of the economy, the management is adopting
a policy of offering stock options and Sweat Equity, to their employees. The tax
implications of such transactions are somewhat ambiguous. Therefore, I propose in
this budget to make certain amendments in the law, to put it beyond doubt that
such stock options will be taxed as a perquisite at the time of exercise of the option
by the employee, and later as capital gains at the time of sale of the security. These
amendments, I expect, will remove the grey areas which exist in the current law
relating to such transactions.
94. For boosting high-tech sectors and supporting first generation
entrepreneurs, there is an acute need for higher investment in venture capital
activities. Very recently we have relaxed the guidelines under the existing scheme by
removing the requirement for time-bound investment and minimum lock-in-period
of funds. I am also harmonising the guidelines for registration of venture capital
activity with the Central Board of Direct Taxes, with those for registration with the
 22
Security and Exchange Board of India. This will ensure uniformity in norms for
registration with both the organisations. I am confident that these initiatives will
increase the attractiveness of the Venture Capital Scheme and induce high net-
worth investors to commit their funds to the ‘sunrise’ sectors, particularly, the
Information Technology Sector.
95. Very recently, the Companies Act, 1956 has been amended to permit
transactions relating to buy- back of shares. There is some ambiguity in the
interpretation of the law as to whether such transactions would be treated as subject
to dividend tax in addition to capital gains tax. In view of this, I propose to amend
the law to put it beyond doubt that on buy-back of shares, the shareholders will not
be subject to dividend tax, and would only be liable to capital gains tax.
96. Mr. Speaker, Sir, I wish to now turn to another area of special focus in this
budget, namely the Housing Sector. In regard to this sector, I propose a comprehensive
package of fiscal incentives focussed at:
* the middle class investors wishing to purchase a dwelling unit;
* the promoters of middle income housing projects; and
* the housing finance companies.
97. As the first element of this package, I propose that the interest on a loan for
a self-occupied property be exempted from tax up to a ceiling of Rs.75,000, increased
from the current ceiling of Rs.30,000. This concession will encourage middle class
investors to take loans to purchase modest dwelling units of their own.
98. The second element of this incentive package relates to the scheme for
housing projects for enjoying a tax holiday under Section 80IA of the Income Tax
Act. The existing provision, inter-alia, requires that the built -up area of dwelling
units should not exceed 1000 sq. feet. There have been many representations that
in towns other than Mumbai and Delhi, the land cost is relatively less, and therefore,
for the same capital expenditure investors can afford to purchase dwelling units of
slightly larger areas. In view of this, it has been represented that the ceiling on built
-up areas for dwelling units in approved projects be increased from 1000 sq. ft to
1500 sq. ft at all locations except Mumbai and Delhi. I propose to accept this
suggestion and make suitable modifications in the law. This amendment in the scheme
for treating housing projects as infrastructure will, I believe, also give a significant
fillip to construction activities in the smaller towns.
99. For the construction activity to pick up any significant degree of momentum,
it has to be ensured that housing finance companies stay financially viable. Currently,
such housing finance companies are subject to tax on interest on loans, on accrual
basis. In order to lessen the burden on such housing finance companies, I propose
to amend the law so that the income of such companies will be taxable on actual
basis, rather than accrual basis.
1 0 0 . A significant number of individuals seeking accommodation in the major
cities are the employees of the business sector. I feel that it is necessary to encourage
the business sector to invest in housing for their employees so as to add to the net
housing stock. In this spirit, I propose to increase the depreciation rate from 20% to
40% on new dwelling units purchased by the business sector for its employees.
 23
1 0 1 . This entire package of fiscal incentives for the housing construction sector
will, I believe, be a powerful force for revival of the entire economy. The construction
sector has very strong linkages with several other major sectors, notably steel and
cement. A general upsurge in construction activities will not only increase the
corpus of housing stock in the country, but will give a substantial fillip to industrial
activity.
1 0 2 . Apprehensions have been expressed in certain quarters regarding the
incidence of a high level of Non Performing Assets (NPAs) in some of the banks. I am
of the view that the banks should make every effort to clean up their books and to
remove any misgivings, which may exist about the transparency of the accounts. To
assist in this direction, Mr. Speaker, Sir, I propose to make tax deductible such
amounts as are provided by banks as ‘doubtful debts’ subject to a maximum of 5%
of the such aggregate ‘doubtful debts’, in any one year. This concession will be
available for a period of 5 years for such ‘doubtful debts’ as are identified under the
prudential norms prescribed by the Reserve Bank of India.
1 0 3 . I propose to amend the law so that tax concession will be available to a
loanee on interest payment to a co-operative bank on actual basis rather than accrual
basis. This proposal will induce the loanees to make timely repayment of their
interest liability in order to avail of the tax benefit, and correspondingly, the financial
condition of the co-operative banks can be expected to improve.
1 0 4 . Mr. Speaker, Sir, I now turn to the proposals relating to the Infrastructure
and Industry sectors.
* I propose to extend the fiscal incentives by way of the tax holiday under
Section 80 IA of the Income Tax Act, to cold chains for agricultural produce.
* The financial condition of most of State Electricity Boards is extremely
precarious. Many of the State Electricity Boards wish to remedy the situation
by unbundling generation, transmission and distribution activities to
separate companies. I propose to treat the activities of transmission and
distribution of power, set up after 1.4.1999, as eligible activities for fiscal
incentives available to infrastructure units. I am sanguine that this proposal
will facilitate the restructuring and rehabilitation of the State Electricity
Boards.
* Currently, the tax exemption given under Section 80 IA of the Income Tax
Act to the infrastructure sector and other core sectors, has to be availed of
within a given maximum period. This given maximum period has come to
vary from sector to sector. In order to bring about uniformity, I propose the
amendment of the Income Tax Act so as to provide a maximum period of 15
years in which units can avail of the tax concessions offered to infrastructure
and other core sector units.
* Mr. Speaker, Sir, I am conscious of the fact that, despite all our
announcements, the industrial development in North Eastern Region has
not come up to our expectations. To give industrialisation a fillip in this
area of the country, I propose a 10 year tax holiday for all industries set up
in Growth Centres, Industrial Infrastructure Development Corporations,
and for other specified industries, in the North Eastern Region. I would
urge the industrial entrepreneurs from this part of the country to seize the
 24
opportunity and set up modern, high value added manufacturing units in
the region.
1 0 5 . The Indian entertainment industry, which includes films, music and
television software is growing by leaps and bounds. I believe that with our creativity
and our talent, India has the potential to become a global media superpower. We
have done remarkably well in the field of computer software development and exports,
and the same can be achieved in the development and export entertainment industry
products, specially films, TV, software and music. With a view to facilitating India
becoming a super power in this sector, I am including a number of measures in the
budget. My aim is to give similar facilities and tax benefits to this sector as are
available to the export of goods and merchandise under section 80HHC.
1 0 6 . Let me assure you that it would be our endeavour to support the
entertainment industry “Dil Se”, and I am sure that no longer would the industry
have to ask the government “Hum Apke Hain Kaun”?
1 0 7 . Mr. Speaker, Sir, we are all conscious of the fact that the Information
Technology sector is going to be the sector of the future. The immediate crisis,
which is looming over this sector, is connected with the Y2K Problem, which will hit
us at the close of the current calendar year. I get the impression that the corporate
sector is not adequately seized of the dangers which lie ahead on account of this
problem. In these circumstances, to assist the business sector to overcome the Y2K
Problem, I propose that all expenditure incurred in making their systems Y2K
compliant be allowed as revenue expenditure in the next financial year. I urge the
business sector to avail of this concession and make every effort to remedy the
defect in their software systems, so that their valuable databases do not spin into
chaos.
1 0 8 . Under the current law, a weighted deduction of 125% of the expenditure
made on in-house R&D is available to corporate houses up to 31.3.2000.
Representations have been received that this period is too short for any company to
plan its R&D programme. I propose to extend the concession for in-house R&D up to
31.3.2005. Further, I propose to extend a similar concession of permitting a weighted
deduction of 125% of expenditure for R&D Projects entrusted to research laboratories
and universities. In the globalised economy, the future is for those who are in the
vanguard of development of technology. In view of this, I would urge the corporate
sector to avail of this facility to the fullest extent.
1 0 9 . In the last few years, the direct tax department has undertaken a concerted
drive to extend the national tax base. As a method of identifying potential taxpayers,
the “One by Six” scheme was extended to 35 cities in 1998-99. This Scheme has
given very satisfying results. Consequent upon the launching of this scheme, the
number of tax assessees has risen from 120 lakh to 140 lakh in the period of one
year. It is the assessment of the department that there is considerable scope for
further registration of tax assessees. In view of the favourable results of the scheme,
I now propose to extend this scheme to 19 more cities in the country having a
population of more than 5 lakh.
1 1 0 . Since the last budget, the Income Tax department has undertaken a drive
for issue of PAN Numbers to the tax-paying applicants. The response of this scheme
 25
has been overwhelming, and we have received as many as 168 lakh applications.
The requisite PAN Numbers have already been issued to 75 lakh taxpayers and we
are confident that the remaining applications will be disposed in the next few months.
1 1 1 . Mr. Speaker, Sir, I will now like to highlight the proposals which are targeted
at those sections of society which require Government’s special attention. First, I
propose that the deduction for medical insurance premia for senior citizens be raised
from the current level of Rs.10,000 to Rs.15,000 and tax deduction for treatment of
specific diseases be increased to Rs.60,000. Considering the fact that medical and
hospitalisation costs have risen and life expectancy has also improved, the general
insurance industry intends to increase the upper ceiling of the sum insured under
the mediclaim policy from the existing level of Rs.3 lakh to Rs.5 lakh, and the upper
age limit for coverage to 80 years from the existing 75 years. Second, I propose that
expenditure made in respect of hostel projects for working women be eligible for
deduction from taxable income under Section 35AC of the Income-Tax Act. Third, I
propose that pension received by the recipients of the different gallantry award
winners, and the family pension received by their heirs, be exempted from income
tax.
1 1 2 . Mr. Speaker, Sir, I now submit my last proposal on direct taxes. I face the
difficult task of containing the revenue and fiscal deficits on the one hand, and on
the other meeting the growing development expenditure. I propose to fulfil this task
and also ensure equitable burden sharing. I am making a modest demand only on
those sections of our society who have the capacity to pay while exempting low-
income earners. With these considerations, I propose to impose an across-the-board
surcharge of 10% on Corporate Tax, and also a 10% surcharge on all other categories
of assessees. In respect of individuals and Hindu Undivided Families, the applicability
of the surcharge is limited to those having total income of Rs.60,000 or more. In
effect, this surcharge will mean an increase of a marginal 2% in the 20% slab & 3%
in the 30% slab. It would leave the rate in the 10% slab unchanged. This is in the
nature of a temporary surcharge. I trust that the House and our citizens will appreciate
the circumstances in which I have had to make this proposal.
1 1 3 . To sum up, Mr. Speaker, Sir, as a result of the various proposals made in
this budget on the direct taxes, the estimated revenue in 1999-2000 would be
Rs.59,235 crore, including a component of net additional resource mobilisation of
Rs.3,100 crore.
1 1 4 . I now have something to say on behalf of my colleague, the Minister of
Communications. Postal Service is highly employment intensive and salary &
allowances constitute a major part of the operating expenses of the Postal Department.
A revision of tariff for some postal services has, therefore, become unavoidable.
However, in the interest of the common man and the role of the postal services in
easy dissemination of news and information there will be no change in the tariff for
Postcard, Money orders, Book packets containing printed books and Registered
newspapers. However, the rate of Printed Postcard is being raised from Rs.1.50 to
Rs.2.00, of Competition Postcard from Rs.3.00 to Rs.4.00, of Inland letter from Rs.1.50
to Rs.2.00, of Book pattern and sample packets from Re.1.00 to Rs.2.00 for first 50
grams or part thereof and from Rs.2.00 to Rs.3.00 for every additional 50 grams or
 26
part thereof, and Parcels from Rs.10.00 to Rs.12.00 for a weight not exceeding 500
grams or part thereof and from Rs.10.00 to Rs.15.00 for every additional 500 grams
or part thereof. There are also certain other changes, which are explained in the
Memorandum circulated along with the budget documents. The changes would take
effect from a date to be notified after the Finance Bill is passed. The revisions proposed
are estimated to yield additional revenue of about Rs.145 crore in a full year and
about Rs.121 crore during 1999-2000. Even this modest increase which is necessary
for sustaining postal development, will only partially meet the cost of various services.
1 1 5 . As a result of the postal tariff revision, total expenditure of the Central
Government for the year 1999-2000 would be marginally reduced to Rs.2,83,882
crore while with my tax and other proposals, net revenue receipts and non-debt
capital receipts would increase to Rs.2,03,927 crore. The revenue deficit is placed
at Rs.54,147 crore, while the fiscal deficit is placed at Rs.79,955 crore. This amounts
to 2.7% and 4.0% respectively on the basis of the new series of GDP announced by
Central Statistical Organisation and after excluding the payment of the share of
small savings collection to State Governments. Based on the old series of GDP and
excluding the payment of the share of small savings collection to State Governments,
the percentage works out to 3.0% and 4.4% respectively.
1 1 6 . With the Budget for 1999-2000, we will have set in motion a medium-term
strategy for restoring the fiscal health of our economy. This budget proposes to
reduce the revenue and fiscal deficits by 0.7% and 0.6% of GDP, respectively. At this
rate of reduction, the revenue deficit will be eliminated in 4 years and the fiscal
deficit will have declined below 2% of GDP. The budget proposes major reform of our
excise taxes. In the medium-term we will move to a single rate and a full-fledged VAT
system. Our customs duty structure will be phased down to Asian levels in 5 years.
During this period Indian industry will have restructured and become fully competitive
in world markets. Our knowledge-based industries will generate lakhs of jobs. The
gains from competition and productivity growth will drive our exports to new heights.
Over the same period our physical and human infrastructure will be raised close to
world class. Above all, the basic needs of all our people for food, shelter, health,
education and employment will be met within a decade from now.
1 1 7 . These achievements will transform India into a genuine economic super
power by the year 2020. The twenty-first century belongs to us.
1 1 8 . In the words of the Prime Minister Shri Atal Behari Vajpayee -
+ÉÉÄJÉÉå àÉå ´Éè£É´É BÉEä ºÉ{ÉxÉä,
{ÉMÉ àÉå iÉÚ{ÉEÉxÉÉå BÉEÉÒ MÉÉÊiÉ cÉä,
®É-]Å£ÉÉÎBÉDiÉ BÉEÉ V´ÉÉ® xÉ âóBÉEiÉÉ,
+ÉÉA ÉÊVɺÉ-ÉÊVÉºÉ BÉEÉÒ ÉÊcààÉiÉ cÉä**
With dreams of prosperity and marching at a stormy pace, the tide of patriotism
will not recede. Let the courageous come forward to join me.
1 1 9 . Mr. Speaker, Sir, with these words, I commend the budget to this august
House.
 1

Budget 1998-99

Speech of

Shri Yashwant Sinha

Minister of Finance

1st June, 1998

PART A

Sir,
I rise to present the budget for the year 1998-99.
I n t ro d u c t i o n
2. This is the first budget of the Government led by Prime Minister Shri Atal
Bihari Vajpayee. It is a defining moment in history. It is an occasion fraught with
expectation. I am very grateful to the Prime Minister for the confidence he has reposed
in me and the guidance he has given me.
3. It has been just over ten weeks since this Government took office. But we
know already that a new India is rising. And as May 11 was surely the first step,
today is yet another. Certainly, a long journey lies ahead, but as history will prove,
we have now begun to build a new India. This will be a strong and prosperous India
- a nation self-reliant, but not autarchic, rather a nation keen to deal with the world
as an equal partner with other countries. As the saying goes, “only the strong can be
free. And only the productive can be strong”. This is the new India we propose to
build.
4. The dimensions of the economic challenges that confront us today have
come into sharper focus since the time I presented the interim budget before this
House. While the people of India have reacted with pride over the events of May 11,
some of our friends abroad have responded negatively. I am confident that these
initial negative responses will be moderated as our position gets better understood,
and will not have any significant impact on our economic development. On our part,
our policies have to be clearly directed and firm. As Gurudev Rabindranath Tagore
said “You cannot cross the sea by standing and staring at the water”. We intend to
cross the sea and I seek the cooperation of this august House in this national
endeavour in the weeks and months ahead.
1
 2
5. In preparing this budget I have been guided by the famous talisman of
Gandhiji. I have recalled to myself the face of the poorest and the weakest man I
have seen and made sure that this budget is of use to him. This budget is rooted in
Swadeshi which will be unfolded as we go along. But I shall hasten to add that
Swadeshi does not mean isolation, Swadeshi means making India strong and self-
reliant so that we can compete with the world and win. As our courageous Prime
Minister has himself said :
ÉÊãɪÉÉ cÉlÉ àÉå v´ÉVÉ BÉE£ÉÉÒ xÉÉ ZÉÖBÉEäMÉÉ,
BÉEnàÉ ¤Éfà ®cÉ cè BÉE£ÉÉÒ xÉÉ °ôBÉEäMÉÉ*
Flag we hold shall never bow,
Marching steps shall never halt.
Current Economic Situation
6. A few days ago the Economic Survey, 1997-98 was tabled in Parliament. It
provides a comprehensive analysis of the economy’s performance during 1997-98.
In my interim budget speech I had already drawn attention to some disquieting
trends: overall economic growth slowed to 5 per cent in 1997-98; agricultural growth
was negative, with foodgrain production dropping to194 million tonnes from199
million tonnes in the previous year; growth of industrial production slackened to 4.2
per cent; export performance was weak for a second successive year, recording growth
in dollar terms of less than 3 per cent; the fiscal deficit worsened to 6.1 per cent of
GDP; the capital market remained in the doldrums and infrastructure bottlenecks
continued to plague the economy. But I am not daunted by the situation. Only the
weak are tamed by adversity, the strong rise above them.
Key Objectives
7. Drawing on the National Agenda for Governance and policy statements of
the Prime Minister, I believe the key objectives of this budget should be to:
* Strengthen the foundations of the Indian economy to deal effectively with
an inherently uncertain external environment.
* Reverse the decline in agriculture and strengthen the rural economy.
* Restore the momentum of industrial growth, especially of small scale
enterprises, and revive the capital market.
* Accelerate the development of infrastructure.
* By these and other means, rapidly expand productive job opportunities.
* Give special impetus to social sector development.
* Calibrate the pace and character of integration with the world economy,
while strengthening India’s international economic position through revival
of exports and reduced reliance on borrowed funds.
* Ensure macro-economic stability and control over inflation.
* Raise the rate of domestic savings to achieve higher national investment
and thus lay the basis for faster medium-term growth. Supplement this
effort through foreign investment.
* Free the productive energies of our people from unnecessary bureaucratic
hurdles and undertake reforms to raise the productivity of our land, labour
and capital.
 3
Agriculture and Rural Development
8. As I stand here and address this august House, my thoughts wander
naturally to the remote villages of India and to millions of our toiling farmers. I have
no doubt in my mind that the health and dynamism of the rural economy is central
to India’s economic and social development. I propose to do the following for agriculture
and rural development:
* Water is a critical input for agriculture. Yet, after all these years of
development only 37 per cent of our cultivable area is under assured
irrigation. The bulk of our poor people live in rainfed areas. We propose to
accord top priority for development of rainfed areas on a watershed basis
and thereby enhance agricultural productivity in a sustainable manner.
Watershed Development Programmes, currently spread across several
ministries and departments, will be unified and the plan allocation stepped
up to Rs.677 crore from Rs.517 crore in RE 1997-98. Furthermore, there
is an increase in the provision for the Accelerated Irrigation Benefit
Programme by 58 per cent over 1997-98.
* Next only to water is the question of rural credit and rural infrastructure.
Under the Rural Infrastructure Development Fund (RIDF) managed by
NABARD moneys are made available to the State Governments for rural
infrastructure. During the past three years about Rs. 2,500 crore has been
allocated to it annually. I am pleased to announce RIDF IV with an enhanced
allocation of Rs.3,000 crore. I invite the States to come forward to utilise
this important facility.
* I propose to augment NABARD’s share capital by Rs.500 crore in the current
year. Government will allocate Rs.100 crore from the budget and the RBI
will contribute the balance of Rs.400 crore. This will enable NABARD to
leverage additional resource from the market to meet the credit needs of
agriculture.
* The problem of rural unemployment and under-employment is a massive
one. This can only be solved through self-employment. There is no reason
why every craftsman, artisan and weaver cannot become an entrepreneur
and run his own little enterprise. A major bottleneck however has been
lack of credit facilities. Earlier NABARD had launched a limited scheme for
promotion of Self Help Groups (SHG) as a channel for the flow of funds to
the micro enterprises. I am asking NABARD to greatly extend the scope
and coverage of the scheme so that 2 lakh Self Help Groups covering 40
lakh families can be assisted over the next five years through this scheme
of micro credit. 10,000 Self Help Groups covering 2 lakh families will be
assisted this year. The Reserve Bank of India is also advising commercial
banks to design specific loan package to meet the needs of micro enterprises.
* I have asked the National Housing Bank to finance one lakh rural dwelling
units under the Swarna Jayanti Housing Finance Scheme as against 50,000
units last year.
* I am making a provision of Rs.265 crore to carry forward the process of
rehabilitation and recapitalisation of the Regional Rural Banks (RRBs).
Sponsor banks are being given an enlarged role in providing management,
operational and restructuring support to RRBs.
 4
* Farmers often face chronic problems of overdue loans due to circumstances
beyond their control. They are even committed to civil prison for this default.
While the repayment culture must improve, this government is determined
to create conditions so that no farmer goes to jail for a loan repayment
default or is forced to commit suicide. The Reserve Bank will be issuing
appropriate guidelines to the banks for hassle-free settlement of old cases
of overdues. Banks will be encouraged to provide appropriate relief on
accumulated interest in deserving cases. The new procedure should also
help in reducing the outstanding volume of Non-Performing Assets (NPAs)
of the banking sector.
* NABARD is being asked to formulate a model scheme for issue of Kisan
Credit Cards to farmers on the basis of their holdings for uniform adoption
by the banks so that the farmers may use them to readily purchase
agricultural inputs such as seeds, fertilisers, pesticides etc. and draw cash
for their production needs.
9. The ingenuity and enterprise of our farmers is today hamstrung by
numerous Central and State laws and regulations relating to the production,
marketing and movement of agricultural commodities. This is clearly unacceptable.
My colleague, the Minister of State for Agriculture, will soon be bringing out, under
the guidance of the Prime Minister, the Government’s National Agricultural Policy
paper which will address these constraints in a comprehensive manner. The Minister
of Commerce is systematically reviewing existing controls on exports of all agricultural
commodities except foodgrains. There is no reason why our farmers should not reap
the benefits of access to wider global markets.
10. The system of agricultural cooperatives in our country is plagued by
bureaucracy and political interference at many levels. As part of a concerted
programme to revitalise the cooperative sector, government will shortly bring forward
a model cooperative law to replace the Multi-State Cooperative Societies Act of 1984
and will encourage the States to make similar amendments in their own acts.
11. There has been a long standing demand from our farmers and the Ministry
of Agriculture for the exclusion of farm implements and tools from the list of items
reserved for manufacture by the SSI sector, so that farmers can benefit from a wider
range of implements and tools at competitive prices and with requisite after sales
service. This proposal had also been recommended by the Advisory Committee of the
Ministry of Industry. Government have decided to accept this recommendation.
12. India has made commendable progress in oilseeds production in recent
years. In order to establish an efficient market environment and to reduce volatility
in prices in this sector, the government is planning to introduce futures trading in
edible oilseeds, their oils and their cakes.
13. The existing subsidy schemes for both urea and decontrolled phosphatic
and potassic fertilisers are being continued. However, for achieving optimum crop
response ratio to fertiliser use, the use of all the three nutrients, nitrogen (N),
phosphorus (P) and potassium (K) should be balanced. This balance has been
progressively distorted over time because of the low price of urea compared with
decontrolled fertilisers. The NPK balance, which was 5.9:2.4:1 in 1991-92, had
 5
changed adversely to 10:2.9:1 by 1996-97. An increase in the price of urea would
help restore this balance. The increase is also justified on the ground of rising
costs, which have led to a more than 50 per cent increase in the subsidy on
indigenously produced urea in two years between 1995-96 and RE 1997-98. It is,
therefore, proposed to increase the selling price of urea by Re.1 per kilogram with
immediate effect.
14. Government is committed to provide safe drinking water to all rural
habitations in the next five years. To achieve this ambitious target, a multi pronged
approach to rural water supply is being adopted:
* The allocation for the Accelerated Rural Water Supply Programme is being
enhanced from Rs.1,302 crore in RE 1997-98 to Rs.1,627 crore in this
regular budget. This enhanced outlay will cover about one lakh habitations.
* As mentioned earlier, we will give a special thrust to Watershed Development
Programmes. This will also ensure better results for ground water availability
and conservation.
* States are being encouraged to institutionalise community-based rural water
supply programmes, which secure active participation of beneficiaries to
own, operate and maintain rural water supply facilities.
15. Over the years, programmes for alleviation of poverty and employment
generation have proliferated. Each scheme is well intentioned but their multiplicity
has led to needless duplication, high overhead costs, confusion at field levels and
insufficient benefit to the people. It is proposed to unify the various programmes
under two broad categories of Self Employment Schemes and Wage Employment
Schemes. Funding and organisational patterns will be rationalised to achieve
maximum beneficial impact of these programmes.
Small Scale Industry
16. The SSI sector makes a valuable contribution of about 40 per cent to our
total manufacturing sector production, 35 per cent to exports and employs over 160
lakh workers. Our commitment to the SSI sector is total. The commonest complaint
of SSI entrepreneurs and associations are the insufficiency of timely credit and the
harassment of the “Inspector Raj”.
17. On the credit problems of the SSI sector, I propose the following initiatives:
* At present, for SSI units having aggregate working capital requirements
up to Rs.2 crore, the working capital limit is determined by the banks on
the basis of a simple calculation of 20 per cent of their annual turnover.
This facility is being doubled to Rs.4 crore. This will ease the flow of bank
credit to SSI.
* To moderate the cost of credit to SSI units, RBI will advise the banks to
accord SSI units with a good track record, the benefit of lower spreads over
the prime lending rate.
* Enhanced powers would be delegated to bank managers of specialised SSI
branches to ensure that most credit proposals are decided at the branch
level.
 6
* At present, Small Industrial Development Bank of India (SIDBI) is a
subsidiary of IDBI and IDBI is the major shareholder in State Finance
Corporations (SFCs). To equip SIDBI to play its apex role in SSI credit
provision more effectively, SIDBI will be delinked from IDBI and IDBI
shareholding in SFCs will be transferred to SIDBI.
* SSI units are often handicapped by delays in the settlement of their dues
from larger companies. To tackle this problem, I am asking RBI to strengthen
the existing mechanisms available to SSI for discounting of bills. RBI will
also modify its guidelines to commercial banks on credit appraisal to give
greater weight to the amount of overdue outstandings that large units have
in respect of SSI supplier. My colleague, the Minister of Industry is separately
bringing amendments in the Interest on Delayed Payments to Small Scale
and Ancillary Industry Undertaking Act,1993 to make the existing legislation
more effective.
18. As for the pervasive problem of the “Inspector Raj”, I shall be announcing
far reaching changes in the administration of Central Excise which should help SSI
units significantly. I urge all States to review their laws and regulations and make
necessary changes to lighten the burden of the inspector raj problem of SSI units.
19. I shall also be announcing some tax concessions to the SSI sector later in
my speech.
Private Investment in Industry
20. The government accords high priority to boosting private investment,
including foreign investment, in industry. We must minimise bureaucratic and
procedural hurdles and create an investor friendly environment. Industrial licensing
was abolished in most industrial sectors as part of the economic reforms. On reviewing
the remaining handful of licensed sectors, the government have further decided to
delicense coal and lignite and petroleum products.
21. Industrial deregulation would remain incomplete without reducing the
burdens imposed by the “Inspector Raj”. The majority of inspectors operate under
State level statutes. Government have initiated a dialogue with the State Governments
to explore the consolidation of regulatory legislation relating to industry and exchange
of best practices across States in carrying out the necessary inspections in the least
burdensome way. I will return to this subject when I present my excise proposals.
22. The Foreign Investment Promotion Board (FIPB) has done a good job in
promoting foreign investment and streamlining the procedures at the Central
government level. Foreign investment flows have increased substantially and were
estimated to be $3.1 billion in 1997-98. About 60 per cent of investment approvals
are in the energy and infrastructure sectors. It will be our objective to create conditions
in which foreign investors will find India an attractive investment destination. We
hope to double the inflow of foreign direct investment within two years. Foreign
investors are frequently inhibited by lack of familiarity with our systems and statutes
and particular problems at the State level. To reduce such problems, we will implement
a system whereby, an officer of the administrative Ministry would be designated as
a monitoring officer to help processing and implementation of the project in
 7
conjunction with Central and State authorities for every foreign investment proposal
exceeding Rs.100 crore. We are committed to creating a hassle-free procedure and I
would like to assure all foreign investors that a decision on their investment proposals
shall be taken within a period of 90 days. It will be the personal responsibility of the
monitoring officer to ensure this.
Housing
23. The National Agenda, identifies housing as a priority area. We will move
purposefully to tackle the country’s enormous housing shortage problem through
partnership between government, housing finance institutions and the private sector.
* 20 lakh additional dwelling units will be built this year with 13 lakhs in
rural areas and 7 lakhs in urban areas.
* The budget allocation for the Indira Awas Yojana Programme is being
substantially enhanced to Rs.1600 crore, from Rs.1144 crore in RE 1997-
98. The scope of this scheme is also being widened to include a loan-cum-
subsidy programme.
* The Urban Land Ceiling and Regulation Act will be repealed to free the
supply of usable urban land for housing construction.
* The capital base of the Housing and Urban Development Corporation
(HUDCO) is being increased by Rs.110 crore from the budget so that it may
leverage more funds for housing construction.
* I also have some tax incentives for housing which I will outline later in my
speech.
Infrastructure
24. The acuteness of our infrastructure problems is equalled only by our resolve
to tackle them. One of the major planks of this budget is to provide strong stimulus
to the infrastructure sector through larger public and private investment in these
sectors. This will also help to boost industrial growth and overall economic activity.
25. The plan outlay for the key infrastructure sectors of Energy, Transport and
Communications in the revised estimates for 1997-98 was Rs.45,252 crore. I am
happy to announce that the outlay for these sectors for the current year will be
Rs.61,146 crore. This is an increase of 35 per cent. I am hopeful that this steep
increase in investments will trigger industrial activity and revive rapid economic
growth.
26. Within a few weeks of taking office, the government passed an important
ordinance for establishing Central and State Electricity Regulatory Commissions
with the primary objective of rationalising electricity tariffs. This will go a long way
towards enhancing investor confidence in the power sector and facilitate raising
resources for higher public and private investment. We have also simplified the
procedures for extending sovereign counter guarantees for a few “Fast Track” power
projects which were held up for long. We now expect early financial closure of these
projects. The total plan outlay for Ministry of Power is being increased to Rs.9,500
crore as against Rs.6,738 crore in RE 1997-98.
 8
27. The outstanding dues from State Electricity Boards to major public sector
undertakings such as NTPC and Coal India amount to about Rs.10,000 crore. These
large outstanding dues are serious impediments to investment by these public sector
undertakings. The government will evolve a guarantee scheme to cover such dues.
On the strength of such guarantees, the PSUs concerned will be able to raise resources
either by securitising these debts or directly entering the market for tapping resources.
This would help these enterprises to raise resources to fund large projects in the
power and coal sectors. The resulting investment will also boost industrial growth
and investment through linkage effects.
28. We must build more roads and the quality of our roads must also improve.
Our National Highways must be brought up to international standards. I am providing
Rs.500 crore for the National Highways Authority of India to catalyse new road projects
including four-laning of existing National Highways. I shall announce some more
measures for this sector in Part B of my speech.
29. To enhance long-term finance for infrastructure investment in the private
sector, the Infrastructure Development Finance Company Limited (IDFC) was
incorporated as a non-government company in 1997. I am happy to inform the
House that the IDFC has tied up its paid up equity capital of Rs.1,000 crore, including
equity participation of Rs.400 crore by nine foreign investors and has now commenced
operation. In order to put IDFC on par with other all India public Financial Institutions
in the matter of fiscal incentives and fund raising benefits extended to these
institutions, it is proposed to make necessary amendments to the Companies Act.
30. Provident funds are a potentially important source of funding for private
sector infrastructure projects. The present pattern of investment prescribed for
provident funds does not permit any investment in securities of private sector
infrastructure projects. I propose to provide some flexibility in this regard by allowing
upto 10% of the new accretion to provident funds to be invested in private sector
securities which have an investment grade rating from at least two credit rating
agencies. This is an enabling provision which will allow the Board of Trustees
managing these funds to invest in these securities subject to their assessment of the
risk-return prospects of each security.
Education
31. Education is the key vehicle for social transformation. Universalisation of
elementary education and eradication of illiteracy are central elements of our social
policy. Government also plans to implement the Consitutional provision for making
primary education free and compulsory up to fifth standard and for girls up to the
college level.
32. This budget provides for a nearly 50 per cent increase in the total budgetary
allocation to Education, from Rs.4,716 crore in RE 1997-98 to Rs.7,047 crore in this
budget. We are committed to raising the total resource allocation for Education to 6
per cent of GDP in a phased manner.
33. The allocations under the Kasturba Gandhi Shiksha Yojana and the Mahila
Samiridhi Yojana will be integrated to support a unified Action Plan for accelerating
female education.
 9
34. Swami Vivekanand while exhorting the youth had said “A far greater work
is the sacrifice of yourself for the benefit of your race, for the welfare of humanity.”
In order to harness the limitless energy of the youth, government will formulate a
scheme for creation of a National Reconstruction Corps, which will mobilise youth
for community-based nation building activities. The scheme will also promote self-
employment of youth whereby the volunteers would simultaneously be given training
in vocations and entrepreneurship development for taking up self-employment
vocations. An inter-Ministerial Committee is being set up to work out the details.
Information Technology
35. The Prime Minister has underlined the crucial importance of Information
Technology for India. It is the fastest growing sector of the Indian economy as indeed
of the world economy. It has tremendous potential for the generation of employment,
incomes and export earnings. It can also provide millions of skilled jobs for women.
Our Information Technology specialists and software creators are second to none in
the world.
36. The government have set itself a target of making India a Global Information
Technology Power and one of the largest generators and exporters of software in the
world within ten years. A National Information Technology Task Force, headed by
the Deputy Chairman, Planning Commission has been set up, to formulate a National
Informatics Policy which will help achieve our objectives.
37. Our software companies operate in a highly competitive global market and
the skilled professionals working in these companies have attractive opportunities
abroad. Our companies need flexible systems of incentives to retain their human
resources. They have sought permission to offer stock option schemes to their Indian
employees linked to ADR/GDR issues abroad, under which their employees will be
eligible for ADR/GDR stock options. In recognition of the excellent work being done
in this sector, and its very special circumstances, the government have decided to
formulate a special scheme to allow such options for the software sector. The details
of the scheme will be notified separately.
38. I also have some fiscal proposals to support rapid development of this crucial
sector which I will present later in my speech.
Financial Sector
39. A mature and well functioning financial system is essential for promoting
savings, channelling investment into the most productive activities and ensuring an
efficient payments mechanism. The East Asian financial crisis has highlighted the
importance of prompt action to strengthen our financial system. The recently
submitted Narasimham Committee Report has provided many recommendations
which are being examined in consultation with RBI. However, I am happy to announce
that decisions have been taken on some important recommendations.
* The relatively high level of Non-Performing Assets (NPAs) in our public
sector banks is a cause for concern. Net NPAs, averaging 9 per cent in
1996-97, must be brought down to below 5 per cent by the year 2000-
2001. As one way of reducing NPAs, Debt Recovery Tribunals will be
strengthened and more Tribunals will be set up to cover all States.
 10
* A few banks have particularly high NPAs. These banks will be encouraged,
on an experimental basis, to establish Asset Reconstruction Companies,
which will takeover the NPAs of the bank at their realisable value and swap
them with special bonds to be held by the bank. The Asset Reconstruction
companies will concentrate on recovery of dues to realise the maximum
value for the assets transferred to them.
* To strengthen the underlying health of our banks, RBI is raising the
minimum required Capital Adequacy Ratio for banks from the present 8
per cent to 9 per cent by March 31, 2000 and to 10 per cent by as early as
possible thereafter. RBI will also announce certain other enhancements of
prudential norms in regard to asset classifications, income recognition,
risk weights, etc.
* Our financial system today works under the burden of several archaic laws
regarding transfers of and transactions in properties and financial
instruments. An Expert Group is being set up to propose precise legal
amendments in the key laws to make the provisions consistent with modern
financial and banking practices.
40. Non-Bank Finance Companies (NBFCs) perform an important role in our
financial sector. But regulation of this sector has to improve to protect unwary small
investors. The Reserve Bank of India Act was amended last year with a view to laying
down a framework for improved regulation of NBFCs. RBI has recently issued
guidelines for registration as also for effective regulation of NBFCs. Our objective
will be to develop a framework of prudential regulations and a supervisory system
which will foster the development of a healthy financial system and also provide
transparent disclosure norms leading to greater depositor awareness to enable the
investors to take well informed investment decisions.
41. Along with reform of the banking sector, it is necessary to move forward
with reforms in insurance which has hitherto been a public sector monopoly. In
order to provide better insurance coverage to our citizens and also to augment the
flow of long-term resources for financing infrastructure, I propose to open the
insurance sector to competition from private Indian companies. The Insurance
Regulatory Authority will also be converted into a statutory body. Necessary legislation
will be introduced later in the year.
FEMA and Money Laundering
42. The present Foreign Exchange Regulation Act, 1973 is outdated and is no
longer in keeping with the needs of the economy and the changes that have taken
place in foreign exchange markets and transactions. We have moved to full current
account convertibility. It is no longer appropriate to deify foreign exchange as
something special and maintain a burdensome and highly regulatory structure around
this deity. Accordingly, government have decided to repeal FERA and replace it with
a new Foreign Exchange Management Act (FEMA), which would be consistent with
the needs of a modern economy. The new Bill will be introduced in this session of
Parliament.
43. At the same time, I want to assure the House that the replacement of FERA
by FEMA is in no way intended to give license for illegal transactions to drug peddlers,
 11
terrorists, arm smugglers and other perpetrators of heinous economic crimes. Indeed,
to protect our society from the globally recognised and, growing problem of money
laundering, I will also bring an anti Money Laundering Bill before the House
simultaneously with FEMA.
Capital Market
44. I am proposing a number of measures to strengthen our capital markets:
* The Securities and Exchange Board of India (SEBI) has approved the
introduction of trading in stock index futures as a way of providing greater
opportunities for hedging and inducing more liquidity into the market. The
government will bring forward the necessary amendment to the Securities
Contracts (Regulation) Act to enable derivative instruments to be treated
as securities.
* Foreign institutional investor (FII) debt funds are today allowed to invest
only in listed debt securities. I propose to allow them to invest in unlisted
domestic debt securities also; the risk of default would be borne by the FIIs.
* To encourage modernisation of broker services, a one time permission was
given last year to stock brokers to corporatise their businesses without
attracting capital gains tax. I propose to extend this exemption by one year.
* To encourage more primary public issues, I am proposing certain changes
to expand the income tax deductibility of expenses incurred on public issues.
* After some of the turbulent events in the stock markets in recent years, a
special effort must be made to restore the confidence of small investors. I
am asking SEBI to devote special attention to strengthening the institutional
arrangements for protecting small investors from defaults and financial
failures of brokers and other market intermediaries.
Non-Resident Indians
45. Whenever I have travelled outside India, Non-Resident Indians (NRIs) have
expressed a sincere desire to contribute meaningfully to the development of India. I
believe NRIs constitute a huge, untapped potential for India’s development. I propose
the following steps to encourage NRIs to participate in the development of their
country of origin:
* At present NRIs are allowed to purchase shares in Indian companies in the
secondary market subject to a limit of 1 per cent of the company’s total
equity for individual NRIs and NRI overseas corporate bodies, with a 5 per
cent limit for aggregate NRI/OCB investments in the company. These limits
were imposed many years ago when our capital market regulations were
much weaker and there were no rules governing acquisition and takeovers.
The situation has changed materially in both these respects. I, therefore,
propose to raise the individual investment limit of 1 per cent for NRIs to 5
per cent and the aggregate limit for all NRI investments in a company from
5 per cent to 10 per cent.
* NRIs have also complained to me that the procedures governing their
participation in our share markets are extremely cumbersome and onerous.
I am having these procedures thoroughly reviewed with a view to modifying
them to facilitate investment by NRIs in our capital markets.
 12
* The Unit Trust of India will launch a new India Millennium Scheme which
will be open for subscription in dollars only by NRIs. The money collected
under this scheme would be invested in shares of Indian companies with
high potential for growth and in high quality Indian debt. The details of the
scheme will be announced shortly.
* The State Bank of India is launching a new Resurgent India Bond
denominated in foreign currencies for subscription by NRIs. This will enable
NRIs to contribute to the flow of resources for our country’s development,
especially for building up infrastructure. The bond will be fully repatriable
and the government will extend tax concessions similar to those currently
available to NRI deposits to this new bond. The details of the scheme will be
notified separately. I am confident that NRIs will welcome this initiative
and will contribute liberally to these Bonds.
46. I have one more significant announcement to make for NRI’s. Government
have decided to draw up a scheme for issuance of a Persons of Indian Origin (PIO)
Card for those living abroad and having foreign passports. The PIO Card, which
would be extended to persons of Indian Origin settled in countries to be specified by
government would besides introducing a visa-free regime, also confer some special
economic, educational, financial and cultural benefits. The details are being worked
out.
Decentralisation and Expenditure Restructuring
47. Government have already appointed a Special Task Force on Devolution of
Powers to States, under the Chairmanship of Shri Bhairon Singh Shekhawat, to
examine and recommend measures for devolution of additional financial powers to
the States and additional or alternative means by which States can raise more
resources. The first report of the Task Force has been received. We are examining
the recommendations in consultation with the RBI.
48. The distinction between plan and non-plan expenditures in our budgetary
system has created several problems. It has led to an excessive focus on so called
plan expenditures with a corresponding neglect of items such as maintenance which
is classified as non-plan. Various bodies, including the Finance Commission, have
advocated the elimination of the plan and non-plan distinction in the budget. I propose
to constitute a Task Force, including representatives of Planning Commission, Finance
Ministry, Comptroller and Auditor-General of India and State Governments to examine
these issues in a comprehensive manner and to make recommendations for a
functionally viable and more focussed presentation of government expenditure in
the budget.
49. A related problem is the proliferation of Central Sector and Centrally
Sponsored Schemes over the years. There is a need to rationalise these, with the
objective of reducing overlaps and duplication, modifying procedures and norms
and making them more easily accessible to the intended beneficiary. The Task Force,
mentioned above, will also advise on this issue.
Development of North Eastern Region
50. The government have already decided to restructure the North Eastern
Council (NEC) for speedy implementation of important infrastructural programmes
 13
in this region. Sikkim will also be included in the Council. Necessary legislation will
be introduced in Parliament to effect these changes.
51. Furthermore, it has been decided that a non-lapsable Central Resource
Pool will be created for deposit of funds from all Ministries where the plan expenditure
on the North Eastern region is less than 10 per cent of the total plan allocation of the
Ministry. The difference between 10 per cent of the allocation and the actual
expenditure incurred on the North Eastern region will be transferred to the Central
Pool, which will be used for funding specific programmes for economic and social
upliftment of the North Eastern States.
52. The North-Eastern Development Finance Corporation Limited (NEDFi)
promoted by public sector financial institutions and banks was incorporated in 1995.
NEDFi strives to respond to the specific needs of industries in the North-East. At
present there is one State Financial Corporation (SFC) in Assam and twin function
Industrial Development Corporations (IDCs) in some other States. In order to foster
healthy and efficient growth of these institutions, I am proposing that the refinancing
function for industrial loans of SFC/IDCs of the North-East will be undertaken
henceforth by NEDFi, rather than IDBI/SIDBI as at present.
Disinvestment/Privatisation/PSU Reform
53. The regular budget takes credit for a receipt of Rs.5,000 crore from
disinvestment in the current year. In order to expedite the process the government
have decided to disinvest specified portions of equity from IOC, GAIL, VSNL and
CONCOR. As part of an overall strategy to restructure Indian Airlines and expand its
capacity, government have decided to restructure the capital of Indian Airlines and
also to undertake a phased disinvestment in this company, over three years, bringing
the government’s equity holding down to 49 per cent.
54. Some public sector undertakings have consistently incurred large losses.
Experience and studies by independent organisations, have conclusively established
them to be unrevivable. Nevertheless, a decision on their closure has been delayed
only on account of the concern for the interest of the workers. In order to find a
viable and satisfactory solution to this dilemma, the government have decided to
provide a safety net to the workers of enterprises destined for closure by providing a
liberal and attractive compensation package prior to closure. At present, when a
unit is closed, the workers are only entitled to retrenchment compensation under
the Industries (Development and Regulation) Act, which is only 15 days wages for
each completed year of service. To make the compensation package attractive, it is
proposed to make applicable the benefits of VRS package, namely 45 days wages for
each completed year of service, subject to the maximum wage or salary accruable on
the basis of the balance of years of service left to all the workers of these public
sector units. As a further improvement to the package, the workers of these units
will also be eligible for a maximum of 60 months or 5 years salary or wages as
compensation in the case of all those who have completed not less than 30 years of
service. This would mean that all those who have put in more than 30 years of
service will get more than the normal VRS. The other conditions of the VRS will
apply and this offer will be made time bound.
55. A separate Restructuring Fund is being constituted for this purpose and
these public sector enterprises will be advanced funds from the budget to offer a
 14
compensation package to the workers. Once the labour is separated, the assets of
the company will be available for disposal at the best economic price. The proceeds
of the disposal, after settling all pending liabilities, will be credited to the Restructuring
Fund which will get recouped to that extent. This would enable the fund to operate
on atleast a partially self-sustaining basis and it is expected that, in the course of
time, budgetary support for the fund will gradually diminish.
56. Government have also decided that in the generality of cases, the government
shareholding in public sector enterprises will be brought down to 26 per cent. In
cases of public sector enterprises involving strategic considerations, government
will continue to retain majority holding. The interest of workers shall be protected in
all cases.
Budget Estimates for 1998-99
57. As Hon’ble Members are aware details of the revised estimates for 1997-98
were presented along with the interim budget in March 1998. I am, therefore, not
going over those estimates again. The figures that are given below are the budget
estimates for 1998-99. I shall compare them with the revised estimates for 1997-98,
since budget estimates are after all estimates. What really matters is the expenditure
in the previous year and the increase proposed in this year ’s budget.
58. I shall now briefly go over the budget estimates for 1998-99.
59. For 1998-99, the total expenditure is estimated at Rs.268107 crore. Of
this, Rs.72,002 crore has been provided as budget support for Central, States and
UT Plans and balance Rs.1,96,105 crore is for non-plan expenditure. Hon’ble Members
will be pleased to note that the budget support for the plan has been increased by
Rs.11,372 crore from Rs.60,630 crore in revised estimates 1997-98, which is the
largest increase ever in absolute terms. Even in percentage terms the 18.8 per cent
increase is the highest in the last decade, except for one year.
Plan Expenditure
Central Plan
60. Total Central plan outlay at Rs.1,05,187 crore will be higher by Rs.24,154
crore from the last year’s level of Rs.81,033 crore. Gross budgetary support for the
Central plan is being enhanced from Rs.33,629 crore in the revised estimates 1997-
98 to Rs.42,464 crore. The balance will be met by the internal and extra-budgetary
resources of the Central Public Sector Enterprises. Gross budgetary support for the
Central plan includes provision of Rs.5,741 crore for externally aided projects.
61. The plan allocations reflect our dominant priorities. The plan allocation for
the Ministry of Agriculture has been increased by 58 per cent from Rs.1807 crore to
Rs.2,854 crore.
62. For 1998-99, the plan allocation for Ministry of Rural Areas and
Employment is Rs.9,912 crore, an increase of Rs.1,556 crore over RE 1997-98 of
Rs.8,356 crore.
63. The plan allocation for Ministry of Health and Family Welfare is Rs.3,684
crore, an increase of 34% over RE 1997-98 of Rs.2,747 crore.
64. The plan allocation for the Department of Education has been increased
substantially from Rs.3,351 crore to Rs.4,245 crore.
 15
65. The plan allocation for Ministry of Welfare is being increased by 91 per cent
from Rs.804 crore to Rs.1,539 crore. It includes Rs.92 crore for National Backward
Classes Finance and Development Corporation, Rs.41 crore for National Minorities
Development and Finance Corporation, Rs.60 crore for share capital contribution to
State Scheduled Castes Development Corporations, Rs.28 crore for National
Handicapped Finance and Development Corporation and Rs.10 crore for National
Safai Karmachari Finance and Development Corporation.
66. In order to sustain our quest for excellence in frontier areas of scientific
research, the plan allocation for Department of Atomic Energy is being enhanced by
68 per cent from Rs.828 crore to Rs.1,391 crore and the plan allocation for Department
of Space is being raised by 62 per cent from Rs.850 crore to Rs.1,381 crore.
67. For tapping the potential of non-conventional energy sources, the plan
allocation for the Ministry of Non-Conventional Energy is being more than doubled
from Rs.190 crore to Rs.404 crore.
68. The plan allocation for the Ministry of Environment and Forests is being
increased by 60 per cent from Rs.440 crore to Rs.704 crore.
69. The budgetary support for the Ministry of Civil Aviation and Tourism is
being more than tripled from Rs.122 crore to Rs.379 crore.
70. The plan allocation for the Department of Women & Child Development is
being stepped up from Rs.1,026 crore to Rs.1,226 crore.
Central Assistance for States and UTs’ Plan
71. I am providing Rs.29,538 crore as Central plan assistance to States and
Union Territories in budget estimates 1998-99 compared to Rs.27,001 crore in the
revised estimates 1997-98. The normal Central Assistance for State plan is proposed
to be enhanced from Rs.12,888 crore to Rs.15,037 crore. The Special Central
Assistance for Tribal Sub-Plan is proposed to be enhanced from Rs.330 crore to
Rs.380 crore. The Additional Central Assistance for externally aided projects is placed
at Rs.5,000 crore. Assistance for Basic Minimum Services and Slum Development
schemes is proposed to be enhanced from Rs.2,873 crore to Rs.3,760 crore.
New schemes
72. A new experimental crop insurance scheme is being launched in 24 selected
districts to cover non-loanee farmers with a provision of Rs.100 crore.
73. A new scheme of Technology Mission on cotton is being launched with a
provision of Rs.60 crore.
74. A new scheme for rehabilitation of tribals displaced from National Parks
and project areas is being launched with a provision of Rs.25 crore.
Non Plan Expenditure
75. Total non-plan expenditure in 1998-99 is estimated to be Rs.1,96,105
crore compared to Rs.1,74,615 crore in revised estimates 1997-98.
76. The provision for interest payments has increased from Rs.65,700 crore in
RE 1997-98 to Rs.75,000 crore.
 16
77. The provision for Defence expenditure has been increased substantially
from Rs.36,099 crore in RE 1997-98 to Rs.41,200 crore. I will consider further increase
in the budgetary support during the course of the year, if necessary. There can be no
compromise in our defence preparedness.
78. An amount of Rs.9,000 crore is being earmarked for Food subsidy in 1998-
99 representing an increase of Rs.1,500 crore over RE 1997-98. The provision for
sugar subsidy has been retained at Rs.400 crore. An increase in food subsidy has
become necessary due to recent revision of minimum support price for wheat
procurement and also to clear arrears pertaining to previous years.
79. Pursuant to the change in the selling price of urea, the provision for subsidy
on indigenous nitrogenous fertilisers is being reduced from Rs.6,600 crore in RE
1997-98 to Rs.6,000 crore. The subsidy on decontrolled phosphatic and potassic
fertilisers is being increased from Rs.2,600 crore in RE 1997-98 to Rs.3,000 crore.
80. Grants to States is being enhanced in 1998-99 from Rs.4,114 crore in RE
1997-98 to Rs.6,314 crore representing an increase of Rs.2,200 crore. Of this, the
increase of Rs.950 crore is due to assistance to the States for improvement in the
pay & allowances of the university and college teachers. The balance of the increase
is mainly due to grants under Tenth Finance Commission’s award.
81. The provision for pension is being increased by Rs.459 crore over RE 1997-
98 to Rs.7,342 crore. This provision takes into account the effect of Government’s
decision to raise the age of superannuation from 58 years to 60 years. This will also
have have an impact on the Small Savings Collections. The provision for loans to
States and Union Territories against net small savings collections is being kept at
Rs.14,200 crore against the provision of Rs.15,732 crore in RE 1997-98.
82. A provision of Rs.1,482 crore has been made for non-plan loans to public
sector enterprises mainly for payment of salaries and wages to the employees of sick
and convalescent PSUs.
Revenue Receipts
83. I shall now turn to the revenue receipts.
84. Hon’ble Members are aware that on the basis of a consensus reached in
the Third Meeting of the Inter-State Council held on July 17, 1997, the then
government had approved in principle to accept the recommendations of the Tenth
Finance Commission regarding the alternative scheme of sharing of Centre’s tax
revenues with the States. I am happy to announce that we have ratified this decision.
Accordingly, I propose to shortly introduce a Constitution Amendment Bill to give
effect to this alternative scheme subject only to one modification. The modification is
that the percentage share of States’ share in the gross proceeds of Central taxes may
be reviewed by successive Finance Commissions instead of freezing it for fifteen
years as suggested by the Tenth Finance Commission.
85. Gross tax revenues at the existing rates of taxation are estimated at
Rs.1,48,506 crore. As Hon’ble Members are aware, we had made a provision of
Rs.7,594 crore in the RE 1997-98 for States’ share in the proceeds of the Voluntary
Disclosure of Income Scheme, 1997 as the collections were estimated to be
 17
Rs.10,050 crore by March 31, 1998. However, the actual collection is reported to be
about Rs.1,000 crore less. After making adjustment for the excess share paid to the
States, I am providing Rs.39,074 crore as the share of taxes of the States. Thus, the
Centre’s net tax revenue will be Rs.1,09,432 crore over RE 1997-98 of Rs.99,158
crore. Non-tax revenues are estimated to increase from Rs.39,356 crore in RE 1997-
98 to Rs.45,137 crore this year. I have taken credit for Rs.2,800 crore as license fee
from the operators of cellular and basic telecom services and Rs.4,200 crore as net
surplus profits of the Reserve Bank of India.
86. The net revenue receipts for the Centre, including non-tax receipts, are
expected to increase from Rs.1,38,514 crore in RE 1997-98 to Rs.1,54,569 crore in
1998-99.
87. In the area of capital receipts, market borrowings are placed at Rs.55,931
crore. Net external assistance is estimated at Rs.2,337 crore. I am also taking credit
for receipts from disinvestment of equity in public sector enterprises of Rs.5,000 crore.
88. I shall come to the fiscal deficit in Part B of my speech.

PART B
89. Sir, I now present my tax proposals.
90. There has been much talk of a tough budget. The temptation to raise taxes
in the given situation was indeed great. But I recognise that direct tax policy must
impart stability and confidence both to individuals and corporates. Therefore, any
uncertainty in this regard must be ended. Tax rates introduced last year are moderate
enough. I do not propose to introduce any changes in the rate structure either for
individual or corporate taxes. I do hope that long-term stability in tax structure
would create virtuous circles of increased productivity, voluntary compliance and
enhance our tax widening efforts. In fact, I am going to announce a couple of
concessions. Considering the difficulties experienced by the tax payers at the marginal
level, the level for tax exemption is being raised from the existing limit of Rs.40,000
to Rs.50,000.
91. Salary earners having income upto Rs.1 lakh will be further pleased to
know that I propose to raise the ceiling of standard deduction in their case from
Rs.20,000 to Rs.25,000. Their pleasure, I hope, will be happily shared by those
salary earners whose income is more than Rs.5 lakhs. They will henceforth not be
entitled to this deduction. For salary earners having income between Rs.1 lakh and
Rs.5 lakhs, no change is proposed in the existing position. I also propose to enhance
the ceiling of tax-free reimbursement of medical expenses from Rs.10,000 to
Rs.15,000.
92. In a country of our size, it is a matter of great anxiety that the total number
of assessees constitutes less than 1.25% of our population. The scope for tax widening
remains the single most formidable challenge in the area of direct taxes. It is well
accepted tenet of taxation policy that moderate rates of taxes only make sense if the
 18
net is wide and the scope of evasion progressively minimised. Towards this objective,
I propose to take some important initiatives. Last year, a scheme was introduced to
cover 12 important cities where if you fulfil two of the four criteria, namely, possession
of a house, subscription to a telephone, spending on foreign travel and possession of
a motor vehicle, you would be obliged to file an income-tax return. This scheme had
several lacunae which I propose to remove. In the first instance, the scheme is being
extended now to cover 23 more cities in India taking the total coverage to 35 cities.
The net itself is being enlarged to include two additional criteria, namely, holding a
credit card and membership of expensive clubs, taking the total parameters to six.
Finally, the matching of two out of four parameters apart from being an
administratively onerous task provided an escape route to many potential assessees.
I believe that if any one fulfils one of the six criteria, it would be reasonable to ask
the individual to file his income-tax return. It could thereafter be determined whether
he is liable for payment of taxes or not. This revised “One-by-Six”, as the scheme
would now be known, is a significant initiative in our tax widening efforts and it is
my intention to raise the total number of individuals filing their income-tax returns
by at least 50 percent during a full fiscal year.
93. Coupled with tax widening, tax evasion continues to be a serious handicap.
While efforts at enforcement would be strengthened, I propose to undertake a new
initiative in making it obligatory for assessees to quote their PAN or GIR number
mandatorily in respect of certain high value transactions. These transactions
would be :-
* Purchase & Sale of immovable property
* Purchase & Sale of motor vehicles
* Transaction in shares exceeding Rs.50,000
* Opening of new bank accounts
* Fixed deposits of more than Rs.50,000
* Applications for allotment of telephone connection
* Payment to hotels exceeding Rs.25,000/-.
With increased usage of computerisation, this data will be fully utilised for increasing
the tax-base and for preventing the leakage of revenue.
94. We must recognise that the cumbersome nature of our income tax forms
coupled with complex procedures is a serious deterrent to an honest individual in
becoming an assessee. I, therefore, propose to introduce, for the first time, a simple
one page taxpayer-friendly return form to be hereinafter called, ‘SARAL’, applicable
to all non-corporate taxpayers. SARAL can be filled up easily without the aid of
Chartered Accountants or Tax Advisors. The ‘SARAL’, I hope, would become popular
enough, through voluntary compliance and the assistance of NGOs, which I propose
to muster, along with mobile vans for important cities, can be widely distributed and
collected easily on spot. This will, apart from contributing to our tax widening effort,
also make an important psychological difference in the mindset of potential tax
assessees.
95. Litigation has been the bane of both direct and indirect taxes. A lot of
energy of the Revenue Department is being frittered in pursuing large number of
litigations pending at different levels for long periods of time. Considerable revenue
 19
also gets locked up in such disputes. Declogging the system will not only incentivise
honest taxpayers, enable government to realise its reasonable dues much earlier
but coupled with administrative measures, would also make the system more user-
friendly. I, therefore, propose to introduce a new scheme called “SAMADHAN”. The
scheme would apply to both direct taxes and indirect taxes and offer waiver of interest,
penalty and immunity from prosecution on payment of arrears of direct tax at the
current rates. In respect of indirect tax, where in recent years the adjustment of
rates has been very sharp, an abatement of 50 per cent of the duty would be available
alongwith waiver of interest, penalty and immunity from prosecution.
96. Legal measures are also being proposed to limit and expedite litigation.
These include enhanced scale of fees for filing appeals before the Appellate
Commissioner and the Income Tax Appellate Tribunal, abolition of the level of Deputy
Commissioner (Appeals), provision of direct appeals to High Courts to reduce delay,
and also extension of the scope of the Authority for Advance Ruling to notified
categories of resident tax payers.
97. Moderate rates and large concessions do not go hand in hand. I have,
therefore, carried out a review of the various concessions and exemptions under the
Income-tax Act. I find that many of them are no longer necessary and some of them
are also being used for tax avoidance. I, therefore, propose to withdraw many of
these provisions. These include exemption to the Export Import Bank of India and
exemption in respect of certain perquisites of foreigners employed in India. The
blanket exemption in respect of educational and medical institutions which is being
misused, is proposed to be withdrawn, compelling such institutions to come under
a discipline. However, safeguards are being provided to ensure that the institutions
genuinely serving the social cause in either field do not lose the existing benefits.
98. I also propose to plug certain loopholes. Rule 5(a) of the First Schedule to
the Income-tax Act relating to computation of profit of insurance business other
than life insurance business is being amended to prevent leakage of revenue.
Similarly, section 10(23G) of that Act is being recast to serve the objective of
infrastructure financing without misuse of the concession. Under the existing
provisions, there is no mechanism to ensure that the tax free funds raised by an
infrastructure enterprise are actually used for infrastructure development within a
reasonable time and are not used for any other purpose. I propose to provide such
a mechanism.
99. Gift-tax has been levied in India since 1958. The revenue yield from this
tax has been insignificant. Last year we collected barely Rs.9 crore. The Gift-tax Act
has also not been successful as an instrument to curb tax evasion and avoidance. I,
therefore, propose to discontinue the levy of gift- tax on gifts made after 30th
September, 1998. At the same time, to ensure that there are no leakages of income-
tax revenue through the mechanism of gifts, I propose to tax the gifts under the
Income-tax Act itself in the hands of the recipients. However, the gifts from non-
residents including NRIs through banking channels will continue to enjoy exemption
as at present.
1 0 0 . I have already said that housing is an area which requires our utmost
attention. Therefore, I propose several incentives to encourage house-building activity.
 20
These include :-
* Tax holiday for approved housing projects - 100 per cent deduction from
profits for first five years and 30 per cent deduction for subsequent five
years.
* Increased deductions against income from house property - deduction for
repairs and collection charges increased from 1/5th to 1/4th and deduction
for interest on borrowed capital in case of self-occupied property increased
from Rs.15,000 to Rs.30,000.
* Carry-forward of losses from house property against future income under
the same head to be allowed for 8 years.
* Deduction equal to 50 per cent of the profits to companies engaged in
housing projects aided by the World Bank.
* Section 80GG in respect of deduction for rents paid is being reintroduced.
* Exemptions to certain specified properties like commercial complexes under
the Wealth-tax Act.
1 0 1 . Other areas in the social sector for which new tax incentives are proposed
or the existing ones being increased include employment generation, improvement
of environment, upliftment of women, road safety, cooperatives and medical expenses
of the handicapped.
1 0 2 . I propose to allow a new deduction to companies with a view to encourage
them to employ additional work force. An amount equal to 30 per cent of additional
wages paid to the new workmen will be allowed as a deduction against profits, subject
to certain conditions.
1 0 3 . For improvement of environment, I propose to allow 100 percent deduction,
subject to a ceiling of Rs.5 lakhs, to undertakings engaged in the collection or
processing of biodegradable waste. I also propose to make activities which encourage
the production of bacteria induced fertilisers eligible for 100 per cent deduction
under section 35AC of the Income-tax Act. Necessary amendment in the rules will
be notified for this purpose. Similar benefit is proposed to be extended to the activities
of establishing and running of educational institutions, hospitals and medical facilities
in rural areas exclusively for women and children and also creches and schools for
the children of workers employed in factories or at project sites. I also propose
similar amendment of rules to make activities which promote road safety and traffic
awareness and prevent accidents eligible for 100 per cent deduction under section
35AC.
1 0 4 . The promotion of sports and games in the country needs to be encouraged.
I propose setting up of National Sports Fund and further propose that donations
made to the Fund will be eligible for 100 per cent deduction.
1 0 5 . I propose to extend 100% tax holiday granted to industrial undertakings
located in any industrially backward State or district till the year 2000. I also propose
similar extension of tax holiday to power sector upto the year 2003 and also to new
refineries set up after 1st October, 1998. I also propose to extend infrastructure
status to inland waterways and inland ports.
 21
1 0 6 . I further propose tax holiday benefits to radio paging services and services
provided by satellite owners for telecommunication.
1 0 7 . I also propose several measures in response to demands from business
and industry. Certain categories of business reorganisations are proposed to be
freed from any additional tax liability or loss of tax benefits keeping in view the
necessity of such reorganisation consequent on economic liberalisation. No capital
gain would be charged and the benefit of carry-forward of losses and unabsorbed
depreciation would be allowed in case of specified reorganisations. Intangible assets
are proposed to be allowed depreciation at the rate of 25 per cent. Provisions for
amortisation of preliminary expenses are proposed to be liberalised. The period of
amortisation is proposed to be reduced from 10 years to 5 years and the rate of
deduction will consequently be doubled. Stock lending is proposed to be exempted
from capital gains.
1 0 8 . Delay in refund of excess tax collected tantamounts to denial of justice. It
is a source of constant harassment, particularly of small tax payers. I intend to
mitigate this difficulty by effecting an amendment in section 192 of the Income-tax
Act which will enable adjustment of loss from house property against salary income,
at the source itself. This, I believe, will eliminate a large number of refund claims.
1 0 9 . In response to demands from tax payers, I propose to take further measures.
Under the existing provisions of section 44AA of the Income-tax Act, every person
carrying on business or profession is required to maintain account books, if his
income from business exceeds Rs.40,000 or his total turnover exceeds Rs.5 lakhs.
Considering the increased cost of engaging accountants, I propose to enhance these
limits to Rs.1,20,000 and Rs.10 lakhs respectively. I further propose that the penalty
leviable at the minimum rate of Rs.100 per day for failure to furnish certificates of
tax deduction or collection at source under section 203 or to deliver copies of
declarations under section 197A, shall not exceed the amount of tax deductible or
collectible, as the case may be. Presently, there is no such ceiling on the quantum of
penalty leviable which causes hardship, particularly to small businessmen.
1 1 0 . Certain demands of the film industry have also engaged my attention and
I propose to give relief to them. Under the existing rules, if a film is released on
commercial basis at least 180 days before the end of the previous year, full
amortisation of the cost incurred on production or acquisition of distribution rights
of the film is allowed in the year of release itself whereas if the film is released later,
full amortisation is not allowed in that year. Considering that nowadays film producers
and distributors release a large number of prints simultaneously to counter the
threat of video-pirates and cable television, resulting in shorter life span for
exploitation of films, I propose to reduce the aforesaid period of 180 days to 90 days.
This will enable the film industry to quickly recoup the cost of film production and
distribution. I also propose that producers of films, who are required to furnish
information in respect of all payments over Rs.5,000 to the Income-tax Department
in any financial year would have to do so now only in respect of payments over
Rs.25,000. I hope these measures would inspire the film industry to make better
and healthier films.
1 1 1 . A controversy has arisen recently regarding the deductibility of payments
by way of extortion money. To set the controversy at rest, I propose to explicitly
 22
provide retrospectively since the inception of Income-tax Act, 1961 that any money
paid by way of extortion will not qualify for deduction as a business expense. As
further rationalisation measure, I propose to make certain amendments with regard
to block assessment procedure and treatment of MODVAT credit in the valuation of
inventories and capital assets.
1 1 2 . The limit of room rent in hotels for the purpose of attracting expenditure
tax is proposed to be increased from Rs.1200 to Rs.2000 per day.
1 1 3 . Taxpayers all over the world have a sense of pride in discharging their
legitimate dues to the government and the society recognises the important
contribution they are making in enabling the State to discharge its responsibilities.
In this country, regrettably, the culture of pride by honest taxpayer and a social
recognition of his important role has yet to evolve. We must make a change in this
mindset. Towards this objective, I propose to introduce a scheme called “SAMMAN”
to demonstrate the society’s recognition of their important contribution to the national
cause. The details of the facilities and recognition to be conferred on the taxpayers
and PAN holders would be separately announced.
1 1 4 . I hope the above measures alongwith SARAL, SAMMAN and SAMADHAN
will go a long way in making our efforts to increase the tax payers compliance a
success. But while we are doing what we can, I call upon the people of India to do
their patriotic duty by the country and honestly pay their taxes.
1 1 5 . Before I move on to indirect tax, I would like to state that a large number of
suggestions were received from all sections of tax payers and I have got them carefully
examined. It is not practicable to acknowledge all these communications individually.
I do so now collectively and am extremely thankful to the tax payers for their valuable
suggestions.
1 1 6 . Hon’ble Members would see from the budget documents that the figure
projected by way of revenue realisation from direct taxes is Rs.48,855 crore which is
higher than the figure indicated in the interim budget. This is after taking into
account the revenue loss of Rs.950 crore, worked out on a mechanical basis, arising
out of certain proposals for reliefs and concessions placed before the House. We
intend to make this loss up and collect the budgeted amount through improved
collection of arrears, continuation of the tax base enlargement efforts, rigorous
enforcement and tightening measures reflected in the budget proposals.
1 1 7 . Mr. Speaker, Sir, our medium-term objective is to enhance the tax-GDP
ratio. As far as customs duties are concerned the process of restructuring has
resulted in a progressive reduction in tariffs, with a view to align these with
internationally acceptable levels, and the broadbanding of rates. These measures
have enhanced the competitveness of Indian industry.
1 1 8 . On the excise side, until a few years ago the regime was characterised by
a multiplicity of rates and punctuated with numerous ad hoc exemptions. As a
result, the tax structure was opaque. It is the objective of the present proposals to
introduce greater transparency in the system through a significant rationalisation
of rates. The ultimate objective of this process is to move towards a Central Value-
Added Tax (VAT) system which can then be merged with a generalised VAT. It is our
intention to move in this broad direction.
 23
1 1 9 . The domestic industry has responded favourably to the restructuring of
customs duties and has shown commendable resilience. They need to improve their
competitive efficiency to meet the challenges of global competition. But they also
have legitimate concerns which cannot be ignored. In this background, the path of
transition has to be carefully calibrated to ensure that the adjustment process for
the Indian industry is orderly without leading to serious disruption.
1 2 0 . I have received representations from a cross section of the industry about
the regime of import duties. Many Hon. Members have also written to me expressing
their concern on the general health of the domestic industry. The demands are
diverse and asymmetrical in most cases. This is for obvious reasons. While the
users of imported raw materials and other inputs or the consumers of finished
imported goods would benefit from further reduction in import duties, the domestic
producers have made a convincing case for urgent relief to the domestic industry.
1 2 1 . I have given my earnest consideration to these concerns and the competing
claims. I am persuaded about a clear disability that our commodity taxation inflicts
on the indigenous goods vis-a-vis the imported goods. While the former are subjected
to sales tax and other local taxes and levies, the import sector escapes them by their
very nature. In order to provide a level playing-field to the domestic industry, I propose
to impose an additional non-modvatable levy of 8% on imports which is approximately
equal to the burden of local taxes on domestic producers. This duty should not be
viewed as a protectionist measure but only as a response to a legitimate demand for
a level playing field. The new levy would not apply to crude oil, newsprint, capital
goods sector under a special tariff regime or goods which are subjected to additional
duties of excise in lieu of sales tax, gold and silver imported by passengers or other
nominated agencies and life saving drugs that are free from customs duties. The
levy would also not apply to goods which are currently exempt both from basic and
additional duties of customs. Similarly, goods imported for subsequent trading have
also been left out of its purview, since they bear the burden of Sales tax at the time
of first sale. The new levy will also not apply to inputs imported under export-promotion
schemes. In addition, there may be other sectors eligible for exemptions. These would
be examined and if considered appropriate notified separately.
1 2 2 . The gradual reduction of import duties in the past few years has resulted
in certain distortions and anomalies. My proposals seek to correct them as far as
found feasible without causing abrupt disruption in the duty structure.
1 2 3 . The steel industry has shown considerable resilience in the past to withstand
gradual reduction in customs duties. Last year, however, the steel industry has not
shown any appreciable growth. I propose to increase the customs duty on cold rolled
coils of iron and steel from 25% to 30%. I also propose to reduce the duty on
stainless steel melting scrap from 10% to 5% and on refractory ceramic goods from
40% to 30%. I am confident that these changes alongwith the imposition of the
special additional duty that I have proposed on the imports in general would provide
adequate relief to the steel industry.
1 2 4 . The duty on wrought copper is being raised from 30% to 35%.
1 2 5 . I do not intend to make any other changes in the duty structure applicable
to ferrous and non-ferrous metals.
 24
1 2 6 . Textile intermediates like DMT, PTA, MEG attract customs duty at 25%.
However, caprolactum which is the raw material for making nylon yarn is subjected
to a higher duty of 30% . I am reducing the duty on caprolactum also to the level of
25% so that all the major textile intermediates attract the same rate of duty. The
import duty on paraxylene, an important input for synthetic fibres and yarn, is
being reduced from a total of 15% to 5%.
1 2 7 . The decentralised sector of the textile industry generates avenues for
employment. It deserves to be encouraged by reducing cost. I propose to reduce
customs duty on apparel grade raw wool from a total of 25% to 20%. The duty on
wool waste and garnetted stock of wool is also being reduced by the same extent. I
also propose to reduce the duty on acetate and cuprammoniun filament yarn from
30% to 20%. In the same vein, machinery required for viscose filament yarn and
woollen industry is being accorded the concessional duty of 10%
1 2 8 . The import of paper and paper board has shown phenomenal growth in
terms of quantity. In order to improve the competitiveness of the domestic producers,
I propose to increase the customs duty on paper and paper board from 20% to 30%.
1 2 9 . Mr. Speaker, Sir, my government values the right to information. With a
view to further strengthen this right, I propose to reduce customs duty on standard
newsprint from 10% to 5%. I also propose to rationalise the duty structure by
subjecting glazed newsprint to the same rate of duty. Furthermore, I also intend to
exempt newsprint from the applicability of 8% across the board special additional
duty.
1 3 0 . I also propose to reduce the duty on light weight coated paper weighing
upto 51 grams per square metre for printing of magazines to a total of 5%.
1 3 1 . The customs duty on photographic chemicals is being raised from 25% to
30%. Similarly, the duty on citric acid is being increased from 30% to 40%.
1 3 2 . I propose to reduce the customs duty on jumbo rolls of cinematographic
film from 25% to10%.
1 3 3 . Motor vehicle parts are generally subjected to customs duty at 40%. However,
I.C. engines and parts thereof for motor vehicles attract a lower rate of 20%. I propose
to raise the customs duty thereon to 30%.
1 3 4 . I propose to reduce the duty on industrial diamonds from 30% to 20%.
This would help the diamond cutting tool industry.
1 3 5 . As a measure of rationalisation, I propose to reduce the duty on rayon-
grade wood pulp from 10% to 5%.
1 3 6 . Thalassaemia is a life-threatening blood-disorder. There have been requests
for exempting maltol, an input used in the manufacture of drugs for the treatment of
this disorder. I propose to fully exempt maltol from customs duty. Hydroxy ethyl
starch and dextran are used in the manufacture of artificial plasma which is free
from import duty. I propose to reduce the burden of duty on artificial plasma by
reducing the duty on hydroxy ethyl strach and dextran from 30% to 5%. I also
propose to exempt Lamivudine, which is used for the treatment of AIDS, from customs
duty.
 25
1 3 7 . Leather industry contributes significantly to our export effort. In order to
encourage its export, I propose to reduce the duty on specified machinery for leather
industry from 20% to 5%. This would also be the rate applicable to leather splitting
machinery. I also propose to reduce the duty on saddle trees from 30% to 10%.
1 3 8 . Sir, the House is aware that India has joined the Information Technology
Agreement. We are committed to abolish the import duty on products of information
technology. This is not because we are bound by the ITA but because we are convinced
that spread of information technology and freer exchange of information is the key
to success and human welfare. I propose to reduce the duty on floppy disk drives,
hard disk drives and CD-ROM drives from a total of 12% to 5%. The duty on ICs of
value exceeding one thousand rupees per piece is also being reduced to 5%. I also
propose to reduce the duty on computer parts excluding PPCB from a total of 15% to
12%. The duty on PPCB is being reduced from a total of 25% to 22%. I also propose
to reduce the duty on cathode ray tubes for colour monitors for computers from a
total of 15% to 5% and on deflection components for colour monitors for computers
from a total of 25% to 5%. My proposals also include reduction in duty on telecom
software from 40% to 30%. Such software henceforth will not be subject to any
additional duty of customs.
1 3 9 . In order to encourage the domestic telecom equipment sector, I propose to
reduce the duty on parts of such equipment to 20%.
1 4 0 . As a measure of environmental protection, I propose to reduce the import
duty on sawn wood and certain other varieties of wood from 30% to 25%. I also
propose to reduce the duty on biopesticides, which are eco-friendly , from 30% to
5%. With the same objective, I have proposed reduction of duty on membrane
electrolysers and parts from 25% to 10%.
1 4 1 . The duty on spodumene, which is an energy saving material, is being
reduced from 25% to 10%. On silicon, which is widely used in solar energy
applications, I propose to reduce the duty to half of the existing 10%.
I propose to reduce the duty on -
* Solar cells and modules from 30% to 20%
* Button cells from 20% to 10%
* Watch movements from 25% to 20%
* DC micro motors from 40% to 20%
* CD mechanism from 40% to 30%
1 4 2 . Mr. Speaker Sir, good roads are a necessity for social and economic
development. I am sure that those of us who are privileged to afford personalised
vehicles can afford to contribute to the faster development of good roads in the
country. I propose to charge an additional tax at the rate of rupee one per litre on
petrol with immediate effect. This is expected to generate an amount of Rs.790 crore
in a year which will be used for the development of roads and entirely go towards
augmenting the corpus of the National Highways Authority of India. I propose to
extend the concessions presently available to import of equipment for construction
of National Highways to other road-construction projects also.
 26
1 4 3 . The importers of precious yellow metal can certainly afford to contribute a
bit more to the national exchequer. I propose to increase the import duty on gold
from 220 rupees per ten grams to 250 rupees per ten grams.
1 4 4 . The duty free allowance for baggage is Rs.6000 at present. Many countries
do not impose any such restrictions. While we may not follow them there is need to
increase the present limit to reduce delays in clearance of passengers. I propose to
increase the baggage allowance from Rs.6000 to Rs.12000 for passengers returning
to India after a stay exceeding three days. I also propose to extend free allowance of
Rs.3000 to Indian residents returning from Nepal, Bhutan, Myanmar or China by
air, after a stay exceeding three days.
1 4 5 . There are a number of items on which it is necessary to reduce the customs
duties marginally on account of GATT binding. I do not wish to take the time of the
House in going into the details.
1 4 6 . The government is committed to provide a tax code which is consistent
with dismantling of administered pricing mechanism of petroleum products in a
phased manner. By the year 2001, the import duty on crude has to be reduced from
the current level of 27% to not more than 5%. The import duty on down stream
products like furnace oil, LSHS, HSD oil, motor spirit and ATF has also to be reduced
to the level of 10% to 15%. In this process, we will ensure an effective protection not
exceeding 20% for downstream industry by suitable differential and calibration of
import duty structure.
1 4 7 . I have initiated the process of implementing the decisions arising from the
dismantling of administered pricing mechanism. I propose to reduce the customs
duty on crude from a total of 27% to 22%. This is estimated to result in a revenue
loss of Rs.965 crore in a year. In order to recoup the loss, I propose to increase the
excise duty on motor spirit from 20% to 35%. I also propose to impose customs duty
on kerosene imported for parallel marketing at 32%, including special duty of 2%.
1 4 8 . I now come to my proposals on central excise.
1 4 9 . Mr. Speaker, Sir, the contribution of the small scale sector in the economy
cannot be over emphasised. It is a critical fast track for generating employment thus
promising support to thousands of families. The predecessor governments have been
sympathetic to the small scale sector but I am afraid they have not done enough to
encourage them so as to exploit their full potential. The fiscal incentives provided to
the small scale sector have been rather meagre for a number of years.
1 5 0 . I have taken certain important steps in this direction. I propose to raise the
exemption limit for excise purpose from Rs.30 lakhs to Rs.50 lakhs, an increase of
about 65%. The clearances between Rs.50 lakhs to Rs.100 lakhs shall be charged to
a flat nominal rate of 5%. These proposals would result in a revenue loss of Rs.300
crore in a year. This is a small price to pay to restore to health this vital sector of our
economy.
1 5 1 . Over the years the scheme of Modvat credit has been considerably liberalised.
However, the amount of Modvat credit availed has grown unexpectedly fast in recent
years, suggesting misuse of the Modvat credit scheme in the absence of a
 27

comprehensive computer net work for cross-checking modvatable invoices from a-

flung ranges. Until such a computer network becomes functional, and as a transitional
measure, I propose to restrict the availability of Modvat credit by 5% of the duty paid
in the case of inputs used in the manufacture of excisable goods. However, no
restriction is placed on the Modvat credit in respect of capital goods.
1 5 2 . My proposals regarding other changes in excise duty are guided by the
overall need to rationalise the rate-structure so as to reduce the multiplicity of rates
and ensure convergence towards a mean rate of 18% ad valorem. An ideal tax structure
would be one where, barring the mean rate, there is one lower rate for items deserving
concession and a higher rate for what may be described as demerit goods. This
would minimise the oscillations in rates and call for compression of intermediate
rates.
1 5 3 . As a first step towards a convergence to the mean rate, I propose to impose
excise duty of 8% on certain commodities. These include :
* Packaged tea
* Branded butter, cheese and ghee
* Sewing machines, other than hand operated
* Branded spices
* Branded edible preparations when produced in factories
* Preparations of meat and fish sold under a brand name
* Skimmed milk powder other than for infant feeding
* Tractors not exceeding 1800 cc
* Spectacle lenses and frames
* Slide fasteners
1 5 4 . I also propose to charge excise duty on exempted articles of plastics at a
flat rate of 5% on clearances in excess of Rs.1 crore in a financial year.
1 5 5 . In the same spirit, I propose to increase the excise duty on medical
instruments and appliances as also on pollution control equipment from 5% to 8%.
1 5 6 . A good number of commodities are subject to excise duty at 8%. Some of
them can bear a higher duty. I , therefore, propose to increase the excise duty on
these commodities to 13%.
1 5 7 . As a result, malt, certain types of cartons, medical furniture, sun glasses
and unrecorded audio cassettes will henceforth be subjected to duty at 13%.
1 5 8 . As a measure of rationalisation, I propose to increase the duty on arms and
ammunition from 18% to 25%. I, however, assure the House that arms and
ammunition for the military services will continue to be exempt from excise duty.
 28

1 5 9 . I propose to raise the duty on multi-utility vehicles from 25% to 30% and
on solid or cushion tyres also from 25% to 30%.
1 6 0 . I also propose to raise the duty on marble tiles from Rs.30 to Rs.40 per
square metre.
1 6 1 . My proposals also include reduction of excise duty on:
* Effluent treatment plants from 13% to 8%
* Diesel engine sets upto 10 HP from 13% to 8%
* Surgical and medical examination gloves from 18% to 8%
* Potassium iodate from 18% to 8%
* Electronic calculators from 18% to 8%
* Pagers from 18% to 13%
* Cellophane from 25% to 18%.
* PVC compound from 25% to 18%.
1 6 2 . I propose to exempt 100% wood-free particle boards and fibre boards made
from agro-based residues from excise duty. Henceforth, cement bonded particle board,
jute particle board, rice husk board, glass fibre reinforced gypsum board, sisal fibre
board and bagasse board will also be free from excise duty. I also propose to exempt
blocks and bricks containing more than 25% fly ash, ready mixed concrete, jute
blankets and jute felt from excise duty. Henceforth, pultruded jute articles shall
also be free from excise duty.
1 6 3 . I propose to exempt recorded audio cassettes from excise duty. I also propose
to exempt recorded video cassettes intended for television broadcasting from excise
duty. The exemption for computer software will now be broad-banded to cover all
software.
1 6 4 . The domestic nylon industry is stagnating for various reasons. I propose to
reduce the duty on nylon filament yarn from 30% to 25%.
1 6 5 . Finance Ministers are often criticised by the tax payers for their compulsive
habit to increase the burden of taxes. However, such complaint cannot be justified
by compulsive smokers. I propose to increase the excise duty on cigarettes by varying
degrees ranging from 6% to 11% of the specific rates.
1 6 6 . I have no intention of being harsh on smokers all the way. Accordingly, I
propose to reduce excise duty on matches manufactured in the cottage sector by
half from Rs.0.50 to Rs.0.25 per hundred boxes. A smaller reduction is also being
made in respect of matches manufactured by other sectors.
1 6 7 . High rates of duties are known to induce evasion and avoidance. I propose
to reduce the excise duty on alcohol-based toilet preparations from 100% to 50%. I
expect that this will improve compliance and States will get more revenue.
1 6 8 . The Maximum Retail Price (MRP) based excise levy introduced last year in
respect of certain products has been welcomed by the industry. This scheme provides
 29

for simplification and certainty in taxation. I propose to extend this scheme to a few
more commodities, such as chocolates, malted food preparations, glazed tiles, razor
blades, radio sets, domestic electrical appliances and pan masala.
1 6 9 . In the last budget, a number of services were added in the tax net. These
included the service rendered on transportation of goods by road. The House is
aware that it led to wide spread resistance and protests. As a result, this service tax
was virtually kept in abeyance and rightly so. I have decided to abolish the service
tax on transportation of goods by road. I have also decided to abolish the service tax
payable by outdoor caterers and pandal contractors. However, I have proposed service
tax on some new services. These are services provided by :
* Architects
* Interior decorators
* Management consultants.
* Chartered Accountants.
* Cost Accountants.
* Company Secretaries
* Private security services
* Real estate agents and real estate consultants
* Market research agencies
* Credit Rating Agencies
* Underwriting agencies
* Slaughter houses using mechanised means for large animals
We will examine how in respect of certain segments liable to Service Tax, the manner
and mode of payment could be further simplified to improve compliance. These new
service taxes will yield Rs.220 crore in a full year.
1 7 0 . My proposals relating to customs duties are estimated to result in a net
gain of Rs.3,304 crore in one year. In case of excise duties, my proposals are estimated
to result in gain of Rs.5,009 crore.
1 7 1 . Mr. Speaker, Sir, there can be no two opinions that we must increase the
level of voluntary compliance and our tax procedures should be simple, transparent
and hassle free. Our tax laws are yet to achieve this objective even though considerable
efforts have been made in the past.
1 7 2 . Our laws are not in tune with the need of the times. It is imperative that
they should be rebuilt on a comprehensive basis and modified to make them truly
modern. I am conscious that it is not an easy task. But it is also not impossible. I
have decided to set up an Expert Group to recast the central excise law. It will be my
Government’s endeavour to bring a new excise law before Parliament in the next
budget session of this House.
 30

1 7 3 . The government have also decided to set up a Settlement Commission for

settlement of certain categories of disputes relating to customs and excise duties.
The details of the scheme are contained in the Finance Bill. I also propose to set up
an authority for Advance Tax Rulings for Excise and Customs in view of the need for
foreign investors to be assured in advance of their likely indirect tax liability. A bill to
this effect will be introduced in Parliament in due course of time.
1 7 4 . Mr. Speaker, Sir, with our courage, determination and conviction, we freed
ourselves from the British Raj more than fifty years ago. This year the nation takes
pride in celebrating the 50th year of Independence. Our trade and industry, however,
is still not free from another Raj, namely, the Inspector Raj. We are committed to put
an end to this in the shortest possible time. I am of the view that we owe it to our
taxpayers to provide a competent, efficient, sensitive and responsive tax
administration. Indeed, it is long overdue.
1 7 5 . There is a widespread feeling that the operation and implementation of
excise laws leads to harassment of the assessees. We are earnestly desirous of bringing
about systemic changes to remedy the situation. Some of the more important
measures that are proposed, are:
* Minimising the contact points between the officials and assessees
* Reducing areas which require permission or approval
* Providing respectability to orders passed by Commissioner (Appeals) and
the Tribunal
* Simplifying the procedure for second appeal in Modvat cases
* Restricting factory visits by the staff
1 7 6 . I am conscious of the fact that there is strong resentment against the
procedures and legal obligations relating to service tax. I have removed a number of
obnoxious and deterrent provisions in law. I also propose to abolish several of the
redundant and irritating central excise rules very shortly.
1 7 7 . On the customs side, I have decided to strengthen the initiatives already
taken in the form of Fast Track Clearance Systems and the Self-Assessment System
in import clearance. Computerisation in both Customs and Central Excise
departments will be completed expeditiously so that information can be obtained
from the assessees and the importers and exporters through electronic media thereby
reducing contact between the assessees and the department.
1 7 8 . I am introducing a new culture of time-bound action by officials of the
Customs and Central Excise department. A Citizens’ Charter is being released shortly
to lay down the citizen’s rights and the obligations cast on the customs and excise
officials.
1 7 9 . Copies of notifications giving effect to the above changes in customs and
excise duties will be laid on the Table of the House in due course.
 31

1 8 0 . Finally, I have something to say on behalf of my Hon’ble colleague, the

Minister of Communications. Postal service is highly employment-intensive and
salary and allowances constitute a major part of the operating expenses of the postal
department. A revision of tariff for postal services has become unavoidable. However,
in the interest of the common man and the role of the print media in a democracy,
there will be no change in the tariff for postcard and registered newspapers. However,
the rate of competition postcard is being raised from Rs.2 to Rs.3, Inland letter from
Re.1 to Rs.1.50, letter from Rs.2 to Rs.3 for every 20 gms. or part thereof and parcels
from Rs.8 to Rs.10 for every 500 gms. or part thereof. There are also certain other
changes which are explained in the Memorandum circulated along with the budget
documents. The changes would take effect from a date to be notified after the Finance
Bill is passed. The revisions proposed are estimated to yield an additional revenue of
about Rs.270 crore in a full year and about Rs.180 crore in 1998-99. Even this
modest increase, which is necessary for sustaining postal development, will only
partially meet the cost of postal services leaving an uncovered postal deficit of about
Rs.695 crore.
1 8 1 . As a result of my tax proposals and the postal tariff revision, total
expenditure of the Central government for the year 1998-99 would be marginally
reduced to Rs.2,67,927 crore while the net revenue receipts and non-debt capital
receipts would increase to Rs.1,76,902 crore. The revenue deficit is placed at
Rs.48,068 crore which is 3% of GDP. The fiscal deficit is placed at Rs.91,025 crore
which is 5.6% of GDP. With the present state of the economy and in view of the need
for expenditure stimulus to growth, I believe further compression is not warranted
this year.
1 8 2 . Sir, it is my firm conviction that in the days to come India will stand tall on
the world’s stage because of our commitment to democracy and the pursuit of
prosperity. I call upon you to join us to strengthen freedom and opportunity, I call
upon you to join us to build a better future for every man, woman and child. As we
move together and with discipline, the future is ours. In the words of Ramdhari
Singh Dinkar :

ºÉäxÉÉxÉÉÒ BÉE®Éä |ɪÉÉhÉ +ɣɪÉ,

£ÉÉ´ÉÉÒ <ÉÊiÉcÉºÉ iÉÖàcÉ®É cè;
ªÉä xÉJÉiÉ +ÉàÉÉ BÉEä ¤ÉÖZÉiÉä cé,
ºÉÉ®É +ÉÉBÉEÉ¶É iÉÖàcÉ®É cè*
Rise O’ warrior march ahead undaunted
You are the Creator of future history
The stars of the dark night are fading
The whole sky belongs to you.
1 8 3 . Mr. Speaker, Sir, with these words, I commend the budget to this august
House.
 1

Interim Budget 1998-99

Speech of

Shri Yashwant Sinha

Minister of Finance

25th March, 1998

Sir,

I rise to present the Interim Budget for 1998-99.

2. This Interim Budget is being presented for the purpose of a Vote-on-Account
to enable the Government to carry on its business and meet essential expenditure
during the first four months of the next financial year. The Demands for Grants and
the Annual Financial Statement, which are for the full financial year, will be revised
and finalised at the time of presentation of the Regular Budget in a few weeks time.
I shall also introduce a Finance Bill today, which merely seeks to continue the existing
tax structure for a full year.
3. As regards the economic situation, we are concerned to note that overall
economic growth has slowed to 5% in 1997-98, agriculture has registered negative
growth of 2%, industry continues to be in the doldrums averaging only 4.6% growth
over the 12 months up to January 1998, and exports have recorded negative growth
in dollar terms in each of the three most recent months up to January 1998, for
which data are available. The bottlenecks in key infrastructure sectors are well known,
the capital market has been lacklustre and the fiscal situation is significantly worse
than expected.
4. I would like to assure the House that these trends and difficulties will be
fully addressed in the Regular Budget for 1998-99 that I shall bring before the Hon’ble
Members shortly. The usual Economic Survey will also be presented to the House at
that time. The Regular Budget will seek to impart the necessary stimulus to agriculture
and industry, restore dynamism to exports, encourage larger flows of foreign
investment in line with the National Agenda for Governance, take decisive initiatives
to improve the state of infrastructure, strengthen the financial system, accelerate
the reform of the public sector while building a strong and transparent system for
PSU disinvestments, and bring about strict fiscal discipline. It will also embody
other new directions included in our National Agenda for Governance.
1
 2

5. The external economic environment is fraught with unusual uncertainty.

The East Asian crisis has swept across much of Asia in the last nine months, bringing
massive economic and financial disruption to several hitherto fast growing economies.
It is the inherent strength of our economy, built over decades, which has enabled us
to hold our heads high and not succumb to the economic gales that have been
sweeping through the Asian region. But we must remain ever watchful and vigilant
and conduct our economic policies with foresight and flexibility. Only then can we
be sure of achieving rapid economic growth with low inflation and external stability
despite the difficult international economic scenario.

Revised Estimates for 1997-98

6. Turning briefly to the Revised Estimates for 1997-98, the most noteworthy
point is major shortfalls in tax collections and disinvestment receipts. Net tax revenues
for the Centre are estimated at only Rs.99,158 crore, reflecting a drop of Rs.14,236
crore, or a 12.6% decline over Budget Estimates. The shortfall is primarily due to
much lower customs revenue on account of both lower volume and unit price of
imports. The decline in excise resulted from unusually low industrial growth. Receipts
from PSU disinvestments are estimated to fall short of the Budget Estimates of
Rs.4,800 crore by Rs.3,894 crore. The Revised Estimates for total expenditure are
expected to exceed the Budget Estimates by only Rs.3,069 crore. This is less than
the additional expenditure of Rs.4,432 crore incurred on account of the single item
of loans to States and Union Territories against small savings collections, which
have been exceptionally buoyant during the year. The net result is a deterioration of
the fiscal deficit from the budget target of 4.5% of GDP to 6.1%. However, if the
increase in expenditure attributable to small savings loans is excluded, the fiscal
deficit, adjusted for the increase over budget in small saving loans to States and
Union Territories, would be 5.8% of GDP in 1997-98.
7. In regard to collections under the Voluntary Disclosure of Income Scheme
(VDIS), estimated at Rs.10,050 crore, my predecessor had announced a decision to
devolve to the States 77.5% of the collections under the scheme up to the end of
December, 1997, amounting to a sum of Rs.4,379 crore. With the blessings of the
Prime Minister, I propose to go a step further and to devolve to the States 77.5% of
the Revised Estimates of VDIS collections for the full year 1997-98. As a consequence,
the States will now receive an additional Rs.3,215 crore, thus taking the total
devolution on this account to Rs.7,594 crore in the current financial year.
8. Furthermore, I propose to provide an additional sum of Rs.1000 crore by
way of Additional Central Assistance to States on account of externally aided projects
in order to settle all pending claims in the current financial year.
9. Taken together, these two decisions will give to the States an additional
sum of Rs.8,594 crore in the current financial year 1997-98. This is fully in accord
with the commitment in our National Agenda to extend greater assistance to States.

Budget Estimates for 1998-99

1 0 . According to the Budget as prepared, total expenditure in 1998-99 is
estimated at Rs.2,64,988 crore against Rs.2,35,245 crore in the current year. Of
this, the gross budgetary support to the Central, State and the Union Territory Plans
 3

is placed at Rs.64,461 crore against Rs.60,630 crore in the current year. We propose
to review the level and content of the budgetary support for Annual Plan 1998-99 in
the Regular Budget. It is our firm resolve to review the Ninth Plan and to revise the
Budget Estimates so that they reflect our thinking and priorities. We propose to
complete this exercise in time for the Regular Budget which will be presented shortly.
1 1 . Non-Plan expenditure in 1998-99 is estimated to be Rs.2,00,527 crore
against Rs.1,74,615 crore in the current year, an increase of Rs.25,912 crore. The
main reasons for increase over RE 97-98 are on account of an increase of Rs.10,300
crore in Interest Payments, an increase of Rs.4,747 crore in Pensions, an increase of
about Rs.3,900 crore in Defence expenditure and an increase of about Rs.1,500
crore in major subsidies.
1 2 . Total non-debt receipts, including tax revenues at existing rates of taxation,
are estimated at Rs.1,68,173 crore, while total expenditure is estimated at
Rs.2,64,988 crore. The fiscal deficit emerging from these estimates for 1998-99
will be about 6% of GDP. This is clearly not acceptable and it will be our endeavour
to bring it down to a reasonable limit in the Regular Budget through appropriate
measures.
1 3 . While it would take some time for us to formulate our specific strategies in
this regard, immediate action is called for to contain the growth in establishment
expenditure and initiate the process of PSU disinvestment at an early date to avoid
shortfalls in receipts experienced in previous years.
1 4 . Hon’ble Members are aware that the Tenth Finance Commission had
recommended an alternative scheme for sharing of resources between the Centre
and the States under which 29% of the gross proceeds of almost all Central taxes is
to be assigned to the States. This recommendation has been under consideration of
Government. On the basis of a consensus arrived at in the Third Meeting of the
Inter-State Council held on July 17, 1997 the previous Government had decided to
accept this scheme in principle. We intend to bring forward the enabling Constitution
Amendment Bill to give effect to this decision which has been endorsed by all the
States.
1 5 . I would like to assure the Hon’ble Members of this august House that I
shall make every effort in my Regular Budget to implement the economic goals
enunciated in our National Agenda for Governance. Economic reforms will be
deepened, broadened and accelerated. Our goal is to make India an economically
strong and vibrant nation which will participate in the world economy with confidence
and from a position of strength. We are determined to build an India in which there
is no place for hunger, poverty, unemployment and deprivation.
16. With these words, I commend the Budget to this august House.
 1

Budget 1997-98
Speech of
Shri P. Chidambaram
Minister of Finance

28th February, 1997

PART A
Sir,
I rise to present the Budget for the year 1997-98.
Introduction
2 . The government headed by Prime Minster Shri Deve Gowda completes nine
months today. When I stood before this House on July 22, 1996, this House received
my proposals with a mixture of wonder, curiosity and scepticism. I was, after all,
the Finance Minister of the genuine coalition government at the Centre. I was also
the first Finance Minister who belonged to an avowed regional party, albeit with a
national outlook.
3 . Hon’ble Members will indulge me for a few minutes while I reflect on those
eventful days in May 1996. One national party acknowledged that it had lost its
claim to form the government. Another tried, but failed. It is in that situation that
regional parties, and certain parties with a larger national presence, came together
to form the United Front government. These parties-long regarded as children of a
lesser God-have demonstrated that, given the opportunity, they can form a
government not only at the State level but also at the Centre. Inspired by the idea
off a truly cooperative federal polity, Chief Ministers have assembled, more often
than ever before, at the Inter-State Council, the National Development Council and
at the Special Conferences to formulate national policies. The formulations of the
government by the United Front and our efforts to take decisions by a national
consensus, in the fiftieth year of India’s independence, have deepened and broadened
Indian democracy.
4 . Hon’ble Members will find that there is a strong continuity between my first
Budget and the present one. The foundation of the Budget remains the Common
Minimum Programme. The experience of the last eight months has demonstrated
the enormous strengths of the programme. Drawing on the CMP, my first Budget
articulated seven broad objectives. These objectives embraced vital elements such
as growth, basic minimum services, employment, macroeconomic stability,

1
 2
investment (particularly in infrastructure), human development and a viable balance
of payments. I believe these objectives remain as valid today as they were eight
months ago.
July 1996 Budget Promises
5 . On the last occasion, I had made over forty specific promises on policies and
programmes. I have carefully taken stock of the situation, and Hon’ble Members
will be pleased to know that I have fulfilled all these promises, save one, to which
I shall refer presently. To recall the more important ones, I am happy to state that
we have
· Provided an additional sum of Rs. 2466 crore to the States for seven Basic
Minimum Services;
· Funded the Rural Infrastructure Development Fund (RIDF)-II with Rs.
2500 crore;
· Expanded the list of industries eligible for automatic approval for foreign
equity investment;
· Set up the Disinvestment Commission and the Tariff Commission;
· Introduced the Jeevan Suraksha and the Jan Arogya insurance schemes;
and
· Launched the Accelerated Irrigation Benefit Programme.
6 . The one commitment that I have been unable to keep is to set up an
Expenditure Management and Reforms Commission. I failed because I wanted an
A team and I was not content with a B team. Key members of the A team are in this
House and in the Rajya Sabha, and they still elude me. I shall keep trying. Meanwhile,
I have not let up on my resolve to keep expenditure within the Budget, and I have
achieved a fair measure of success.
Current Economic Situation
7 . The Economic Survey 1996-97 was laid in the Parliament a few days ago. It
provided a detailed and balanced account of the state of the economy. There is
indeed much to be done, but there is also much to be proud of. The outstanding
feature of the economy is that the GDP has been growing during the last three
years at an average rate of 7%. I salute the farmers, the workers, the entrepreneurs
and the service providers who have made this possible.
8 . The positive features of our economic performance in 1996-97 include:
· Continued high economic growth at 6.8%;
· A strong recovery of growth in agriculture and allied sectors to 3.7%, after
a disappointing minus 0.1% in 1995-96;
· Rebound in foodgrains production to 191 million tonnes;
· Manufacturing sector growth at 10.6%; and
· A sizeable build up in our foreign currency reserves from US$ 17.0 billion
to US$ 19.5 billion as on February 27, 1997.
 3
9 . I shall not be true to myself or to the country if I did not highlight the areas
of weakness. Two areas of great concern are the sharp drop in domestic crude oil
production and the sluggish performance of the power sector. Other matters of
concern include a deceleration in the growth of exports, a rise in the rate of inflation
and a volatile capital market. Government has addressed these concerns through
some far-reaching initiatives in the last three months. I have also fresh proposals
in this Budget.
10. Macroeconomic management involves, inevitably, striking a balance
between various objectives and considerations. As Hon’ble Members are aware, in
1995-96, the growth in money supply was reduced sharply to 13.2%. Although this
helped to contain inflation, it also led to high real interest rates, a widespread
perception of a liquidity crunch and a slackening of investment proposals. Since
July 1996, corrective action has been taken which has eased the availability of
money and brought down the interest rates. The long-delayed increase in the prices
of petroleum products and supply-side problems, arising mainly out of lower
production and lower procurement of wheat in the last season, exerted pressure on
the price level. Government has taken a number of steps to maintain price stability.
Paddy production and procurement in the Kharif season have been satisfactory
and we have adequate stocks of rice. The Rabi wheat crop is also very promising
and steps will be taken to maximise procurement. At the same time, I would like to
make it clear that, if necessary, government will not hesitate to import wheat and
other essential articles to counter the pressure on prices. Maintaining price stability
is high on the agenda of this government.
11. Apart from supply side management, we have to adopt prudent fiscal
and monetary policies that will stabilise prices. For the year 1997-98, the government
and RBI will act in concert towards a further reduction in the fiscal deficit,
containment of the growth of money supply within 16% and adoption of a liberal
import policy for essential commodities. Our goal is to break inflationary expectations
and reduce the rate of inflation from the present level.
Poverty Alleviation Programmes
12. Our fight against poverty is not a game in populism. It is a battle at the
grassroots level. It is a battle in which, I believe, all of us ought to be on the side
of the poor. Those who are poor are those who do not have land or water or
education or opportunity. Our programmes, therefore, revolve around the concerns
of the poor. For example
· The flagship programme of the Prime Minister is the Basic Minimum
Services plan. As against Rs. 2466 crore in the current year, I propose to
provide Rs. 3300 crore for this programme in 1997-98. This will include
Rs. 330 crore for slum development.
· The provision for the Accelerated Irrigation Benefit Programme is being
enhanced from Rs. 900 crore to Rs. 1300 crore in 1997-98.
· The Ganga Kalyan Yojana is intended to support farmers to take up
schemes for groundwater and surface water utilisation through a mixture
of subsidy, maintenance support and credit arrangements. Rs. 200 crore
 4
is being provided in 1997-98.
· On august 15, 1997, the Prime Minister will inaugurate the Kasturba
Gandhi Shiksha Yojana, a programme to establish special schools for girl
children in the districts which have particularly low literacy rate. I have
placed Rs. 250 crore in the Budget for 1997-98.
· All current schemes, addressed to different target groups such as PMRY,
IRDP, NRY etc., will be reoriented to provide skill-based training,
entrepreneurship development and subsidy-linked bank credit to 1 million
youth to empower them to start viable small business.
13. Our government believes that poverty alleviation programmes are
important instruments in the fight against poverty. While maintaining the large
outlays for these programmes, it is necessary to rationalise their number and make
them more focussed and effective. The Planning Commission is now engaged in a
comprehensive exercise and the revised portfolio of poverty alleviation programmes
will be implemented with effect from April 1, 1997.
Rural Credit
14. Agriculture is the lifeblood of our economy. The CMP calls for a doubling
of the flow of credit to agriculture and agro-industries within five years. In 1996-
97, the first year of this government, it is estimated that credit flow to agriculture
will increase from about Rs. 22,000 crore to nearly Rs. 28,600 crore-an increase of
an unprecedented Rs. 6,600 crore.
15. Hon’ble Members will be glad to know that the Rural Infrastructure
Development Fund (RIDF) has proved to be popular and successful. Under RIDF-
I, Rs. 2,000 crore was sanctioned for 4,530 projects. By March 1997, disbursements
will amount to about Rs. 1,400 crore. Under RIDF-II, 8,387 projects worth over Rs.
2,500 crore have been sanctioned. RIDF-III will be launched in 1997-98 and Rs.
2,500 crore will be provided. I urge the States to continue to make the best use of
these funds.
16. The policy of recapitalising the Regional Rural Banks (RRBs) will
continue next year. I am providing Rs. 270 crore for this purpose. I also intend to
allow a greater role to sponsor banks in the ownership and management of RRBs.
17. NABARD is being strengthened. NABARD has been given Rs. 500 crore
as advance additional share capital-Rs. 100 crore by government and Rs. 400 crore
by RBI-in the current year. The share capital will be augmented by a similar allocation
in 1997-98. I am also glad to announce that, as promised last year, NABARD has
promoted and incorporated this month, state level agricultural development finance
institutions in three States as joint ventures. More will be incorporated next year.
Controls on Agriculture
18. The CMP said that all controls on agricultural products will be reviewed
and, wherever found unnecessary, will be abolished. Only some regulations are by
the Central government and a beginning is being made by abolishing a few. The
Rice Milling Industries (Regulation) Act, 1958 and the Ginning and Pressing Factories
Act, 1925 will be repealed. Licensing, price control and requisitioning under the
Cold Storage Order, 1964 will be removed. The Edible Oils and Edible Oil Seeds
Storage Control Order, 1977 and the Cotton Control Order, 1986 will be invoked
 5
only in well-defined emergency situations. Domestic futures trading would be
resumed in respect of ginned and baled cotton, baled raw jute and jute goods. An
international Castor Oil Futures Exchange will be set up. I urge State governments
to follow this lead and abolish as many controls as possible.
Small Scale Industry
19. As Hon’ble Members are aware, government has recently enhanced the
investment ceiling for plant and machinery of small scale industries (SSIs) to Rs. 3
crore and of tiny units to Rs. 25 lakhs. In order to ensure that credit is available
to all segments of the now-enlarged SSI sector, the RBI is issuing instructions that
out of the funds normally available to the SSI sector, 40% will be reserved for units
with investment in plant and machinery between 5 lakhs, 20% for units with
investment between Rs. 5 lakhs and Rs. 25 lakhs and the remaining 40% for other
SSI units.
20. Government also announced recently that it will examine carefully the
other recommendations of the Abid Hussain Committee on the SSI sector. With a
view to reduce wastage in agricultural commodities, improve quality and hygiene
and promote exports, the Advisory Committee on reservation and dereservation
has recommended that 14 items, now reserved for manufacture in the SSI sector,
may be dereserved. 822 items would still remain reserved for production in the SSI
sector. Government has accepted these recommendations. The dereserved items
include rice-milling, dal milling, poultry feed, vinegar, synthetic syrups, biscuits,
ice cream, a variety of automobile parts and corrugated paper and boards. It is
expected that new investment and improved technology will flow into these
businesses.
Housing
21. A constraint on adding to the housing stock of the country is the
Urban Land (Ceiling and Regulation) Act, 1976. It is the intention of the government
to move a Bill for amending the Act in this session of the Parliament.
22. Indira Awas Yojana was launched to build houses for the poor in rural
areas. Housing finance companies provide credit, but the bulk of such credit flows
into the urban and semi-urban areas. There are some rural housing credit
programmes but they lend meagre amounts up to Rs. 10,000. There is virtually no
source of credit for the farmer who wishes to build a modest house on his freehold
land or to improve or add to his old dwelling. This gap must be filled. In consultation
with the National Housing Bank (NHB) and others I have worked out a plan. Loans,
up to Rs. 2 lakhs, will be given for building houses on freehold land in rural areas
at normal rates of interest, subject to the borrower putting in one-third of the value
of the house. NHB has been requested to prepare a scheme in which other
organisations will also participate. The Prime Minister will launch the scheme on
August 15, 1997 and it is our goal to sanction 50,000 loans in the first year.
Employees’ Provident Fund & Gratuity
23. The Central Board of trustees of the Employees’ Provident Fund (EPF)
has made specific proposals to make the EPF schemes more attractive. Government
has also looked at the matter from the point of view of augmenting savings. I am
happy to announce the following decisions:
· The rate of contribution in all industries and establishments will be
increased from 8.33% to 10% for both employers and employees with
effect from March 1, 1997.
 6
· In the scheduled industries where the rate of contribution is now 10%,
the Act will be amended to make the rate 12% for both employers and
employees.
· The requirement of keeping 20% of the incremental PF amounts in the
Special Deposit Scheme (SDS) will now be withdrawn with effect from
March 1, 1997 and the Board of Trustees will be free to invest this portion
of the funds in any other kinds of permitted securities.
24. In 1995, the Central government enhanced the ceiling on the amount
of gratuity payable from Rs. 1 lakh to Rs. 2.5 lakh for Central government employees.
I am now pleased to announce that the benefit will be extended to all employees
covered under the Payment of Gratuity Act, 1972, which will be amended for this
purpose.
Public Sector Autonomy
25. The CMP promised that “the United Front government will identify
public sector companies that have comparative advantages and will support them
in their drive to become global giants.” To begin with, nine well-performing public
sector enterprises, the Navratnas, have been identified. These are IOC, ONGC,
HPCL, BPCL, IPCL, VSNL, BHEL, SAIL and NTPC. The Industry Minister will shortly
unveil a package of measures that will help them achieve this objective. He will also
make a full statement on managerial and commercial autonomy to all PSUs.
26. In the meanwhile, government has decided to delegate more monetary
powers to the Boards of profit-making enterprises. For these PSUs, the existing
limits for capital expenditure that can be incurred without the prior approval of the
government is being doubled straight-away, and where the gross block is over Rs.
500 crore, the limit will be Rs. 100 crore.
Disinvestment
27. The Disinvestment Commission was constituted in August, 1996 and
40 PSUs were referred to the Commission for advice. The Commission has submitted
its first report. It has made specific recommendations in respect of three companies.
We intend to proceed with the disinvestment in these companies along the lines
suggested by the Commission. While the Commission will make further reports
every month, a second batch of PSUs has been referred to the Commission. As the
Commission has observed “The essence of a long-term disinvestment strategy should
be not only to enhance budgetary receipts, but also minimise budgetary support
towards unprofitable units while ensuring their long-term viability and sustainable
levels of employment in them.” Government agrees with this view and I appeal to
Hon’ble Members to take a positive view of disinvestment.
Oil and Gas
The country’s demand for petroleum products is growing at over 8% per annum,
which is faster than the growth of domestic supply. We cannot choke this growth.
At the same time, we must reduce our dependence on imported petroleum products.
There is no real alternative to increasing the supply. Just 6 of the 26 basins that
have potential for oil and gas in India have been explored, and that too only partially.
The Minister for State for Petroleum and Natural Gas will be making a detailed
 7
statement on the new exploration licensing policy (NELP) shortly. The highlights of
the policy are the following:
· Companies, including ONGC and OIL, will be paid the international price
of oil for new discoveries made under the NELP;
· Royalty payments will be fixed on an ad valorem basis instead of the
present system of specific rates;
· Royalty payments for exploration in deep waters will be charged at half
the rate for offshore areas for the first seven years after commencement of
commercial production;
· Freedom for marketing crude oil and gas in the domestic market;
· Tax holiday for seven years after commencement of commercial production
for blocks in the North-East region;
· ONGC and OIL will get the same duty concessions on import of capital
goods under the NELP as private production sharing contracts;
· Cess levied under the Oil Industry Development Act, 1974 will be abolished
for the new exploration blocks; and
· A separate petroleum tax code will be put in place as in other countries to
facilitate new investments.
It is my fervent hoe that Indian and foreign companies will respond positively to
this package of measures.
29. In order to ensure that adequate domestic refining capacity is created,
I propose to allow refineries to import capital goods during the Ninth Plan period at
a concessional duty on par with the fertiliser sector. Domestic capital goods suppliers
will also get deemed export status.
Infrastructure
30. The Infrastructure Development Finance Company has been
incorporated. Section 80IA of the Income Tax Act grants five year tax holiday for
certain infrastructure projects. Last month, I announced that telecommunications
will qualify as infrastructure. I now propose to add Oil Exploration and Industrial
Parks to this category.
31. I am also glad to announce that the vexed question of assignability of
telecom licenses has been resolved and that tripartite agreements are proposed to
be entered into among the Department of Telecommunications, the licensee and
the lenders.
32. As Commerce Minister, I proposed in the Exim Policy that supply of
goods to oil, gas and power projects, if the supplies are made under the procedure
of international competitive bidding, should be given the benefits of “deemed exports’.
As Finance Minister, I am glad to accept this wholesome proposal. Details are being
notified separately.
33. The National Highway Authority of India (NHAI) is now geared to
implement the new policy on roads and highways. I propose to enhance budget
support for NHAI to Rs. 500 crore which is a significant step up from Rs. 200 crore
provided in the current year.
 8
Foreign Investment
34. Foreign Institutional Investors (FIIs) continue to repose great confidence
in India. Net FII investment in India is now over US$ 7 billion. During the course
of this year I have expanded the opportunities for such investments. I propose to
take one more step at the instance of Indian companies. The limit of aggregate
investment in a company by FIIs, NRIs and NRI-OCBs is now 24%. I propose to
allow companies to raise this limit to 30%, subject to the condition that the Board
of Directors of the company approves the limit and the general body of the company
passes a special resolution in this behalf.
3 5 Venture capital funds are important vehicles for stimulating investments in
new ventures. Under the present guidelines they can invest upto 5% of their corpus
in the equity of any single company. This is unduly restrictive. The limit is being
increased to 20%.
Capital Market
36. Over 20 million Indians have invested their savings in the capital market.
The establishment of the first Depository was an important step taken to bring the
Indian capital market upto world standards and to protect the interests of the
investors. SEBI was asked to suggest more measures. The committee appointed by
me draft a new Companies Bill has also made valuable suggestions. After considering
these suggestions, I propose to accept five recommendations:
· The principle of buy-back of shares by companies subject to certain
conditions will be introduced in the Companies Act;
· The provisions of Sections 370 and 372 of the Companies Act will be
merged and an overall ceiling of 60% will be kept for inter-corporate
investment and loans;
· The Companies Act will be amended to provide for nomination facilities
for holder of securities;
· Companies raising funds from the capital market will be required to give
an annual statement disclosing the end-use of such funds; and
· One time permission will be given to stockbrokers to corporatise their
business without attracting tax on capital gains, which will be exempted.
37. I am of the firm view that markets will prosper when economic growth
continues to be strong, the fiscal deficit is reduced, interest rates decline and
investors are reassured that their interests are secure.
FERA and Money Laundering
38. As we progress towards a more open economy with greater trade and
investment linkages with the rest of the world, the regulations governing foreign
exchange transactions also need to be modernised. It is generally acknowledged
that the Foreign Exchange Regulation Act, 1973 needs to be replaced by a new law
consistent with full current account convertibility and our objective of progressively
liberalising capital account transactions. Hence, I propose to introduce, later this
year, a Bill titled The Foreign Exchange Management Act. A RBI-appointed group is
expected to complete the drafting of the Bill shortly.
39. While FERA is being replaced, we will not let up in our effort to curb
the laundering of ill-gotten money. A Bill dealing with money laundering is under
preparation and I propose to introduce it during this session of the Parliament.
 9
Capital Account Convertibility
40. A little while ago I made a reference to capital account convertibility.
We are proud of our foreign exchange earners. They have been given the facility of
the Export Earners Foreign Currency (EEFC) Account. At present, the total amount
in these accounts is a modest Rs. 2000 crore. I propose to expand the scope of the
account by allowing the following facilities:
· To open offices abroad and to meet the expenses thereof; and
· To make investments from the balance in the account in overseas joint
ventures upto the limit of US$ 15 million, without reference to the RBI.
41. I also believe that the time has come for a preparatory work towards
capital account convertibility. This is a cherished goal. It is also a matter of great
sensitivity. Hence, I shall not make any commitment. For the present, I am asking
RBI to appoint a group of experts to lay out the road map towards capital account
convertibility, prescribe the economic parameters which have to be achieved at
each milestone and work out a detailed time table for achieving the goal. I believe
the appointment of such a group will send a powerful signal to the world about our
determination to join the ranks of the frontline nations.
Science and Technology
42. My last budget was viewed in certain quarters as science and technology-
friendly. Flattery has its rewards, and I intend to strengthen my friendship with the
scientific community. I propose to take the following initiatives:
· The scheme to match every additional commercial rupee earned by CSIR
and ICAR laboratories, as well as the IITs, will continue on a permanent
basis.
· The Technology Development Board, established to accelerate the
commercialisation of indigenous technology, has identified 16 projects
that are commercially viable in the fields of agriculture, health, chemicals
and pharmaceuticals. In 1996-97, I provided Rs. 30 crore to the Technology
Development Fund. I propose to increase the allocation in 1997-98 to Rs.
70 crore.
43. Tomorrow’s technology is based on today’s science. I am concerned
that there is declining interest in the learning of sciences in schools and colleges.
I hold the view that an MBA – even if he is from Harvard – is not a patch on a
scientist. On the occasion of the 50 th anniversary of our independence, we will
launch the “Swarnajayanti” fellowships. Outstanding scientists below the age of 45
will be assisted to attain and sustain world class levels in science. A sum of Rs. 50
crore in the Department of Education’s budget will be used to create a corpus. The
Minister of State for Science and Technology will announce the details of the scheme.
44. Closer linkages have to be developed between Indian industry and
publicly-funded research laboratories. Hence, I propose to allow government-
promoted societies recognised by the Department of Science and Industrial Research
and notified under the Income Tax Act to invest in the equity of private sector
companies. These institutions will invest not money but their knowledge and know-
how as their equity.
 10
Information Technology
45. If there is one science that will dominate the 21 st century, it is
information technology. If there is one industry in which India can emerge as a
world leader, it is information technology. However, for this potential to be realised,
we need a completely new policy for manufacturing and marketing IT products.
The Electronic Hardware Technology Park (EHTP) Scheme, presently in force, gives
limited flexibility. There is an imperative need to increase production volumes and
attract foreign direct investment. Accordingly, it has been decided that EHTP/
EOU/EPZ units in electronic hardware may be permitted to sell one half of the
value of their products, during any 12 month period, in the domestic market and
export the other half. The sale in the domestic market will be on payment of excise
duty equivalent to full custom duty, including additional duty of customs. Details
of the new unified manufacturing scheme will be incorporated in the new EXIM
policy that will be effective from April 1, 1997.
Companies Act and Direct Taxes Act
46. Hon’ble Members will recall that I had set up an expert group to draft
a new Companies Bill and another expert committee to prepare a new Direct Taxes
Bill. Both groups have done splendid work and have submitted their reports. Copies
of the reports will be distributed widely. A working draft of each Bill will also be
circulated as soon as it is ready. It is my hope that there will be wide and informed
debate on the two Bills. It is my intention to bring the new Companies Bill before
this House in the monsoon session and the new Direct Taxes Bill in the winter
session.
Insurance
47. The CMP accords high priority to infrastructure. The India Infrastructure
Report has been published and it now remains for us to implement the report. The
critical need is funds, and that too long-term funds. That is why the CMP said,
“There is a strong link between infrastructure development and the financial sectors
reforms. Infrastructure needs long-term finances.” Hon’ble Members are fully aware
that long-term funds are in the Pension and Insurance sectors.
48. Our foremost companies in the insurance sector are LIC and GIC.
After a long interval of time, LIC and GIC have been given the full complement of
Board members. We have also decided to grant substantial autonomy to LIC and
GIC, including the power to make non-scheduled, non-consortium investments, to
determine the terms and conditions of service of their employees and agents, to
make regulations and some other powers. LIC and GIC will be further strengthened
in due course.
49. Under the present laws, pension funds are, by an archaic defintion,
included in the business of life insurance. However, it is self-evident that pension
and insurance are two different benefits and two different businesses. While life
insurance is the monopoly of LIC, several pension funds have been rightly exempted
and allowed to operate independently. In 1995, at the instance of my distinguished
predecessor, UTI floated the UTI Retirement Benefit Plan. It has attracted about
80,000 subscribers. I propose to allow UTI to expand the above plan into a full-
fledged pension fund. UTI has made a request to government in this regard; LIC
has no objection; and hence it is appropriate to amend the laws.
 11
51. Similarly, the penetration of health insurance cover in our country is
distressingly low. Just about 20 lakh Indians have some kind of health cover. The
Jan Arogya scheme, launched barely six months ago, has already attracted 4 lakh
policyholders. Clearly, there is a demand for health insurance products. GIC has
frankly admitted that its Mediclaim policy has not been successful and that it
would like to promote joint ventures in this line of business. GIC is also confident
of facing competition in the health insurance business. Accordingly, I propose to
move necessary amendments to enable GIC to float joint ventures and also to allow
entry of selected Indian players in the health insurance sector.
52. What I have outlined is a very modest opening of one segment of the
insurance sector. LIC will continue to enjoy a monopoly in the life insurance business
and GIC will continue to enjoy a monopoly in the non-life, non-health insurance
business. I would also like to make it clear that only a few Indian companies, that
is Indian-controlled and with majority Indian ownership, will be permitted to enter
the health insurance business. Comprehensive regulation will be made and enforced
by the Insurance Regulatory Authority (IRA) for all the service providers in the
insurance industry. They will also have to meet the prudential, investment and
social norms laid down by the IRA.
Phasing out of Ad Hocs
53. Hon’ble Members will recall that in my last Budget speech I had
promised to present concrete proposals in this Budget to phase out the system of
ad hoc treasury bills by 1997-98. I am glad to announce that the government and
the RBI have worked out the specific measures in this regard.
54. The system of ad hoc treasury bills to finance the budget deficit will be
discontinued with effect from April 1, 1997. A scheme of ways and means advances
(WMA) by the RBI to the Central government is being introduced to accommodate
temporary mismatches in the government’s receipts and payments. This will not be
a permanent source of financing the government’s deficit. Besides ways and means
advances, RBI’s support will be available for the government’s borrowings
programme. Details of the scheme are being separately announced by the RBI.
55. What I am effecting today is a bold and radical change which will
strengthen fiscal discipline and provide greater autonomy to RBI in the conduct of
the monetary policy. With the discontinuance of ad hoc treasury bills and tap
treasury bills, and the introduction of ways and means advances, the concept of
Budget deficit, as currently defined, will lose its relevance either as an indicator of
short term requirement of funds by the government or the extent of monetisation.
Therefore, it is proposed to discontinue the practice of showing the ‘Budget deficit’;
instead Gross Fiscal Deficit (GFD) would become the key indicator of deficit. The
extent of RBI support to the Central government’s borrowing programme will be
shown as “Monetised deficit” in the Budget documents.
Indexed Bonds
56. Several countries have used variety of indexed bonds to provide investors
an effective hedge against inflation and to enhance the credibility of anti-inflationary
policies followed by the government. I believe the time is ripe for India to introduce
a capital indexed bond where the repayment of the principal amounts will be indexed
to inflation.
 12
New Devolution Formula
57. I have already placed in the House a discussion paper on the
recommendations of the Tenth Finance Commission (TFC) on the formula to be
adopted for devolution of resources from the Centre to the States. The views of the
States have been received. The Standing Committee of the Inter-State Council has
also considered the matter. Based on these consultations, I propose to accept the
recommendations of the TFC to form a single, divisible pool of taxes to be shared
between the Centre and the States. To begin with, we shall adopt the proportion of
29% recommended by the TFC. This will be an improvement on the present share
of the States. However, we are willing to discuss the matter further when we bring
the Constitution Amendment Bill to give effect to the decision. We reaffirm our
belief that the polity of India requires a strong Centre and strong States and if, I
may add, strong local bodies.
Revised Estimates for 1996-97
58. I shall now briefly go over the Revised Estimates Revised Estimates for
1996-97.
59. The Budget Estimates for 1996-97 had placed the total expenditure at
Rs. 2,04,660 crore. This is now expected to come down to Rs. 2,02,298 crore. This
is the net effect of a decrease of Rs. 2,571 crore in non-Plan expenditure and an
increase of Rs. 209 crore in the Plan expenditure.
60. Non-Plan expenditure in the current year is placed at Rs. 1,47,404
crore. This represents a decrease of Rs. 2,571 crore over the Budget Estimates
basically on account of saving of Rs. 3,000 crore in the provision made for the
likely impact of the recommendations of the Fifth Pay Commission. On the other
hand, we have not got Rs. 4,500 crore of the anticipated receipts from disinvestment.
Despite these constraints, I made an additional provision of Rs. 1,700 crore for
Defence during the year. On balance, we have managed our receipts and expenditure
within the Budget.
61. My greatest satisfaction is on the Plan side. We saved a considerable
amount of Plan expenditure of the Central government. It was, therefore, possible
for me to provide an additional Rs. 2,500 crore to the States as Additional Central
Assistance for externally-aided projects. I also provided Rs. 663 crore to Jammu
and Kashmir during the year. As a result, total Plan expenditure has increased by
Rs. 209 crore. If I have robbed Peter, the Central government, it is only to pay Paul,
the States.
62. In October, 1996, the Prime Minister announced a package of initiatives
for the North-East, including adequate funding for on-going projects, which will
require over Rs. 6,000 crore. Government will allocate funds for these projects in
the Ninth Plan. The Numaligarh Refinery is making good progress. I have provided
Rs 100 crore for the project in the RE 1996-97 and over the next two years adequate
funds will be found to ensure its completion on schedule.
63. The overall gross tax revenue which was estimated at Rs. 1,32,145
crore in the Budget estimates will be marginally higher by Rs. 174 crore, although
the net tax revenue of the Centre would be marginally less by about Rs. 100 crore
from the Budget estimate of Rs. 97,310 crore.
 13
64. Taking into account the Revised Estimates of revenues and expenditure,
the Revenue Deficit has come down from the Budget estimate of 2.5% of GDP to
2.3% of the GDP. There is no change in the Budget estimate of the fiscal deficit
which would remain at 5% of the GDP. I am profoundly sorry to disappoint my
well-meaning critics.
65. What will we do without our critics? As Saint Tiruvalluvar said:
“Idipparai Illatha Emara Mannan Keduppar Ilanum Kedum”
(Behold the King who reposeth not on those who can rebuke him/He will perish
even when he hath no enemies.)
Budget Estimates for 1997-98
66. I now turn to Budget Estimates for 1997-98.
67. The total expenditure is estimated at Rs. 2,32,481 crore of which Rs.
62,852 crore has been provided as budget support for Central, States and UT Plans
and the balance Rs. 1,69,629 crore is for non-Plan expenditure. Hon’ble Members
will be pleased to note that the increase in budget support for the Plan will be Rs.
7,958 crore over RE 1996-97, which is the largest increase ever.
68. Budgetary support to the Central Plan is being concentrated on rural
development, emplyment and poverty alleviation programmes and in the human
resource development sectors. For 1997-98, the outlay for the Ministry of Rural
Areas and Employment is being increased to Rs. 9,096 crore, an increase of Rs.
1,271 crore over the RE for 1996-97. In 1997-98, Jawahar Rozgar Yojana is estimated
to generate about 520 million mandays of employment. About 90,000 habitations
will be provided with safe drinking water during 1997-98 under the Accelerated
Rural Water Supply Scheme.
69. The outlay for the Social Services is being substantially enhanced from
Rs. 11,785 crore is RE 1996-97 to Rs. Rs. 15,707 crore in BE 1997-98. Significant
increases are under Urban Development (Rs. 775 crore), General Education (Rs.
1,189 crore), Technical Education (Rs. 132 crore), Family Welfare (Rs. 282 crore)
and Water Supply and Sanitation (Rs. 312 crore).
70. The Science and Technology sector is being provided Rs. 1,870 crore
as against Rs. 1,584 crore is RE 1996-97.
71. The Maulana Azad Education Foundation is being given Rs. 40 crore.
The National Minorities Development and Finance Corporation is being provided
Rs. 41 crore.
72. Rs 96 crore is being allocated to the National SC and ST Finance and
Development Corporation. For the welfare of the handicapped, I am providing Rs.
90 crore and for the National Handicapped ST Finance and Development Corporation
I am giving Rs. 28 crore.
73. The total non-Plan expenditure in 1997-98 is estimated to be Rs.
1,69,629 crore. The interest payments are estimated to be Rs. 68,000 crore.
74. Fertiliser subsidy on indigenous fertilsers is being enhanced to Rs.
5,240 crore in 1997-98 from Rs. 4,743 crore in 1996-97. In addition, subsidy on
imported fertilsers is being increased to Rs. 1,950 crore in 1997-98, as against Rs.
 14
1,350 crore in. The subsidy on sale of decontrolled fertilsers is being enhanced to
Rs. 2,000 crore in 1997-98 from Rs. 1,674 crore.
75. An amount of Rs. 7,500 crore is being earmarked for foodgrains and
sugar subsidies in 1997-98 representing an increase of Rs. 1,434 crore over RE
1996-97. When the dual card system under the Targeted PDS takes effect throughout
the country, if more funds are required, I shall provide the same. I may not wear
my heart on my sleeve, but my heart is in the right place.
76. I would like to make a special mention of the outlay for Defence. Rs.
35,620 crore is being provided which included Rs. 3,620 crore for implementing
the recommendations of the Fifth Pay Commission. In the past, revenue expenditure
of the Defence Services had been routinely underprovided. This year, I have requested
the Ministry of Defence to fully provide for the revenue expenditure. On the capital
account, for the present, I am providing Rs. 8,907 crore which is Rs. 402 crore
more than RE 1996-97, with a clear promise – and I make that solemn undertaking
here – that any additional requirement of the Defence for capital expenditure wiil
be adequately provided for during the course of the year. Mr. Speaker, Sir, my head
is also in the right place.
77. A provision of Rs. 4,205 crore is being made for implementing the
recommendations of the Fifth Pay Commission for employees other than Defence
and Railway personnel for whom separate provision have been made in this Budget
and in the Railway Budget. The recommendations of the Pay Commission are being
processed expeditiously according to established procedure.
78. The non-Plan provision for assistance to public sector units has been
on the increase. In 1996-97, we approved revival packages for Bharat Yantra Nigam,
Bharat Bhari Udyog Nigam, Hindustan Paper Corporation, Scooters India, HEC
and Bharat Refractories. For 1997-98, I am providing Rs. 1,107 crore as non-Plan
loans, and I expect that we will approve more restructuring proposals during the
course of the next year.
Revenue Receipts
79. I now turn to revenue receipts.
80. Gross tax revenues at the existing rates of taxation are estimated at
Rs. 1,53,347 crore. After providing Rs. 40,254 crore as the States’ share of taxes,
the Centre’s net tax revenue will be Rs. 1,13,094 crore. Non-tax revenues have also
shown healthy buoyancy. The receipts under the head are expected to be Rs.
39,749 crore in 1997-98. I have taken credit for Rs. 3,681 crore as license fee from
private operators of cellular and basic telecom services.
81. The net revenue receipts for the Centre, including non-tax receipts, are
expected to increase from Rs. 1,30,783 crore in Re 1996-97 to Rs. 1,52,843 crore
in 1997-98.
82. In the area of capital receipts, market borrowings are placed at Rs.
34,425 crore. Net external assistance will be Rs. 2,435 crore. I am also taking
credit for receipts from disinvestment of equity in public sector enterprises of Rs.
4,800 crore. Total receipts at the existing rates of taxation are estimated at Rs.
2,31,876 crore.
 15
83. I shall come to the gross fiscal deficit in Part B of my speech.

PART B
84. Let me preface my tax proposals by saying that I have set for myself
the goal of augmenting the net tax revenues of the Central government by a healthy
15-16%; I believe that through the measures proposed by me we will attain this
goal.
85. I shall begin with my direct tax proposals.
86. The CMP affirms that “the United Front government will continue with
tax reforms and take other steps to augment revenues legitimately due to the
government and to curb tax evasion. I believe that a good tax policy should aim at
moderate rates, a wider tax base, simpler procedural rules and securing greater
compliance. Households and the corporate sector are our best savers; we must
reward them. From another point of view, however, the tax to GDP ratio for the
Central government, which currently is only around 10.5 per cent, needs to increase
to sustain the needs of public investment and social sector expenditure. Moreover,
the proportion of direct taxes should increase in the total tax revenues of the
government.
87. It is inexplicable that in a country of over 900 million people, only 12
million people are assessed to income-tax and, what is worse, only about 12,000
assessees are in the tax bracket of income above Rs. 10 lakhs. I intend to make a
beginning in widening the tax net by an amendment of Section 139 of the income-
tax Act. My proposal is that residents of large metropolitan cities who satisfy any
of the two following economic criteria, namely, ownership of a four-wheeler vehicle,
occupation of immovable property meeting certain prescribed criteria, ownership of
a telephone and foreign travel in the previous year, should normally fall within the
taxable slabs and should voluntarily file their tax returns. I appeal to them to
cooperate in our endeavour. If anyone fails to do so, the income-tax Department
would serve upon him a notice obliging him to file his return so that taxes, if due
from him could be collected. Those who live in apparent comfort must have the
satisfaction of finding their names in the records of the income-tax Department.
88. With the same objective, I also propose to introduce a new Estimated
Income Scheme for retail traders. The scheme will apply to persons engaged in the
business of retail trade of any goods or merchandise having a total turnover of less
than 40 lakhs. A trader with a turnover of less than 8 lakhs will stand exempted,
given the present exemption limit. The income of the trader will be estimated at 5
per cent of the total turnover. Assessees who file a return showing income less that
5% of turnover will be required to maintain books of account and get their accounts
audited.
89. With the aforesaid steps, the existing presumptive scheme under section
115K, popularly known as Rs. 1,400 scheme, which has not yielded the desired
results, being discontinued.
90. Members may recall that, last July, I had reduced the income-tax rate
for the first income slab from 20 per cent to 15 per cent. It was, I believe, a step in
the right direction. If we look at comparative income-tax slabs in other developing
Asian countries, it will be evident that tax rates in India are still high and constitute
an important reason for tax evasion. It is now widely accepted that moderate rates
 16
of taxation encourage savings, foster growth and motivate voluntary compliance. I
have received wise counsel from many Hon’ble Members. I have, therefore, decided
to lower the rates of personal income-tax across-the-board in a significant manner.
The current rates of 15, 30 and 40 per cent are being replaced by the new rates of
10, 20 and 30 per cent. The rate will be 10 per cent in the first slab of Rs. 40,000
to Rs. 60,000, and 20 per cent in the slab of Rs. 60,000 to Rs. 1,50,000 and 30 per
cent for all income above Rs. 1,50,000.
91. The new rates are so moderate that there is now little justification for
increasing the exemption limit. However, salaried persons deserve some relief. I,
therefore, propose to increase the limit of standard deduction to Rs. 20,000, which
will, henceforth, apply uniformly to all salaried taxpayers. An employee drawing a
salary of Rs. 75,000 per annum and contributing 10 per cent thereof to the provident
fund would have to pay no tax at all.
92. During the last meeting of the National Development Council, a
suggestion was made that the government should think of a scheme to harness
‘black money’ for productive purposes. I have balanced the economic and the ethical
arguments. I have considered various options. And I believe that the time is
opportune to introduce a Voluntary Disclosure Scheme. This would be a simple
scheme where, irrespective of the year or the nature or the source of the funds, the
amount disclosed, either as cash, securities or assets, whether held in India or
abroad, would be charged at the revised highest rate of tax. Interest and penalty
will be waived. Immunity will be granted from any action under the income-tax,
Wealth tax and Foreign Exchange Regulation Acts. The date of commencement of
the scheme will be notified separately, but the scheme will end on December 31,
1997. Of the total resources which can be secured under the Scheme, a substantial
part – 77.5 per cent – accrue to the State governments. I hope they will cooperate
in our endeavour in attracting people to avail of this new opportunity being offered
to those who have shied away from paying legitimate taxes in the past. The share
which becomes available to the Central government will go entirely towards financing
the Basic Minimum Services programme and infrastructure needs.
93. I also propose to give some further relief to our senior citizens. I propose
to increase the rate of rebate available to them to 100 per cent, from the existing
40 per cent, subject to a limit of Rs. 10,000. Thus a senior citizen having an
income upto Rs. 1 lakh would not have to pay any tax. Senior Citizens with higher
incomes will also enjoy this exemption limit but will be taxed above the threshold
level of upto Rs. 1 lakh.
94. Responding to demands from Chief Ministers, Propose to amend section
80G of the Income-tax Act to provide for 100 per cent deduction in respect of
donations made to the Chief Minister’s Relief Fund or Lieutenant Governor ’s Relief
Fund.
95. Turning to corporate taxes, I had in my last budget reduced the rate of
surcharge from 15 per cent to 7.5 per cent and had expressed the hope that I
would take a similar step in my next budget. I propose to abolish the balance
surcharge on companies.
96. Corporates should be encouraged to undertake new investments. Hence,
 17
I propose to reduce the tax rate applicable to both domestic and foreign companies.
The rate for domestic companies will now be 35 per cent and for foreign companies
48 per cent. The reduction in the corporate rates, apart from better compliance,
should impart an added momentum to the growth process, create multiplier
beneficial effects all around and also attract greater foreign investment.
97. There has also been a demand from the corporate sector that the tax
rate of 30 per cent on royalty and technical services fees payable to foreign companies
is too high and acts as a hindrance to the transfer of technology. I, therefore,
propose to reduce this rate to 20 per cent.
98. I have received requests from non-resident Indians that the capital
gains tax rate in their case arising on transfer of securities should be at par with
the rate applicable in the case of FIIs. I see merit in their demand and, accordingly,
propose that the rate be reduced from the existing 20 per cent to 10 per cent.
99. The Minimum Alternate Tax (MAT) on companies, which was introduced
last year, has been the subject of extensive debate. A large number of representations
have been received to repeal – or review – the provisions. The economic rationale
for MAT has, I am afraid, not been altered and I am unable to accept the request
that the provision introduced last year be totally withdrawn. However, there is a
case for a review of the manner in which the tax is charged and collected. I,
therefore, propose to make the following changes in the provisions of MAT:-
(i) Export profits will be exempt from MAT and will be eligible for full deduction
under section 80HHC.
(ii) A system of credit will be introduced in respect of the payment of MAT.
When a company pays MAT, the tax credit earned by it shall be allowed
to be carried forward for a period of 5 assessment years and, in the
assessment year when regular tax becomes payable, the difference between
the regular tax and tax computed under MAT for that year will be set off
against the MAT credit available. Thus, at the proposed new rate of
corporate tax, every company including the zero tax companies, would
have to pay income-tax of not less than 10.5 per cent on its book profits.
100. Another area of vigorous debate over many years relates to the issue of tax
on dividends. I wish to end this debate. Hence, I propose to abolish tax on dividends
in the hands of the shareholder.
101. Some companies distribute exorbitant dividends. Ideally, they should retain
bulk of their profits and plough them into fresh investments. I intend to reward
companies who invest in future growth. Hence, I propose to levy a tax on distributed
profits at the moderate rate of 10 per cent on the amount so distributed. This tax
shall be incidence on the company and shall not be passed on the shareholder.
102. In order to encourage investments in government securities, called gilts, I
propose to abolish Tax Deducted at Source (TDS) on such securities. I also propose
to include gilts for the higher deduction limit of Rs. 15,000 under section 80L of the
Income-tax Act as is available in respect of income received from the units of UTI
or approved mutual funds.
 18
103. I have already announced that Telecommunication will qualify as
infrastructure. I, therefore, propose to extend the following benefits to this sector:-
(i) Tax holiday under section 80 IA;
(ii) Amortisation of license fees; and
(iii) Inclusion of investment made in debentures and equity shares of a public
company providing telecommunication services for the purposes of tax
rebate under section 88.
104. In order to encourage the development of tourism infrastructure, I propose
to give a deduction of 50 per cent of the profits in respect of new hotels which are
located in a hilly area or a place of pilgrimage or a specified place of tourist
importance. These hotels will also be exempt from the levy of expenditure tax. In
respect of hotels located in other places, excluding the four metropolitan cities, the
deduction shall be only 30 per cent of the profits.
105. Taxing financial itermediation goes contrary to the canons of sound public
finance. Today, an interest-tax at the rate of 3 per cent is levied on the interest
income of lending institutions, including banks and NBFCs. I propose to reduce
the levy to 2 per cent and I hope to eliminate this levy progressively. This will help
to keep down the cost of borrowing.
106. As a measure of simplification, I propose to amend Section 37 of the
Income-tax Act to provide for the removal of artificial disallowance on account of
advertisement, travelling, hotel expenses, entertainment expenses etc. incurred for
legitimate business purposes.
107. I have also decided to eliminate a number of exemptions which continue to
remain on statute book and have since lost their relevance or rationale. These
include exemptions and deductions under sections 10(15A), 10(26AA), 80GG and
80JJ.
108. Now, I turn to my indirect tax proposals.
109. In relation to indirect taxes the CMP has stipulated: “The progress towards
the goal of bringing India’s tariffs in accord with world levels will be measure and
calibrated.”
110. On more than one occasion, I have stated that we would achieve the
average levels of tariffs prevalent in ASEAN countries by the turn of the century.
This will give time to Indian industry to adjust to these changes. This year’s proposals
should be seen in this background.
111. I propose to reduce the peak rate of customs duty from 50% to 40%
112. High levels of customs duties on capital good are inconsistent with our
policy of attracting the best technology. Greenfield investments in large projects
should be globally competitive. I have tried to harmonise the needs of the Indian
industry with the requirements of the capital goods sector. I, therefore, propose a
modest reduction in duty on capital goods from 25% to 20%. This reduced rate of
20% will also apply to project imports. Over the next two to three years these rates
 19
would need to be further adjusted to conform to levels prevalent in other developing
Asian countries.
113. I also propose to exempt plans, designs and drawings from the levy of
customs duty.
114. The customs duty on several inputs for the steel industry is being reduced.
I propose to reduce the duty on coking coal (of ash content below 12%) from 5% to
3% and on coking coal of higher ash content, as well as coke, from 20% to 10%. I
also propose to reduce the duty on nickel from 20% to 10%, on ferro alloys from
25% to 20% and on re-rollable steel scrap from 30% to 20%. All these measures
should benefit the steel industry to reduce its cost of production.
115. Iron and steel products at present generally attract customs duty at 30%.
I do not propose to make any major changes in the duty structure this year.
However, I propose to reduce the duty on Cold Rolled Coils of iron and steel from
30% to 25% to help the engineering industry. I further propose to reduce the duty
on ships brought for breaking from 10% to 5% and on pig iron from 20% to 10%.
116. I propose to reduce the duty on non-coking coal from 20% to 10%. This will
help the power sector.
117. Chemicals constitute vital inputs for several down-stream industries
including the small scale sector. I propose to reduce the duty on organic and
inorganic chemicals from 40% to 30%. I also propose to make the following reductions
on certain essential chemicals:
· On linear alkylbenzene, from 30% to 20%.
· On methanol, from 30% to 20%.
· On naphthalene, from 30% to 20%.
· On phenol, from 30% to 25%.
· On catalysts, from 30% to 25%.
118. I also propose to reduce the customs duty on dyes, pigments, paints and
varnishes, glues, enzymes and modified starches from 40% to 30%. These reductions
will significantly benefit our textile industry.
119. Mr. Speaker, Sir, the scheduled dismantling of quantitative restrictions
under the Multi Fibre Agreement will expose all textile exporting countries to stiff
competition. The Ministry of Textiles have created a “Technology Upgradation Fund”
for both the textile and jute industries to enhance the competitive efficiency of
these sectors. Our textile industry has, therefore, to upgrade its technologies in the
shortest possible time. Last year, I had reduced the customs duty on several kinds
of textile machinery to 10%. In order to improve the quality of our garments for
exports, this year I propose to ad some more processing machines to this category.
However, to mitigate any adverse impact on domestic manufacturers, I have decided
to allow them to import the components and parts of these machinery at a
concessional duty of 10%.
120. As a relief to the woolen textile industry, I propose to reduce the import
duty on apparel grade wool from 25% to 20%, on wool waste from 30% to 20% and
on woolen and synthetic rags from 30% to 25%. On flax fibre, I propose to reduce
the duty from 30% to 20%.
 20
121. In order to conserve our forest resources, I propose to fully exempt wood
logs, fuel wood, wood chips, etc. from customs duty.
122. The spread of “Information Technology” has radically altered conventional
wisdom on growth strategies. I propose several measures to encourage this industry
and to reduce costs. These include:
· Full exemption to computer software.
· Reduction on duty on computer parts, other than populated printed circuit
boards from 20% to 10%.
· Reduction of duty on cartridge tape drive and digital video disc drive from
20% to 10%.
· Reduction on duty on populated printed circuit boards from 30% to 20%.
· Reduction on duty on integrated circuits from 20% to 10%.
· Reduction on duty on colour monitor tubes from 20% to 10%.
· Reduction on duty on colour picture tubes from 35% to 30%.
· Reduction on duty on parts of cellular telephones and pagers from 30% to
20%.
· Reduction on duty on telecom equipment from 40% to 30% and on their
parts from 30% to 20%.
123. Ham operators are presently eligible to import specified equipment upto a
value of Rs. 50,000 at a concessional rate of duty. I propose to raise this limit to
Rs. 75,000.
124. I propose to reduce the duty on watch parts and movements from 50% to
25% and on watch cases of base metals from 50% to 30%. I also propose to reduce
duty on horological materials from 20% to 10%. This will help our watch industry
to further enhance their quality.
125. We are all concerned about the menace of growing pollution. In order to
help reduce the cost of CNG kits, I have decided to reduce the customs duty on
such kits and their parts from 10% to a modest 5%. Similarly, I propose to reduce
the customs duty on catalytic converters and their parts to 5% from their existing
rate of 25%.
126. To improve the quality of medical care, I propose to reduce the import duty
on medical equipment from 30% to 20%; on linear accelerators of 15 MeV and
above used for cancer treatment from 10% to 0%; and on ophthalmic blanks for
making spectacle lenses from 50% to 20%.
127. To promote tourism, I propose to reduce the import duty on specified
equipment required for hotels from 35% to 25% and on specified specialty food
items used by foreign tourists from 50% to 25%.
128. I also propose to give some relief to the film and photographic industry by
reducing the import duty on cine films and other photographic films from 30% to
25% and on parts of cameras from 50% to 25%.
 21
129. I propose to reduce the customs duty on baggage from 60% to 50%.
130. I now come to proposals on central excise.
131. Our excise structure is far too complex. Till some time ago, we had a
multiplicity of rates, innumerable end-use exemptions and other distortions.
Considerable simplification has taken place. Last July, I promised that within three
years we shall have a four rate tax structure. I find that, in the first instance, it is
necessary to reduce the dispersion in excise rates. I believe that we can eventually
gravitate towards a mean rate around 18%. With this objective in view, I have
introduced three new rates, namely, 8% 13% and 18%. In the process I have done
away with the rates of 20% and 10% (except in the case of some petroleum products).
In the interest of revenue, I have perforce to continue, for the time being, the rate
of 15% which will apply to metals and a few other commodities.
132. However, the excise duty structure is still punctuated with many exemptions.
All commodities, with some unavoidable exceptions, should be subject to excise
duty at minimum rate. I propose to undertake this exercise in the next year ’s
budget.
133. Cotton yarn will continue to bear excise duty of 5% only.
134. I propose to withdraw the exemption in a few cases like jams, jellies,
sauces and soups where I propose to impose a nominal duty of 8% . Similarly, I
propose to levy a duty of 8% on pens and ball point pens exceeding a value of Rs.
100 per piece and on non-power sun glasses. However, writing ink will be free from
excise duty.
135. On a number of items of mass consumption like biscuits, sugar
confectionery, laundry soap, tooth paste, tooth powder, kitchen and tableware of
glass, and clocks and watches of a value upto Rs. 600 per piece, I propose to
reduce the excise duty from 10% to 8%. A rate of 13% would be applied for watches
and clocks above Rs. 600 per piece and other items machinery and parts, tyres and
tubes of two-wheeled motor vehicles, fluorescent tubes, and computers and parts
thereof. A reduced rate of 13% will also apply to X-ray films, sanitary towels,
napkins for babies and similar sanitary articles.
136. In respect of a large number of products, I propose to reduce the excise
duty by percentages ranging from 2% to 7% and apply the mean rate. Accordingly,
the mean rate of 18% would be applicable to many commodities including cocoa
and cocoa preparations, instant coffee, sherbats, organic and inorganic chemicals,
paints and dyes, electric wires and cables, toilet soaps, detergents, articles of leather,
synthetic rubber, fibres and blended synthetic yarn, paper and paper board, plywood,
travel goods and a host of consumer durables.
137. Agricultural and horticultural machinery are fully exempt from excise duty.
I propose to extend the exemption from excise duty to milking machines, dairy
machines and their parts.
138. In order to revive and give a thrust to the ailing jute industry, I propose to
fully exempt all jute and jute products from excise duty.
139. At present, import of equipment and consumables by recognized research
 22
institutions is exempt from customs duty. In the interest of the domestic producer,
I propose to allow the purchase of indigenous equipment and consumables by such
institutions free of excise duty.
140. I also propose to reduce the duties of excise on certain items in order to
bring about a more balanced excise structure on the whole. The changes proposed
are:
· Reduction of duty on taxis and cars for physically handicapped from 30%
to 25%.
· Reduction of duty on polyester filament yarn from 40% to 30%.
· Reduction of duty on cosmetics and toilet preparations from 40% to 30%.
· Reduction of duty on glazed tiles from 30% to 25%.
· Reduction of duty on air conditioner from 40% to 30%.
141. Mr. Speaker, Sir, smoking in public places is banned in Delhi. The fight
against cancer and respiratory diseases continues. My contribution will be to increase
the excise duty on non-filter cigarettes, not exceeding 60mm in length, popularly
called mini cigarettes, from Rs. 75 per thousand to Rs. 90 per thousand. I have
also increased the duty on other categories of cigarettes. The increase range from
Rs. 20 to Rs. 70 per thousand. There has been no increase in the excise duty on
biris since 1995. I, therefore, propose to increase the excise duty on biris from Rs.
5 per thousand to Rs. 6 per thousand. The impact of this duty change on the retail
price would be only 2 paise for a bundle of 20 biris. As regards cigarettes, the
increase would be 15 times more for every mini cigarette.
142. The small scale sector makes an important contribution to our overall
production, provides gainful employment and also contributes to our export effort.
It is the declared policy of this Government to free the small scale industry from
the rigours of cumbersome procedures. In line with this objective, I have radically
simplified the scheme of excise duty concessions for the small scale units. I intend
to continue the full exemption for duty on clearances upto Rs. 30 lakhs and upto
Rs. 100 lakhs, if the small scale unit does not avail any modvat credit on duty paid
inputs. The flat rate of duty will be 3% ad-valorem on clearances between Rs. 30 to
Rs. 50 lakhs and 3% ad-valorem on clearances between Rs. 50 to Rs. 100 lakhs.
The flat rate will apply for all specified goods to which the small scale exemption is
applicable. In the revised scheme of exemption, the small scale units will not be
required to maintain complicated records for availing modvat. They will also not be
required to determine the classification of goods.
143. In order to curb avoidance from payment of duty, I have decided to exclude
a few items like cotton yarn and texturised man-made yarn from the purview of the
SSI exemption scheme.
144. Mr. Speaker, Sir, while it is our policy to moderate the tax rates and
simplify procedures, the government is equally committed to curb evasion of taxes.
It is reported that in some sectors, like induction furnace, steel re-rolling mills etc.,
evasion of excise duty is substantial and the production is not being reported
correctly. I propose to tackle this problem by introducing collection of excise duty
 23
on the basis of their production capacity. Suitable legislative changes in the excise
law for enabling the implementation of the aforesaid changes are under consideration.
The details of the proposals would be submitted to this House in due course.
145. The average citizen consumes a basket of commodities. As a result of my
proposals – some increases and many reductions – I believe the basket will carry a
significantly lower tax burden.
146. The services sector contributes nearly 40% of the GDP. ‘Services’ are products
as much as ‘manufactured goods’. Both must bear taxes. Hence, I propose to
extend the service tax to cover a number of well known services like:
· Transportation of goods by road;
· Consulting engineers;
· Custom house, Steamer and Clearing and Forwarding agents;
· Air travel agents, tour operators and car rental agencies;
· Out-door caterers, pandal contractors and mandap keepers;
· Man-power recruitment agencies.
147. The proposals on service tax are estimated to yield a revenue of Rs. 1,200
crore in a full year. However, for the financial year 1997-98, I am taking credit for
Rs. 900 crore. I wish to inform the House that in order to improve our national
highways, I propose to utilise the bulk of the proceeds realised from service tax on
transportation of goods by road to augment the resources of the National Highway
Authority.
148. On the conventional basis, my proposals relating to reduction in customs
duties are estimated to result in a loss of Rs. 2,625 crore in a financial year and,
in the case of excise duties, my proposals are broadly revenue neutral. However,
the buoyancy and the growth momentum that would be imparted to the economy
would more than compensate for our losses computed through the conventional
calculations.
149. I now have to say something on behalf of my colleague the Minister of
Communications who has made a statement earlier today. A revision of tariffs for
some postal services has become unavoidable. However, in doing so, we have kept
in view the interest of the common man and the role of postal services in meeting
wider social obligations. While there is no change for Registered Newspapers, the
price for ordinary Post Card is being raised to 25 paise and printed Post Card to Rs.
1.50. The price for Inland Letter is also being raised from 75 paise to Re. 1 and for
Envelope from Re. 1 to Rs. 2. Certain other changes are also being effected which
is explained in the memorandum circulated alongwith the budget documents. The
changes will take effect from a date to be notified later. The proposed revisions are
estimated o yield an additional revenue of Rs. 367 crore in a full year and Rs. 305
crore during 1997-98. This modest increase is necessary for the development of
postal services and in partially bridging the deficit on the numerous services being
provided by the Postal Department.
150. Copies of the notifications giving effect to the above changes in customs
and excise will be laid on the Table of the House in due course.
151. Mr. Speaker, Sir, as I come to the end of my labours, let me look at the final
 24
outcome. The revenue deficit in 1997-98 is placed at Rs. 30,266 crore or 2.1% of
GDP. The fiscal deficit comes to Rs. 65,454 crore which is 4.5% of GDP. I have not
wavered in my commitment to continue on the course of fiscal correction. With the
support of this House, and as I promised in the CMP, I hope to bring the fiscal
deficit under 4% in the next budget.
152. Our goal must be to achieve rapid and broad-based growth which alone
can ensure higher employment, better living standards and a humane and just
society. The challenges that we face today are not unique to India. Other countries,
including our friends in Asia, have faced similar challenges. Japan showed the
way. Other Asian countries are surging ahead. And, finally, there is the example of
China, powering its way to becoming the second largest economy in the world.
These countries have shown that with courage, wisdom and pragmatism they can
find their rightful places in the world.
153. Deng Xiao Peng, to whom we paid homage a few days ago, once said, “From
our experience of these last few years, I is entirely possible for economic development
to reach a new stage every few years. Development is the only hard truth.” India’s
economy has also reached a new stage. Our beloved India is far stronger today
than she was six years ago.
154. I would appeal to this House, and to the Indian people to heed the call of
Gurudev Rabindranath Tagore:
Desha desha nadita kari mandrita tabha bheri,
Aashilo jata birabrinda aashana tabha gheri.
Deen aagata oyi, Bharat tabu kayi?
Shay ki rahila lupta aaji shaba-jana-paschatay?
Louk bishwakarmabhar mili shabar shathay
(Thy call has sped over all countries of the world
And men have gathered around thy seat.
The day is come; but where is India?
Does she still remain hidden, lagging behind?
Let her take up her burden and march with all.)
155. Mr. Speaker, Sir, with these words, I commend the Budget to this august
House.
[28th February, 1997]
 1

Budget 1996-97
Speech of
Shri P. Chidambaram
Minister of Finance
27th July, 1996
PART A

Mr. Speaker Sir,

I rise to present the regular budget for the year 1996-97.
2 . An unusually peaceful general election produced an unusually complex
mandate. It was the duty of every political party to be faithful to that mandate.
Accordingly, political parties of different complexions and different ideologies have
come together to form this government. Many of them are regional parties, albeit
with a national outlook. What has united us is a resolve to preserve India’s secular
heritage and to provide a representative government committed to faster economic
growth and enhanced social justice.
3 . The United Front is a coalition. Before assuming office, the partners of the
coalition finalised a document called “A Common Approach to Major Policy Matters
and a Minimum Programme”, popularly called the CMP. This historic document
was released to the nation by our Prime Minister, Shri Deve Gowda, on June 4,
1996. When I began work on the CMP I was not even a Minister. When we completed
our exercise I found myself in the office of Finance Minister. Therefore, my
commitment to the CMP goes beyond the office I hold. Hon’ble Members will have
many opportunities this afternoon to test my commitment and they will find that
the CMP has provided the foundation and set the agenda for this Budget.
4 . An Update of the Economic Survey 1995-96 was laid on the Table of the
House last Friday. It is a slim document of no more than 21 pages and I hope it
made for good weekend reading. Our conclusions are that the economic indicators
point to high growth but there are significant areas of weakness. The Update has
identified these areas as the fiscal deficit, sluggish agricultural growth, inadequate
infrastructure, high interest rates and the trade deficit. The most worrisome is the
decline in the growth of agricultural crop production to 0.9 per cent in 1995-96.
The Update has also listed fiscal challenge, infrastructure challenge and employment

1
 2
and poverty alleviation as key issues which need to be addressed on a priority
basis.
5 . The CMP has declared that the government will follow economic policies that
will promote growth with social justice and lead to greater self-reliance. We have no
use for jobless growth; nor for growth that leaves untouched large sections of the
people. We will remove controls and regulations over agriculture and industry. We
will keep our economy open and competitive in order to encourage more foreign
trade and attract more foreign investment. We will reform the tax system. We will
broaden and deepen reforms of the financial and capital markets even while
strengthening independent regulators like the Reserve Bank of India (RBI) and the
Securities and Exchange Board of India (SEBI). Above all, we will observe fiscal and
monetary prudence which is the key to low inflation and rapid growth.
6 . This Budget, therefore, has seven broad objectives:
· To remain steadfast on the course of economic reforms and liberalisation
aimed at accelerating economic growth.
· To address the concerns of the poor and provide them with basic minimum
services in a time-bound manner.
· To ensure broad-based growth in agriculture, industry and services to
achieve high employment.
· To ensure fiscal prudence and macro-economic stability.
· To enhance investment, especially in the infrastructure sectors.
· To strengthen key interventions to promote human development.
· To ensure viability in the balance of payments through strong export
performance and larger foreign investment flows.
I shall now deal with the major areas of the economy and spell out our policy
initiatives in order to achieve the objectives that I have just listed.
Agriculture & Rural Credit
7 . The Common Minimum Programme lays emphasis on broad-based agricultural
development and calls for a doubling of the flow of credit to agriculture and agro-
industries, particularly to small and marginal farmers, within five years. We have
evolved an integrated plan consisting of several elements for fulfilling this important
objective.
8 . First, the share capital of the National Bank for Agriculture and Rural
Development (NABARD) will be increased from the present level of Rs.500 crore to
Rs.2,000 crore in the next five years. I propose to double NABARD’s paid up share
capital to Rs.1,000 crore in the current year. A budgetary provision of Rs.100 crore
is being made towards the Government of India’s share and the balance Rs.400
crore will be contributed by the Reserve Bank of India.
9 . Second, the Rural Infrastructure Development Fund (RIDF) which is operated
by NABARD and funded by contributions from commercial banks falling short of
their priority lending targets will be augmented considerably. The RIDF provides
 3
loans to State governments for completion of projects in areas like medium and
minor irrigation, soil conservation and watershed management. During 1995-96,
NABARD sanctioned loans aggregating Rs.1,984 crore to 19 States for completing
2,489 projects. During the current financial year, an additional Rs.2,500 crore will
be made available for financing rural infrastructure through the RIDF.
10. In addition to the RIDF, I am proposing an Accelerated Irrigation Benefit
Programme under which the Centre will provide, on a matching basis, additional
Central assistance by way of loans to the States for the timely completion of selected
large irrigation and multi-purpose projects. I am making an allocation of Rs.800
crore in 1996-97 to launch this scheme which is designed to accelerate the
completion of irrigation projects where the project cost exceeds Rs.1,000 crore and
is beyond the resource capability of the States. I am also allocating Rs.100 crore in
the current financial year for irrigation projects where, with just a little additional
resources, the projects could be completed and farmers could get the benefit of
assured water supply. 100,000 hectares will be brought under irrigation through
these schemes and I have been assured that the first crop will be harvested on
these lands during one of the next four agricultural seasons. Details of the large
projects and the projects to benefit 100,000 hectares will be announced by the
Planning Commission in the next few days. This programme will be closely monitored
by the Department of Programme Implementation.
11. Fourth, to promote investment in commercial or high technology
agriculture and allied activities such as horticulture, floriculture and agro-processing,
state level agricultural development finance institutions are proposed to be set up.
NABARD will be the chief promoter. Other national level financial institutions as
well as the State governments concerned will be requested to participate in the
equity.
12. Fifth, it has been agreed with RBI to promote the setting up of new
private local area banks with jurisdiction over two or three contiguous districts.
This would enable the mobilisation of rural savings by local institutions and, at the
same time, make them available for investments in the local areas.
13. Finally, we have taken a number of decisions that will directly benefit the
farmers. Two weeks ago, the Prime Minister announced increases in the subsidies
for phosphatic and potassic fertilisers. Government have decided to extend the
subsidy under the Integrated Cereal Development - Rice Programme to power tillers
at the rate of Rs.30,000 or 50% of the cost for each power tiller. The subsidy
scheme on small tractors at the rate of Rs.30,000 per tractor is presently restricted
to small and marginal farmers. I am extending this scheme to all farmers. I am also
enhancing the subsidy on sprinkler and drip irrigation from 50% to 70% of the cost
of the system and the ceiling is also being raised from Rs. 15,000 to Rs.25,000 per
hectare. In respect of small and marginal farmers, women and scheduled castes
and scheduled tribes, this limit is being raised to 90% of the cost of the system.
Basic Minimum Services
14. One of the first acts of the Prime Minister, Shri Deve Gowda, was to
convene a meeting of Chief Ministers on Basic Minimum Services. This reflects the
resolve of the United Front to “advance the principles of political, administrative
and economic federalism”. The Chief Ministers’ Conference recommended adoption
 4
of seven objectives to be attained by the year 2000. These are 100% coverage of
provision of safe drinking water; 100% coverage of primary health centres;
universalisation of primary education; public housing assistance to all shelter-less
poor families; extension of the mid-day meal scheme; road connectivity to all villages
and habitations; and streamlining the public distribution system targeted to families
below the poverty line.
15. These objectives are now being served by Centrally-sponsored schemes
and schemes in State Plans. Hon’ble Members will be glad to know that I am
providing an additional amount of Rs.2,466 crore as Central assistance for State
and UT plans to significantly increase the availability of funds for these schemes.
From this amount, it is our intention to allocate about Rs.250 crore to provide
shelter and other basic amenities to slum dwellers. The distribution of this enhanced
allocation across the seven schemes and across States and Union Territories will
be determined by the Planning Commission in consultation with them.
Infrastructure Financing
16. The Update of the Economic Survey has highlighted the enormous
challenge on the infrastructure front. The state of our infrastructure - particularly
power and roads - is very poor. We cannot sustain a 7 per cent growth unless we
can revitalise these infrastructure sectors. Huge funds are also required for telecom,
railways and ports.
17. Infrastructure needs long-term finance, typically 15-20 year financial
instruments. However, it has not been possible to float such instruments in the
Indian market so far. Hence, I am proposing the establishment of an Infrastructure
Development Finance Company (IDFC). This company will be incorporated with an
authorised share capital of Rs.5,000 crore. The Central government, the RBI, banks
and financial institutions will contribute to the share capital. I am making a
budgetary provision of Rs.500 crore in the current financial year as the contribution
of the Central government. The RBI’s initial contribution to the share capital will
also be Rs.500 crore. Among other things, the IDFC will act as a direct lender, as
a refinancing institution and as a provider of financial guarantees. I believe that
the IDFC will induce investors, both Indian and foreign, to make available long-
term funds at the lowest possible market rates.
18. I am also proposing some tax incentives for infrastructure investment
which I shall outline later.
19. Hon’ble Members are aware that the Central government has already
set up the National Highway Authority of India. We need a world-class national
highway system in place very quickly. I have decided to provide a sum of Rs.200
crore to strengthen the capital base of the National Highway Authority of India. The
Authority will now be in a position to leverage resources for highway development
from both within India and from outside.
Small Scale Industry
20. The entrepreneur-driven small-scale sector forms the backbone of our
industry. I am deeply committed to strengthening this sector. The following set of
measures will be put in place immediately.
· First, the Small Industries Development Bank of India (SIDBI) has an
 5
unutilised corpus of about Rs.175 crore in its Technology Development
and Modernisation Fund Scheme. I am now proposing that SIDBI should
refinance the State Financial Corporations (SFCs) and commercial banks
for modernisation projects upto Rs.50 lakh. This will decentralise decision-
making to the advantage of small-scale units seeking modernisation funds
from SFCs and banks.
· Second, refinance is now provided for the Single Window Scheme of SFCs
etc. for composite loans upto Rs.50 lakh. I am doubling this ceiling to
Rs.100 lakh.
· Third, SIDBI will participate in venture capital funds set up by public
sector institutions as well as private companies upto 50% of the total
corpus of the fund, provided such a fund is dedicated to the financing of
small-scale industry.
· Fourth, in order to encourage a larger number of small scale units to seek
ISO 9000 certification of quality, lending institutions will be permitted to
lend to the ultimate borrowers on the same terms and conditions as SIDBI’s
direct lending scheme. SIDBI will provide refinance assistance to these
lending institutions.
Science & Technology
21. Science and technology is the key to economic progress and prosperity.
Indian scientists and technologists have accomplished a great deal, especially in
the areas of agriculture, space, atomic energy and defence. There is now need for
a massive renewal of our science and technology infrastructure.
22. I propose to extend a matching one-time grant for the modernisation of
the laboratories and institutes of the Council of Scientific and Industrial Research
(CSIR) and the Indian Council of Agricultural Research (ICAR). I will match every
commercial rupee that the CSIR and ICAR earn incrementally in the next two years
with another rupee from the Budget.
23. I also propose to strengthen the Fund for Technology Development and
Application which was created in 1994-95 to help indigenously developed
technologies reach the stage of commercial application. The interim Budget had
provided Rs.10 crore. As a demonstration of this government’s commitment to
science and technology, I am immediately making available Rs.30 crore. The
Department of Science & Technology will announce the constitution of the Technology
Development Board shortly.
Public Distribution System
24. The Common Minimum Programme states that the Public Distribution
System will be strengthened to meet the twin objectives of price stability and making
available essential articles to the poor. It is, therefore, proposed to restructure the
PDS. A beginning will be made where the need is most acutely felt. The restructured
PDS will serve households below the poverty line. Details of the restructured PDS
are being worked out and will be announced in due course.
Pay Commission
25. The Fifth Pay Commission is expected to submit its report by the end
of September 1996. Funds have been provided in this Budget as well as the Railway
 6
Budget to meet the anticipated expenditure. Meanwhile, I am happy that the question
of granting another installment of interim relief has been sorted out satisfactorily.
Other Welfare Measures
26. The Prime Minister has repeatedly declared that this government is a
government of the poor and for the poor. Growth with social justice will be the
motto of this government. Unless the country’s GDP grows at over 7% per year in
the next 10 years, we will not be able to abolish poverty and unemployment. However,
there is a need to identify vulnerable sections of the people and help them. The
Prime Minister has identified some target groups which deserve to be helped and I
am proposing some new initiatives for meeting their special needs. These initiatives
will be implemented through the State governments and, as far as possible, in
collaboration with non-governmental organisations.
· I am setting apart, initially, a sum of Rs.5 crore to assist in the
establishment of old-age homes and another sum of Rs. 5 crore to assist
in the establishment of residential primary schools for poor children
irrespective of caste or creed. It is intended that both these programmes
should be implemented through non-governmental organisations. The
programmes will be firmed up by the Ministries concerned in consultation
with the State governments.
· Rs.10 crore is being provided for giving assistance to States which have or
will set up Women Development Corporations. An additional amount of
Rs.10 crore has been set apart for starting training-cum-production centres
or schemes for destitute women in different States.
· I am creating a National Illness Assistance Fund with an initial corpus of
Rs.5 crore. Besides, Rs.25 crore have been set apart for contributions to
the corpus of State Illness Assistance Funds that we would encourage the
State governments to establish. 100% of the donations to these funds will
be exempt from income tax. These funds will be used to provide assistance
to the very poor for surgery or treatment for serious illnesses requiring
hospitalisation.
· Rs.5 crore is being provided to award an ex-gratia amount of Rs.50,000
per family to the families of lorry and bus drivers who meet with fatal
accidents. This will be implemented by the State governments on a
reimbursable basis.
· I am making a provision of Rs.5 crore for building residential facilities for
hamals - our brothers who toil day and night. This scheme will also be
implemented by the States.
27. Government will consider a scheme of financial assistance to States
who confer ownership rights in respect of minor forest produce on Scheduled Castes,
Scheduled Tribes, Other Backward Classes and other weaker sections who work in
forests.
Fiscal Discipline
28. The biggest challenge that we face is the fiscal challenge. The United
 7
Front government is committed to bringing the fiscal deficit to below 4% of GDP.
This is what the Common Minimum Programme says and this is what I intend to
do over a period of time. One plank of the strategy is, of course, to raise more
revenues. But without a credible public expenditure management policy, no
programme of fiscal deficit reduction will be sustained. I believe that no one is
against austerity or efficiency as such. At the same time, I accept the position that
sound expenditure management is not a mere technocratic exercise but involves
issues of equity, fairness and non-discrimination. In order to work out a reasonable
policy in this regard, I propose to appoint a high-level Expenditure Management
and Reforms Commission comprising distinguished political leaders, economists
and administrators. This Commission will be given four months - and I hope no
more- to submit its recommendations on public expenditure management and
control as far as the Central government is concerned. The report will be made
public immediately so that we can generate an informed public debate on an issue
that has a vital bearing on our economic future.
29. I also propose to place before the House a discussion paper on subsidies.
The paper will list all the subsidies, visible and hidden, so that there can be an
informed debate and a consensus on the overall level of subsidies as a percentage
of GDP and their appropriate targeting.
30. In the meantime, I intend to be strict in matters relating to cash
management, project portfolio review, adherence to budgetary ceiling and adequacy
of returns from public sector enterprises.
31. Hon’ble Members are aware that in September 1994 an agreement was
signed between the Central Government and the RBI to phase out the system of
ad-hoc treasury bills by 1997-98. The experience last year and in the current year
so far has shown the difficulty of staying below the within-year limit. Nevertheless,
I remain convinced that the system of ad-hoc treasury bills must be phased out.
However, before this can happen we need to put in place a better expenditure
control mechanism. We also need a more transparent method of defining and
reporting the true budget deficit, including all forms of monetisation. I shall present
concrete proposals in this regard at the time of presentation of next year’s budget
so that RBI can have greater autonomy in formulating and implementing monetary
policy.
Insurance, Banking and the Capital Market
32. Earlier I made a reference to insurance in the context of long-term
finances. LIC and GIC are our two premier institutions in the insurance sector. I
intend to strengthen them. The strength of an insurer has to be measured by the
range and quality of its services and products and by the number of people availing
of those services and products. I am happy to announce that I have been able to
persuade LIC and GIC to offer two new services aimed at the middle class and the
p o o r.
33. LIC will offer a new pension scheme called “Jeevan Suraksha”. The
details of the new scheme will be announced separately but an illustration of how
the scheme will work can be given. A person who subscribes to the scheme at age
30 for a period of 30 years by paying just Rs.250 per month will get a life pension
of Rs.3,500 per month beginning at age 60. In addition, that person will get 25%
 8
of the commuted value of the pension - about Rs.1 lakh - immediately on retirement.
If the insured person dies before retirement, the spouse will be paid a substantial
life-long pension. This scheme will meet a long-felt need amongst a large number
of people for economic security beyond their working life. To launch this personal-
cum-family pension scheme, I am proposing some fiscal incentives which I shall
outline later.
34. Medical insurance is an area where the quality of the product can be
greatly improved. Under the existing Medicare scheme, the maximum cover available
is Rs.83,000 which is further segmented into different components. This ceiling is
being enhanced to Rs.3 lakh with a single aggregate limit.
35. Furthermore, the GIC will launch a new low price medicare policy
appropriate to the vast majority of our people. Jeevan is the brand name for the
LIC and we respect intellectual property rights. So we are calling this new scheme
“Jan Arogya”. The policy will provide a cover upto Rs.5,000 per year with an annual
premium of only Rs.70. What is more, a family of four comprising the husband,
wife and two children below the age of 25, can pay an annual premium of Rs.240
and get cover for Rs.20,000 for the family as a whole. GIC will soon announce the
details of this scheme.
36. I have advised LIC and GIC to introduce modern information technology
in their business. I have also asked LIC to review the premium structure based on
the latest mortality tables.
37. An interim, non-statutory Insurance Regulatory Authority was set up
in January 1996. I now propose to introduce a Bill to make it a statutory body and
to empower it suitably. When I return to the subject of insurance in the next
Budget, I shall address some of the policy parameters outlined in the Common
Minimum Programme, including the sequence of steps for the restructuring of the
insurance industry.
38. Reform of the banking sector has been an integral part of the process
of economic reforms. The public sector banks have shown an improvement in
profitability and capital adequacy and are taking steps to adopt improved technology.
The entry of private sector banks has added a welcome measure of competition.
Hon’ble Members are aware that in the past three years the government provided
a total of Rs.11,840 crore to recapitalise several public sector banks. I am happy to
inform the House that three of these banks are now in a position to return part of
the capital, amounting to Rs.747 crore, reflecting an improvement in their
performance. This re-flow of resources will help to recapitalise some more public
sector banks for which a provision of Rs.909 crore is being made in 1996-97. Some
of the strong public sector banks are also planning to recapitalise themselves by
accessing the capital markets directly. Hon’ble Members will be pleased to know
that the State Bank of India is today a prized scrip in the market. I am also
providing Rs.200 crore in 1996-97 for restructuring and recapitalising the Regional
Rural Banks.
39. The capital market has a crucial role to play in raising funds for new
investment. Government will ensure healthy development of the capital markets
through effective regulation, greater transparency and improved trading and
settlement practices. Our major stock exchanges have already introduced on line
 9
electronic trading. The commencement of a Central Depository, which is expected
in the course of this year, will be a historic further step in the modernisation of the
capital markets.
40. The present regulations governing foreign institutional investors allow
investment only in listed securities. There is also a limit of not more than 5% for an
individual FII and an aggregate of 24% for all FIIs in the stock of a listed company.
It has been represented that these limits should be liberalised. Besides, FIIs are
unable to invest in infrastructure because most infrastructure projects are set up
by new companies which are not expected to be listed for some time. Having regard
to these representations, I propose to raise the limit of 5% for an individual FII to
10% subject, however, to the aggregate limit of 24% for all FIIs. I also propose to
allow them to invest in unlisted companies in the same manner as they are allowed
to invest in listed companies. The revised guidelines are being issued separately by
SEBI.
Non Banking Finance Institutions
41. Serious concerns have been expressed from time to time about the
activities of a number of non-banking financial institutions, both corporate and
non-corporate. I am happy to inform the House that, in consultation with the
Reserve Bank of India, we have decided to bring before this House amendments to
the RBI Act to strengthen the regulatory powers over all kinds of non-banking
financial companies.
Corporate Sector
42. It is widely acknowledged that the Companies Act 1956 needs to be re-
written comprehensively. Some work has already been done. I intend to constitute
a small drafting team comprising persons with knowledge of law, economics and
company affairs to prepare a new draft and make it ready for public debate. My
deadline is January 1, 1997.
43. In the meanwhile, I propose to introduce some urgent amendments to
the present Act to provide for the following:
· Companies defaulting on payment of interest or repayment of principal on
deposits will be debarred from raising further deposits until these defaults
are remedied.
· The present ceiling of Rs.1,000 on the claims of arrears of wages and
salaries of employees in case of winding up of a company is absurdly low.
This will be enhanced.
· Mutual funds and venture capital funds will be permitted to vote in respect
of their holdings in companies.
· Non-voting shares will be permitted upto 25% of the issued equity capital.
This will go a long way in meeting the demand for a level playing field.
· Companies in the infrastructure sector will be allowed to issue shares
that are redeemable after the expiry of a period of 20 years from the date
of issue.
44. Hon’ble Members will agree with me that these changes are necessary
 10
and should be introduced right away. Next year, I shall come back to the House
with a new Companies Bill.
45. In order to achieve competitiveness, Indian industry must be given
easy access to improved technology. At present RBI accords automatic approval for
technology imports subject to the requirement that royalty will be limited to 5% on
domestic sales and 8% on export sales and that the lump sum payment does not
exceed Rs.1 crore. All other cases require case-by-case approval by the Central
government. Industry has represented that the Rs.1 crore limit for automatic
approval needs to be increased. Responding to this demand, it has been decided to
increase this limit to $ 2 million (equivalent to about Rs.7 crore). With this
liberalisation, a large number of technology import cases will not have to come to
government.
46. The Industrial Reconstruction Bank of India (IRBI) was constituted to
function as the principal credit and reconstruction agency. Thanks to rapid changes,
the burden of reconstruction is being shared by different stakeholders including
development financial institutions and banks. I, therefore, propose to transform
the IRBI into a full-fledged, all-purpose development finance institution with
headquarters in Calcutta. I will soon bring the necessary changes in the statute
governing IRBI.
FIPB, Tariff Commission and Disinvestment Commission
47. In keeping with the promises made in the Common Minimum
Programme, government have reconstituted the Foreign Investment Promotion Board.
The Foreign Investment Promotion Council will also be set up shortly. Together,
they will vigorously promote and approve foreign direct investment in India keeping
in view the objective of attracting at least $ 10 billion every year.
48. In order to expedite foreign investment approvals and also increase the
transparency of the process, government have decided to expand the list of 35
industries which are eligible for automatic approval upto 51% of foreign equity. The
expanded list will be announced separately by my colleague, the Minister of Industry.
At present, the automatic approval procedure is subject to the requirement that
the value of foreign equity should cover the total import of capital goods. This
condition was introduced in 1991 when capital goods imports were subject to
import licensing. As capital goods have been free of import licensing restrictions
since 1992, this condition is being dropped.
49. Government have also initiated action to set up an independent Tariff
Commission.
50. Government have approved the proposal to establish a Disinvestment
Commission. Any decision to disinvest will be taken and implemented in a
transparent manner. Revenues generated from such disinvestment will be utilised
for allocations for education and health and for creating a fund to strengthen
public sector enterprises. The interim Budget for 1996-97 took credit for Rs.5,000
crore through disinvestment. I propose to take credit for the same amount. The
disinvestment will be done in three tranches, approximately in September, November
and January/ February.
 11
Industrial Sickness
51. The Sick Industries Companies Act (SICA) has a narrow definition of
sickness and cannot deal with incipient or potential sickness. Managements have
been able to use the BIFR route to abdicate their legitimate responsibilities. Under
the present dispensation workers, financial institutions, banks and government
are often the losers. I have initiated a total review of SICA and the working of BIFR
and I intend to bring a new Bill in the winter session of Parliament.
Centre-State Relations
52. I have already made a reference to the Chief Ministers’ Conference on
Basic Minimum Services. The Prime Minister intends to call another conference of
Chief Ministers to discuss the political aspects of Centre-State relations and
federalism. At the last conference, the Chief Ministers expressed the view that
many centrally-sponsored schemes should be retained as such and should continue
to be funded by the Central government. While we respect the views of the Chief
Ministers, it is our desire that most Centrally-sponsored schemes should be
transferred to the control of the State governments. In the meantime, States will be
given greater flexibility in the implementation of these programmes. Provisions
available under all other schemes will be pooled and the basic entitlement ratio will
be worked out for each State. The States will be free to select for implementation,
within their annual entitlement, such schemes that are more suited to their needs.
The Ministry of Planning and Programme Implementation is working on the revised
guidelines and procedures in consultation with the concerned Ministries and the
States.
53. I also intend to circulate a discussion paper to Hon’ble Members on
the 10th Finance Commission’s recommendation to form a single divisible pool of
taxes to be shared between the Centre and the States. Prima-facie, the Finance
Commission’s recommendation appears to be in the national interest but it will
require an amendment to the Constitution. Hence, I wish to encourage a debate
before a final decision is taken.
54. The Common Minimum Programme has promised that the Government
will, within six months, bring out a detailed document that will articulate the
priorities and programmes of the Ninth Plan. While a number of programmes have
been initiated in this Budget, it will be our endeavour to prepare an Approach
Paper to the Ninth Five Year Plan within four months. The Ninth Plan will target a
growth rate of 7% per annum and will articulate strategies for decentralisation of
responsibilities, for raising resources and for ensuring widespread growth. The
initiatives that have been taken this year will be followed by a more comprehensive
programme of social and economic development with the focus on elimination of
poverty.
55. I shall now briefly go over the Budget estimates.
56. As Hon’ble Members are aware details of the revised estimates for
1995-96 were presented along with the interim Budget in February 1996. I am,
therefore, not going over those estimates again. The figures that are given below
are the budget estimates for 1996-97 and for plan expenditure I shall compare
them with the budget estimates for 1995-96.
 12
57. For 1996-97, the total expenditure is estimated at Rs.204,698 crore.
Of this, Rs.54,685 crore is gross budgetary support for the Central Plan and
assistance to State and UT plans, representing a sharp increase of 13% over
Rs.48,500 crore. Non-plan expenditure is placed at Rs.150,013 crore.
58. Central assistance for State and UT plans is being stepped up from
Rs.19,506 crore to Rs.21,972 crore. The increase will provide funds to the States
for implementing the seven Basic Minimum Services schemes to which I have
referred earlier.
59. Gross budgetary support for the Central Plan is being enhanced from
Rs.28,994 crore to Rs.32,713 crore.
60. All anti-poverty programmes will be reviewed with a view to
strengthening them and providing them with more funds. The plan allocation for
the Department of Rural Development has been increased from Rs.1,263 crore to
Rs.2,195 crore. The plan allocation for the Department of Rural Employment and
Poverty Alleviation is Rs.6,437 crore.
61. The plan allocation for the Department of Fertilizers has been increased
from Rs.205 crore to Rs.373 crore in order to increase domestic production.
62. For tapping the potential of non-conventional energy sources, the plan
allocation for the Ministry of Non-Conventional Energy is being raised by Rs.87
crore to Rs.334 crore.
63. Mr. Speaker, Sir, I hope Hon’ble Members will forgive the Finance
Minister if he is partial to the cause of exports. After all, I cut my teeth in economic
administration in the Ministry of Commerce. Promotion of exports must remain
high on our agenda. Hence, I propose to provide a sum of Rs.50 crore for the
corpus of the recently established India Brand Equity Fund. I would appeal to
industry and trade to contribute at least an equal amount in this financial year
itself. A sum of Rs.25 crore has been provided for critical balancing infrastructure.
Non-plan provision for export promotion and market development has been enhanced
from Rs.315 crore to Rs.460 crore. Deemed exporters will now get refund of terminal
excise duty in quick time.
64. The plan allocation for the Department of Health has been stepped up
from Rs.647 crore to Rs.792 crore.
65. The plan allocation for the Department of Education has been increased
substantially from Rs.1,825 crore to Rs.3,388 crore. This will help in implementation
of the District Primary Education Programme and the mid-day meal scheme.
66. This government is committed to safeguard the interests of women and
children by expanding the social safety nets. The annual plan allocation for the
Department of Women & Child Development is being stepped up from Rs.730 crore
to Rs.847 crore. The allocation for the Integrated Child Development Scheme is
being increased from Rs.588 crore to Rs.682 crore.
67. The plan allocation for the Ministry of Labour has been increased from
Rs.136 crore to Rs.188 crore. Enhanced provisions have been made for schemes
relating to improvement in the working conditions and for training of workers.
 13
68. In the Railway Budget presented a few days ago, government have
announced an outlay of Rs.8,130 crore in the Railway plan for the current year
with a budgetary support of Rs.1,269 crore. Based on the ability of the Railways to
meet their stipulated targets on internal resource generation, I will consider increase
in the budgetary support during the course of the year for this crucial sector.
69. The plan allocation for the Ministry of Surface Transport has been
increased by Rs.240 crore to Rs.1,322 crore, mainly to provide enhanced support
for national highways. Schemes are on the anvil to make Kochi and Tuticorin
important transshipment ports for container traffic.
70. There are persistent demands from the Andaman and Nicobar Islands
and Lakshadweep for more flexible norms for determining the cost for funding and
implementing projects. Having regard to their special needs, I have agreed to these
demands. We will also ensure that the Island Development Authority is activated to
accelerate development in these strategic islands.
71. I am happy to inform Hon’ble Members that the Members of Parliament
Local Area Development Scheme (MPLADS) is being continued in the current year.
Adequate funds are being made available for this scheme.
72. The total non-plan expenditure in 1996-97 is placed at Rs.150,013
crore compared to Rs.123,651 crore in BE 1995-96 and Rs.134,320 crore in RE
1995-96. Of the increment, Rs.8,000 crore is on account of increase in interest
payments, the provision for which is now placed at Rs.60,000 crore. The provision
for Defence expenditure has been increased from Rs.26,879 crore in RE 1995-96 to
Rs.27,798 crore. I assure Hon’ble Members that, if required, more funds will be
made available in order to equip and keep our armed forces in fighting fit condition.
73. I have already referred to the major new initiatives for giving an impetus
to agriculture and irrigation. The increase on account of higher subsidies for
phosphatic and potassic fertilisers will be Rs.1,724 crore over last year’s provision
of Rs.500 crore. The enhanced subsidies are expected to lead to a balanced use of
various fertilizers for better soil health and productivity.
74. The provision for food subsidy has also been increased from Rs.5,500
crore to Rs.5,884 crore.
75. A provision of Rs.449 crore has been made for writing off the outstanding
interest and conversion of loans into equity in the subsidiaries of Bharat Yantra
Nigam Ltd., Bharat Bhari Udyog Ltd. and Hindustan Paper Corporation Ltd. under
BIFR approved revival plans. In addition, a provision of Rs.1,270 crore has been
made for non-plan loans to public sector enterprises mainly for payment of salaries
and wages to the employees.
76. I now turn to the revenue receipts. Gross tax revenues at the existing
rates of taxation are estimated at Rs.129,453 crore. After providing Rs.34,451
crore as the share of taxes of the States, the Centre’s net tax revenue will be
Rs.95,002 crore. Non-tax revenues, an important component of our receipts, have
also shown healthy buoyancy. The receipts under this head, which were estimated
at Rs.29,103 crore in RE 1995-96, are expected to be Rs.33,035 crore this year. I
 14
am confident that we can do better under some heads. I have taken credit for
Rs.2,500 crore as license fee from private operators of cellular and basic telecom
services.
77. The net revenue receipts for the Centre, including non-tax receipts, are
expected to increase from Rs.110,191 crore in RE 1995-96 to Rs.128,037 crore in
1996-97.
78. In the area of capital receipts, traditional market borrowings are placed
at Rs.3,700 crore. Other medium and long-term loans are estimated at Rs.21,798
crore. Net external assistance will be Rs.2,461 crore. I am also taking credit for
receipts from disinvestment of equity in public sector enterprises of Rs.5,000 crore.
Total receipts at the existing rates of taxation are estimated at Rs.195,774 crore
while total expenditure is Rs.204,698 crore. I shall come to the Budget deficit and
the fiscal deficit in Part B of my speech.
PART B
79. Now, I turn to my tax proposals.
80. The good news is there are no new direct taxes save one and even that
solitary new tax, I am confident, will be almost universally welcomed.
81. There are pressing demands from all sections of society to raise the
threshold limit for personal income-tax from the existing level of Rs.40,000 to at
least Rs.60,000. Each increase of Rs.1,000 in the threshold limit will cost the
exchequer Rs.150 crore and, since 77.5% of this loss will be borne by the States,
any major concession on this front will put a severe strain on the States’ financial
resources. Besides, when the direct tax base is already narrow - only 110 lakh
persons pay income-tax - no Finance Minister can afford to let 20 or 30 lakhs of
them go out of the net. However, I accept the need to provide relief to the assessees
in the first tax bracket, especially the salaried class. I propose to do so in two ways:
first, I propose to reduce the income-tax rate for the first bracket from 20 per cent
to 15 per cent. This benefit will be available to all assessees. I also propose to raise
the standard deduction from Rs.15,000 to Rs.18,000 for salaried employees having
an income upto Rs.60,000. Thus, a salaried employee with an income of Rs.60,000
per year, making the minimum contribution to his provident fund, will now pay no
tax at all. If he has no savings, he will still pay only Rs.300.
82. We owe a special consideration to our senior citizens. At present, senior
citizens benefit from a special tax rebate of 40% upto an income level of Rs.100,000.
I propose to raise this to Rs.120,000.
83. House-owners, residing in their own houses that have been financed
by borrowing, deserve relief. The deduction of interest payments of Rs.10,000 allowed
to them from their income from property is proposed to be raised to Rs.15,000.
84. As another relief measure, I propose to raise the limit under section
80D of the Income-tax Act for deduction in respect of insurance on the health of
the individual and his family members from Rs.6,000 to Rs.10,000.
85. I have already mentioned the new scheme of personal-cum-family
pension being introduced by LIC. In order to encourage savings in this form, I
 15
propose to allow the contribution to the pension fund to be deducted from taxable
income upto a limit of Rs.10,000 per annum. I also propose to exempt the income
of such a pension fund in the LIC from the levy of income-tax.
86. At present, a five year tax holiday is available under section 80-IA to
enterprises engaged in developing, maintaining and operating infrastructure facilities
such as roads, highways, bridges, new airports, ports and rail systems. I propose
to extend this incentive to investment in irrigation, water supply, sanitation and
sewerage systems.
87. I also propose to provide a five year tax holiday under section 80-IA of
the Income Tax Act to companies exclusively created to participate in research and
development activities. I am also simplifying the existing procedure for giving
weighted deduction under section 35(2AA) of the Income-tax Act on sums paid for
scientific research to a National Laboratory or a University or an Indian Institute of
Technology by deleting the condition of approval by an outside body.
88. Infrastructure funds have become an important source of capital to
finance infrastructure projects. In order to encourage such funds established to
mobilise resources for financing infrastructure facilities, I propose to exempt them
from income-tax. Any dividend, interest or long-term capital gains of such funds or
companies from investments in the form of shares or long-term finance in any
enterprise set up to develop, maintain and operate an infrastructure facility will be
free from income tax.
89. I also propose to allow investment in approved debentures or equity
shares of public companies as eligible for tax rebate under section 88 if the proceeds
of such public issues are applied to create a new infrastructure facility or to generate
or distribute power. In the case of such investment, the limit of Rs.60,000 under
section 88 will be raised to Rs.70,000.
90. Corporate tax rates have been reduced and simplified over the past few
years and the results have been very encouraging with a significant increase in
corporate taxes as a percentage of GDP. However, there are two issues which need
to be addressed. The first is the promise made in the past that the corporate
surcharge will be temporary. The other is the phenomenon of zero tax companies
which, according to many observers, reflects an excessive degree of laxity in the tax
regime. I propose to respond to the two issues as follows:
(i) I am reducing the rate of surcharge on corporation tax from 15% to 7.5%
and hope to take a similar step in my next budget. The reduced tax
burden will benefit all companies big and small.
(ii) I propose to introduce a “Minimum Alternate Tax” (MAT) on companies. In
a case where the total income of the company, as computed under the
Income Tax Act after availing of all eligible deductions, is less than 30 per
cent of the book profit, the total income of such a company shall be
deemed to be 30 per cent of the book profit and shall be charged to tax
accordingly. The effective rate works out to 12 per cent of book profit
calculated under the Companies Act. Companies engaged in the power
 16
and infrastructure sectors will, however, be exempted from the levy of
MAT.
91. As a step towards achieving a level playing field for Indian companies
vis-a-vis the foreign companies, I propose to reduce the tax on long-term capital
gains in the case of domestic companies from 30 per cent to 20 per cent.
92. In order to encourage savings and to channelise savings into investments
in priority sectors of the economy, I propose to exempt from tax long-term capital
gains if the net consideration received or accruing from the transfer of the capital
asset is invested in specified assets for a period of three years or, alternatively, if
the entire capital gains are invested in specified assets for a period of seven years.
The assessee will now have a choice of two new savings instruments.
93. I also propose to allow depreciation in the case of fractional ownership
of assets because of the need for joint financing of big, capital intensive projects by
a consortium of financiers having fractional shares in the assets.
94. In order to promote efficiency in industry, I propose to provide that
unabsorbed depreciation will be carried forward for a period of eight years only in
the same manner as business losses.
95. The practice of sale-and-lease-back of assets results in passing of very
high depreciation to the leasing concerns. This needs to be curbed. Hence, I propose
to provide in the Income Tax Act that in case of sale-and-lease-back transactions,
the written down value of the asset, in the hands of lessee, who was the previous
owner, will be treated as cost in the hands of the lessor. This measure, while not
affecting bona fide transactions, will prevent loss-making concerns from indulging
in unhealthy trade-off of depreciation.
96. I find it unreasonable that commercial properties, not used by the
assessee as his business, office or factory premises, should be outside the levy of
wealth-tax. Accordingly, I propose to plug this unintended loophole and levy wealth-
tax on such commercial properties.
97. Other measures of tax relief proposed by me include—
(i) Allowing a special deduction of Rs.15,000 to the patient or guardian of a
patient of protracted diseases like cancer or AIDS involving considerable
expenditure on treatment.
(ii) Exempting under section 10(24) of the Income Tax Act the income of an
Association of Registered Trade Unions.
(iii) Extending 100 per cent deduction under section 80G of the Income Tax
Act to—
(a) Donations made to Illness Assistance Funds established by the Central
government and the State governments to meet the medical expenses of
the poorest of the poor;
(b) Donations made to State and National Councils of Blood Transfusion
recently set up by the Ministry of Health and Family Welfare; and
(c) Donations made to the three funds established by the armed forces of the
 17
country. These are the Army Central Welfare Fund, The Indian Naval
Benevolent Fund and the Air Force Central Welfare Fund. This is my way
of saluting the brave officers and jawans of our armed forces.
98. As a part of our obligation to SAARC I am exempting from income tax
the income of SAARC Fund for Regional Projects (SFRP).
99. In order to promote industrial development in the North-Eastern region
of the country, a North-Eastern Development Finance Corporation was established
in August, 1995. I propose to exempt its income from tax.
100. These proposals are likely to result in an improvement of revenue under
direct taxes which is estimated at Rs.912 crore.
101. I shall now come to the proposals relating to indirect taxes.
102. Over the last few years steps have been taken to reform our indirect tax
structure by reducing the number of rates, removing exemptions and by switching
over to ad-valorem rates. On the customs side the peak rate of duty was reduced
to 50% in 1995-96 accompanied by reduction in rates down the line in respect of
all commodities. Central excise duties were also revamped and moved closer to a
Value Added Tax with the introduction of Modvat for capital goods and extension of
input credit facilities to almost all items necessary for the manufacture of goods.
These changes have contributed to the growth in industrial production, simplified
the tax structure and brought about greater transparency. They have also led to
strong growth in revenues, with indirect tax collections increasing by 19 per cent
in each of the last two years, in spite of substantial reduction in rates. The Common
Minimum Programme mandates the government to continue with tax reforms and
I propose to do so.
103. Keeping in view the twin objectives of making our industry globally
competitive and providing it reasonable levels of protection in the transitional period,
I propose to take measured and calibrated steps in the matter of customs tariffs.
104. The salient features of my proposals are—
· Reduction in customs duties on crude oil and other basic petrochemical
intermediates.
· Reduction in the rates of customs duties on raw materials and inputs
such as chemicals, plastics, natural rubber and ferrous and non-ferrous
metals.
· Substantial reduction in customs duties on raw materials and components
required for giving a thrust to the electronic goods sector.
· Reduction in the rate of duty on computers for giving a boost to the
software industry.
· Reduction in import duty on selected machinery to modernize the textiles
and garment sector.
· Removal of several anomalies in duty rates.
 18
· Unification of rates on similar items in order to substantially reduce
disputes on classification and on rates.
· Retention of only such exemptions which are necessary, for the present.
105. India has become a major producer and exporter of chemicals. This
industry has shown a healthy growth in the last two years. This is an area in which
India can exploit its potential of trained technical manpower and become a leading
nation of the world in the production of chemicals. To achieve these objectives, I
propose to take the following steps:
· Reduction in the rate of duty on crude oil from 35% to 25%.
· Reduction in the rate of duty on bitumen from 30% to 10%.
· Unification of rates at 10% on petrochemical building blocks such as
cumene, toluene and cyclohexane.
· Reduction in the rate of duty on chemicals, both organic and inorganic,
from 50% to 40%.
106. Our textile industry employs millions of people. It is necessary to modernise
it and provide an environment in which it can grow rapidly. I propose the following
measures:
· Reduction in the import duty on rayon grade wood pulp from 25% to 5%.
· Reduction in the import duty on acrylonitrile from 20% to 10%.
· Reduction in the rate of duty on DMT, PTA and MEG from 35% to 25%;
however in the case of caprolactum the revised duty will be 30%.
· Reduction in the rate of duty on artificial and synthetic fibres from 45%
to 30%.
· Unification of the rates of duty on nylon filament yarn, polyester filament
yarn and viscose filament yarn from the existing levels of 45% and 40% at
30%.
107. I also propose a major restructuring of excise duties in the textile sector,
extending the benefit of Modvat, to which I shall come a little later. I am confident
that with these measures our textile industry will grow from strength to strength in
the coming years.
108. Our power plants face a shortage of coal on account of growing demand
and better utilisation of installed capacity. I propose to reduce the rate of duty on
non-coking coal from 35% to 20%. I also propose reduction of duty on coke from
the existing level of 25% to 20%.
109. Our plastics industry is coming of age. I propose a reduction of duty on
plastics from 40% to 30%. Further, on articles of plastics I propose a reduction
from the existing level of 50% to 40%.
110. In regard to rates of duties on drugs and pharmaceuticals, I propose to
retain the zero rate of duty on life saving drugs. I also propose to reduce the rate
 19
of duty on all other allopathic medicines from 50% to 40%. In order to make
available veterinary drugs commonly used I propose to reduce the rate on specified
veterinary drugs from 15% to 10%.
111. There has been a persistent complaint from industry that customs duty on
metals is very high and this makes it difficult for downstream industry, especially
capital goods, to be competitive. Industry has been demanding that the rate of duty
on metals should be brought down drastically. However, realising the need to provide
adequate time to our metals industry to adjust itself to global competition, I propose
a modest reduction from 35% or 40% at present to a peak rate of 30% on all metals
except nickel and aluminum. On unwrought aluminum and unwrought nickel I
propose to retain the current level of 10% and 20% respectively. On wrought
aluminum I propose to reduce the duty from 25% to 20% and on wrought nickel
from 30% to 20%.
112. While I do not wish to tamper with the rate of duty on machinery which
stands at 25%, I propose a reduction of duty on signaling and safety equipment for
railways, airports, sea ports etc. from the current level of 50% to 25%.
113. The last three years have witnessed a tremendous growth in our electronic
industry which has been the result of enterprise as well as the stimulation provided
by sharp reduction in customs duties. In order to maintain this trend, I propose
the following changes:
· On raw materials, from the existing 15% to 10%
· On components, from 25% to 20%.
· On glass shells for colour TVs, from 30% to 25%.
· On colour picture tubes, from 40% to 30%.
· On computers and computer peripherals, from 40% to 20%.
· Finished goods will continue to attract 50% rate of duty.
114. With a view to encourage sports in the country, I also propose to reduce
import duty on sports goods from 50% to 30%.
115. In order to give relief to professional press photographers I propose to
allow them to import free of duty photographic equipment upto Rs.1 lakh. A similar
concession is also being extended to accredited journalists for import of personal
computer, typewriter and fax machine.
116. Telecommunication is a growing sector and will turn out to be the life-line
of our economy. The existence of an efficient telecommunication net work is a pre-
requisite for accelerated economic growth. In order to give a boost to the efforts
being made by the Department of Telecommunications, I propose that the duty on
parts and sub-assemblies of telecommunication equipment be reduced from 35%
to 30% and on finished equipment from 50% to 40%. In order to avoid the temptation
to smuggle cellular phones, pagers and trunking handsets, I propose to reduce the
customs duty on them to 30%.
117. Upgradation of medical standards in the country is extremely important. I,
therefore, propose to reduce the rate of duty on specified equipment, not generally
 20
made in India, and their parts from 15% to 10% and on other medical equipment
from 40% to 30%.
118. Edible oils now carry a rate of duty of 30%. This is an important item of
daily food for the masses and we have a chronic shortage of edible oils in the
country. I propose to reduce the import duty on edible oils from 30% to 20%.
119. Mr. Speaker, Sir, earlier in my speech I dwelt on the dire need to step up
investment in infrastructure. I had also detailed the sectors to which I propose to
make large allocations. I have to raise resources to meet these requirements. I
intend to ask importers to share the burden of building the infrastructure in this
country because, ultimately, it will help raise production and enhance
competitiveness. I, therefore, propose a levy of 2% as special customs duty on all
imports except those that carry nil rate of duty or are imported at nil rate of
customs duty for export production under the various duty free licences. This levy
will not apply to gold and silver imported by eligible passengers or under special
import licences. This is likely to yield about Rs.1600 crore in the current year.
120. Importers will be happy to know that the Reserve Bank of India is
announcing today the withdrawal of the interest rate surcharge of 25% on import
finance imposed in February, 1996.
121. I now come to my proposals regarding central excise. A large number of
countries in the world today have a value added tax system which has been
recognised to be the most efficient form of commodity taxation. I am glad to note
that some State governments are moving towards the value added tax system. The
last few years of reforms have taken us closer to having a Central VAT, but there
are still certain legal obstacles.
122. Our central excise structure still has 11 ad-valorem rates. The rates range
from 0 to 50 per cent. Ideally there should be only four rates of excise duties Ñ
zero, a lower rate of excise duty on goods of mass consumption, a single normal
rate on all other goods and a higher rate on luxury items. It is absolutely necessary
for us to move towards this rate structure so that we put an end to wasteful
litigation and have a transparent and simple tax structure. It was not possible in
the time available to me in preparing this Budget to achieve this goal in the current
year. However, I propose to take the first step this year and I am confident that we
will achieve a four-rate excise duty structure in another year or two.
123. I propose to integrate the tax on the textile sector with the mainstream of
central excise duties by introducing the Modvat principle in this sector. Hon’ble
Members are aware that at present excise duties are levied at the fibre and yarn
stage and there is only an additional excise duty, in lieu of sales tax, on fabrics.
This is one of the most inefficient ways of taxation as it results in very high duties
on inputs, which encourages evasion; it does not capture value addition; and it
denies the industry an opportunity of claiming Modvat input credit on capital
goods, chemicals and yarn. While modernisation of other industries is taking place
speedily, our textile industry has not been able to participate fully in this process
because of this lopsided tax structure. I, therefore, make the following proposals.
124. I propose to reduce the excise duty on yarn in the case of polyester filament
yarn from the current level of 50% to 40% and unify the rates on other yarn at
 21
20%, except nylon filament yarn and cotton yarn for which the present rates of
30% and 5% respectively will be retained. In order to provide Modvat for the textile
sector, I propose to impose a basic excise duty of 5% on cotton fabrics and 10% on
other fabrics which will be collected at the processed fabric stage. The processors
would be in a position to Modvat the duty paid on yarn imputed on the basis that
yarn accounts for 50% of the value of the finished fabric. I have adopted a simple
procedure of imputed value to avoid the imposition of a basic duty on grey fabrics
which are manufactured by thousands of power-looms. Such power-looms will,
therefore, continue to be outside the excise net. Composite mills and textile
processors will be able to avail themselves of Modvat facilities hitherto not extended
to them. This restructuring of excise duty, together with the substantial reduction
in customs duties on selected machinery and on inputs for the textile sector, should
provide a major boost to the textile industry. I believe that this will also simplify the
calculation of drawback rates for garment exporters.
125. In my proposals on customs duties, I have proposed a reduction in customs
duty on crude oil from 35% to 25%. This is part of a restructuring and rationalisation
of the duty structure aimed at encouraging efficient refineries and enabling me to
shift the duties from the input stage to the product stage. I propose to make up the
loss on customs duty by adjusting the excise duty upward from 10% to 15% on all
petroleum products except LPG and kerosene. The proposed changes in customs
and excise duties taken together are revenue neutral and will have no impact on
the administered prices of petroleum products.
126. Honourable Members are aware that almost all articles of mass consumption
are already exempt from excise duty and a large number of other widely consumed
articles carry a rate of only 10%. I propose to exempt some more articles from
excise duty. They are:
(a) Vanaspati and margarine;
(b) Writing and printing paper supplied to all State Text Book Corporations;
(c) Animal fats and oils;
(d) Asbestos fibre;
(e) Metallic ores; and
(f) Tapioca products.
127. I propose to reduce the duty on the following articles:
(a) Tooth paste, from 20% to 10%;
(b) Detergents, from 30% to 25%;
(c) Cartons, boxes and bags made of paper and paperboard, from 20% to
10%;
(d) Glassware produced by semi-automatic process, from 20% to 10%;
(e) Glassware used for table, kitchen etc., from 15% to 10%;
(f) Articles of asbestos cement, from 25% to 20%; and
(g) Ceramic articles, other than glazed tiles, from 20% to 15%.
128. I also propose to raise the exemption limit for footwear from Rs.50 to Rs.
75 per pair.
129. The rates of excise duty on motor vehicles are not in consonance with the
accepted classification of such vehicles. I therefore propose the following
rationalisation:
 22
(a) Duty on motor cars and other motor vehicles principally designed to carry
not more than six persons, excluding the driver, will remain unchanged at
40%.
(b) Duty on motor vehicles principally designed to carry more than 6 persons
but not more than 12 persons, excluding the driver - 20%
(c) Duty on other motor vehicles for transport of persons or goods - 15%.
There is no change in the duty on two-wheelers or tractors.
130. If there is one area in which a Finance Minister can both tax and please,
it is cigarettes. Today, however, I shall please you only in a small way by proposing
modest increases in the specific duties on cigarettes ranging from about 5% to 71/
2%. In the case of non-filter cigarettes, not exceeding 60 mm in length, popularly
called mini cigarettes, I propose to raise the tax by 25% from Rs.60 per thousand
to Rs.75 per thousand.
131. In order to encourage R & D efforts in India I propose to exempt goods
developed and patented in India and concurrently in specified countries from the
levy of excise duty for a period of three years. I am also rationalising the exemption
from customs duty for import of equipment and consumables for R&D institutions.
132. I have proposed the addition of potassium chlorate, copper powder and
cigarette lighters to the list of goods eligible for duty exemption under the SSI
scheme. The reduction in import duties proposed elsewhere will also substantially
benefit the small scale industries. In order to benefit hundreds of small scale
manufacturers of matches I have decided to dispense with the physical control
system operating on them and introduce the self- removal procedure freeing them
from the day to day bother of control. I hope SSI match units will respond with
substantial increase in payment of excise duties.
133. I have proposed rationalisation of rates and exemptions both in customs
and excise in several other areas. I would not like to take the time of the House by
going into these details.
134. Our excise procedures are outdated and not in tune with the times. They
need to be modified. They should encourage voluntary compliance with tax laws by
the tax payers. With effect from 1st October,1996, assessees would no longer be
required to furnish copies of invoices along with the monthly returns. All that they
would be required to furnish to the excise department will be a simple Return
indicating the duty paid on self- assessment basis. Wherever possible the assessees’
computers could also be linked to the Department’s computers for on line
assessment.
135. I also propose to introduce a scheme of selective audit by the excise officers
and dispense with the existing scheme of routine examination and checking of
returns and documents furnished by the assessees. This scheme would also come
into force from 1st October, 1996.
136. I am sure that these changes would be widely welcomed by the
manufacturers who are required to pay excise duties and I expect them to comply
with the laws faithfully. However, I wish to affirm government’s resolve to deal with
 23
tax evaders sternly. I am proposing suitable changes in the Customs and Excise
Acts to provide for mandatory penalty, together with interest, for evasion of duties
on account of fraud, collusion, misstatement or suppression of facts. Henceforth,
the mandatory penalty for evasion of duty on these counts shall be equal to the
amount of duty evaded. Tax evaders would also be required to pay interest starting
from the first day of the succeeding month in which the duty evaded ought to have
been paid and also face criminal prosecution.
137. Mr. Speaker, Sir, the Central Excise and Salt Act, 1944, reminds us of the
colonial era when excise duty was collected on salt. There is no excise duty on salt
and hence the reference to salt is outdated. I propose to delete all references to salt.
138. The Modvat scheme which provides for duty credit on inputs and capital
goods has been liberalised considerably over the past few years. Still, there are
problems about the coverage of certain inputs and capital goods. I propose to
clarify the scope of eligible capital goods by specifying the heading and sub-headings
of the tariff relating to capital goods in the Modvat Rules. It is also a matter of
concern that there is misuse of the Modvat credit scheme. At present, Modvat
invoices can be issued by any dealer registered with the excise department and this
facility is reportedly being misused. Therefore, I propose to restrict the issue of
Modvatable invoices by dealers upto two stages. Suitable provisions are also being
made in the Modvat Rules for charging of interest in the case of wrong availment
of Modvat credit and for mandatory penalty for misuse of Modvat facility.
139. The tax on services has come to stay. With a view to widening the tax base,
I propose to bring in advertising services, radio paging services and courier services
under the tax net. The tax on these services will be at the rate of 5%. While this
measure is expected to yield Rs.150 crore in a full year, I am taking credit only of
Rs.70 crore in the current year.
140. My proposals relating to reduction in customs duties are estimated to
result in a loss of Rs.650 crore in the remaining part of the current financial year.
However, by taking into account receipts from the special customs duty estimated
to be Rs.1600 crore, there will be a net gain of Rs.950 crore in customs revenue.
141. In the case of excise duties, including additional excise duties, a gain of
Rs.760 crore is estimated. Of this, the States are likely to get Rs.384 crore as their
share of excise duties.
142. I now have something to say on behalf of my colleague, the Minister of
Communications. Postal rates, some of which were last revised in 1990, do not
meet even the direct cost of most of the services resulting in increasing budgetary
support. Not with-standing this, no change in the rates of ordinary postcard, letter,
parcels and other postal services is being proposed. A modest increase is proposed
only in respect of two services which are used for business and commercial purposes.
The rate of the printed post card is being increased from 60p. to Re.1 and the
registration fee is being increased from Rs. 6 to Rs.8. It has also been decided to
introduce a new category of postcard, called Competition Postcard, which alone
may be used for responding to any competition organised on or through television,
radio, newspapers or magazines. It is proposed to remove the unintended
subsidisation by fixing the tariff for this category of postcard at Rs.2. The changes
 24
will take effect from a date to be notified after the Finance Bill is passed. The
revisions proposed are estimated to yield a modest revenue of Rs.38 crore in 1996-
97, still leaving a large postal deficit.
143. Copies of notifications giving effect to the above changes in customs and
excise duties will be laid on the Table of the House in due course.
144. My budget proposals have many implications both for the expenditure side
and the revenue side. However, Hon’ble Members will be pleased to know that the
end result is satisfactory. The revenue deficit in 1996-97 is placed at Rs.31,475
crore or 2.5% of GDP which is significantly lower than Rs.33,331 crore in RE 1995-
96 or 3% of GDP. The fiscal deficit comes to Rs.62,266 crore in 1996-97, which is
lower than the figure of Rs.64,010 crore in RE 1995-96. As a percentage of GDP,
the fiscal deficit is 5% in 1996-97 compared to 5.9% in the previous year. I hope to
do better in my next budget and move along the path of reducing the fiscal deficit
to below 4%.
145. Mr. Speaker, Sir, at the end of this exercise, I ask myself what is a budget
about? While it is a measure of the health of the economy, it is also a mirror to the
travails and aspirations of the people. 2000 years ago, Saint Tiruvalluvar laid down
the golden rule for the King’s Ministers:
“Iyattralum, eettalum, kattalum, katta
Vakuthalam Vallath Arasu”
(To be able to increase wealth, to lay it up and guard,
And also well to distribute it, marks a royal lord.)
146. I have made an attempt to raise revenues without putting any burden
upon the poor, to allocate large resources for agriculture, irrigation, infrastructure
and the social sector, to provide more funds for basic minimum services, to give tax
reliefs to the salaried and the middle classes and to promote savings and investment.
I have strived to serve the seven objectives that I declared at the outset.
147. The Common Minimum Programme is absolutely right when it says that
the country’s GDP needs to grow at over 7% per year in the next 10 years in order
to abolish poverty and unemployment.
148. I believe that our economy is on a high growth curve. Wisdom dictates that
we remain on that curve. In order to do so, we need more reforms, not less. We
need more resources, not less. We need more discipline, not less. And we need
more compassion, not less. If we remain true to the Common Minimum Programme,
we shall overcome our difficulties and take India to the frontline of the nations of
the world. This budget, my maiden effort, attempts to blend Ñ I hope in the right
proportions Ñ courage and compassion, reform and restraint and growth and social
justice.
149. Mr. Speaker, Sir, with these words, I commend this budget to this august
House.
[22nd July, 1996]
 Interim Budget 1996-97
Speech of
Shri Manmohan Singh
Minister of Finance
28th February, 1996
Mr. Speaker Sir,
I rise to present the Interim Budget for 1996-97.
2 . Five years ago, the people of India gave a mandate to our Party, under the
courageous and far-sighted leadership of Prime Minister Shri P.V. Narasimha Rao.
We took office at a time when the economy was on the brink of collapse. Inflation
was out of control, exports were declining, foreign exchange reserves had declined
to no more than two week’s imports and industry was virtually crippled. We had to
give the highest priority to restoring macroeconomic stability and then, as quickly
as possible, to bring the economy back to a path of rapid and equitable economic
growth.
3 . The strategy we have followed has been outlined before this House by the
Prime Minister himself on several occasions. We have sought to accelerate the rate
of growth of our economy and achieve broad-based development, which alone can
ensure a rising standard of living for all our people. We have sought to modernise
our economy, improve productivity and increase efficiency in all sectors. We have
sought to integrate our economy more effectively with the world, so that we can
compete successfully in world markets and also attract larger volumes of investment,
as so many other countries in Asia have done to their advantage. Above all, we
have sought to ensure that in this process the needs of the poorer sections of our
society are constantly kept in view. As the private sector has expanded vigorously
into many areas which were earlier reserved for the State, the focus of State activity
and the deployment of public resources is now being concentrated on meeting the
needs of the poor and on the social sectors such as health, education and rural
infrastructure where the market economy alone cannot bring benefits rapidly.
4 . The journey of the past five years has been both difficult and rewarding. I
would not say that we have achieved all that we wanted. But, I believe we can
honestly say that the results we have achieved amply vindicate our approach and
aspirations. Let me briefly review the progress in some important areas.
5 . Inflation is our worst enemy and it hurts the poor more than anyone else.
Control of inflation was therefore our first priority. We worked hard to achieve this
objective by reducing the fiscal deficit, curbing the growth of money supply and

1
 2
increasing the supply of essential commodities. The result is evident. The annual
rate of inflation was as high as 17 per cent in August 1991. It has been brought
below 5 per cent in February 1996, the lowest level since 1988. Furthermore, the
annual rate of price increase of essential commodities, such as wheat, edible oils
and sugar, is even lower. To mitigate the impact of inflation on the poorer sections,
the Public Distribution System has been strengthened. The revamped PDS has
been extended to 1775 blocks in tribal, hilly, desert and other remote areas. A
further expansion of RPDS to more than 650 additional blocks is in process.
6 . Our policies have also produced a resurgence of economic growth. After
slumping to less than one per cent in the crisis year of 1991-92, the rate of growth
of Gross Domestic Product rebounded to 5 per cent per annum in both 1992-93
and 1993-94. It then accelerated to 6.3 per cent in 1994-95 and continued high
growth of 6.2 per cent is estimated for 1995-96. By any standards this has been
one of the swiftest and strongest recoveries from a serious macroeconomic crisis in
the entire world. In the first four years of the Eighth Plan, growth has averaged 5.7
per cent. This is in line with the Plan target of 5.6 per cent.
7 . This exceptional recovery has been under-pinned by strong performance of
all major sectors of the economy. Agriculture provides livelihood for two-thirds of
our people and has been given high priority in our policies. We have provided more
remunerative prices. We have removed barriers to internal and external trade in
agricultural commodities. We have encouraged agro-processing activities. We have
sharply reduced the bias against agriculture in our foreign trade policies. The goal
has been to quickly expand income-earning opportunities for our farmers.
8 . Honourable Members will join me in paying handsome tribute to our farmers.
They have responded superbly to these new policies. Agricultural production declined
during the crisis of 1991-92 but thereafter it has grown by more than 4 per cent
per year, on average, in the next three years. Food production also rose by more
than 4 per cent per year, on average, to reach a record level of 191 million tonnes
in 1994-95. A similar bumper output is expected in 1995-96. Foodgrain production,
however, is only one part of the story. Agriculture has also diversified. Milk production
has gone up by nearly 10 lakh tonnes between 1990-91 and 1994-95. The production
of fruits and vegetables has also increased substantially.
9 . So much for those critics who used to claim that our policies have neglected
agriculture.
10. Our industry has responded magnificently to the stimulus of our policies of
unshackling domestic industry and to the challenge of international competition.
Many had predicted that the liberalisation of imports would swamp domestic
industry. We had more confidence in our industry. Five years ago I had said that
“our entrepreneurs are second to none”. They have amply vindicated the faith we
placed in them. Industrial production was stagnant in 1991-92. It recovered robustly
to grow by 6 per cent in 1993-94 and then further increased to 8.6 per cent in
1994-95. Industrial growth has accelerated to 12 per cent in the first half of 1995-
96. Capital goods production surged in 1994-95 by 25 per cent. This is more than
twice the growth recorded by the other broad categories of basic goods, intermediate
 3
goods and consumer goods. The capital goods sector continued to outpace the
other sectors in the first half of 1995-96, recording a growth of 14.3 per cent. This
has happened despite the opening up of the economy to competition from imports.
None can now doubt the inherent strength and competitiveness of our industry.
11. I am particularly happy to inform Honourable Members that our reform
policies have given a special boost to small scale industry. In each year after the
crisis, the production from small scale industry has grown faster than overall
industrial production. For example, in 1993-94 output of small scale industry rose
by 7.1 per cent, whereas overall industrial production grew by 6.0 per cent. Similarly,
in 1994-95 small scale industrial growth of 10.1 per cent outpaced overall industrial
growth of 8.6 per cent.
12. As I have already mentioned our strategy of reform accorded the highest
priority to improving the living standards of the poor. We have pursued a three-
pronged approach of promoting rapid, broad-based, employment-generating growth,
broadening and deepening special programmes for poverty alleviation and
employment generation and giving a strong thrust to programmes for social sectors
and social security. In 1991 our critics had warned that economic reforms would
lead to massive unemployment and the poor would bear the brunt of adjustment.
The results show that these fears were misplaced.
· The total increase in employment in the economy was 3 million in 1991-
92. It doubled to an average of 6 million in the next two years and exceeded
7 million in 1994-95. Employment growth is likely to be even higher this
year. This compares with an average increase of less than 5 million per
year in the eighties.
· The latest Planning Commission estimates of poverty show a significant
decline in the proportion of people below the poverty line. The proportion
fell from above 25 per cent in 1987-88 to below 19 per cent in 1993-94.
· The average real wage for unskilled agricultural labour, one of the weakest
sections of our society, also shows improvement. Real wages fell by 6 per
cent in the crisis year of 1991-92. Thereafter they rose steadily at an
annual rate of 5 per cent in each of the next three years.
13. Despite tight fiscal constraints, we have, in the three years between
1992-93 and 1995-96, increased the Central Plan budget allocation for rural
development by about 150 per cent, for education by over 90 per cent, for elementary
education by nearly 130 per cent and for health by over 120 per cent. We have
launched important new programmes and initiatives for the weaker sections.
· The Employment Assurance Scheme provides assured employment for 100
days to unskilled rural poor at the rate of two persons per family in 3175 poorest
blocks of the country during the lean season.
· The Prime Minister ’s Rozgar Yojana is designed to generate employment
through setting up micro enterprises by educated unemployed. In 1994-
95, 1.9 lakh beneficiaries were sanctioned loans under the scheme. The
target for 1995-96 is 2.6 lakh beneficiaries.
· The National Social Assistance Programme has three key components.
 4
The first provides monthly old age pension from the Central Government
of 75 rupees to those below the poverty line. This is expected to benefit 54
lakh people. Second, there is a lump-sum survivor benefit on the death of
the primary bread winner in poor households of 10,000 rupees in the
case of accidental death and 5,000 rupees in the case of death from
natural causes. This is expected to benefit 4.5 lakh families a year. Third,
there is a maternity benefit of 300 rupees for expectant mothers. This is
anticipated to benefit 46 lakh women each year.
· The Mid-day Meal Programme is intended to improve nutrition and school
attendance of 11 crore children in classes I to IV in 3 years. In the first
year of the scheme 3.4 crore children have already been covered.
· Under the Indira Awas Yojana 4 lakh houses were built for poor families
in rural areas in 1994-95. 10 lakh houses will be built under the Scheme
in 1995-96.
· The Mahila Samridhi Yojana aims at empowering women through giving
them greater control over household savings.
· The Rural Infrastructural Development Fund has been established in
NABARD. It will provide Rs.2,000 crore for completing ongoing projects of
medium and minor irrigation, soil conservation and other rural
infrastructure.
· Bank credit for village and khadi industries is being expanded through
the provision of a special bank consortium fund of Rs.1,000 crore.
· A new Group Life Insurance Scheme of the LIC to provide life cover of
5,000 rupees to each person is being implemented by Panchayats in rural
areas, with a subsidized premium for poor households.
· The National Backward Classes Finance and Development Corporation,
which we set up in 1992, has sanctioned over Rs.250 crore of loans to
beneficiaries.
· The National Scheduled Castes and Scheduled Tribes Finance and
Development Corporation has sanctioned loans of Rs.400 crore.
· The National Minorities Development and Finance Corporation for assisting
development of backward sections among minorities has become
operational.
· The Handicapped Development and Finance Corporation is being
established with authorised capital of Rs.400 crore.
14. We are proud of the role played by the Indian workers in accelerating
the pace of industrial development. A number of steps have been taken to protect
and promote their interests. We have raised the eligibility limit for payment of
bonus from Rs.2,500 to Rs.3,500 per month and the ceiling for calculation of
bonus from Rs.1,600 to Rs.2,500 per month. Earlier, Government had increased
the ceiling under the Payment of Gratuity Act to enable workers to get gratuity up
to Rs.1 lakh. The revised ceilings for bonus eligibility and bonus calculation are
applicable to both non-government and to government employees. We gave one
installment of Interim Relief to government employees even before the establishment
 5
of the Fifth Central Pay Commission. A second installment was given subsequently
on the basis of an interim report of the Pay Commission. Interim Relief has also
been given to pensioners and family pensioners. We have also merged a portion of
Dearness Allowance with pay for calculating gratuity.
15. History was made with the passage of the Constitution (Seventy Third
Amendment) Act, 1992, which made it a constitutional requirement to set up in
every State, Panchayats at the village, intermediate and district levels. The
Amendment ensures that women and other weaker sections of the society will
necessarily get adequate representation in the Panchayats. This is a major step
forward for the empowerment of these under-privileged sections of the society. To
make this devolution of power a reality, each State is required to set up a Finance
Commission to recommend the principles which should govern the distribution of
the State revenue between the State and the Panchayats. The Tenth Finance
Commission has also allocated a sum of about Rs.4,400 crore to be given to the
Panchayati Raj Institutions over the next four years.
16. The crisis of 1991 was most visibly reflected in our balance of payments.
In the past five years, our foreign trade and external payments policies have
transformed weakness into strength.
· Exports declined in dollar value in 1991-92. They grew by 20 per cent in
1993-94, and by 18 per cent in 1994-95. Export growth has accelerated
to 24 per cent in the first 9 months of 1995-96.
· Trade liberalization has actually increased our self-reliance in foreign trade.
The ratio of export earnings to import payments has risen from an average
of 60 per cent in the eighties to 90 per cent in the last two years.
· Foreign investment has risen from less than 200 million dollars in 1991-
92 to nearly 5 billion dollars last year. Direct foreign investment flows are
expected to rise to about 2 billion dollars this year. Honourable Members
will be happy to hear that over 85 per cent of foreign investment approvals
are in the priority sectors, including infrastructure, and more than 80 per
cent of proposals involve joint ventures with Indian companies.
· On the eve of the 1991 crisis, our external debt was rising at 8 billion
dollars per year. In the four and half years from April 1991 to September
1995, the growth of external debt has averaged only 2.2 billion dollars per
year. The ratio of external debt to GDP has fallen from a peak of 41 per
cent in 1991-92 to about 29 per cent in September 1995. Correspondingly,
debt service payments, as per cent of current earnings, are likely to drop
from above 35 per cent in 1990-91 to below 27 per cent in 1995-96.
Furthermore, the proportion of short-term external debt has been brought
down from above 10 per cent in March 1991 to below 5 per cent in
September 1995.
17. As part of the economic reforms, we have undertaken sweeping
measures to strengthen our banking system and capital markets. As a result, the
number of public sector banks declaring operating losses has fallen dramatically
from 8 in 1992-93 to only one in 1994-95. The average ratio of non-performing
assets to total advances of public sector banks has also declined significantly from
26 per cent in 1992-93 to 20 per cent in 1994-95. An ambitious programme for
rehabilitation and restructuring of Regional Rural Banks has been launched.
 6
18. Our programme of capital market reform has greatly increased the
mobilization of investible funds through primary issues from about Rs.6,000 crore
in 1991-92 to over Rs. 27,500 crore in 1994-95. Even more important, we have
strengthened regulation and supervision over the capital markets with a view to
improving the transparency, efficiency and integrity of our stock exchanges.
Systematic and determined efforts have been made to modernize the infrastructure
and working of capital markets. In 1992 the National Stock Exchange did not exist.
By 1995, this modern, computerized and screen-based exchange, which sets new
standards of transparency in trading, accounted for more trading volume than any
other stock exchange in the country. We have also taken steps to establish a
system of depositories which will greatly improve our settlement systems.
19. Our reforms in the financial sector are designed to promote savings
and investment in our economy. As I have stated earlier, we must rely more and
more on our own resources to finance the process of development. I am happy to
report to this august House that our thrust towards self-reliance has met with
success. Last year our rate of gross domestic savings (as a ratio to GDP) set a new
record of 24.4 per cent, higher than at any time in our history. This financed a high
rate of gross domestic investment, 25.2 per cent of GDP, and supported a record
high level of real gross fixed investment, at 22.2 per cent of GDP.
20. To summarize, Mr. Speaker Sir, our economy today is growing faster
than 6 per cent per year. Industry is growing rapidly. Agricultural production is
strong. Food stocks are high. Employment growth is buoyant. Poverty is declining.
Inflation is at its lowest ebb in many years. Exports are booming. Foreign investment
is buoyant. Foreign exchange reserves are comfortable. And the level of savings
and investment is high.
21. These are all impressive economic achievements. They are the direct
result of the political leadership and vision of the Prime Minister in bringing about
an evolution in our policies which has enabled our workers and our farmers, our
entrepreneurs and our managers, our scientists and other professionals to
demonstrate their inherent potential. The dynamism that has been unleashed augurs
well for the future. And yet, the tasks of economic reform are by no means over.
Whichever government comes to power after the elections, will face the challenge of
maintaining and improving on the strong record of economic performance of the
past few years. The task will not be easy. A further reduction in the fiscal deficit
will be essential to keep inflation low, reduce interest rates and prevent pressure
on the balance of payments. We have begun the process of inducting private
investment into key infrastructure sectors such as power, telecommunications,
petroleum, roads and ports. There has already been strong response to our initiatives
in the power and telecommunications sectors and private investment in roads,
bridges and ports has also begun. But we will need to build on these initiatives and
undertake further reforms of the policy framework for key infrastructure sectors to
ensure high levels of public and private investment, efficient operation and expanded
provision of reliable services, in adequate supplies and at affordable prices.
Systematic reforms will have to be pursued in power, coal, petroleum, roads and
ports, if the current buoyancy in economic growth, employment and exports is to
be sustained. Further reforms in trade and industrial policy are necessary.
Restructuring and reform of public enterprises must be pursued with vigour. Our
system of industrial relations also needs reform. The performance of our social
sectors, especially primary education and health, has to improve further
substantially. The same goes for irrigation and other forms of rural infrastructure,
whose extent and quality determine the conditions within which three-quarters of
 7
our citizens live and work.
22. These and other challenges will face the Government which will take
office after the elections. On our part I can only say that our Government, under
the leadership of Prime Minister Shri P.V. Narasimha Rao, has shown that it has
the will and vision to face the challenges ahead and do what is necessary for India’s
economic and social progress to forge ahead.
23. I shall now briefly go over the Revised Estimates for 1995-96.
24. Budget Estimates for 1995-96 had placed the total expenditure at
Rs.172,151 crore. This is now expected to go up to Rs.183,004 crore, showing an
increase of Rs.10,853 crore.
25. Plan expenditure in the year 1995-96 was estimated at Rs.48,500 crore
in the Budget Estimates. It is now expected to go up to Rs.48,684 crore. To provide
for the increased requirement of rural development sector and for schemes
announced during the year, I have had to make some adjustments in allocations.
The revised estimates show an increase of Rs.551 crore for Plan expenditure in
rural development and an increase of Rs.679 crore in education. Central assistance
to State and U.T. Plans, which was estimated at Rs.19,506 crore is now expected
to increase to Rs.19,854 crore.
26. On the non-Plan side I have provided for an additional sum of Rs.1,085
crore on account of food and fertilizer subsidies. I have also had to make provision
for Rs.3,112 crore for increased loans to States and Union Territories as their
share in small savings collections, which have far exceeded budget expectations.
The Interim Relief granted to the Central Government employees and pensioners
will result in additional expenditure estimated at about Rs.1,650 crore in the current
financial year. A sum of Rs.1,010 crore has been provided as write off of loans of
State Governments. An additional sum of Rs.1,379 crore has been provided for
defence expenditure, to keep up the level of defence preparedness. I have also had
to provide an additional Rs.266 crore for expenditure on police in keeping with our
heightened internal security requirements. There has also been an increase in
expenditure of Rs.745 crore on account of loans to public sector enterprises mainly
for payments of salaries and wages. Total non-Plan expenditure has entailed an
additional provision of Rs.10,669 crore.
27. I am happy once again to report to this august House that our tax
reforms have continued to yield benefits beyond our expectations. This is shown by
the much higher receipts both in direct and indirect taxes. Gross tax revenues are
now expected to exceed budget estimates by Rs.6,592 crore and reach Rs.110,354
crore. Our strategy of tax reforms, consisting of moderate rates but tighter
administration and expanded coverage, will need to be actively pursued so that we
are able to get even higher returns in the years to come. Officers of the Revenue
Department, whose dedication and untiring efforts have helped in achieving these
exemplary results, deserve commendation.
28. Non-tax revenues, which constitute an important component of our
receipts, have also shown healthy buoyancy. Receipts under this head, which were
estimated at Rs.26,413 crore in the Budget, are now expected to be Rs.29,103
crore in the revised estimates. I am glad to inform the House that non-tax receipts
include Rs.1,850 crore as licence fee from the private operators of cellular telecom
services. These receipts to General Revenues will enable the Government to provide
larger resources for high priority development activities. The House is aware that
 8
the Supreme Court judgement a few days ago has vindicated the Government’s
stand and cleared the way for allocation of licenses for basic telecom services.
However, because of some uncertainty with regard to timing of receipts and as a
matter of abundant caution, I am not taking credit for license fees from operators
of basic telecom services during the current year.
29. Non-debt creating capital receipts from disinvestment of government
equity in public sector undertakings will be much lower than budgeted, mainly
because of somewhat depressed conditions in capital markets for much of the year.
These receipts will only amount to Rs.357 crore as compared to budget expectations
of Rs.7,000 crore.
30. Taking into account the variations in receipts and expenditures, the
current year is expected to end with a budget deficit of Rs.7,600 crore. The fiscal
deficit was originally budgeted at Rs.57,634 crore and placed at 5.5 per cent of
GDP. It is now expected to be Rs.64,010 crore. This amounts to 5.9 per cent of
GDP. Most of the deterioration in the fiscal deficit compared with the budget estimates
is due to the increased mobilisation from small savings. Three quarters of small
savings collections are on-lent to the States. Therefore, when small savings collections
exceed budget estimates, the Centre’s fiscal deficit increases. If small savings
collections this year had not exceeded the budgeted level, the fiscal deficit would
have been only 5.6 per cent of GDP.
31. Coming to the tax and expenditure policies for 1996-97, these must
take into account the medium term objectives for accelerated economic and social
development in the next five years. Broadly stated, these objectives are:
(a) To pursue macroeconomic policies seeking to accelerate the rate of
economic growth to 7 to 8 per cent per annum in a framework of reasonable
price stability.
(b) To design a pattern of growth which would lead to an annual increase of
over 10 million new jobs.
(c) To refashion economic and social policies to reduce the proportion of
people living below the poverty line to less than 10 per cent by 2001.
(d) To ensure that Indian agriculture continues to grow at an annual rate of
at least four per cent per annum, with strong emphasis on the use of
modern science and technology to promote diversification of cropping
pattern and special efforts to increase the productivity of dry land
agriculture and ecologically fragile regions.
(e) To further strengthen Indian industry to meet the challenge of international
competition and ensure sustained growth of exports of about 25 per cent
per year.
(f) To expand and improve the quality of economic infrastructure of power,
transport, communications and roads, laying particular emphasis on
speedy reduction of regional imbalances in levels of development.
(g) To strengthen and expand social safety nets to provide more effective and
direct assistance to vulnerable sections.
(h) To ensure universal access to elementary education by the year 2001,
laying particular emphasis on the girl child and imparting a strong
vocational bias to secondary education.
 9
(i) To expand primary health care facilities through a programme of national
health insurance for those below the poverty line and with strong emphasis
on reduction in infant mortality rates to the levels prevailing in States like
Kerala.
(j) To expand substantially the programmes relating to provision of shelter,
rural housing and slum improvement.
The realisation of these objectives will require many new programmes. However,
constitutional propriety demands that these programmes, involving a mix of both
tax and expenditure policies, are worked out by the government which will come
into office after the forthcoming elections to the Lok Sabha. The interim Budget for
1996-97 therefore does not include any new programmes.
32. I am presenting an interim Budget for the purpose of a Vote-on-Account
to enable the Government to meet expenditure during the first 4 months of the
next financial year. The Demands for Grants and the Annual Financial Statement,
which are for the entire financial year, would be revised as necessary at the time of
presentation of the regular budget.
33. I now turn to the budget estimates for 1996-97. I am proposing an
increase in the estimates for Plan expenditure from Rs.48,500 crore in BE 1995-96
to Rs.50,521 crore in BE 1996-97. The budget support proposed for the Plan is
interim and will need to be reviewed at the time of the regular budget exercise.
However the amount I am now providing will ensure that the tempo of development
activities is maintained and the full year requirements of major social sector schemes
launched during the course of the current year are fully provided for.
34. I have tried to ensure that increased budgetary support is provided for
rural development and social sectors.
· Members may recall that in keeping with the priorities of our Government
the outlay for rural development programmes during the Eighth Plan period
was stepped up substantially to the level of Rs.30,000 crore from the
actual expenditure of Rs.11,000 crore during Seventh Plan. With the
proposed allocation of Rs.8,692 crore for 1996-97, the total expenditure
during the Eighth Plan will be of the order of Rs.33,400 crore. This amounts
to a more than three-fold increase over the actual expenditure during the
Seventh Plan.
· I have proposed to provide an increase in budgetary support of about
Rs.880 crore for Plan expenditure in education to ensure that
implementation of the Mid-Day Meal Scheme does not in any way suffer
on account of resources. 7.2 crore children are expected to benefit from
this programme in 1996-97.
· I am also raising the allocation for the National Social Assistance
Programme from Rs.550 crore in 1995-96 to Rs.932 crore in 1996-97.
· I propose to increase the allocation for Indira Awas Yojana so that more
than 10 lakh houses are provided for the rural poor in 1996-97.
· A provision of Rs.448 crore has been made for the Million Well Scheme so
that small and marginal farmers who are below the poverty line are provided
with remunerative assets for meeting their water needs.
· The Employment Assurance Scheme which was launched in October, 1993,
 10
has elicited heartening response. A provision of Rs.1,970 crore has been
made for this scheme during 1996-97.
35. The total non-Plan expenditure during 1996-97 is estimated to be
Rs.151,503 crore compared to Rs.134,320 crore in revised estimates for the current
year. A major factor which has been contributing to the sizeable increase in our
non-Plan expenditure is the interest burden. The provision for interest payments
during 1996-97 is estimated to be Rs.60,000 crore as against Rs.52,000 crore in
the current year. Interest payments represent mainly the legacy of past borrowings.
Indeed, they would have been even higher but for our success in reducing the fiscal
deficit in recent years. Members will appreciate that our emphasis on reducing the
fiscal deficit will pay rich dividends in the form of reduction of interest burden in
the years to come. There should be no slackening in our resolve to bring the fiscal
deficit to a more manageable and affordable level. This together with continued
reforms of our tax system, generation of more internal resources by public sector
enterprises, greater disinvestment in public sector enterprises and containing
subsidies to affordable levels will free resources for higher priority development
needs.
36. I am providing Rs.27,819 crore for defence in this Interim Budget as
against Rs.25,500 crore in the budget estimates for 1995-96. Defence preparedness
is vital for our national security and the House can rest assured that we will not
compromise with our country’s security. The provision for defence will be further
revised at the time of preparation of the regular budget. I am also providing Rs.5,774
crore for food subsidy and Rs.6,800 crore for fertilizer subsidy. An amount of
Rs.5,000 crore is being provided to meet contingent expenditure. A sum of Rs.400
crore has also been provided for the conduct of general elections to the Lok Sabha.
37. Coming to receipts, the estimates of tax revenues have been made at
existing rates of taxation in the interim Budget. Gross tax revenue at existing levels
of taxation is placed at Rs.128,540 crore. States’ share of taxes next year is estimated
at Rs.34,027 crore compared to Rs.29,266 crore in the revised estimates of the
current year. Taking into account the maturing liability, the net small savings
collections are placed at Rs.15,716 crore in 1996-97. I am taking a credit of Rs.5,000
crore next year as receipts from disinvestments as continuation of the policy of
mobilising non-inflationary resources. I am also expecting an increase in dividends
and have estimated these receipts at Rs.4,051 crore in 1996-97.
38. Taking into account the changes in receipts and expenditure, total net
revenue receipts of the Centre, at the existing rates of taxation, are estimated at
Rs.127,162 crore and total expenditure is estimated at Rs.202,024 crore. The budget
deficit during 1996-97 is estimated to be Rs.5,000 crore and the fiscal deficit is
estimated to be Rs.62,404 crore. My proposals in the interim Budget will take us
further in the direction of bringing down the fiscal deficit to more manageable
proportions. I expect that on the basis of these estimates the fiscal deficit during
1996-97 will be 5 per cent of GDP. I would have liked to do better. I am restrained
in my efforts because I am presenting an interim Budget at this stage. But I am
sure that these efforts will provide a sound foundation for enhanced efforts in this
direction.
39. I propose to introduce a Finance Bill which seeks to continue the existing
rates of Income Tax in the financial year 1996-97. I am not proposing any changes
in the rates of Custom and Central Excise duties.
40. Mr. Speaker, Sir, I have sought to outline our achievements, the
 11
unfinished task that lies ahead, as well as our vision of the future economic and
social agenda we must pursue to realize the national goal of an India free from the
fear of war, want and exploitation; an India which takes full advantage of modern
science and technology to build a strong, self reliant and internationally competitive
economy; an India firmly committed to the twin pursuit of excellence and social
equity in the framework of an open society and democratic polity based on the rule
of law and abiding faith in fundamental human freedoms.
41. In my first budget speech to this Honourable House on 24th July
1991, I had stated, quoting Victor Hugo, that no power on earth could stop an idea
whose time had come. I had also suggested to this House that the emergence of
India as a front ranking economic power house of the world economy happened to
be an idea whose time had indeed come. Despite enormous challenges and
difficulties, we have worked earnestly to give concrete shape to this dream. We are
already the sixth largest economy of the world. We are determined to further move
up this ladder. But this will require far-sighted political leadership, sustained hard
work and willingness to accept utmost discipline in our national life. We cannot
afford to fritter away the vast energies of our nation in senseless communal strife
or caste and class wars. Nor can we allow the national commitment to Swadeshi to
be misused by the forces of obscurantism to perpetuate economic backwardness
and prevent India from occupying her rightful place in the world. As Jawahar Lal
Nehru taught us, in an interdependent world, Swadeshi must not be interpreted to
mean economic isolation but rather self reliance in building a prosperous India
which interacts as an equal with other countries in the world. We seek to build a
new India which, in the words of Gandhiji, will be like a house with windows open
on all sides; let ideas from all the cultures and civilisations of the world freely flow
in; but we must refuse to be blown off our feet by any one of them. This is the true
essence of Swadeshi and we shall not compromise on this essential principle.
42. India is on the threshold of exciting new opportunities. Gandhiji used
to say that the central disease of India is its deep poverty and deeper ignorance.
Thanks to recent developments in science and technology, it is now possible as
never before to wage a successful war against poverty, ignorance and disease.
Drawing inspiration from the high ideals and humanism of Swami Vivekananda,
Mahatma Gandhi, Gurudev Rabindranath Tagore and Pandit Jawahar Lal Nehru,
our party and Government reaffirm our solemn commitment to successful pursuit
of this giant national enterprise. We shall overcome.
43. Mr. Speaker, Sir, this is the last session of the present Lok Sabha.
Soon, our people will be called upon to exercise their sovereign democratic right to
choose the next Government. Undoubtedly, their choice will have a profound bearing
on the future of our polity and the well being of our children and our grand children.
Time and again, the Indian people have shown that they can be relied upon to
make sound and sensible decisions. I have every reason to believe that when the
time comes, our people will be discriminating enough to recognise the friendly
hand that alone can help our nation to move forward on the road to peace and
prosperity and preserve its unity and integrity.
[Interim-28th February, 1996]
 1

Budget 1995-96
Speech of
Shri Manmohan Singh
Minister of Finance
15th March, 1995

PART A
Sir,
I rise to present the Budget for 1995-96.
2. Four years have passed since our Government, under the leadership of
Prime Minister Shri P.V. Narasimha Rao, took office in the midst of an unprecedented
economic crisis. Our immediate task was to save the nation from a relentless slide
into the abyss of falling production, soaring inflation and deepening poverty. We
dealt swiftly with the immediate crisis and we also worked towards a broader
objective of shifting the economy on to a path of rapid, employment-generating
growth. Our aim was to raise India to her rightful place in the comity of nations.
3. Sometimes, in the heat of political debate, we lose sight of what has
already been achieved. Let me take a few minutes to outline how far we have come
since those grim days of 1991:
· The growth of our economy had fallen to less than one per cent in 1991-
92. We brought the economy back to a growth of 4.3 per cent per year in
the two years thereafter, and growth has accelerated further to 5.3 per
cent in 1994-95. Few countries can claim as quick and smooth a recovery
from as deep an economic crisis.
· Industrial growth had collapsed to about half of one per cent in 1991-92.
Today, Indian industry is experiencing a vibrant, broad-based recovery
with industrial growth of 8.7 per cent in April-November, 1994. The
manufacturing sector is growing even faster at 9.2 per cent and the capital
goods sector is growing at 24.7 per cent. I hope that those critics who
predicted that our industrial and trade reforms would hurt Indian industry
will look at the reality and think again.
· There are signs of a strong revival in domestic industrial investment in
1994-95 as Indian industry modernises and upgrades technology, and
improves competitiveness. Foreign direct investment is also responding

1
 2
well to the new policies, with large investments flowing into key
infrastructure sectors such as Power and Telecommunications.
· Foodgrain production had fallen to 168 million tonnes in 1991-92. This
year, it will be an all-time record of 185 million tonnes. Our farmers have
clearly benefited from the policy of offering remunerative prices and have
returned a strong production performance.
· Public stocks of foodgrain, which provide an invaluable insurance against
bad weather and other contingencies, had declined to 14.7 million tonnes
three years ago. They have been rebuilt to a record level of 31 million
tonnes, as on January 1, 1995.
· Growth has created new jobs for our people. In 1991-92, total employment
grew by only about 3 million. In each of the two years thereafter,
employment increased twice as fast, with about 6 million new jobs added
each year. The increase is expected to be even higher in 1994-95. The
drawing room Cassandras, who predicted massive unemployment as a
consequence of the reforms, have been conclusively proved wrong.
· The inability to manage our external payments was the immediate cause
of our collapse in 1991. I am sure, Honourable Members are aware of the
remarkable change that has taken place in this area. The dollar value of
exports fell by 1.5 per cent in 1991-92. In 1994-95 our exports have
grown by over 17 per cent in the first 10 months. This follows a 20 per
cent increase in 1993-94. Imports have also grown in line with the revival
of the economy but the balance of payments situation is comfortable.
· The fears that were voiced in some quarters that our trade policy would
generate a disruptive flood of imports and weaken the economy have been
shown to be completely unfounded. Liberalisation and openness have
actually increased our self-reliance. Exports now finance over 90 per cent
of imports, compared to only about 60 per cent in the latter half of the
eighties. The external deficit on current account was over 3 per cent of
GDP in 1990-91. It is expected to be less than 1/2 per cent in 1994-95.
· At the time of the crisis, our external debt was rising at the rate of 8
billion dollars a year. In 1993-94, the increase in external debt was reduced
to less than one billion dollars. In the first half of 1994-95, our external
debt stock actually declined by almost 300 million dollars.
· Our foreign currency reserves had fallen to barely one billion dollars in
June 1991. On March 10, 1995 they stood at over 20 billion dollars.
· A key element of our strategy was to give top priority to strengthening anti-
poverty programmes, once the initial crisis was overcome. We have fulfilled this
promise. Plan expenditure on employment and anti-poverty programmes in the
Central Sector has been increased very sharply in the last two budgets. The allocation
for Rural Development has been more than doubled from Rs.3100 crore in 1992-
93 (BE) to over Rs.7000 crore in 1994-95 (BE). Over the same period the allocation
for Elementary Education was increased by 84 per cent, for Adult Education by 78
per cent and for Health by 91 per cent.
4 . These indicators testify to a remarkable turnaround, in a relatively short
time. We inherited an economy near collapse four years ago. We have transformed
 3
it into an economy showing strong growth in agricultural and industrial output, a
strong revival of domestic investment, a steady increase in foreign direct investment,
renewed growth of employment and a comfortable foreign exchange position. This
is the result of the hard work of our farmers and industrial workers, our managers
and exporters, combined with the far sighted economic policies implemented by the
government under the leadership of Prime Minister Shri P.V.Narasimha Rao. What
is most encouraging is the emergence of a broad national consensus in support of
reforms, a consensus which vindicates our strategy of moving forward steadily and
surely on the path of reform.
5 . We have come a long way, but the journey is far from over. We need to
redouble our efforts in several areas to consolidate our gains, and push the economy
to even better performance. This is both feasible and also necessary to achieve our
goals. Reforms in the areas of taxation, trade and industrial policies and the financial
sector have yielded good results. They need to be completed as planned, so as to
enhance the efficiency and competitiveness of our economy. Barriers to further
expansion of agriculture have to be identified and lifted. The public sector has to be
revamped. Industrial relations have to provide for greater flexibility in deployment
of labour. Delivery systems for social services have to be modernised, plugging
loopholes and promoting cost effectiveness. Capital market reforms have to be
widened and deepened to strengthen investor protection. Insurance sector reforms
have to be pursued with the aim of greatly widening access to insurance services
and promoting competitive and efficient customer-oriented services. We must and
will push ahead in all these areas.
6 . There are also some weak spots, which have surfaced and need to be addressed
urgently. After the initial successes in fiscal consolidation, further progress has
proved much more difficult. The fiscal deficit increased sharply in 1993-94 and the
pressure on the deficit has continued in 1994-95. These developments must be
countered through determined action. If we try to fund every project and programme
irrespective of the revenues available, we only generate high inflation, high interest
rates which choke off investment, and a proliferation of under-funded, incomplete
projects. This approach will only jeopardise our basic objective of development with
social justice since it is the poor who will suffer most from the resultant inflation
and slow growth of employment opportunities. We must, therefore, ensure that
fiscal discipline is further improved in the years ahead.
7 . Inflation has surfaced again as a serious problem. We had succeeded in
lowering the rate of inflation from the peak of 17 per cent in 1991 to around 7 per
cent in the middle of 1993, but since then inflation has accelerated again and
currently exceeds 11 per cent. This acceleration has occurred because of several
factors. One reason is the sharp increase in procurement prices in the previous
three years. Another factor is the shortfall in production in critical sectors such as
sugar, cotton and oilseeds. The persistence of fiscal deficits at levels higher than
they should be, has also contributed to inflationary pressure. Recognizing these
problems, we will tackle inflation on a priority basis in the year ahead.
8 . Monetary policy has already been tightened to reduce the growth of money
supply. Interest rates on bank deposits have been raised to give greater
encouragement to savings. Taking advantage of the improved foreign exchange
 4
position, imports of key essential commodities, such as sugar, cotton, pulses and
edible oils have been freely allowed with zero or low duties to moderate inflationary
pressure. We are also taking advantage of the comfortable foodgrain stocks to
undertake continuous open market sales of wheat and rice with a view to moderating
price pressure in these items. The Public Distribution System (PDS) has been
strengthened and supplies through the PDS are being supplemented by necessary
imports of sugar and edible oils. Over the coming year, we will use all instruments
available to ensure stability in prices of wheat, rice and edible oils. Tariff and trade
policies will be deployed to ensure that domestic prices of industrial products do
not rise unduly. The consumer movement will be strengthened and Government
will be vigilant in curbing restrictive practices and hoarding. My revenue proposals,
to which I will come a little later, are also designed to check inflation in commodities
of mass consumption.
9 . Infrastructure is another area of potential weakness. If we are to aim at
economic growth of 7 to 8 per cent, which has been achieved in other countries and
which alone can provide the jobs we need for our growing labour force, then we
need much larger investment and much greater efficiency in key infrastructure
sectors such as power, roads, ports, irrigation, railways and telecommunications.
Sound financial management holds the key to progress in this area. Adequate
supply of quality infrastructure depends crucially on the financial viability of these
sectors, which in turn depends upon the adoption of reasonable cost recovery
policies. To take the example of power, many State Governments are unable to
finance new investment in power generation because of the financial weakness of
the State Electricity Boards. Taking advantage of the Central Government’s initiative
to encourage private investment in power generation, many State Governments are
actively trying to attract private sector investments into this area. But private
sector investors are unwilling to invest in Power unless the State Governments and
the Central Government provide guarantees and counter-guarantees to reassure
the private sector producers that they will be paid for the power they generate.
Such counter-guarantees are justifiable only if they are viewed as providing
temporary breathing space, during which State Electricity Boards undertake
necessary reforms of their institutional structure, operating practices and pricing
policies. In the long run, we cannot escape the reality that the users of electricity
must pay for its cost. The same criterion holds for other infrastructure sectors also.
Once financial viability is assured, we can expect a renewed surge of both public
sector and private sector investments in these areas.
1 0 . I shall now deal with some issues of social equity and poverty alleviation.
In my first Budget speech itself, I had emphasised that economic growth and
restructuring are not ends in themselves. They are only the means to improving
the lives of ordinary citizens. I wish to assure the House that this concern has been
central to our strategy from the very beginning. Experience in our own country, as
also from all over the world, shows that the surest antidote to poverty is rapid and
broad based growth. This is precisely what our economic reforms seek to achieve.
We also recognise that the fruits of growth will take time to reach some of the
poorest and weakest sections of our society. To ensure that they too derive benefit
in the short run, we have given the highest priority to strengthening programmes
of rural development, employment generation, primary education, primary health
and other key social sector programmes. These programmes, coupled with
 5
accelerating economic growth over the last three years, are beginning to have
desirable effects on employment and poverty. I have already mentioned that total
employment is expanding much faster than three years ago. Real wages of
agricultural labourers had declined in 1991-92 during the crisis. They had increased
above pre-crisis levels by 1993-94. Available information on vital statistics, like the
crude death rate and the infant mortality rate, also indicates a clear recovery in
general living standards after 1991-92.
11. The message is clear: the task of lifting the age-old burden of poverty
in our society is daunting, but we are on the right track. We must persevere with
our two-track strategy of accelerating growth, investment and modernisation on
the one track, and strengthening anti-poverty programmes on the other. The Central
Plan allocations and the tax proposals in this Budget are designed to advance both
elements of this strategy. Before coming to these proposals, I would like to outline
some new initiatives aimed at strengthening the income-earning opportunities for
the weaker segments of our society.
12. Inadequacy of public investment in agriculture is today a matter of
general concern. This is an area which is the responsibility of the States, but many
States have neglected investment in infrastructure for agriculture. There are many
rural infrastructure projects, which have been started but are lying incomplete for
want of resources. They represent a major loss of potential income and employment
to the rural population. To encourage quicker completion of projects in rural
infrastructure, I propose to establish a new Rural Infrastructural Development
Fund within the National Bank for Agriculture and Rural Development (NABARD)
from April 1995. The Fund will provide loans to State Governments and State
owned Corporations for completing ongoing projects relating to medium and minor
irrigation, soil conservation, watershed management and other forms of rural
infrastructure. The loans will be on a project-specific basis with repayment and
interest guaranteed by the concerned State Government. Priority will be assigned
to projects which can be completed within the least time period. Resources for the
Fund will come from commercial banks which will be required by Reserve Bank of
India (RBI) to contribute an amount equivalent to a bank’s shortfall in achieving
the priority sector target for agricultural lending, subject to a maximum of 1.5 per
cent of the bank’s net credit. This is expected to create a corpus of about Rs.2,000
crore for completion of rural infrastructure projects.
13. Our Scheduled Castes and Scheduled Tribes citizens are amongst the
poorest members of our rural society. In the one hundred predominantly tribal
districts, NABARD will open an exclusive line of credit to Cooperatives and Regional
Rural Banks for meeting the credit needs of Scheduled Tribes. Rs.400 crore will be
earmarked for this purpose during 1995-96. NABARD will also earmark a further
Rs.100 crore for financing Scheduled Castes and Scheduled Tribes beneficiaries
identified by the Scheduled Castes and Scheduled Tribes Corporations. This amount
would be available to the commercial and cooperative banks for meeting the
investment needs of Scheduled Caste and Scheduled Tribe beneficiaries in both
farm and non-farm activities.
14. Khadi and village industries provide crucial non-farm earning
opportunities to our rural population. I propose to establish a new scheme under
 6
which the banking system will provide Rs.1,000 crore on a consortium basis to the
Khadi and Village Industries Commission (KVIC), which will lend to viable khadi
and village industry units, either directly or through State level Khadi and Village
Industries Boards (KVIBs). The Central and State Governments will guarantee these
loans by commercial banks to KVIC and KVIBs, respectively.
15. The handloom sector employs millions of poor weavers. At present,
NABARD refinancing to this sector is restricted to the flow of credit through the
District and State Cooperative Banks. Henceforth, NABARD will extend refinancing
to commercial banks also for extending credit to cooperative handloom institutions.
Steps are also being taken to accelerate the flow of credit to the Handloom Centres
and Quality Dyeing Units coming under the scheme initiated last year.
16. Our Small Scale Industries employ 14 million workers and account for
40 per cent of our total manufacturing output and 35 per cent of our exports. This
dynamic sector must be strengthened and assisted to better serve the goals of
growth, employment generation and self-reliance through exports. A Technology
Development and Modernization Fund will be established in the Small Industries
Development Bank of India (SIDBI) to provide financial assistance to quality projects
aimed at strengthening the export capability of small-scale industries. The initial
amount earmarked for this Fund will be Rs.200 crore. The financial assistance,
which would be directly provided by SIDBI to eligible small-scale units, can take
the form of either loans or equity.
17. A National Equity Fund Scheme was established in 1987, to provide
equity assistance to tiny small scale units with projects of less than Rs.10 lakhs
and located in places with a population not exceeding 5 lakhs (15 lakhs in the case
of Hill Areas and the North Eastern Region). I propose to extend the National
Equity Fund Scheme to all tiny small-scale units irrespective of their location,
except for units in metropolitan areas. Furthermore, the scope of this scheme will
be enlarged to cover expansion, modernization, technology upgradation and
diversification. The scheme, which is managed by SIDBI, will continue to be funded
by the Central Government and SIDBI on 50:50 basis.
18. Adequate availability of credit from the banking system is critical for
the small scale sector. The Government, in consultation with banks, has formulated
a Seven Point Action Plan for improving the flow of credit to this sector. A key
feature of the Plan is the setting up of specialized bank branches to serve the needs
of small scale units in 85 identified districts, each with more than 2,000 registered
small scale units. The public sector banks will ensure that 100 such dedicated
branches are operational before the end of 1995-96.
19. The North Eastern region of our country merits special attention. With
a view to accelerating industrial development, a new North Eastern Development
Bank (NEDB) is being established to finance creation, expansion and modernization
of industrial enterprises and infrastructure projects in the region. The Bank will be
located within the region. It will have an authorized capital of Rs.500 crore. Initial
contributions to capital will be provided by All India Financial Institutions such as
IDBI, ICICI and UTI, providing scope for contribution from other investors
subsequently.
 7
20. In addition to these measures for enhancing income earning
opportunities for the weaker sections of our society, I am pleased to announce four
far-reaching programmes for the general welfare of the poor, especially in rural
areas. The first programme addresses the serious deficiency in housing facilities
for the rural poor. As Honourable Members are aware, there is a major ongoing
rural housing programme, the Indira Awas Yojana. About 4 lakh dwelling units are
expected to be provided on a subsidized basis in 1994-95 to Scheduled Castes,
Scheduled Tribes and freed bonded labourers. For 1995-96, the housing target is
being more than doubled to 10 lakh units. With this initiative, we will be able to
build 50 lakh rural dwelling units in the next five years. This will go a long way
towards solving the critical shortage for basic shelter among rural poor.
21. The greatest hardships among the poor are often suffered by the old
and the weak, most of whom are unemployable. To soften the hardship in their
twilight years, a National Social Assistance Scheme has been proposed to cover the
poor and needy. One component of the scheme is the provision of a national
minimum old age pension of Rs.75 per month to people above 65 years of age who
are below the poverty line. A second component provides lump-sum survivor benefits
to poor households, on the death of the primary bread earner, of Rs.5000. The
third component aims at provision of sustenance for pre-natal and post-natal
maternity care to women belonging to poor households for the first two births. The
scheme will eventually cover about 14 million neediest beneficiaries from households
below the poverty line. Three quarters of the beneficiaries are likely to be women
needing assistance on account of old age, widowhood and maternity. The Scheme,
to be funded jointly by the Centre and the States, will be implemented by the
States through Panchayati Raj institutions. For this purpose, I am appointing a
Committee to work out the details of this Scheme.
22. The social assistance package will be complemented by a new Group
Life Insurance Scheme of the LIC which will be implemented by Panchayats in
rural areas. Under this scheme, life cover of Rs.5000 will be provided for a modest
annual premium of around Rs.70. For poor households, the Central Government
will subsidise 25 per cent of the premium with the State Government meeting an
equal amount and the beneficiary contributing 50 per cent. The subsidy will be
limited to one policy per poor household. For the others, there will be no subsidy
on the premium. The object of the scheme is a massive promotion of social insurance
and thrift in rural areas with the active involvement of Panchayats. For poor
households, it will provide a second tier of partly subsidised security supplementing
the survivor benefit and will also inculcate the habit of saving. The LIC will be
working out the details of the scheme.
23. Schemes to provide mid-day meals for school children have a beneficial
impact not only on child nutrition but also on school attendance. Some of the State
Governments have been operating school mid-day meals schemes. As part of the
emphasis being laid by this Government on the primary education, and taking into
account the comfortable food stocks with the public sector agencies, it is appropriate
that the Central Government should be willing to participate in phased expansion
of these schemes. The modality of implementing this, with necessary local variations,
will be worked out by a Committee to make it operational in 1995-96.
24. Taken as a whole, these new initiatives for funding agricultural
infrastructure, promoting handlooms and khadi and village industries, expanding
rural housing and introducing social insurance will greatly strengthen the anti-
 8
poverty component of our strategy. In parallel, we will also continue with the
economic reforms, which have already yielded excellent results.
25. The industrial, trade and tax reforms, which have created demonstrable
buoyancy in industrial production, investment and exports, will be continued, with
a special effort to improve implementation at the ground level. An important positive
development is the upsurge of investment proposals in infrastructure sectors, such
as power and telecommunications. We will ensure that the flow of investment into
these critical sectors is expedited. Reforms in the capital markets are being pursued
vigorously. Major amendments have been made recently in the Securities and
Exchange Board of India (SEBI) Act to give SEBI powers for effective regulation of
the capital markets. We propose to introduce legislation to set up Central Depositories
later this year. We will continue our efforts at financial sector reforms.
26. In my speech last year, I had drawn attention to the report of the
Committee on Reforms in the Insurance Sector and indicated that we would evolve
a broad consensus on the future direction of reform. As a first step, I propose to
establish an independent Regulatory Authority for the Insurance industry. Necessary
legislation will be introduced shortly.
27. I shall now briefly go over the Revised Estimates for 1994-95.
28. The Budget Estimates for 1994-95 had placed the total expenditure at
Rs.1,51,699 crore. This is now expected to go up to Rs.1,62,272 crore, an increase
of Rs.10,573 crore.
29. Budget Estimates for the current year provided Rs.46,582 crore as
budget support for Plan expenditure. This is being enhanced to Rs.48,761 crore to
accommodate additional assistance to the State Plans and additional allocations
for the MPs Local Area Scheme.
30. Non-Plan expenditure in the current year is placed at Rs.1,13,511
crore which represents an increase of Rs.8,394 crore over the Budget Estimates.
Additional provision has had to be made in the Revised Estimates towards food and
fertilizer subsidies. The provision for food subsidy has to be substantially increased
by Rs.1,100 crore because of the time lag in the revision of issue prices of foodgrains.
Fertilizer subsidy is being increased by Rs.1,166 crore from the budgeted level to
cover the requirement of imports and to clear past arrears. There has been an
unprecedented rise in collections from small savings schemes this year.
Consequently, an additional amount of Rs.4,497 crore is being provided in the
Revised Estimates as loans to States and Union Territories.
31. Gross tax revenues were estimated at Rs.87,136 crore in the Budget
Estimates. I am happy to report that our tax reforms are beginning to have the
expected impact and gross tax revenues are Rs.2,695 crore higher than the Budget
Estimates, reaching a figure of Rs.89,831 crore in the Revised Estimates for 1994-
95. This is a vindication of our strategy of tax reform, and also a tribute to the hard
work and dedication of the revenue department, without whose unstinting efforts
this result could not have been achieved.
32. External loans, net of repayment, are placed at Rs.3,947 crore compared
to the Budget Estimates of Rs.4,279 crore.
 9
33. Though tax collections and other non-debt receipts have been higher
than budgeted, the gains have been outweighed by much larger increases in plan
and non-plan expenditure. The fiscal deficit was originally budgeted at Rs.54,915
crore or 6 per cent of GDP. The fiscal deficit in the Revised Estimates comes to
Rs.61,035 crore which is about 6.7 per cent of GDP. However, nearly three quarters
of this deterioration is due to the extraordinary rise in small saving collections, 75
per cent of which are passed on to the States. Thus the bulk of the deterioration in
the fiscal deficit is not on account of increased expenditure of the Central
Government, but only a reflection of larger small savings as compared to the Budget
Estimates, which are on lent to the States. If this element is excluded, the Centre’s
fiscal deficit would be only 6. 2 per cent of GDP compared to the Budget target of
6 per cent.
34. The Tenth Finance Commission (TFC) submitted its Report covering
the five year period of 1995-2000, on November 26, 1994. The Report recommends
a substantial increase in transfers to the States. Despite the severe constraint on
the Centre’s resources, the Government has accepted the recommendations of the
Commission and these are being implemented with effect from 1995-96. The flow
of funds based on Finance Commission devolution and transfers will increase by
about 22 per cent, from Rs.28,832 crore in 1994-95 to Rs.35,055 crore in 1995-96.
We expect the States to use the additional resources for the purposes for which
they are released and ensure that the fruits of the schemes reach the intended
beneficiaries.
35. I now turn to the Budget Estimates for 1995-96. The total expenditure
is estimated at Rs.1,72,151 crore. The total budgetary support from the Central
Government’s budget to the Central and the State Plans is being placed at Rs.48,500
crore in 1995-96, which represents an increase of Rs.1,918 crore over the level in
Budget Estimates 1994-95.
36. The total outlay of the Central Plan 1995-96 has been increased to
Rs.78,849 crore from Rs.70,141 crore in the Budget Estimates 1994-95. The
budgetary support for the Central Plan 1995-96 has been increased to Rs.28,994
crore from Rs.27,278 crore in the Budget Estimates 1994-95. The balance will be
met by the internal and extra budgetary resources of the Central Public Sector
Enterprises to the extent of 63 per cent, as against 61 per cent in Budget Estimates
1994-95.
37. I am providing Rs.19,506 crore as Central Plan assistance to States
and Union Territories in the Budget Estimates 1995-96 compared to Rs.19,304
crore in Budget Estimates 1994-95. It is relevant to note that the plan transfer to
States and UTs for 1994-95 include Rs.2,680 crore as part of the Ninth Finance
Commission decisions. Tenth Finance Commission has not suggested any transfer
on Plan Account. Thus the discretionary plan transfer by the Centre to States and
UT goes up from Rs.16,624 crore in 1994-95 to Rs.19,506 crore in 1995-96, yielding
an increase of over 17%. This amount has to be viewed in the background of
substantial increase in transfers to the States as a result of the recommendations
of the Tenth Finance Commission.
38. In line with our strategy of giving priority to programmes which directly
benefit the poor, budgetary support to the Central Plan is being concentrated on
Rural Development, Employment and Poverty-alleviation programmes and human
resource development sectors. As Honourable Members are aware, the directly
targeted Rural Development programmes for eradicating rural poverty have received
 10
special emphasis and enhanced outlays during the reform process. In the last
budget, the outlay for the Department of Rural Development was raised to Rs.7,010
crore, more than double the amount of Rs.3,100 crore budgeted two years earlier
in 1992-93. For 1995-96, this allocation is being further increased to Rs. 7,700
crore. With this, we will be well on the way to meeting the Eighth Five Year Plan
target of Rs.30,000 crore of Central Plan outlay for Rural Development. It is estimated
that the Rural Employment programmes under the Department of Rural Development
generated about 800 million mandays of employment in 1991-92. In 1995-96,
these programmes are estimated to generate 1290 million mandays of employment.
39. The Annual Plan of 1995-96 will continue to lay stress on improving
productivity in the agricultural sector and diversifying the pattern of agriculture
into higher value generating farm schemes like horticulture. Revitalising the
cooperatives for providing credit inputs and extension support, marketing and
processing would be another thrust area. The flow of agricultural credit through
cooperatives is projected at Rs.14,000 crore in 1995-96, as compared to an estimate
of about Rs.12,000 crore in 1994-95. Assistance will be given to 220 cooperative
societies for women and 330 cooperative societies for weaker sections. It is expected
that over 38,000 hectares would be brought under drip irrigation. Integrated pest
management, which is eco-friendly, will be extended and 1500 training-cum-
demonstrations will be organised to train over 50,000 farmers. 40,000 hectares are
expected to be covered under intensive fish farming.
40. The spread of educational opportunities is essential for social and
economic development. Despite severe budgetary constraints, the Plan Outlay for
Education in 1995-96 is being increased from Rs.1,541 crore in 1994-95 to Rs.1,825
crore in 1995-96. Elementary Education is particularly important, especially for
improving the position of girls and women in our society. The outlay for Elementary
Education is being increased substantially by 24.5 per cent to Rs.651 crore. Under
Operation Black Board, primary schools with enrolment of more than 100 children
are being provided a third teacher. The allocation for Operation Black Board is
being increased by 30 per cent for 1995-96. The allocation for post-matric
scholarships for Scheduled Castes and Scheduled Tribes has been increased from
Rs.105 crore in 1994-95 to Rs.145 crore in 1995-96. This will help additional
coverage of deserving students. To assist the State Governments, Government of
India is passing on all the external assistance received for Primary Education as
grants to State Governments, irrespective of the terms on which the assistance is
received by the Central Government.
41. The combined Plan Outlay for the Departments of Health and Family
Welfare is being increased to Rs.2,251 crore in 1995-96. The allocation for the
National Malaria Eradication Programme for 1995-96 is being increased by 32 per
cent to Rs.139 crore, so that coverage can be extended to 163 million people with
top priority being accorded to tribal areas and North Eastern States where the
problem of malaria has been endemic. Rs.80 crore is being allocated in 1995-96 for
the Leprosy Control Programme which aims to eliminate transmission of this disease
by the year 2000. An allocation of Rs.726 crore is proposed for Family Welfare
Services directly meant for rural areas, including Rs.160 crore for maintenance of
5435 Rural Family Welfare Centres and Rs.190 crore for the maintenance of 9577
Rural Sub-Centres.
 11
42. Total non-Plan expenditure in 1995-96 is estimated to be Rs.1,23,651
crore. The outlay for Defence has been increased to Rs.25,500 crore, keeping in
mind national security imperatives. An amount of Rs.5,400 crore is being earmarked
for fertiliser subsidy in 1995-96. In addition, Rs.500 crore has been earmarked for
cheaper supply of phosphatic and potassium fertilisers to farmers, thus raising the
total effective fertiliser subsidy to Rs.5,900 crore. Food subsidy receives an allocation
of Rs.5,250 crore.
43. Turning to revenue receipts, gross tax revenues at the existing rates of
taxation, are estimated at Rs.1,03,762 crore. The payment of share of taxes to
States is placed at Rs.29,388 crore. The net revenue receipts to the Centre, including
non-tax revenues are estimated to increase from Rs.86,084 crore in 1994-95, to
Rs.1,00,787 crore in 1995-96.
44. In the area of capital receipts, traditional market borrowings are put at
Rs.3,700 crore. Other medium and long term loans are estimated at Rs.19,000
crore and short term loans at Rs.4,387 crore. Net external assistance is estimated
at Rs.4,456 crore. As in previous years, the Government intends to continue the
process of disinvestment of the equity of public sector enterprises. The Budget
Estimates provide for receipts from disinvestment of Rs.7,000 crore, a significant
increase from the figure of Rs.5,237 crore in the Revised Estimates for 1994-95.
45. Taking into account other changes in receipts and expenditure, total
receipts at existing rates of taxation are estimated at Rs.1,67,151 crore, while total
expenditure is estimated at Rs.1,72,151 crore. This results in a budget deficit of
Rs.5,000 crore. The fiscal deficit emerging from these estimates for 1995-96 will be
Rs.57,634 crore, which will be about 5.5 per cent of GDP. I would have liked to do
better, but on balance I feel that a fiscal deficit of this order can be absorbed, if the
existing growth momentum is maintained.
PART B
46. I now turn to my tax proposals for 1995-96.
47. Over the past three years, we have made a number of structural changes
in our tax laws covering both direct and indirect taxes. Unlike earlier isolated
attempts to modify the tax system, these changes were part of a medium term
programme of tax reform guided by certain general principles that have gained
wide acceptability. We wanted to build a structure which is simple, relies on moderate
tax rates but with a wider base and better enforcement, serves the objectives of
equity and provides the incentives and signals consistent with developing an
internationally competitive, dynamic economy.
48. Direct taxation is the most equitable form of raising revenues, but our
experience in the earlier years of high tax rates showed that high rates did not lead
to high collections. I am happy to report that our decision to reduce rates and
thereby encourage compliance has yielded good results. Personal income and
corporation taxes, taken together, are expected to increase by more than 25 per
cent in 1994-95. The share of direct taxes in GDP has increased from 2.1 per cent
in 1990-91 to 2.8 per cent in 1994-95.
49. In the area of customs duty our objective was to reduce the high rates
 12
of import duty gradually, so as to lower costs of production and improve
competitiveness of user industries while allowing domestic producers facing
competition from imported goods reasonable time to adjust. The strong growth of
Indian industry in 1994-95, to which I have referred earlier, demonstrates
conclusively that customs duty reforms have succeeded in imparting the necessary
dynamism to industrial production.
50. In the area of excise duties, our objectives were to simplify the structure,
broaden the base, reduce high rates of duty which encourage evasion, shift to ad
valorem rates as far as possible and extend the coverage of MODVAT. The results
are evident in the impressive growth of excise revenues in 1994-95.
51. I am reassured by these results that our basic strategy of tax reforms
stands fully vindicated. Together with administrative steps being taken to improve
revenue collection, I am now confident that we can create a tax structure which
will ensure buoyant revenues while also stimulating growth of production and
employment.
52. Mr. Speaker Sir, after this brief overview, I would like to present the
details of my proposals relating to direct taxes.
53. I have received many representations from Members of Parliament,
trade unions and others requesting for increase in the exemption limit for personal
income-tax. Our Government has consistently responded to the genuine needs of
the common man. I, therefore, propose to further raise the exemption limit for
income tax from Rs 35,000 at present, to Rs. 40,000.
54. We need to strengthen incentives for savings. At present, under section
80L of the Income-tax Act, income by way of interest and dividend from certain
specified financial assets is exempt from income tax to the extent of Rs.10,000 per
annum. In order to provide greater fillip to domestic savings by individuals and
HUFs, I propose to raise this limit to Rs.13,000. This will provide both relief and an
added incentive for savers.
55. With these changes, a salaried individual will not pay any tax upto a
salary level of Rs.55,000. In the case of working women, this limit is even higher at
Rs. 58,000. In addition, such an individual would benefit from an additional
exemption of Rs.13,000 if he or she takes full advantage of the exemption for
income from savings instruments under section 80 L. The tax exempt income could
therefore reach a maximum of Rs 68,000 generally and Rs 71,000 for working
women. It is only beyond this level that such individuals will start paying tax and
that too only at modest rates.
56. Inadequate infrastructure is a key constraint to our economic progress.
In order to promote expansion of quality infrastructure, I propose to allow a five-
year tax holiday for any enterprise which builds, maintains and operates
infrastructure facilities in the area of highways, expressways and new bridges,
airports, ports and rapid mass transport systems. This tax holiday will be available
to enterprises which commence operation after 1st April,1995 . As an incentive to
financial institutions to provide long-term finance for development of such
infrastructure, I propose to allow a deduction of upto 40 per cent of their taxable
income derived from financing of these investments, provided this amount is credited
to a special reserve.
 13
57. Under section 80-IA of the Income-tax Act, new industrial undertakings,
hotels and shipping concerns commencing operation before 31st March,1995 are
entitled to a deduction of 30 per cent of their income if they are companies or 25
per cent of their income if they are non-corporate entities. This incentive is available
to co-operative societies for the first 12 years, and to others for the first 10 years
of operation. As a special measure of support to small scale industries, I propose
to extend this concession to them for five more years. Thus, new industrial
undertakings in the small scale sector which commence operation before 31st
March, 2000 will be eligible for this concession.
58. Exports of software have grown rapidly and represent a potentially
dynamic segment of export earnings. Software exporters have, however, represented
that the deduction under section 80HHE available to them is extended from year to
year whereas section 80HHC for export of goods is open-ended. I propose to accede
to their request to place section 80HHE on the same basis as section 80HHC.
59. Venture capital funds can be an important instrument for promoting
growth of new firms and technologies which often involve high risk. The tax laws of
many countries allow income of such funds to be exempt from taxation in the
hands of the fund but tax it, after distribution, in the hands of the shareholders.
In order to encourage the formation of venture capital funds on similar lines in
India, I propose to exempt from tax, income by way of dividend and long term
capital gains from equity investments made by approved venture capital funds or
venture capital companies. Such venture capital funds will be required to invest
only in unlisted companies engaged in manufacturing. Income will, however, be
fully taxable in the hands of the shareholders.
60. On Independence Day, 1994, the Prime Minister had announced the
launching of the Integrated Urban Poverty Eradication Programme. Under this
programme, the Ministry of Urban Development is setting up a National Urban
Poverty Eradication Fund (NUPEF). I propose to allow 100% deduction from income
in respect of contributions made to this fund.
61. Under section 80-U of the Income-tax Act, a separate deduction of
Rs.20,000 is allowed from the total income of handicapped persons. I have received
several representations from handicapped persons and welfare organisations stating
that these individuals need additional relief on account of increased cost of medicines
and living aids. Recognising their needs, I propose to raise the level of deduction for
handicapped persons from Rs.20,000 at present to Rs.40,000.
62. Many voluntary relief organisations have represented that the parents
or guardians of children with severe disability, such as spastic children, face great
mental agony having to worry about the burden of providing for the maintenance
of the disabled after the death of the parents or the guardian. I see merit in this
representation. I, therefore, propose to allow a new deduction of upto Rs. 20,000,
from the taxable income of parents or guardians of handicapped children provided
this amount is deposited in any approved scheme of LIC, UTI etc. for providing
recurring or lump sum payment for the maintenance and upkeep of a handicapped
dependant after the death of parents or the guardian.
63. A number of funds have been established by trade unions for the
 14
welfare of the employees and their dependants. These funds are used to provide
cash benefits in the event of superannuation, illness or death or to meet the cost
of education of the employees’ children. I propose to exempt the income of such
funds from income tax.
64. The National Minorities Development and Finance Corporation has been
set up in pursuance of the announcement made by the Prime Minister on
Independence Day, 1993. The main object of the Corporation is to promote economic
and developmental activities for the benefit of the members of the minority
communities. I propose to exempt from income tax the income of this corporation
as well as of similar corporations established by any State Government. I also
propose to allow deduction in respect of donations made to these corporations,
under section 80G of the Income-tax Act .
65. Upgradation of human resources is a high priority. The fundamental
need is for improvement of primary and adult education in rural and semi-urban
areas where facilities for such education are deficient. In addition to public funding,
we have to encourage private contributions for this purpose. In 1993, I had extended
the benefit of 100% deduction from taxable income for donations to universities
and educational institutions of national eminence. This year, I propose to extend
100% deduction for donations to Zila Saksharta Samitis constituted in the districts
for the promotion of elementary education. This measure will help to mobilise
additional resources for elementary and adult education in rural and semi-urban
areas and enable us to intensify our total literacy campaign.
66. All over the world, revenue administrations widen the tax base by
enlarging the scope of deduction of tax at source. This brings in more persons into
the tax net and assists the transition to lower rates of taxation. It also helps in the
reporting of correct incomes. In many countries, income from professional and
technical services is subject to deduction of tax at source. In order to prevent
under-reporting of income in this sector, I propose to introduce a new provision in
the Income-tax Act subjecting the sums payable by way of fees for professional or
technical services to the requirement of deduction of income-tax at source at the
rate of 10 per cent. There will be no deduction of tax at source where the aggregate
of payments or credits during the financial year is below Rs.20,000 or where
payments are made by individuals and HUFs.
67. Tax is deducted at source on payments made in excess of Rs. 10,000,
to contractors under section 194C of the Income-tax Act. Legal disputes have arisen
whether the TDS provisions will apply to transport contracts, advertisement
contracts, broadcasting contracts, telecasting contracts and catering contracts. To
avoid further litigation and check tax avoidance, I propose to provide for deduction
of tax at source in these cases at the existing rate of 2 per cent for the main
contract and 1 per cent for sub-contracts. Taking into account the inflation over
the years, I also propose to raise the limit below which deduction at source is not
necessary from Rs.10,000 at present to Rs.20,000.
68. The income from units of mutual funds or of the Unit Trust of India,
though liable to income-tax, is not subject to deduction of tax at source in most
cases. This has led to non-reporting or under-reporting of such income. In order to
prevent misuse and ensure a uniformity of treatment with other financial instruments
 15
I propose to provide for deduction of tax at source from such incomes at the rate
of 20 per cent in the case of companies and at the rate of 15 per cent for all others
including individuals and HUFs. There will be no change in the present tax treatment
of non-residents or offshore funds. In the case of resident unit-holders, deduction
of tax at source will be made only if the aggregate amount of income payable under
each scheme during a financial year exceeds Rs.10,000. No deduction of tax at
source will be required where units have been issued under an existing scheme
which provides for payment of a fixed amount after a certain period of time or
where post-dated cheques have already been issued towards payment of income.
69. I also propose to provide for deduction of income-tax at source from
interest on time deposits with banks at the rate of 20 per cent plus surcharge in
the case of domestic companies and 10 per cent in the case of individuals and
other non-corporate entities. The new provision will be applicable only to the deposits
made on or after 1st July, 1995. No tax shall be deducted if the amount of interest
credited or paid during a financial year is Rs.10,000 or less branch-wise. Thus,
persons having small deposits will not be affected by the requirement of deduction
of tax. The existing facility of non-deduction of tax, where the recipient of interest
has no taxable income will also be available. Interest on time deposits with primary
co-operative credit societies, co-operative land mortgage banks and co-operative
land development banks will be outside the scope of this provision.
70. Chapter XX C of the Income-tax Act empowers the Central Government
to make pre-emptive purchase of immovable properties, beyond a prescribed limit,
which, at present, is Rs.10 lakhs. A single monetary limit for all the notified cities
needs to be revised in the context of local variations in real estate prices. I, therefore,
propose to make a provision for prescribing different monetary limits for different
cities.
71. Hon’ble Members are aware that the searches conducted by the Income
Tax Department are an important means of unearthing black money. However,
undisclosed incomes have to be related to the different years in which the income
was earned and as such assessments are unduly delayed. In order to make the
procedure more effective, I am proposing a new scheme under which undisclosed
income detected as a result of search shall be assessed separately at a flat rate of
60 per cent. An appeal against the order can be filed directly before the Income-Tax
Appellate Tribunal.
72. In allowing deduction for depreciation, 100 per cent deduction is allowed
in the year of purchase for individual items of machinery or plant the value of
which does not exceed Rs.5,000, The written down value of such assets is thereafter
taken as nil. This provision was introduced as difficulties were experienced in
keeping record of items of small value for purposes of allowance of depreciation.
After switching over to the concept of block of assets with effect from 1st April,
1988, all the items of plant and machinery falling in a block are pooled together for
allowing depreciation at the prescribed rates. There is, therefore, no justification
for the continuance of this provision. I, accordingly, propose to provide that even
items of machinery or plant costing less than Rs. 5,000 will form part of a ‘block
of assets’ and depreciation will be allowed on the same at the rate specified in the
Income-tax Rules.
 16
73. I propose to amend the provisions of the Income-tax Act to provide that
the taxable income may be computed only on cash or mercantile basis. It is also
being provided that the taxpayers shall follow accounting standards as may be
notified by the Central Government from time to time for various businesses. This
provision is being made applicable from accounting year starting from 1st April,1996.
74. The calculation of capital gains on sale of bonus shares has led to
several disputes. In order to simplify the position and avoid disputes, I propose
that the cost of bonus shares for calculating the capital gains tax shall be taken at
nil.
75. I now turn to my proposals regarding indirect taxes.
76. The thrust of my proposals is to continue the strategy of tax reform we
have followed and reduce the cost of inputs to Indian producers, simplify the tax
structure, minimize anomalies, promote competition and efficiency, lower prices
paid by Indian consumers and thereby check the potential for inflation.
77. I shall deal first with import duties. The present peak rate of import
duty of 65% is still very high compared to other developing countries, let alone
industrialised nations. I propose to continue the process of phased reduction in the
peak rate by lowering it to 50%.
78. The machinery and capital goods sector is a critical sector of our industry
and it has responded extremely well to the new policies with a growth of 25% in
April-November, 1994. I propose a package of measures which will further rationalise
and simplify the import duty structure as applicable to machinery and capital
goods, remove a number of anomalies and assist the industry in achieving a high
rate of growth.
· At present the general import duty rate on machinery items is 25% but
certain capital goods like generating sets and weighing machinery attract
higher rate of duty. I am proposing to bring down the duty on these items
also to 25%.
· The rate of import duty on machine tools, currently varies between 35%
and 45%. I propose to unify the duty rates at 25% which is the general
rate for machinery. Parts of such machine tools will also generally attract
duty of 25%.
· Components of capital goods generally attract an import duty of 25% but
components which contain electronic parts and components which are
interchangeable with motor vehicle parts, attract higher rates. I propose
to reduce the duty rate on these components to 25%.
· Quality control is a must for manufacturing industries if they have to
improve the quality of their products. I am proposing to reduce the import
duty on testing, quality control and other instruments from present rates
varying from 40% to 60% to a uniform level of 25%. Parts of such
instruments in general will also attract the same rate.
79. These proposals will unify the customs duty rates for nearly 80% of
general machinery (both mechanical and electrical), machine tools, instruments
 17
and projects at 25%. They will avoid anomalies relating to parts and components,
reduce classification disputes and promote investment by reducing its cost.
80. Metals, ferrous and non-ferrous, are key inputs into capital goods and
many other lines of production, many of which are undertaken by small scale
producers. These items at present attract rates of duty varying from 50% to 60%.
Ideally, such materials should not attract rates of duty higher than those on the
capital goods. But keeping in view the need to allow domestic producers of metals
a reasonable transition period, I am proposing to reduce the import duty rates on
ferrous and non-ferrous metals to 40%. For unwrought non-ferrous metals like
copper, zinc and lead, the import duty is proposed to be reduced to 35%. Import
duty on hot rolled coils of iron and steel for re-rolling is proposed to be reduced
from 40% to 30%, and that on stainless steel scrap from 30% to 20%. Import duty
on sponge iron is proposed to be reduced from 30% to 20%. I also propose to
reduce the import duty on a number of non-metallic minerals from 65% to 30%.
81. I am also simplifying the import duty structure on ball or roller bearings
which currently attract different rates of duty depending on size, weight and
description. Henceforth all ball or roller bearings will attract a uniform duty of 25%
+ Rs. 120/kg.The revised duty structure is likely to reduce the incentive for under-
invoicing and smuggling.
82. Clothing and textiles are items of mass consumption. Yet our import
duties on raw materials and inputs used to manufacture synthetic yarns, fibres
and fabrics are on the high side. In view of this, and keeping in mind the continuing
inflationary pressure in this sensitive area, I propose to reduce import duty on
xylenes from 30% to 10% to lower the cost of manufacturing DMT/PTA. I am also
proposing to reduce the import duty on DMT, PTA and MEG, being essential raw
materials for the manufacture of polyester fibre and polyester filament yarn, from
60% to 35%. On caprolactum, a basic raw material for nylon, the import duty is
proposed to be reduced from 60% to 45%. These changes should substantially
reduce input costs to the user industries. To help ensure that the benefits are
reflected in the prices of the final products, I also propose to reduce the import
duty on synthetic fibres and filament yarns to 45% ad valorem.
83. I am also proposing to reduce the import duty on certain chemicals
widely used in industry. On basic feed stocks like ethylene and benzene, the import
duty is being reduced from 15% to 10%. On soda ash, caustic soda and linear alkyl
benzene, the import duty is being reduced from 65% to 40%. On certain chemical
intermediates like acrylonitrile, the import duty is being reduced from 30% to 20%.
I am proposing to reduce the import duty on molasses from 65% to 10% to help the
alcohol based chemical industries. The duty on LPG is also being reduced from
15% to 10%.
84. Electronics is a fast growing industry offering great promise for exports,
employment and development in the small scale sector. In my last budget, I had
conducted a major restructuring of duties to promote growth of this industry. As a
further step in this direction, I propose to reduce the import duty on specified raw
materials and piece parts from the present levels of 20% and 30% to a uniform
level of 15%, on electronic components including printed circuit boards and colour
monitor tubes from 40% to 25%, on populated printed circuit boards from 50%
 18
and 65% to 35% and on computers, from 65% to 40%. I am also proposing to
reduce the import duty on integrated circuits and hard disc drives to 25% which is
likely to reduce the grey market in these products. Import duty on picture tubes for
colour TVs is being reduced from 65% to 40%. To give a boost to the telecom optical
fibre cable industry, I propose to reduce the import duty on optical fibres from 40%
to 35%. I am also proposing to reduce the import duty on both systems and
application software to a uniform level of 10% only. With these changes in duty
structure, I expect this industry to show even more dynamism in future.
85. For promoting healthcare, last year I had simplified the import duty
structure on medical equipment, exempted many types of life saving equipment
from payment of duty, and abolished the certification procedure for availing of the
exemption for charitable hospitals. In order to help manufacture and maintenance
of medical equipment, I am extending the benefit of full exemption from import
duty to all parts of exempted life saving and sight saving equipment . Some crucial
spare parts of other dutiable medical equipment such as populated PCB will attract
an import duty of 15%. I am also proposing to fully exempt linear accelerators,
which are vital for the treatment of cancer patients. There are also proposals for
reduction of import duty on a large number of drug intermediates from 50% to
40%.
86. Our printing industry needs quality paper so as to establish a foothold
in the international field. With this in view, I am proposing to reduce the import
duty on paper from 65% to 40%.
87. To promote exports of finished leather and make it more competitive,
I propose to abolish the export duty on finished leather.
88. Agriculture is the lynchpin of our economy and employs two thirds of
our labour force. In order to help agriculture and allied sectors directly, I propose
reducing import duties on certain items. I am proposing to reduce the import duty
on grand parent poultry stock from 30% to 20%. On certain drugs used as feed mix
for poultry, the duty is being reduced from 65% to 15%. For the fishing industry,
I propose to reduce the import duty on certain vaccines, prawn feed mix and
preparations for prawn processing from 65% to 15%. Agriculture and allied sectors
will also be helped by the general reduction in import duties on general machinery
and components. I have, however, proposed an increase in import duty on malt
and starch from 10% to 30%, that on silk cocoon from 30% to 40% and on oleopine
resins from 10% to 20% in order to give necessary protection to these sectors.
89. I propose to raise the free baggage allowance for passengers coming to
India from Rs. 4000 to Rs.6000. Beyond this limit, the duty rate now is 100%
which I propose to reduce to 80%. I hope this will provide welcome relief to our
people working abroad and to travellers in general. At present import of goods
through a courier attracts import duty at the rate of 100% upto Rs.10,000/-and
200% thereafter. There has been a long standing demand from industry that goods
imported through a courier should be charged at the relevant rate for the item
being imported. I am making a provision to this effect in the Finance Bill. Pending
passage of the Legislation, I am proposing that goods imported by a courier will
attract a duty of 80% without any value limit.
 19
90. I now turn to my proposals for excise duties.
91. In my earlier budgets, I had exempted from excise duty a large number
of items of common consumption like processed food, dairy products, jam, jelly,
butter, cheese, tea and coffee. Many other items of mass consumption like cooking
oil, bicycles and their tyres, kerosene stoves, bread, spices and household utensils
are also exempt from excise duty. My proposals in this budget will further reduce
the burden of excise duties on articles which are widely consumed.
92. A number of articles of mass use are made of plastics. Plastics are also
finding increasing use in agriculture and agro-processing. The present rate of duty
on this basic material is 30%. I propose to bring down the rate of duty on plastics
to 25%. On the dutiable articles made from plastics also, I propose to reduce the
excise duty to 25%. However, articles of plastics which are exempt at present will
continue to be so. These measures are being combined with a reduction in the
import duty on bulk plastics from rates varying between 45% and 65% to a uniform
rate of 40%.
93. At present, we have a uniform excise duty of 15% on all metals except
aluminum. I now propose to reduce the excise duty on aluminum also from 20% to
15%.
94. In order to remove areas of dispute in classification and to rationalise
the duty structure, I propose a uniform excise duty of 15% on parts of capital
goods as against present rates which vary from 10% to 25%. This will avoid disputes
as to whether a particular item should be considered as an article of metal or
component of a machinery.
95. I am also proposing a concessional rate of excise duty of 10% on
glassware produced by the labour intensive mouth blown process as against the
present rate of 20%.
96. Many Honourable Members of Parliament have suggested that there
are certain sectors of the industry which are both highly labour intensive and
belong to the unorganised sector and that they deserve complete exemption from
excise duty. Having regard to these requests, I propose to exempt the following
from excise duty:-
- HDPE and polypropylene mono-filaments which are mainly used for making
fishing nets and mosquito nets;
- metal containers made without the aid of power;
- non-elastic narrow woven fabrics of cotton;
- unbranded surgical bandages; and
- tarpaulin cloth made without the aid of power.
97. As part of the process of reducing higher end duty rates, I am proposing
to lower excise duty:-
- on aerated water from 50% to 40%;
 20
- on air conditioning machinery from 60% to 40%;
- on cosmetics from 50% to 40%;
- on glazed tiles from 40% to 30%.
- on perfumed antiseptic cream from 30% to 20%.
98. I am also proposing reduction in excise duty in certain areas of general
consumption -
- on polymer based paints from 30% to 20%;
- on cocoa and cocoa preparations from 25% to 20%;
- on malt based food preparations from 25% to 20%;
- on asbestos fibres from 20% to 10%;
- on asbestos cement articles from 30% to 25%.
- on audio and video magnetic tapes from 30% to 20%;
- on dry cell batteries from 25% to 20%;
- on coated fabrics from 35% to 25%;
- on ceramic laboratory ware from 30% to 20%.
- on fireworks from 20% to 15%.
- on parts of motor vehicles and two-wheelers from 20% to 15%.
- on glass containers from 30% to 20%.
99. I propose to reduce the excise duty on polyester filament yarn from
69% to 57.5%. The rate is still high but revenue constraints rule out any further
reduction for the present. The concurrent reduction in import duties, indicated
earlier, will help ensure that the benefit of excise duty reduction is passed on to
consumers.
100. The textured polyester yarn industry has complained about the burden
of excise duty of 69% on the value addition in their industry. I am proposing
suitable adjustment in the tariff value of textured yarn so as to reduce the total
duty burden at the texturising stage from Rs. 10.35/kg to Rs.4.60/kg. On sewing
thread which currently attracts excise duty at rates varying from 23% to 69%, I am
proposing a uniform duty of 23%.
101. I have some proposals which are in the nature of anti-evasion measures.
I am proposing an excise duty of 10% on wool tops so as to check evasion of excise
duty at the woollen yarn stage. As full Modvat credit will be available, the tax will
fall only on those who are evading excise duty at the yarn stage. I am also proposing
a minimum excise duty of Rs. 10 per kilo on waste and scrap of fibre and yarn so
as to discourage the tendency to clear good quality fibre and yarn in the guise of
waste. It is also being clarified that yarn made predominantly from synthetic waste
will attract the same rate of duty as yarn made from staple fibre.
102. Insulated wires and cables attract a duty of 30%. As these have wide
household and industrial application, I am proposing to reduce the duty to 25%.
 21
103. There is a persistent demand from the plastic woven bags manufacturers
for extending Modvat to the users of such bags. I am now proposing that users of
such plastic bags as well as jute bags be allowed full credit of excise duty paid on
such bags. Cement industry is one of the major consumers of such bags. I am
simultaneously proposing a modest increase in excise duty on cement from Rs.330
to Rs.350/MT for integrated cement plants and Rs. 185 to Rs. 200/MT for mini
cement plants. For the mini cement plants using vertical shaft kilns, the daily
clearance limit is also being raised from 200 to 300 MT per day.
104. Certain items of china and porcelain ware attract a duty of 30% which
is on the high side for a product which is increasingly of common use. With a view
to giving relief to the consumers, I am proposing to reduce the duty to 15%.
105. Small scale units play a significant role in the economy of the country.
Currently, only units whose turnover of dutiable goods did not exceed Rs. 2 crore
in the preceding financial year are eligible for the concessional rates of excise duty
under the general small scale industry exemption scheme. I have received
representations that the present limit of Rs. 2 crore is too low and that it acts as
a disincentive to future growth. I am thus proposing to raise the eligibility limit for
availing of the SSI exemption scheme to Rs. 3 crore.
106. There has been a perpetual problem with manufacturers of exempted
goods as they may have to pay excise duty on waste and scrap generated during
the process of manufacture. It does not seem very logical to bring these units
under the excise control only for the purpose of charging duty on such waste and
scrap. I am thus proposing to fully exempt waste and scrap which arise in the
manufacture of exempted goods. This should help a large number of units in the
small scale sector.
107. I am also proposing abolition of the system of filing of classification
lists. From 1st May, 1995, the manufacturers need not file any classification list
before clearing goods from the factory.
108. There have been requests from trade and industry for liberalisation
and simplification of Modvat scheme. With this end in view, I am proposing the
following relaxations in the Modvat Rules-
- Allowing Modvat credit for specified quality control, testing, pollution control
and R&D equipment;
- Utilisation of Modvat credit for payment of duty on any goods notified
under the Modvat scheme;
- Allowing Modvat credit for furnace oil and low sulphur heavy stock used
for generation of power in a factory manufacturing excisable goods.
109. I am also proposing to extend Modvat for tyre yarn used in tyres by
imposing a duty of 20% on the intermediate tyre cord fabrics. To make up for the
revenue loss, the specific rates of duty on tyres are being raised by about 8%.
Excise duty on tyres for two wheeled and three wheeled vehicles is, however, not
being raised.
110. I am proposing extension of Modvat scheme to industrial fabrics. In
the case of woollen fabrics also, I am proposing to extend Modvat fully, as such
fabrics already attract basic excise duty and enjoy limited Modvat facilities.
 22
111. I am also proposing to broadly align the Central Excise Tariff on textiles
on the lines of the harmonised system of nomenclature. This will help reduce
classification disputes.
112. Consonant with the increase in prices, I am proposing an increase in
the existing specific rates of duty on cigarettes by about 7%.
113. I have also proposed certain amendments in the Finance Bill seeking
to effect changes in the Customs Act, the Central Excises and Salt Act and excise
and customs tariffs. These include certain consequential amendments to the customs
tariff based on the amendments to the Harmonised Commodity Description and
Coding System which has been adopted by our country in terms of International
Convention on the Harmonised System. The amendments are merely enabling
provisions and do not have significant revenue implications. In order to save the
time of the House, I do not propose to recount them.
114. The increases in excise duties are expected to lead to a revenue gain of
Rs. 335 crore while the reliefs will amount to Rs. 646 crore in a full year. Of the
total net loss of Rs. 311 crore, the loss to the Centre will be Rs.203 crore and that
to the States Rs.108 crore. On the customs side, the proposals would result in a
revenue loss of Rs. 1179 crore. Applying conventional methods of estimation, the
proposed changes in direct taxes are expected to lead to a revenue loss of about
Rs.900 crore on account of Income tax, of which the loss to the States would be
about Rs.700 crore. Total net loss to the Centre would thus be Rs. 1582 crore.
115. These methods do not take adequate account of the gains from
simplification, rationalisation and improved tax compliance. Last year, the net loss
from the revenue proposals on the basis of conventional estimates was placed at
more than Rs. 4000 crore. However, I had predicted that because of gains from
compliance and better administration our revenues would not suffer any loss. This
optimism has been fully justified by performance as indicated in the Revised
Estimates for 1994-95. The tax changes I have proposed in the budget are essentially
a continuation of the efforts made in the previous year and I am confident that the
gains from the reform will ensure that there will be no revenue loss. I am not,
therefore, assuming any revenue losses from my Budget proposals. Hence the
fiscal deficit will remain at 5.5% of GDP.
116. Copies of notifications giving effect to the changes in customs and
excise duties will be laid on the Table of the House in due course.
117. Honourable members may recall that in my first Budget Speech, I had
affirmed that no power on earth could stop an idea whose time had come. I had
also stated that the emergence of India as a major economic power was such an
idea. It is this vision, of a resurgent India, taking her rightful place as an economic
power house in Asia, which has inspired our economic policies. Our Government
has worked hard to convert this vision into a reality, and I think the House will
agree with me that our efforts have met with considerable success. We have sought
to mobilise the collective will of our people for development through an action
programme which commits us to the twin pursuit of excellence and social justice.
There is no parallel example in the world of a country of India’s size and diversity
seeking to bring about a massive social and economic transformation in the
framework of a democratic polity and an open society committed to the rule of law
and individual freedom. India’s experience is, therefore, of great worldwide
 23
significance. The world is certainly watching us with interest and expectation.
118. As I see it, India is on the threshold of unprecedented opportunities
provided we have the wisdom to seize them. We have made a good beginning but
there is still a vast unfinished agenda. We have to persevere in our efforts. This will
call for hard work and dedication and a measure of self-discipline on the part of all
sections of society. We must never forget that a higher standard of living for our
people can become a reality only through an all round increase in productivity.
Clearly there are no short cuts to it. We cannot simply spend our way into prosperity.
Those of us in politics have a special responsibility. The pursuit of competitive
politics must not be allowed to distract our people’s attention from the basic task
of nation building. Politics in this country must recapture the spirit of idealism and
self sacrifice, which inspired our freedom struggle, and become a purposeful
instrument of social change. This then is no time for rest or to fritter away our
energies in partisan strife. It is a time for rededication and reaffirmation of our
collective solemn resolve to work tirelessly for building a new India worthy of the
dreams of the founding fathers of our Republic, an India which will enable our
children and grand children to lead a life of dignity and self respect, to take pride
in being Indian and to grapple effectively with the challenges of the twenty-first
century.
119. Mr. Speaker, Sir, with these words I commend this Budget to this
august House.
[15th March, 1995]
 1

Budget 1994-95
Speech of
Shri Manmohan Singh
Minister of Finance
28th February, 1994

PART A

Sir,
It is with a sense of great privilege, and also deep humility, that I rise to
present the Budget for 1994-95.
2 . Less than three years have passed since our Party, under the inspiring
leadership of Prime Minister Shri P.V. Narasimha Rao, came into office, as a minority
Government at that time, facing the awesome task of rebuilding a shattered economy.
The Prime Minister had pledged that we would give top priority to grappling with
the grave economic crisis and put the economy back on a path of strong sustainable
growth. In pursuit of this mandate we embarked on a far reaching programme of
economic restructuring and reform.
3 . Three years are not enough to complete economic restructuring in a country
as complex as India, but it is time enough to take stock. I am sure all Honourable
Members will agree that the economic situation has shown substantial improvement.
Progress on the external front has been dramatic.
· Our foreign currency reserves, which were a little over $1 billion in June,
1991 are now close to $ 13 billion. Our gold, which earlier had been
pledged abroad, is back in our possession.
· Exporters are responding very well to our sweeping reforms of exchange
rate and trade policies. Our exports have increased by a remarkable 21
per cent in dollar terms in the first 10 months of 1993-94. This compares,
for the corresponding period, with a decline of 3 per cent in 1991-92 and
a rise of 2 per cent in 1992-93.
· Despite all the fears that liberalisation would lead to a flood of imports,
the dollar value of our imports during April-January 1993-94 was less
than one per cent higher than imports during the corresponding period of
1992-93. For the fiscal year 1993-94, imports are likely to be lower than
even 1990-91.

1
 2
· The current account deficit in our balance of payments during 1993-94
will be less than half a per cent of GDP compared to over 3 per cent in
1990-91 and 2 per cent in 1992-93.
· Contrary to what many feared, the exchange rate for the rupee has
remained remarkably steady despite unification and lifting of trade controls.
Foreign exchange is flowing through legal channels in ample quantities
instead of through hawala transactions as earlier.
· International confidence in India has been restored. Foreign direct and
portfolio investment, which was hardly $150 million in 1991-92, is likely
to be around $3 billion in 1993-94.
4 . The news on the domestic economy is also encouraging. Inflation has
been reduced from the peak of 17 per cent in August 1991 to about half that level
at present. Agricultural performance has been strong. Food stocks in the public
system stood at over 23 million tonnes on 1 st January, 1994. This is the highest
level in seven years and provides invaluable insurance against any possible crop
failure. Industrial growth is also recovering, though more slowly than we had hoped.
Overall economic growth is estimated at about 4 per cent for the second year in a
row. Fears that the reform programme might lead to a large scale increase in
unemployment have turned out to be unfounded. The latest available data of persons
registered with employment exchanges and seeking jobs show a fall of 1.4 per cent
in November 1993 as compared to November 1992.
5 . The slow growth of industry in 1993-94 is a matter of concern and is
largely due to the sluggishness of the capital goods sector. If capital goods are
excluded, the rest of the manufacturing sector shows 6 per cent growth in the
second quarter and is expected to improve in the rest of the year. The recession in
the capital goods industries is primarily because investment activity slowed down
temporarily as firms adjusted their investment plans to the new situation. There
are signs that this restructuring process is well advanced and many companies are
now launching major programmes to enhance their international competitiveness.
The turnaround in investment is, therefore, beginning.
6 . In real life the picture is never entirely rosy and there are some warning
signals which we must heed. It has not been possible to contain the fiscal deficit in
the current year to the level we had originally targeted. The slower pace of industrial
recovery in 1993-94 led to a shortfall in revenues and various expenditures have
also exceeded Budget estimates. The slippage in the fiscal deficit in 1993-94 has
been less damaging than might have been the case ordinarily, mainly because of
the existence of sizeable idle industrial capacity and low investment levels. But as
investment begins to revive, we cannot afford continuing weakness on the fiscal
front. Unless the deterioration witnessed in the current year is speedily reversed,
there is a serious danger that we may slip back into a position where large
government deficits fuel inflation, widen the current account imbalance and push
up interest rates, making it impossible to bring about the rapid economic growth
we need to raise living standards and create productive jobs in adequate numbers.
7. In formulating this Budget, I have sought to address six major tasks:
- First, we must accelerate the reform and modernisation of our tax system
we began two years ago.
 3
- Second, we must correct the slippage in the fiscal deficit that has occurred
in the current year.
- Third, we must build on the demonstrable success already achieved in
the external sector where our strong performance has vindicated our
strategy of phased integration with the world economy.
- Fourth, the Budget must provide a major stimulus for a strong industrial
recovery, especially for investment and capital goods production.
- Fifth, and most importantly, we must reorient our development policies
and programmes to address more effectively the problems of poverty,
unemployment and social deprivation which affect a large mass of our
people, particularly in rural areas.
- Sixth, we have to consolidate and deepen the progress we have made in
restoring the health of our banking system.
8 . Last year we moved to a unified, market-determined exchange rate system.
The system has worked extremely well. The time has come to take the next step
and move towards convertibility on the current account. Current account
convertibility will substantially liberalise the access to foreign exchange for all current
business transactions and also liberalise foreign exchange access for travel, education
and medical expenses, etc. This will virtually eliminate reliance upon illegal channels
for such transactions. The details of these liberalisations are being separately
announced by the Reserve Bank. Consistent with the progressive liberalisation of
our external payments regime, we shall review the Foreign Exchange Regulation
Act, 1973, and undertake necessary changes, including, if necessary, its replacement
by new legislation.
9 . Our policies towards foreign direct and portfolio investment have yielded
good results and have helped us reduce our reliance on foreign borrowing. Much of
the direct investment approved has been for critical infrastructure sectors. As
envisaged in my Budget speech last year, Government is currently negotiating
bilateral investment treaties with several major investor countries.
1 0 . Our external debt, which is a cause of concern, is growing more slowly
now. It grew by about $6 billion per year on an average in the latter half of the
1980s. In 1990-91 the debt grew by over $8 billion. In 1991-92 and 1992-93, the
increase averaged only about $3 billion. In the first half of 1993-94, external debt
has increased by hardly $300 million. Furthermore, the recent increase in debt has
been more than offset by the sharp increase in our foreign currency reserves. I
would like to assure the House that we shall remain vigilant on this front so that
external debt remains within prudent levels. There is no question of India falling
into a debt trap. In fact, we propose to respond to the easier payments position by
retiring some of the high cost debt we have incurred in the past. Indian companies
will be freely permitted to pre-pay past foreign loans.
1 1 . Honourable Members are aware that some of our external debt is owed to
the IMF. We had approached the Fund in our hour of difficulty. Now that our
payments situation has improved considerably and our reserves have been rebuilt
to comfortable levels, we are in a position to repay the Fund somewhat ahead of
schedule. Repayments of principal and interest amounting to $1.4 billion are due
to the Fund in 1994-95. Instead of following the regular schedule of payments, we
 4
intend to pre-pay the entire amount at the beginning of the year. This decision to
pre-pay in no sense detracts from the excellent relations we have with the Fund
which has helped us immensely in our time of need. We will not hesitate to seek
financial support again, if conditions warrant.
1 2 . At present exporters and other foreign exchange earners, are permitted to
retain up to 15 per cent of foreign exchange receipts in an account designated in
foreign currency. It has been decided to increase the percentage of retention allowed
from 15 to 25 per cent. As a special incentive, for 100% Export Oriented Units and
units in Export Processing Zones as well as units in Electronic Hardware Technology
Parks and Software Technology Parks, the retention allowed will be 50 per cent.
This facility is designed to protect exporters from having to incur conversion costs
when they make payments for imports. The necessary notifications are being
separately issued by the Reserve Bank of India.
1 3 . Turning to the need to strengthen fiscal discipline, I have long felt that
Government should not be able to finance its deficits by creating money, through
unlimited recourse to the Reserve Bank, by issue of ad hoc Treasury Bills. This
practice has also weakened the Reserve Bank’s capacity to conduct effective monetary
policy. As a corrective measure, I propose to phase out the Government’s access to
ad hoc Treasury Bills over a period of three years. In 1994-95 the budget deficit is
being limited to about two-thirds of one per cent of expected GDP, or Rs.6,000
crore. Normally, net issue of ad hoc Treasury Bills for the year as a whole should
not exceed this amount. It has also been agreed with the Reserve Bank that the net
issue of ad hoc Treasury Bills should not exceed Rs.9,000 crore for more than ten
continuous working days at any time during the year. If this happens, the Reserve
Bank will automatically sell Treasury Bills in the market to reduce the level of ad
hoc Treasury Bills. This is a historic step which will in due course contribute to a
significant improvement in fiscal and monetary discipline, and give the Reserve
Bank greater scope for effective monetary management. In subsequent years, the
recourse to ad hoc Treasury Bills will be progressively reduced and by 1997-98,
the Government will cease to have direct recourse to the Reserve Bank for financing
its deficit and will have to meet its entire requirements through borrowing from the
market.
1 4 . Interest rates have an important influence on investment in industry and
other sectors of the economy. There have been repeated demands that interest
rates should be brought down. The minimum lending rates charged by banks have
been brought down already by three percentage points over the past year. The
Financial Institutions have also reduced their effective rates. I am happy to inform
the House that the All-India Financial Institutions are now reducing their minimum
lending rate by a further one percentage point to 14 per cent exclusive of interest
tax. Simultaneously, the commercial banks’ minimum lending rate on term loans
of three years and above is also being reduced from 15 per cent to 14 per cent. The
Reserve Bank is separately issuing the notification. These changes take effect from
tomorrow and will help to stimulate investment in the economy.
1 5 . Government had earlier proposed certain amendments to the Companies
Act to streamline the Act in line with the contemporary requirements. Several
representations have been received from industry seeking modifications of these
proposals to give Indian companies an environment in which they can compete
 5
effectively in the highly competitive market place. Government has reconsidered
the matter in the light of these representations and it is proposed to submit a new
Bill to Parliament which will be responsive to these concerns.
1 6 . We live in a world where science and technology have become a major
determinant of the power and wealth of nations. India is proud of the achievements
of its scientists and technologists, but a great deal more needs to be done to make
science and technology an effective instrument of national renewal. To accelerate
the development and application of indigenous technology to production processes,
I propose to credit the 5 per cent cess on payments of royalty for imported
technologies which is presently collected under the Research and Development
Cess Act, 1986, into a new Fund for Technology Development and Application. This
Fund will be placed at the disposal of the Department of Science and Technology
to help the indigenously developed technologies reach the stage of commercial
application. Necessary amendments to this effect will be made in the R & D Cess
Act. I shall propose some further measures to promote research and development
when I come to my tax proposals.
1 7 . I would like to assure the House that our policies are geared towards
promoting a dynamic and internationally competitive industrial sector. I am confident
that given our vast reservoir of skilled manpower and entrepreneurship, Indian
industry has the capacity and the will to meet the challenge of global competition.
Government and industry will work as active partners to usher in the second
industrial revolution which is both more efficient and more employment-oriented.
This year, my revenue proposals, to which I will come later, include a strong package
of measures to boost industrial investment and capital goods production. Looking
ahead, I have a vision of our industrial firms acquiring a global reach and their
names becoming household words in far off, distant lands.
1 8 . Let me now turn to some issues relating to agriculture. An adequate flow
of institutional rural credit to agriculture is vital for the development of the rural
sector and this flow at present is unduly low in relation to need. The reasons
include high costs of intermediation incurred by banks and cooperatives,
fundamental weaknesses in the institutional structure and unsustainable restrictions
on credit and interest rate policy. I propose to take a number of significant steps to
lay the basis for a long-term improvement in rural credit. The National Bank for
Agriculture and Rural Development (NABARD) is the apex agency for rural credit.
I am providing Rs.100 crore for augmenting its share capital and the Reserve Bank
will contribute an equivalent amount. This will nearly triple NABARD’s share capital
and equip it to play a strong leadership role in strengthening the system of rural
credit.
1 9 . One of our major concerns in rural credit has been the weak condition of
the Regional Rural Banks (RRBs). Of the 196 regional rural banks, as many as 150
have shown losses in each of the past five years. Many have completely wiped out
their equity and reserves and in some the losses are eating into deposits. This is an
unsustainable situation and long-term structural measures are necessary if these
banks are to be rehabilitated. The Reserve Bank has already announced some
measures giving RRBs greater flexibility in their lending operations to make them
more viable. I propose to take up 50 of the 196 RRBs from all over the country in
the course of 1994-95 for undertaking comprehensive restructuring, including
cleaning up of their balance sheets and infusion of fresh capital. The form and
modality of the restructuring and associated financial support will be worked out
 6
during the year. The experience with these 50 RRBs will guide our approach in
later years to the other RRBs. The success of this programme will depend on full
cooperation from State Governments and sponsor banks, who are shareholders, as
well as the employees of RRBs. Our objective is to transform presently weak and
ailing RRBs into financially viable and effective instruments of decentralised rural
banking.
2 0 . In addition, we must find ways of strengthening the co-operative credit
structure which has played a significant role in rural development through credit
support. As against Rs.6,295 crore of new lending by co-operatives during 1992-
93, they are expected to reach Rs.8,500 crore during 1993-94. During 1994-95 we
are planning for a further increase to Rs.9,600 crore. This quantitative expansion
must be accompanied by organisational and structural changes which ensure
financial viability. The Government proposes to initiate a series of measures for
strengthening the cooperative structure. NABARD will be entering into memoranda
of understanding with State and District Cooperative Banks and concerned State
Governments for implementing State-specific development action plans to revamp
the cooperative system and improve its viability.
2 1 . These measures to strengthen the rural credit system are being
accompanied by a substantial increase in the budget provision for Rural Development
to which I will come shortly. It will also be our objective to ensure that our policies
towards agriculture eliminate all unnecessary restraints on farmers. Restrictions
on domestic movement of foodgrains and other agricultural goods must be completely
removed, so that our farmers can reap the benefits of an unified national market.
They must also be increasingly free to export, thus not only making their due
contribution to our national export effort, but also benefiting from profitable export
opportunities.
2 2 . Honourable Members are aware, we have embarked on a basic
restructuring of the banking system aimed at ensuring full financial viability of its
operations and strengthening its competitive capability. I provided a sum of Rs.5,700
crore as capital contribution to the nationalised banks in 1993-94 to help them
make necessary provisions against bad and doubtful loans and meet the new capital
adequacy norms. I had indicated last year that there would be additional capital
needs in 1994-95 and 1995-96 and also that this burden could not be borne
exclusively by the Budget. I am happy to report to the House that in December
1993 and January 1994, the State Bank of India successfully raised over Rs.2,200
crore from the public through issue of equity and another Rs.1,000 crore through
a bond issue. To allow the nationalised banks to access capital markets in the
same way, and mitigate the burden on the Budget, legislative amendments were
introduced in the Lok Sabha in the Winter Session. Their speedy passage will help
many of these banks to mobilise the capital they need to meet their requirements.
Many nationalised banks will nevertheless require additional support during 1994-
95 and I am providing Rs.5,600 crore in 1994-95 as additional capital contribution
for these banks. As before, this capital will be provided in the form of Government
bonds on which there will be no immediate cash outgo. Interest payments and
amortisation will of course be a charge on future budgets.
2 3 . I am grateful to this House for quick passage last August of the Recovery
of Debt due to Banks and Financial Institutions Act, 1993 which provides for the
establishment of Special Recovery Tribunals. These Tribunals will soon be
 7
operational, and will play a major role in improving the recovery of banks’ dues. I
am also happy to report that the Reserve Bank is setting up the Board for Financial
Supervision to supervise the banks and other financial institutions. To alert banks
and financial institutions and put them on guard against borrowers who have
defaulted in their dues to other lending institutions, the Reserve Bank of India is
putting in place arrangements for circulating among banks and financial institutions
names of the defaulting borrowers above a threshold limit. The Reserve Bank will
also publish a list of defaulting borrowers in cases where suits have been filed by
banks and financial institutions. Both these measures will encourage greater
discipline among the borrowers.
2 4 . The Government attaches high priority to reforms of the capital markets
aimed at creating an efficient and competitive capital market subject to effective
regulation by the Securities and Exchange Board of India (SEBI) which will ensure
adequate investor protection. After a temporary setback in 1992 following the
securities scam, the capital market recovered ground quickly. The funds mobilised
in the capital market through public and rights issues, duly approved by SEBI, in
the first ten months of 1993-94 were over Rs.18,000 crore, as compared to less
than Rs.16,000 crore in the same period of 1992-93 and under Rs.6,000 crore for
the full year, 1991-92. In addition, a number of Indian companies raised funds
abroad through Euro-equity issues and Foreign Currency Convertible Bond Issues.
The Government is committed to a thorough modernisation of the capital market
and rapid improvement of trading practices with a view to ensuring transparency
and speed of settlements. The model National Stock Exchange with screen-based
trading is expected to begin operation by the middle of this year. The establishment
of a Depository System of scrip-less trading is another important objective.
Government intends to bring before Parliament separate legislation for the
establishment of Depositories. The Government also proposes to make further
amendments to the SEBI Act and the Securities Contracts (Regulation) Act in order
to give additional powers to SEBI.
2 5 . In my Budget speech last year, I had announced the establishment of a
High-Powered Committee to study the insurance industry and make
recommendations on directions for its development in future. The Committee on
Reforms in the Insurance Sector was appointed under the Chairmanship of Shri
R.N. Malhotra, former Governor of the Reserve Bank of India. The Committee has
recently submitted its report, which underscores the need for progressive
deregulation of the insurance sector to create a more competitive and financially
strong insurance industry, functioning under an independent regulatory authority.
The report is now under active consideration of the Government. It is my intention
to evolve a broad national consensus about the future direction and content of
reform in this important sector.
2 6 . Efficient and abundant infrastructure services are a necessary precondition
for the success of our economic reforms and especially for international
competitiveness. Our electric power sector is faced with severe problems, including
problems of financial viability of the State Electricity Boards which must be solved
if the supply of reliable power is to keep pace with ever-increasing demand. The
sector requires major changes in the working of State Electricity Boards,
rationalisation of tariffs and restructuring of responsibilities for generation,
 8
transmission and distribution. A Committee of the National Development Council
is looking into a comprehensive reform of our power system and it will be necessary
to face up to a number of hard decisions in this sector.
2 7 . Significant steps have been taken in the oil and gas sector to promote
investment including private investment in exploration, development, refining and
marketing. We propose to deepen and intensify these initiatives. To promote
modernisation and investment in the coal industry, Government is reviewing the
policy framework for investment, pricing and distribution. New initiatives are under
consideration in the Telecommunications Sector.
2 8 . I shall now briefly go over the Revised Estimates for 1993-94.
2 9 . Budget estimates for 1993-94 had placed the total expenditure at
Rs.131,323 crore. This is now expected to go up to Rs.143,872 crore, that is, an
increase of Rs.12,549 crore.
3 0 . Budget estimates for the current year provided Rs.41,251 crore as budget
support for Plan Expenditure. This is now being increased by Rs.4,775 crore to
Rs.46,026 crore. Of this increase Rs.3,493 crore are for assistance to States for
financing their plans. A large part of this increase relates to externally-aided projects.
I have also provided Rs.856 crore as advance plan assistance to special category
States to cover their opening deficits and Rs.339 crore as additional special plan
loan to Punjab to help that State in the process of recovery.
3 1 . Under the Central Plan, a provision of Rs.600 crore has been made for the
new Employment Assurance Scheme announced by the Prime Minister on 15th
August, 1993. I have also augmented the current year ’s provision for the National
Renewal Fund by Rs.320 crore, taking the total to Rs.1,020 crore. This increase
will fund implementation of Voluntary Retirement Schemes in Public Sector
Undertakings and also finance training and counselling.
3 2 . Non-plan expenditure in the current year will require an additional
provision of Rs.7,774 crore. An additional Rs.2,200 crore has to be provided for
food subsidy and Rs.900 crore for fertilizer subsidy. I am including a provision of
Rs.632 crore towards assistance to States for providing concession to farmers on
decontrolled fertilizers. It has also become necessary to provide an additional
Rs.2,320 crore for Defence expenditure. Honourable Members will appreciate that
there can be no question of compromise on the external and internal security of
our country.I am providing an additional Rs.303 crore more for Police. Other
increases include Rs.219 crore for pensions and Rs.500 crore for loans to States as
their share of small savings collections, following improved collections.
3 3 . Gross tax revenue, which was estimated in the Budget at Rs.84,867
crore, is now expected to yield Rs.8,117 crore less. Of this, about Rs.822 crore is
due to tax receipts of the National Capital Territory of Delhi flowing into its own
Consolidated Fund from 1st of December, 1993. There is also a consequential
reduction in expenditure on this account. The rest of the shortfall is mainly
under Customs and Union Excise Duties. Customs revenue is Rs.5,227 crore
lower than expected mainly because imports have not increased as originally
estimated. There is a shortfall of Rs.2,001 crore in excise duty mainly due to the
setback in production in certain high revenue yielding sectors of the economy.
Due to the delay in finalisation of the procedure for disinvestment of equity holding
 9
in Public Sector Enterprises, the related receipts this year are estimated at Rs.2,500
crore compared to the Budget estimate of Rs.3,500 crore.
3 4 . The shortfall in receipts has necessitated a larger resort to borrowings.
However, I have made serious efforts to ensure that the increased borrowing does
not lead to excessive growth of high powered money. Instead, we have seen to it
that the Government has borrowed on the basis of market-related instruments
such as the 364 days Treasury Bills which were started in 1992-93. We have also
introduced certain other new instruments such as zero coupon rate bonds and 3
year loans for conversion of maturing 364 days Treasury Bills.
3 5 . External loans net of repayments are placed at Rs.3,837 crore compared
to the Budget estimate of Rs.5,454 crore.
3 6 . Taking into account other variations in receipts and expenditure, the
current year is expected to end with a budget deficit of Rs.9,060 crore. The fiscal
deficit, which was estimated at Rs.36,959 crore in the original Budget, is now
expected to go up to Rs.58,551 crore. The fiscal deficit as a percentage of GDP will,
therefore, be 7.3 per cent, which is much higher than projected at the budget
stage. I am far from happy with this development. But, as I have stated earlier,
there were special circumstances in 1993-94 which warranted somewhat higher
deficit. In a situation characterised by idle industrial capacity, I was concerned
that an attempt to bring about a sharp reduction in the fiscal deficit might well
have been counter-productive. However, we cannot afford to repeat large fiscal
deficits. We must return to the path of fiscal rectitude.
3 7 . I now turn to the Budget estimates for 1994-95.
3 8 . In order to maintain the tempo of development activities, the budgetary
support for the Central Plan 1994-95 has been increased to Rs.27,278 crore from
Rs.23,241 crore in Budget estimates 1993-94, an increase of about 17.4 per cent.
The total outlay of the Central Plan of Rs.70,141 crore for 1994-95 will be financed
by budgetary support to the extent of 39 per cent as against 36 per cent in Budget
estimates 1993-94. The balance of the Central Plan outlay will be financed by the
internal and extra-budgetary resources of the Central Public Sector Enterprises.
3 9 . I am providing Rs.19,304 crore as Plan assistance to States and Union
Territories in 1994-95 compared to Rs.18,010 crore in Budget estimates 1993-94.
The total budgetary support from the Central Government’s budget to the Central
and the State Plans will be increased by 13 per cent from Rs.41,251 crore in
Budget estimates 1993-94 to Rs.46,582 crore in 1994-95.
4 0 . The increased budgetary support to the Central Plan is being directed to
support higher outlays in important social sectors such as Rural Development,
Education, Health and Family Welfare and Women and Child Development, and
Welfare of Scheduled Castes, Scheduled Tribes and Other Backward Classes. In
response to the vital need for greater employment generation and capital formation
in rural areas, and in order to focus more sharply on alleviation of rural poverty,
the outlay for the Department of Rural Development has been increased from
Rs.5,010 crore in Budget estimates 1993-94 to Rs.7,010 crore in 1994-95,
representing a massive increase of 40 per cent over the previous year. Honourable
Members will recall that the allocation for Rural Development was Rs.3,100 crore
 10
in Budget estimates 1992-93. In two years, we have more than doubled this provision.
For the new Employment Assurance Scheme announced by the Prime Minister on
15th August, 1993, which is being implemented in 1752 identified blocks, an outlay
of Rs.1,200 crore has been provided as compared to the 1993-94 outlay of Rs.600
crore. Similarly, the allocations for the Jawahar Rozgar Yojana have also been
enhanced from Rs.3,306 crore in Budget estimates 1993-94 to Rs.3,855 crore in
1994-95. It is estimated that 1150 million mandays of employment are likely to be
generated in 1994-95. I have also increased the allocation for the Accelerated Rural
Water Supply Programme, including the Rajiv Gandhi National Drinking Water
Scheme, by Rs.150 crore in 1994-95.
4 1 . The Prime Minister’s Rozgar Yojana was launched on October 2, 1993, to
provide self-employment opportunities to one million educated unemployed youth
in the country by setting up 7 lakh micro enterprises through industry, service
and business ventures. The Scheme intends to cover urban areas during 1993-94
and whole of the country from 1994-95 onwards. A provision of Rs.145 crore has
been made for 1994-95.
4 2 . The outlay for Agriculture will be Rs.2,005 crore in 1994-95. A major
thrust is being given to horticulture development, with a 42 per cent increase in
allocation from Rs.130 crore in Budget estimates1993-94 to Rs.184 crore in 1994-
95. A major scheme for promoting use of plastics in drip irrigation is under
implementation for which an enhanced outlay of Rs.45 crore has been kept during
1994-95.
4 3 . In the Eighth Plan, we have given high priority to the development of
human resources. The bulk of outlay for this sector is in the plans of the States.
The outlay for education in the Central plan is being increased by 17.6 per cent, to
Rs.1,541 crore in 1994-95. Special efforts are being made for strengthening of
elementary education, for which the outlay has been increased from Rs.442 crore
in Budget estimates 1993-94 to Rs.523 crore in 1994-95. The allocation for the
University Grants Commission has been increased from Rs.159 crore in the Budget
estimates for 1993-94 to Rs.209 crore in 1994-95. Special allocations have been
made to upgrade the quality of libraries and laboratories in the system of higher
education. Provision has also been made for the establishment of an Indian Institute
of Technology and for two Central Universities in Assam.
4 4 . The outlay for Health has been increased by nearly 20 per cent from
Rs.483 crore in Budget estimates 1993-94 to Rs.578 crore in 1994-95. A revamped
National Programme for the Control of Blindness, will be implemented from the
next year. The allocation for the Leprosy Eradication Programme has been increased
from Rs.35 crore in Budget estimates 1993-94 to Rs.94 crore in 1994-95. Control
and prevention of AIDS is of paramount importance; an increased provision of
Rs.83 crore has been made for 1994-95.
4 5 . The outlay for the Department of Family Welfare has also been increased
from Rs.1,270 crore in Budget estimates 1993-94 to Rs.1,430 crore in 1994-95.
4 6 . The provision for the Welfare of Scheduled Castes, Scheduled Tribes and
Other Backward Classes, inclusive of support to States for specified schemes, has
been increased in 1994-95 to Rs.982 crore. The share capital contribution by the
Central Government to the National Scheduled Castes and Scheduled Tribes Finance
 11
and Development Corporation and the National Backward Classes Finance and
Development Corporation is being increased from Rs.53 crore in Budget estimates
1993-94 to Rs.76 crore in 1994-95.
4 7 . Recognising the critical role of infrastructure, Plan outlays in Power,
Petroleum and Natural Gas, Telecommunication, Railways and Transport, have all
been increased. The Plan outlay for power sector has been raised from Rs.7,461
crore in Budget estimates1993-94 to Rs.8,464 crore in 1994-95; and within this
total, the budget support for this sector has been increased by over 27 per cent
from Rs.2,445 crore in Budget estimates 1993-94 to Rs.3,117 crore in 1994-95.
The Plan outlay for the Telecommunication services has been increased from
Rs.6,321 crore in Budget estimates 1993-94 to Rs.7,246 crore in 1994-95. The
outlay for Roads has been stepped up from Rs.593 crore in Budget estimates 1993-
94 to Rs.665 crore in 1994-95. We have also increased the budget support to the
Railways by 20 per cent from Rs.960 crore in Budget estimates 1993-94 to Rs.1,150
crore in 1994-95. To sustain long-term development, cost recovery for infrastructure
services has to become much more effective. Investments in infrastructure sectors
must increasingly be financed through internal and extra-budgetary resources of
Public Sector Undertakings.
4 8 . The role of science and technology is critical for modernising our economy
and making it globally competitive. The outlay for the Department of Science &
Technology has been raised by 19 per cent from Rs.189 crore in Budget estimates
1993-94 to Rs. 225 crore in 1994-95.
4 9 . Total non-plan expenditure next year is placed at Rs.1,05,117 crore
compared to Rs.97,846 crore in the Revised estimates of current year. I have to
draw the attention of the Honourable Members to a major factor which has been
contributing to the sizeable increase in non-plan expenditure year after year, and
this is the interest burden. The provision for interest payments next year is placed
at Rs.46,000 crore. This is an increase of Rs.8,000 crore over the current year ’s
Budget estimates whereas the increase in total non-plan expenditure is Rs.15,045
crore. Honourable Members will appreciate that the major part of the interest
burden is a legacy from the past and it continues to grow because of the continued
high level of Government borrowing. Interest payments can be reduced only if we
can implement a programme of phased reduction in the Government’s total borrowing
requirements or fiscal deficit. This can become a reality only if our tax system
becomes more buoyant, our public enterprises generate more internal resources
and we reduce expenditure on subsidies. A bold programme for disinvestment of
government equity in public enterprises and earmarking a part of the sale proceeds
purely for debt reduction would also be of great help.
5 0 . Defence is another important element in non-plan expenditure. We cannot
take chances with our national security. I am, therefore, providing Rs.23,000 crore
for Defence as against Rs.19,180 crore in the Budget estimates for 1993-94 which
was itself raised to Rs.21,500 crore in the Revised estimates. I am providing Rs.4,000
crore each for food subsidy and fertilizers subsidy. I am also providing Rs.341
crore being the balance amount payable by Government under the scheme of Debt
Relief to Farmers. Furthermore, I am providing for a net expenditure of Rs.365
crore on account of Government’s assumption of exchange loss liability on Foreign
Currency Non-Resident Accounts Scheme, which was previously borne by the
Reserve Bank of India.
 12
5 1 . The provision made in next year ’s Budget for non-plan expenditure other
than the provisions for interest payments and defence is actually Rs.2,729 crore
less than in the Revised estimates for the current year.
5 2 . Coming to receipts, gross tax revenue at existing levels of taxation is
placed at Rs.87,136 crore. States’ share of taxes next year is estimated at Rs.24,394
crore compared to Rs.22,244 crore in the Revised estimates of current year. External
loans net of repayments are placed at Rs.4,279 crore compared to Rs.3,837 crore
in the current year’s Revised estimates.
5 3 . Taking into account maturing liabilities, the net Small Savings collections
next year are placed at the same level as in the current year, that is, Rs.6,000
crore. I am taking a credit of Rs.4,000 crore next year as receipts from disinvestment
as a continuation of the policy of mobilising non-inflationary resources from the
sale of public sector equity. Total receipts are estimated at Rs.1,45,699 crore and
total expenditure at Rs.1,51,699 crore leaving a gap of Rs.6,000 crore.

PART B
5 4 . I now turn to the tax proposals for 1994-95. This year I shall begin with
the proposals relating to indirect taxes.
5 5 . Over the years, our indirect tax structure has grown into a complex maze
of high and multiple rates, with numerous exemptions, and different rates being
applicable for the same product for different uses and users. This has resulted in
unnecessary complexity leading to administrative abuse, mounting litigation and
uncertain economic impact. All this has effectively eroded the tax base and buoyancy
of the system and created serious economic distortions. My proposals, in both
customs and central excise, aim at simplifying the structure and continuing the
process of moving to moderate rates of taxation.
5 6 . Customs duties though lowered in the past three budgets need to be
brought down further to make key imported raw materials and capital goods available
to Indian industry at reasonable costs and also to reduce unduly high levels of
protection to industry. At the same time, the scale of duty reduction has to be
calibrated to ensure that it does not place unreasonable pressure on domestic
producers of similar products. In this framework, the key features of my customs
tariff reform proposals are:-
· Further reduction in the peak rate of customs duty;
· Substantial reduction in duties on key raw materials, such as steel and
chemicals;
· Reduction in customs duties on capital goods to boost investment combined
with other incentives which will help the domestic capital goods industry;
· Reduction or removal of anomalies caused by import duties on raw
materials and components being higher than on finished products;
· A systematic effort to unify rates on similar products to serve both economic
rationality and to reduce the scope for classification disputes;
 13
· A major pruning of notifications including end use exemptions to about
half their present number, thus reducing discretionary power and
possibilities for disputes;
5 7 . I propose to reduce the peak rate of customs duty from 85% to 65%.
Items like baggage and liquor will however continue to attract higher duty as at
present.
5 8 . Availability of capital goods at a reasonable cost is necessary to enhance
our competitiveness and promote investment. It is also necessary to ensure that
our domestic capital goods industry, which has tremendous potential, is not at a
comparative disadvantage due to anomalies in the tax structure . To further both
these objectives , I propose the following package of measures:
(a) I propose to reduce basic customs duty on project imports and general
capital goods from 35% to 25%. The facility of project imports is being
extended to include port development. All this will help to reduce cost of
investment and modernisation in Indian industry. Import duty on parts,
whether imported as parts of original equipment, or as spares is also
being reduced to 25% from the present rates varying from 25% to 85%.
Import duty on fertiliser projects and power projects will continue at nil
rate and 20% respectively without any countervailing duty.
(b) Domestic suppliers of capital goods have consistently argued that if
domestic capital goods are to compete with imports, there should be a
countervailing duty on imports of capital goods equivalent to the excise
duty on domestic capital goods. I propose to accept this demand.
(c) I am simultaneously extending the benefit of Modvat to capital goods so
that full credit of excise duty paid on domestic capital goods or
countervailing duty paid on imported capital goods will be available at one
time. This has been a long standing demand of all sectors of Indian
industry.
(d) At present, machine tools attract duty at varying rates of 40%, 60% and
80%. I propose to simplify the structure by charging duty at 35% or 45%
only.
(e) With the reduction of duty on finished capital goods it is necessary to
reduce the customs duty on steel, which is a key input. I propose to
reduce the customs duty on steel from a range of 75% to 85% at present
to 50%. Import duties on primary forms of major non-ferrous metals copper,
zinc and lead are also being unified at 50%. These proposals will give a
strong boost to investment in the economy and will help the domestic
capital goods industry, in particular.
5 9 . To help domestic metal producers, the import duties on all ores and
concentrates are being reduced and unified at 10%. To reduce the cost of inputs for
the secondary steel sector, I propose to reduce the import duty on melting scrap
from 12.5% to 10% and on iron ore pellets from 15% to 10%.
6 0 . In order to give a thrust to the export efforts of our leather industry,
 14
which is a major export earner, and is also employment intensive, I propose to
reduce import duty on a large number of items of machinery and raw materials
used in this industry from rates varying from 25% to 50% at present to a uniform
level of 20% without the addition of countervailing duty.
6 1 . Electronics and telecommunication are vital for rapid economic development
and can greatly contribute to generation of both additional employment and exports.
I propose to rationalise the tariff structure for these sectors as follows :
(a) The import duty on computer parts is being reduced from 80% to 50%.
The duty on specified components is being reduced from 50% to 40% and
on specified piece parts from 35% to 30%.. The import duty on application
software is being reduced from 85% to 20% .
(b) In order to encourage the telecommunication sector, I propose to reduce
import duty on non-electronic parts for manufacture of such equipment
from 50% to 40% and on optical fibre from 85% to 40% to encourage
manufacture of optical fibre cables in the country.
6 2 . The domestic watch industry has a significant growth potential . To enable
this industry to become internationally competitive, I propose to reduce the import
duty on certain items of machinery for the industry from 50% at present to 25%.
I also propose to reduce the duty on certain components and raw materials for the
watch industry from 70% and 50% at present to 25% and 20% respectively.
6 3 . The present import duty structure for medical equipment is complex and
involves in some cases time consuming administrative procedure. The domestic
industry is also not able to compete with imported equipment because it is now
available duty-free to hospitals on production of certificates by designated authorities.
In order to remove the above hindrances , I propose to abolish the system of
certification for charitable hospitals and freely permit import of specified medical
equipment at 15% without any countervailing duty. The list of such equipment is
being separately notified and can be expanded on merits. Import at zero rate for
government hospitals and for all specified life saving and sight saving equipment
is, however, being continued. Import duty on other medical equipment which is at
present 85% is being reduced to 40%. Components for their manufacture will be
allowed to be imported at 15% customs duty. This differential will help manufacture
of medical equipment by indigenous industry.
6 4 . The import duty structure for coal and petroleum is being simplified.
Crude petroleum and coal will attract import duty of 35% as against Rs.1500 per
metric tonne and 85% respectively. Duty on coke is being reduced from 85% to
25%. LPG and other petroleum gases will attract import duty at 15%. Naphtha and
kerosene will continue to be exempted from basic customs duty. Other petroleum
products will attract an import duty of 30%. These changes do not affect the
administered prices of petroleum products to consumers.
6 5 . The present import duty structure for chemicals provides for a lower rate
of duty of 15% for the basic feed stocks and peak rate of 85% for the finished
chemicals. The overall dispersal of the rates is being reduced by the reduction of
peak rate to 65%. In addition, duties on DMT, PTA and MEG are being reduced
from 70% to 60% and on intermediates like xylenes and toluene, the duty is being
 15
reduced from 40% to 30%. The 15% rate for basic feed stocks has been kept
undisturbed.
6 6 . In the pharmaceutical sector, import duty on a large number of raw
materials which at present varies from 85% to 50% is being lowered to two rates of
50% or 25%. In a few cases, there has been some upward adjustment of import
duty having regard to the need to protect the interest of domestic manufacturers of
drug intermediates.
6 7 . While I have no doubt that the phased reduction of customs tariffs is
essential for the longer term interest of our industry, I am also fully aware of the
concern of some industries about the dumping of certain imported goods at artificially
low prices. I assure the House that our anti dumping provisions will be reviewed
and further strengthened, if necessary.
6 8 . I now turn to my proposals for central excise.
6 9 . This Budget proposes a major reform of the excise tax structure as part
of our programme of modernising our tax system. The principal features of this
restructuring are:
· Extension of Modvat to capital goods and petroleum products;
· Shift in the bulk of excise taxation from specific to ad valorem rates which
will assure much greater built -in buoyancy of revenues.
· Reduction in the total number of ad valorem tax rates to about half the
existing number which will be a major step towards simplicity and
transparency;
· Continuing the process of lowering rates when they are unduly high;
· Application of uniform rates for similar commodities to the extent possible.
This will reduce classification problems, scope for misuse and widespread
litigation;
· Removal of complicated price list procedure;
· Reduction of the number of special exemption notifications by about half.
7 0 . These steps will promote growth of manufacturing output and employment,
will make tax administration easier, less discretionary and also reduce the scope
for misclassification, disputes and evasion. They will increase revenue elasticity
and pave the way for an eventual adoption of a Value Added Tax.
7 1 . Inevitably, a major restructuring involves changes in many rates for several
products as products have to be reclassified into fewer rate categories. Furthermore,
duty rates have been adjusted in some cases to compensate for loss of revenue
because of the extension of Modvat. However, I have ensured that items of mass
consumption are not burdened by higher taxes. For example, full exemption continues
for many goods such as handloom products, unbranded drugs, domestic electric
bulbs, bicycles, baby food, cooking oil, spices, jams, jellies, sauces, tea and coffee.
And care has been taken not to raise the rates on, for example, sugar, matches and
vanaspati. There should be no adverse effect on prices of essential items of
consumption of the common man.
 16
7 2 . I will now highlight a few major areas of special interest.
7 3 . Sir, the House may recall that the Modvat scheme was introduced in
1986. Its subsequent extension has greatly helped to reduce the cascading effect of
input taxes. But the coverage remains incomplete. Petroleum products, textiles,
matches, tobacco products and capital goods had been left out of the scheme.
There is a persistent demand from industry to make the scheme more comprehensive.
I now propose to extend the Modvat scheme to two important sectors namely,
capital goods and petroleum products.
7 4 . I propose to rationalise the structure for petroleum products. At present,
the excise duty rates are specific. There are numerous exemptions depending on
the end use. I propose to replace the existing specific rates by a uniform advalorem
rate of 10% on all petroleum products with the exception of motor spirit which will
attract duty of 20%. End use exemptions will be virtually eliminated. Existing
concessions for the fertilizer industry are, however, being continued. These changes
have no impact on the administered prices of these items.
7 5 . The current duty structure for cotton and man made fabrics is a
combination of ad-valorem and specific rates. I propose to switch over to ad-valorem
rates of 5%, 10% and 20% only instead of the numerous specific and ad-valorem
rates currently prevailing.
7 6 . The present excise duty structure on fibres and yarns is complicated and
different specific rates are prescribed for different varieties of yarn and fibres. This
has required frequent testing of samples to determine the correct duty liability. In
order to obviate all problems of classification and to make the excise duty neutral
as between various fibres and yarns, I propose to impose a uniform excise duty of
20% on all fibres and blended or spun yarns. On cotton yarn, excise duty is,
however, proposed at 5% only instead of the present complex and varying specific
rates depending on the count of the yarn. As regards filament yarns, revenue
considerations preclude moving to a uniform excise duty. I have thus proposed an
ad-valorem duty rate of 60% for polyester filament yarn, 30% for nylon and
polypropylene yarn and 15% for viscose filament yarn. For industrial yarns, lower
rates of 30%, 20% and 10% have been prescribed. The scheme of Modvat is being
extended to yarns made from fibres. With this Modvat will cover all yarns. These
changes are largely a simplification and rationalisation of the structure. Combined
with the reduction in customs duties, they should help to moderate prices in this
s e c t o r.
7 7 . I propose to fix a uniform duty of 15% on all metals, except aluminium for
which the duty will be 20% as against 25% now. However, a lower duty of 10% will
be available to pig iron and certain other products of iron.
7 8 . The excise duty structure on drugs differentiates between Schedule I,
Schedule II and other drugs. Schedule I drugs which are for the National Health
Programme and are under price control are fully exempted from excise duty. This
will continue. Single formulations of Schedule II drugs attract excise duty at 10%
while other branded drugs pay excise duty at 15%. I propose to unify these rates
at 15%. I propose to charge a moderate 10% excise duty on branded ayurvedic and
homoeopathic medicines and medicines of other alternative systems. At present,
bulk drugs producers cannot get full benefit of Modvat credit because the excise
duty on bulk drugs is 5% which is too low. This is being raised to 10% to enable
 17
them to get full credit. Unbranded drugs, however, will continue to be exempted
from excise duty.
7 9 . In order to simplify the duty structure for various chemicals and chemical
based products like dyes, paints, tanning preparations, etc., I am proposing a
uniform duty of 20% on such products instead of present rates varying from 5% to
25%. A uniform duty of 30% is being proposed for major bulk plastics , synthetic
paints and detergents, which currently attract 35%.
8 0 . The paper duty structure is complicated due to ad-valorem rates of nil,
10%,15%,25%,30%, specific rates and specific cum ad-valorem rates. This is now
being simplified by making the general rate of duty on paper at 20%, keeping nil
rate for news print, stationery articles etc., 30% for paper based laminates and
floor coverings and 10% or 15% for paper made from unconventional raw materials.
I am enlarging the scope of the exemption currently available to paper mills using
unconventional raw materials. This exemption limits the benefit by clubbing the
clearances of paper from more than one factory of a manufacturer. I am now
allowing this concession to be availed of by each factory separately.
8 1 . The duty rate of 70% applicable to cosmetics and similar personal care
products are too high for items which are now increasingly forming part of the
consumption basket of ordinary people. The rate is, therefore, being reduced to
50%.
8 2 . I am also proposing certain changes in the general small scale industry
exemption scheme. At present only registered units are eligible for concessions
upto a clearance value of Rs. 75 lakhs. Non-registered units can get exemption
only up to Rs. 30 lakhs. I propose to do away with this distinction so that small
scale units can get the exemption meant for them irrespective of whether they are
registered or not. This will satisfy one of the major demands of small scale industry.
The scope of the small scale exemption scheme is also being expanded to cover a
number of additional items including certain iron, steel and copper products.
8 3 . Under the present scheme, a small unit manufacturing goods under the
brand name of another unit is entitled to duty concession only if the brand name
does not belong to a large unit. There have been reports of bigger units avoiding
payment of duty by getting their brand names registered in the name of smaller
units. This does not allow a small manufacturer to promote his own brand. With
the advent of international brand names in the country, it is necessary to check
the misuse of the scheme in the interest of domestic industry. I, therefore, propose
that the benefit of duty concession would not be available to clearances of goods
bearing the brand name of another manufacturer.
8 4 . One of the persistent demands of the small scale industries has been to
allow them to pay duty even though they are otherwise entitled to exemption as
this will enable their customers to claim the benefit of Modvat credit. There is
considerable merit in this request, and I propose to give the option to those who
will like to exercise it.
8 5 . It may be recalled that in the last budget, in order to give encouragement
to the ship breaking industry, basic customs duty on ships for breaking up was
reduced to 5%. Countervailing duty was payable in addition. Ferrous metals obtained
from breaking up of ships were consequently exempted from excise duty. There
 18
have been some disputes regarding liability of countervailing duty on ships for
breaking up. In order to obviate the disputes, I propose to exempt ships for breaking
up from countervailing duty and correspondingly adjust the basic customs duty to
15%. For the ship breaking industry, all goods obtained from such breaking up are
also proposed to be exempted from excise duty so that ship breaking activity is
completely outside the excise control.
8 6 . As I am continuing the specific rates of duties on cigarettes, and these
have remained unchanged for two years despite an increase in price, I propose to
increase the duties on cigarettes by about 12%. However, in the non-filter segment,
the excise duty for upto 60 mm category is being reduced from Rs. 120 per thousand
to Rs. 60 per thousand, for increased utilisation of tobacco in this industry, which
would in turn help the tobacco growers.
8 7 . Over the years, while attempts have been made to widen the base for
domestic indirect taxes, the services sector has not been subjected to taxation. Yet
this sector accounts for about 40% of our GDP and is showing strong growth.
There is no sound reason for exempting services from taxation , when goods are
taxed and many countries treat goods and services alike for tax purposes. The Tax
Reforms Committee has also recommended imposition of tax on services as a
measure for broadening the base of indirect taxes. I, therefore, propose to make a
modest effort in this direction by imposing a tax on services of telephones, non-life
insurance and stock brokers. The tax will be charged at 5% on the amount of
telephone bills , the net premium charged by the insurance companies, and the
brokerage or commission charged by the stock brokers in relation to their services.
These proposals will come into force from a date to be notified later on.
8 8 . The existing system of determination of value of goods for charging excise
duty is cumbersome and time-consuming. It involves filing of price lists in advance
by the assessee and their approval by the excise officer. The process has to be
followed whenever there is a change in the price. As a measure of procedural
simplification, I have decided to dispense with the requirement of price lists. The
assessee will now be allowed to pay excise duty on the basis of the value arrived at
from the invoice. I am sure that this facility will be widely welcome by the industry.
This will also help lay the ground for eventual adoption of a value added tax which
relies on invoice value.
8 9 . The details of the revenue implications of the measures announced are
given in the Explanatory Memorandum to the Finance Bill.
9 0 . I have also proposed certain other amendments in the Finance Bill seeking
to effect changes in the Customs Act, and Excise and Customs Tariffs. The
amendments are merely enabling provisions and do not have significant revenue
implications. Besides, there are proposals for amendment of some of the existing
notifications. In order to save the time of the House, I do not propose to recount
them.
9 1 . Copies of notifications giving effect to the above changes in customs and
excise duties will be laid on the Table of the House in due course.
9 2 . I now turn to my direct tax proposals for 1994-95.
9 3 . I propose to carry forward the basic philosophy which has guided our tax
reforms of moving to a simpler system with moderate rates of tax and a much
greater reliance on broadening the base, with better tax administration.
 19
9 4 . I have received numerous representations from workers, trade unions,
and other bodies representing middle class citizens for raising the exemption limit
for income tax which is now Rs.30,000. I am persuaded that there is merit in the
demand and I propose to raise the exemption limit to Rs. 35,000. With this, a
salary or wage earner with a gross income of Rs. 50,000 will pay no income-tax. A
working woman with a salary of Rs. 52,000 will also pay no tax.
9 5 . I also propose to adjust the tax slabs which have not been changed for
two years. At present, the first bracket is from Rs. 30,000 to Rs. 50,000 with a tax
rate of 20 per cent. Henceforth the first slab will be Rs. 35,000 to Rs. 60,000, with
the same rate of 20 per cent. tax . The second slab at present is from Rs. 50,000
to Rs. 1,00,000 with a tax rate of 30 per cent. Hereafter, the second slab will be Rs.
60,000 to Rs. 1,20,000 with the same rate of 30 per cent. tax. The maximum tax
rate of 40 per cent. which at present applies to incomes above Rs.1,00,000 will
henceforth be applicable to incomes above Rs. 1,20,000.
9 6 . I had stated last year that I was forced to retain the surcharge of 12 per
cent on non-corporate incomes for one more year. I am happy to announce that I
now propose to withdraw the surcharge completely.
9 7 . Last year, I had indicated that while major reforms of the corporate tax
structure are desirable they would have to be deferred by one year. I now propose
to implement these reforms which will help both our private and public sector
companies to save more, invest more, and become more competitive.
9 8 . At present, widely held companies are taxed at 45 per cent. while other
domestic companies attract 50 per cent tax. I propose to do away with the distinction
which now exists between the tax rates for widely held and closely held domestic
companies and lower both rates to a single rate of 40 per cent.
9 9 . All domestic companies having income exceeding Rs.75,000 are liable to
pay surcharge at the rate of 15 per cent. Much as I would like to eliminate this
surcharge, revenue constraints compel me to continue this levy for the present.
The tax on companies incorporated abroad, but earning income in India, is 65 per
cent at present. In line with the general reduction in corporate tax rates, this rate
is being reduced to 55 per cent.
1 0 0 .One of the consequences of our economic policies is the need to assist
Indian companies to re-structure themselves to improve their competitive position
in the market. This may call for divestment of part of the business assets or
realisation of potential value from dormant assets, both of which will entail long-
term capital gains tax. This acts as a deterrent to re-structuring. The present rate
of such long-term capital gains tax on domestic companies is 40 per cent, whereas
long-term capital gains of individuals are taxed at only 20 per cent. I, therefore,
propose to lower the rate of capital gains tax on domestic companies to 30 per cent.
1 0 1 .I also propose that, just like shares, even units of Unit Trust of India and
other approved Mutual Funds, if held for more than 12 months, will be treated as
long-term capital assets, with consequential benefits; the required holding period
for such units at present is 36 months. This will bring some welcome relief to
investors in units who generally belong to lower middle or middle classes.
1 0 2 .The rates of taxation of investment income (i.e. dividend and interest
 20
income) of non-residents vary with the tax status of the recipient. I propose to
rationalise the scheme of such taxation by having a uniform rate of 20 per cent. on
such income in the hands of all non-resident companies and non-resident individuals
(be they Indians or foreign nationals).
1 0 3 .Representations have been received from Non-Resident Indians that they
should not lose their Non-Resident status even if they visit India and stay for more
than 149 days. I propose to raise this period of stay to 181 days.
1 0 4 .Two years ago I introduced a special tax rebate for senior citizens (i.e.,
those aged 65 and above) at 10 per cent of the tax due if their income was below
Rs. 50,000. Last year I increased the tax rebate to 20 per cent and also increased
the income limit to Rs. 75,000. I now propose to raise the tax rebate admissible to
them from 20 per cent of the tax due to 40 per cent and make the benefit available
to senior citizens having income upto Rs. 1 lakh.
1 0 5 .In 1992, we had decided to club the income arising to a minor child with
that of the parent. This causes undue hardship in cases involving handicapped
children and their parents. In order that the post-tax income of a child who is
physically handicapped is not reduced, I propose to exempt the incomes of such
handicapped children from the provisions of clubbing, both under the Income-tax
and Wealth-tax Acts.
1 0 6 .For enabling self-employed people to contribute to a pension fund to provide
for security in their old age, the Unit Trust of India is going to set up a fund. I
propose to include contributions to such a pension fund among the amounts which
qualify for tax rebate under Section 88 of the Income-tax Act.
1 0 7 .Investment in the development of human resources is an essential pre-
requisite for growth and progress. Several students take loans for their studies. As
a means of helping students from poorer families, who take loans from financial
institutions, I propose to allow a deduction from income of Rs.25,000 per year on
account of repayments of principal and payment of interest up to a cumulative
total of Rs. 2 lakhs. This tax concession will be available to students who undertake
graduate or post-graduate studies in Engineering, Medicine or Management, or
post-graduate studies in pure sciences, applied sciences, Mathematics or Statistics.
1 0 8 .Encouragement of science and technology is essential for promotion of
growth. At present, when an assessee makes a contribution to a National Laboratory
under the aegis of Indian Council of Agricultural Research, Indian Council of Medical
Research or Council of Scientific and Industrial Research, he or she gets a weighted
deduction of 125 per cent of the contribution. I propose to extend this benefit to all
Universities, deemed Universities, Indian Institutes of Technology and scientific
laboratories under the aegis of the Defence Research and Development Organization,
the Department of Electronics, the Department of Bio-technology and the Department
of Atomic Energy.
1 0 9 .Several Universities and Co-operative Societies have made representations
that the tax exemption under section 10(10C) for approved Voluntary Retirement
Schemes should be extended to their employees. I propose to accept their
representations.
1 1 0 .A statement has already been made in the last session of Parliament,
 21
signifying Government’s intention to exempt the incomes of Government Corporations
established for the welfare of the backward classes. I propose to make legislative
amendments for carrying out this commitment.
1 1 1 .The system of community of property (COMMUNIAO DOS BENS) is peculiar
to the people living in Goa, Daman, Diu, Dadra and Nagar Haveli. Recently, certain
judicial decisions have been handed down according to which business income of
a Goanese family becomes taxable entirely in the hands of a single entity. The
decisions affect the time-honoured method of dividing such income equally and
assessing such income separately in the hands of the husband and wife. This I
understand has given rise to unnecessary tensions and anxiety amongst the Goan
couples. To set at rest all controversies in this area, I propose to make suitable
amendments in the Income-tax Act to ensure that, excepting for salaries, any other
income arising to the citizens governed by the system of community of property in
Goa will be divided equally and assessed separately in the hands of the husband
and the wife.
1 1 2 .We have, in the last few years, liberalised the taxation of perquisites in the
form of medical expenditure in the case of employees. I propose extending the
scope of the benefit by including reimbursement of bills paid by employees to
recognised private hospitals.
1 1 3 .In order to give relief to those living in their own houses and as an incentive
for house construction, I propose to raise the deduction on account of interest on
borrowed capital for house construction from Rs.5,000 to Rs.10,000 for purposes
of income tax.
1 1 4 .We have been implementing a simple presumptive scheme of taxation for
the assessees in the unorganised sector for the past two years. The scheme was to
have ended with this year. I propose to continue with the scheme. My hope is that
more people will avail of this very simple scheme and come forward readily to
contribute their mite to the national tax effort without any fear or inhibition.
1 1 5 .In addition, I am introducing a new estimated income scheme for
contractors with a turnover of upto Rs.40 lakhs and for truck-owners who own
upto ten trucks. In the case of contractors, the net profit will be estimated at 8 per
cent. of the gross receipts. In the case of truck owners, the income will be estimated
at Rs. 24,000 per truck per year for Light Commercial Vehicles and Medium Motor
Vehicles, and Rs. 30,000 per truck per year for Heavy Transport Motor Vehicles. In
both these cases, no further deduction on account of depreciation or interest or
other expenses will be allowed. In both cases, the scheme is optional. This scheme
is based on the recommendation of the Chelliah Committee on Tax Reforms. The
scheme will be simple and free of irritants, and I expect an enthusiastic response.
1 1 6 .Last year, I announced a five-year tax holiday to new industrial
undertakings commencing production in States specified in the Eighth Schedule to
the Income-tax Act. There have been repeated and widespread demands that the
benefit should be extended to backward districts in other States. I had announced
the setting up of a Study Group to go into this question. The Group’s report has
been received and is under consideration. As a stimulus to new investment in
backward districts in other States of the country, I propose to extend this concession
to such districts which are backward according to certain guidelines which will be
prescribed.
 22
1 1 7 .Government has already announced its intention of allowing the deduction
in respect of profits of new industrial undertakings engaged in the manufacture of
items listed in the Eleventh Schedule of the Income-tax Act to large-scale units
also, provided such units are set up in the backward States enumerated in the
Eighth Schedule. I propose to give legislative shape to this intention.
1 1 8 .In order to continue to give encouragement to the export of computer
software, I propose extending the exemption for such export profits for one more
y e a r.
1 1 9 .We have an ambitious programme of attracting tourists to this country. It
has been strongly urged that the present rate of tax on expenditure incurred in
hotels discourages tourism. I, therefore, propose to reduce the rate of expenditure
tax from 20 per cent. to 10 per cent.. I am doing so on the expectation that the
State Governments too will follow suit and reduce their taxation on hotels in order
to encourage tourism within the country and attract more foreign tourists to our
land.
1 2 0 .Pollution control is of vital importance to all of us. I, therefore, propose to
include pollution control among the eligible projects for concession under section
35AC of the Income-tax Act, so that a person who makes a contribution to such a
project can claim 100 per cent of such contribution as a tax deduction.
1 2 1 .The exemption limit for gift-tax is Rs.30,000 and an additional exemption
of Rs.30,000 is available for gifts to dependant relatives on the occasion of marriage.
Marriages are joyous occasions of family re-union, and honest tax-paying citizens
have a right to be free from tax considerations as far as possible on such auspicious
occasions. I, therefore, propose to raise the exemption for such gifts on the occasion
of marriage of a dependant relative from Rs.30,000 to Rs.1,00,000.
1 2 2 .As conventionally estimated, the proposed changes in custom duties will
result in a revenue loss of Rs. 2,981 crores and a revenue gain of Rs. 699 crores.
On the Excise side, the revenue gain is anticipated at Rs. 2,106 crores and reliefs
will amount to Rs. 2,000 crores. The effect of changes in Direct taxes will result in
a loss of Rs. 1,075 crores in the personal Income-tax collections and Rs. 1,355
crores in Corporation tax. The estimated loss on Expenditure-tax is Rs. 75 crores.
Taking into account an estimated gain of Rs. 600 crores on account of taxes on
services, the total net loss on account of tax measures by conventional methods of
calculation amounts to Rs. 4,081 crores. The loss to the States on account of
reliefs in personal Income-tax is Rs. 625 crores and the gains on the Excise duty
Rs. 148 crores. On the basis of these calculations, the Centre will suffer a net loss
of Rs. 3604 crores.
1 2 3 .Normally, a revenue loss of this magnitude at a time when the fiscal
system is under pressure would require levy of additional taxes or an increase in
existing rates. I have not followed this course of action for several reasons. The
revenue loss calculations do not give any credit for simplification and rationalisation
of the tax structure which will help revenue collections. Fiscal experts are near
unanimous that there is considerable evasion of taxes in our system and that it is
possible to reduce tax rates and yet mobilise additional revenue by improving tax
administration and compliance. The simplification in the indirect tax structure
that is now being introduced, will reduce the scope for discretion, disputes and
 23
litigation, all of which are a source of tax evasion. The shift to ad-valorem excise
duties will also add to buoyancy. I also propose to make a major effort at improving
tax administration. Tax laws are going to be administered fairly and firmly.
Computerisation, which has already begun in both Departments, is expected to
further improve tax administration. I also hope that tax payers who have long
argued for moderation in the rates of taxes and held out assurances that this
would improve compliance, will now live up to their side of the bargain. They have,
in the long run, the most to gain from the success of this experiment.
1 2 4 .Economic life everywhere is characterised by great uncertainty. There is
always the possibility that things may not work out the way I have assumed.
Although one cannot be dogmatic in these matters, my considered view is that the
risks involved in the course of action I have proposed, do not cross the limits of
prudence. The consequence of postponing the tax reform, or of imposing additional
taxes to offset the revenue loss as conventionally calculated, would be wholly
unproductive in a situation where our economy is characterised by sizeable unutilized
industrial capacity, record food stocks and comfortable foreign exchange reserves.
Any such course could give a setback to the economic recovery which our country
needs, and which is now on the horizon.
1 2 5 .For these reasons, I do not propose to assume any revenue loss as a
result of the Budget proposals. The Budget deficit will therefore remain at Rs.
6,000 crores and the fiscal deficit at Rs. 54,915 crores. At this level, the fiscal
deficit will be around 6 per cent. of GDP. This is higher than I would like to see, but
as I have said, all tax reforms involve some risks.
1 2 6 .This Budget is being presented at a critical time for the economy. There
are moments in history which call for determined and decisive action. The
consequences of inaction or ill-designed responses can be horrendous and are felt
for decades to come. June, 1991 was such a moment. Thanks to the magnificent
leadership provided by the Prime Minister Shri P.V. Narasimha Rao, we have been
successful in reversing the adverse tide in our fortunes. However, the task of national
reconstruction is by no means over. It is by its very nature a task which should
occupy us for the rest of the decade. But we pursue this task today from a stronger
position. The economy has been restored to health and shows all the potential for
rapid growth in the years ahead. Our agricultural sector is strong and well placed
to respond to the new policies. Our industrial sector, both, private and public, has
begun the difficult process of restructuring to face increasingly competitive market
conditions. The climate for investment - both domestic and foreign - has vastly
improved. The tax structure now proposed goes a long way towards the kind of
modern tax system and moderate tax rates and an emphasis on compliance, which
is the hallmark of all successful countries. I am confident that it will provide a
strong stimulus for new investments, economic revival and international
competitiveness which is what the economy needs today. The medium term objectives
set out in the report of the Tax Reform Committee are now clearly within our reach.
1 2 7 .Mr. Speaker, Sir, this Budget is inspired by a firm conviction that India
has all the material and human resources to be a front-ranking nation of the world.
We are on the threshold of a new century, indeed a new millennium. There are
tremendous opportunities, provided we have the wisdom and foresight to seize
them. There are also immense dangers if we falter or appear indecisive. Sir, this
 24
then is a time for hard work, for recapturing the high noon of idealism which
inspired our freedom struggle, for a firm determination to hold aloft, undimmed
and untarnished, the bright torch of India which, as Jawaharlal Nehru was fond of
saying, embodies her great and eternal spirit so that its light reaches every home
and rekindles hope, faith and courage, and pride in being an Indian. Let us strive
tirelessly, as the great poet Rabindranath Tagore said in his prayer, to build an
India where “the clear stream of reason has not lost its way into the dreary desert
sand of dead habit”. May we be worthy of this noble task and of this ancient and
sacred land of India.
1 2 8 .Sir, I commend the Budget to this august House.
[28th February, 1994]
 1

Budget 1993-94
Speech of
Shri Manmohan Singh
Minister of Finance
27th February, 1993

PART A
Sir,
I rise to present the budget for 1993-94.
2 . It is now twenty months since our government took office: twenty eventful
months in which we have worked ceaselessly to overcome the very difficult economic
situation we inherited. In June, 1991, the economy was in the throes of an
unprecedented balance of payments crisis. A savage squeeze had been imposed on
imports; international confidence had collapsed; industrial production was falling;
and inflation was on the rise.
3 . The sense of crisis is now behind us. We have restored a measure of
normalcy to our external payments. The annual rate of inflation has been reduced
from the peak of 17% in August, 1991 to below 7%. International confidence has
been restored. Agriculture has performed well in the current year and industrial
production is beginning to recover. The growth of the economy, which had declined
to 1.2% in 1991-92, is expected to be around 4% in 1992-93. The economic strategy
we have followed, resting on the twin pillars of fiscal discipline and structural
reform, has been vindicated by the decisive upturn.
4 . Fiscal discipline was necessary because the government had lived for too
long beyond its means. The rising fiscal deficits of the Central Government were
the root cause of our balance of payments problem, rising prices and high rates of
interest. We have made good progress by reducing the fiscal deficit from 8.4% of
GDP in 1990-91 to about 5% in the current year.
5 . Policies of structural reform aimed at increasing efficiency in resource
use and improving our international competitiveness were crucial for providing a
lasting solution to the payments crisis. It was necessary to restructure our trade
and industrial policies, encourage efficiency through greater domestic competition,
allow our producers to have access to imports at reasonable rates of duty, encourage
foreign investment and upgradation of technology, and progressively integrate the
Indian economy with the world economy. Without these reforms, India would face
the certain prospect of entering the 21st century as just about the poorest country

1
 2
in Asia. I am convinced that the Indian people would never tolerate such an outcome.
India’s natural and human resources entitle us to think in terms of becoming a
major powerhouse of the world economy. Our reforms are inspired precisely by this
vision.
6 . The policy initiatives we have taken do not in any way reduce our
commitment to take care of the poor and the disadvantaged. On the contrary, we
have taken steps to minimise the burden of adjustment on the poor and working
classes. We have disproved those professional prophets of gloom who were predicting
millions of people becoming unemployed.
7 . When we embarked on this path, we knew that the benefit of our policies
would only be seen after three to four years. Patience is therefore essential.
Nevertheless, Honourable Members can take comfort that the early results are
certainly encouraging. Inflation is down and production is beginning to recover.
Fears of being swamped by imports as a consequence of liberalisation have proved
to be grossly exaggerated. Despite the virtual removal of import licensing in 1992-
93, total imports in 1992-93 in US dollars are likely to be lower than in 1990-91.
Although the rupee has been floated for most current account transactions, the
market exchange rate has remained relatively stable. The investment climate has
improved considerably. Corporate capital issues by non-Government public limited
companies in April-October, 1992 were 67 percent higher than in the same period
of the previous year. Loans sanctioned by financial institutions in the first ten
months of 1992-93 were 49% higher than in the same period of the previous year.
Foreign investors are showing active interest in investment in many sectors, including
critical infrastructure sectors such as power and petroleum. Since August 1991
the approvals given for foreign investment proposals upto the end of January amount
to an equity investment of $ 2.3 billion. These are of course only approvals at this
stage and actual flows will take time to materialise, but they certainly indicate a
substantial potential for larger investment inflows in the future.
8 . Nevertheless, there is no room for complacency. Fiscal imbalances are
still large. The efficiency and resource generating capacity of public sector enterprises
are still very inadequate. Inflationary expectations have not yet been purged from
the system and inflationary pressure could easily build up again if fiscal discipline
is relaxed. The economy is still vulnerable to external shocks and loss of confidence.
The riots and disturbances in December and January have also taken their toll, by
disrupting domestic production and exports and by casting doubts about the stability
of our polity and society and our determination to persevere with the difficult task
of economic reform. We can ill afford such doubts.
9 . The priorities for economic policy, at this critical stage of our economic
restructuring, are very clear:
· We must continue with the fiscal correction to ensure that inflationary
expectations are effectively curbed; to this end, the fiscal deficit both at
the Centre and in the States must be further reduced as a percentage of
G D P.
· The room for fiscal maneuver gained by restraining expenditure over the
past two years must be used to give a strong fillip to development
expenditure in 1993-94, especially for programmes of poverty alleviation,
 3
rural development and the vital social services such as education and
health.
· The hesitant industrial recovery must be converted into a strong revival in
1993-94, which can then be followed by a vigorous boom in the last three
years of the Eighth Plan.
· We must make further progress with our announced strategy of tax reform,
moving to a simpler tax system, with moderate rates and much greater
focus on compliance.
· We must ensure that our economic strategy gives full support to agriculture
on which the livelihood and well being of the majority of our people depend,
and also to agro-processing industries, which have a tremendous potential
for increasing employment and income in rural areas.
· Finally, exports must be made a truly high priority national endeavour so
that we can move as quickly as possible to managing the balance of
payments without the need for continued exceptional financing from
abroad. This is the only meaningful route to self-reliance.
1 0 . The expenditure and tax proposals for 1993-94, which I will be presenting
shortly, have been tailored to meet these objectives.
1 1 . Adequate availability of credit at reasonable rates of interest will be critical
in converting this year’s weak industrial recovery into a strong revival next year.
One factor behind the inadequacy of credit for the commercial sector is the
preemption of a large proportion of banks’ resources by the government at below-
market rates of interest through the Statutory Liquidity Ratio (SLR). In 1992-93 we
began the process of reducing the SLR in order to release a larger volume of resources
for commercial lending. Our objective is to reduce the SLR further from an effective
average level of about 36 percent at present to about 25% over the next 3 years.
The precise phasing of the reduction will be announced by Reserve Bank of India,
taking into account the emerging aggregate monetary and credit situation.
1 2 . The reduction in inflation achieved thus far justifies a reduction in interest
rates. Accordingly, the Reserve Bank of India is separately notifying a reduction in
the maximum interest rate on bank deposits from 12% to 11%. Simultaneously,
the minimum lending rate of 18% on commercial advances is being lowered to
17%. It is my expectation that the lowering of interest rates will help the economic
recovery in the coming year. As inflation abates, there will be scope for further
reduction in interest rates.
1 3 . No economic strategy can succeed in our country which does not recognise
the central role of agriculture in supporting broad-based and equitable development.
The government is firmly committed to ensuring that agriculture, agro-processing
and rural development are given top priority in the design of economic policy.
1 4 . A major instrument for encouraging agricultural production and making
it profitable is the assurance of remunerative prices to the farmers. Procurement
prices for the last kharif crop and the forthcoming rabi have been handsomely
raised to ensure that farmers are compensated for increases in the cost of inputs.
It is also the policy of the Government not to place administrative restrictions on
 4
movements of agricultural products within the country. Our farmers must have
the full benefit of prices available in the domestic market.
1 5 . Agricultural credit is another critical input for agricultural, and more
broadly, rural development. The flow of rural credit from institutional sources is
expected to jump from Rs.13,800 crore during 1992-93 to Rs.16,500 crore during
1993-94, an increase of 20%. NABARD’s investment refinance support to banks
will increase by 22% from Rs.2,300 crore in the current year to Rs.2,800 crore in
1993-94. Within this total, NABARD has evolved an innovative package of measures
to ensure special attention to priority areas. Term loans for minor irrigation will
support the sinking of 3.75 lakh wells and installation of 6 lakh pump sets. The
rate of NABARD refinance of bank loans is being increased to 90% in the case of
North Eastern States and also of investments in 100% export oriented units in
agriculture and allied activities. NABARD will also take up pilot projects for intensive
development of rural industries in five selected districts with an outlay of Rs.125
crore. NABARD is setting up a Venture Capital Fund, with an initial corpus of Rs.5
crore, to assist new and innovative investments in farm and non-farm sectors, and
a Cooperative Development Fund with an initial corpus of Rs.10 crore to help
improve management systems and skills in cooperative banks. In 1993-94, we
shall pay special attention to revitalising the agricultural credit system so that it
becomes a more effective instrument for increasing capital formation and productivity
of agriculture.
1 6 . Our strategy of gradually reducing the high levels of protection to Indian
industry, and integrating our economy with the world economy, will clearly help
Indian agriculture. It will moderate the high industrial prices which the farmer has
to pay. It will also ensure a more competitive exchange rate, at which our agricultural
and agro-based exports will be much more profitable. I venture to suggest to
Honourable Members that in the medium run, these changes will be far more
significant in favouring agricultural producers than any programme of special
subsidies could ever be.
1 7 . In my Budget speech last year I had indicated that the Government
intended to implement the recommendations of the Narasimham Committee on
financial sector reform in stages. The securities scam which was discovered in
April 1992 has revealed certain weaknesses which add urgency to the need for
financial sector reform. A major reform initiated last year was the introduction of
new norms for income recognition, and provisioning for bad debts and the
prescription of new capital adequacy requirements in line with internationally
accepted Basle Committee norms. The new norms will ensure that the books of the
banks will reflect their financial position more accurately and in accordance with
internationally accepted accounting practices. These changes will improve our ability
to evaluate the performance of the banks and will also make for more effective
bank supervision.
1 8 . Because of the new norms, however, banks will have to make large
provisions amounting to over Rs.10,000 crore for bad and doubtful advances in
their portfolios. As the provisioning norms are being introduced in two stages, the
first impact will be felt in the year ending 31 March 1993, with a further impact
next year. The resulting losses will eat into the capital of the banks, which is
already inadequate given the new capital adequacy norms. In order to protect the
 5
viability and financial health of the Indian banking system I am making provision
for a large capital contribution of Rs.5,700 crore to the nationalised banks in 1993-
94 to meet the gap created by the application of the first stage of the provisioning
norms. There will be no immediate net outgo from the budget, as the Government’s
contribution is in the form of Government bonds; but the interest payment on
these bonds, and their ultimate redemption will be a real burden on the budget in
future. This is the price we have to pay for having long tolerated management
practices in the banks and types of lending which paid inadequate attention to
portfolio quality and recoveries. I may add that while undertaking such a large
injection of capital into the banks, specific commitments will be required from each
bank to ensure that their future management practices ensure a high level of
portfolio quality so that the earlier problem does not recur.
1 9 . Even this large injection of capital will only solve the immediate problem.
Additional losses will arise because of the second stage of provisioning next year.
Besides, the capital adequacy requirements are also being introduced in a phased
manner and there will be additional capital needs on this account in 1994-95 and
1995-96. This burden cannot be borne entirely by the budget without eating into
scarce resources which are desperately needed for development, especially in the
rural areas. Government has, therefore, decided that the State Bank of India, as
well as other nationalised banks which are in a position to do so, will be allowed to
access the capital markets to raise fresh equity to meet their shortfall in capital
requirements over the next three years. The additional capital thus moblised will
help our banks to expand their lending which would otherwise be constrained by
capital inadequacy. Government will, continue to retain majority ownership, and
therefore effective control, in the public sector banks. Necessary legislation to give
effect to this decision will be introduced later in the year.
2 0 . If banks are to make provisions for bad debts, they must also be able to
realise the security on their bad debts. At present the legal process for realising
bank dues is tortuous, and cases take several years in the courts. Government
has, therefore, decided to set up Special Tribunals to expedite legal action by the
banks to enforce recoveries. Legislation to this effect will be introduced in the
course of the year.
2 1 . The securities scam has also revealed weaknesses in the existing system
of supervision of banks. Following the recommendations of the Narasimham
Committee, Reserve Bank of India has decided to strengthen its supervisory
arrangements by setting up a separate Board for Financial Supervision within the
Reserve Bank.
2 2 . Parallel with reforms in the banking system we are vigorously pursuing
reforms in the capital markets. We must ensure that trading and settlement take
place with speed and transparency under appropriate rules and regulations designed
to ensure investor protection. The Securities and Exchange Board of India, which
was given statutory status and powers twelve months ago, has been entrusted with
the task of bringing about this transition. As promised in my last Budget speech,
the office of the Controller of Capital Issues in the Ministry of Finance has been
abolished, and almost all powers under the Securities Contract (Regulations) Act
have been delegated or transferred to SEBI.
 6
2 3 . Several important steps have been taken in the current year to reform the
capital market. Rules and regulations have been notified to deal with insider trading,
the operation of mutual funds, registration of brokers, merchant bankers and other
intermediaries. The scheme for allowing Foreign Institutional Investors to invest in
the capital markets announced in my last Budget speech has been implemented
and a number of approvals given. Several private sector mutual funds have recently
been given clearances by SEBI. A company has been incorporated for the
establishment of a National Stock Exchange which is expected to operate as a
model stock exchange with member brokers all over the country trading in the
exchange through modern telecommunication facilities. Proposals are also being
considered for the establishment of a centralised depository with a National Clearance
and Settlement System.
2 4 . We are determined to ensure that further reforms of the capital market
are implemented in the course of 1993-94 so that the capital market can mobilise
large funds for investment. On the basis of experience gained, the Government has
decided to amend the Securities and Exchange Board of India Act to give SEBI
additional powers in order to increase its effectiveness.
2 5 . With reforms underway in the banking sector and in the capital markets,
it is necessary to address the need for similar reforms in the insurance industry
aimed at introducing a more competitive environment subject to suitable regulation
and supervision. I propose to appoint a High Powered Committee to go into these
issues in depth and submit its recommendations within six months.
2 6 . In my Budget speech last year, I announced the introduction of a new
system of exchange rate management under which a dual exchange rate regime
was introduced, and import licensing was eliminated on most items of capital
goods, raw materials, intermediates and components. These items became freely
importable against foreign exchange purchased in the market. The system has
worked fairly well and the market exchange rate has been remarkably stable. The
existence of a dual rate, however, hurts exporters and other foreign exchange earners
who have to surrender 40% of their earnings at the official rate, getting the benefit
of the higher market rate on only 60 percent. Many exporters have said that this
amounts to a tax on exporters of goods and services whose continuation cannot be
justified at a time when exports must receive our fullest support. There is merit in
this point of view, and the experience of the past year gives ground for confidence
that we can unify the exchange rate and still manage the balance of payments with
a reasonable degree of stability in the exchange rate. The Government has therefore
decided to eliminate the dual rate arrangement. All exporters, as well as other
foreign exchange earners such as our workers abroad, will henceforth be allowed
to convert 100% of their earnings at the market rate. All imports will also henceforth
have to be paid for at the market rate. The details of the new system are being
notified separately by Reserve Bank of India. I expect that this will give a major
boost to exports, and will further encourage foreign exchange flows into official
channels.
2 7 . Several other steps are also being taken to stimulate exports. The Commerce
Ministry is reviewing the list of items whose exports are subject to one or other
restriction with a view to removing as many restrictions as possible. Reserve Bank
of India is taking steps to ensure that adequate credit will be available for exports.
Banks have already been asked to ensure that export credit amounts to at least
 7
10% of their total advances. The interest rate on rupee export credit is being reduced
by one percentage point. As a further measure of support for exports, the interest
tax will be waived in the case of export credit from banks. I will have more to say
on incentives for exporters when I come to the tax proposals in the Budget.
2 8 . A new policy towards foreign investment has been an integral part of our
strategy of modernising the economy, and establishing global linkages which will
be of critical importance in the emerging world economy. I have already mentioned
that the initiatives taken in this area thus far have yielded encouraging results. I
have no doubt that as our reforms proceed and gain momentum, we can expect to
attract a substantial share of the private investment that is presently flowing to
many developing countries in Asia. The Government has signed the Multilateral
Investment Guarantee Agency (MIGA) convention and we expect to join MIGA formally
as soon as membership procedures are completed. Several countries, including the
UK, Germany and the United States, have expressed an interest in signing bilateral
investment treaties. The Government has indicated a willingness to enter into
bilateral negotiations on this issue.
2 9 . Industrial modernisation, and especially the creation of internationally
competitive industries, requires a massive expansion of and qualitative improvement
in infrastructure. This is especially true of power generation, telecommunications
and roads. Traditionally, these areas have been the preserve of the public sector.
Substantial expansion of public investment in these areas is certainly necessary.
However, the needs of the country are far beyond the capacity of the public sector
to deliver in a reasonable time frame. The Government has, therefore, adopted a
policy of encouraging private sector involvement and participation in these areas to
supplement the efforts being made by the public sector. In order to attract such
investment it will be necessary to make changes in policies, procedures and the
regulatory framework in these sectors. The Government proposes to make such
changes as the need arises.
3 0 . Over the past two years, we have taken several steps to remove unnecessary
bureaucratic interference in economic activity in order to create an environment in
which the energies of our people can be harnessed to maximise innovation,
production and growth. However, I am constantly told that despite liberalisation at
the policy level, our procedures in many areas remain archaic and cumbersome.
Many of our laws also need thorough review to bring them in line with the emerging
economic environment. The Government has therefore decided that a special review
group will be constituted in each Ministry to make a review of existing laws and
procedures to identify changes needed in the light of the new policies. I hope the
State Governments which have a crucial role to play in promoting development and
investment in the new environment will also take similar steps at their end.
3 1 . Let me now turn to the revised estimates for 1992-93.
3 2 . We have tried to maintain strict control over expenditure, but certain
increases over the Budget estimates were unavoidable. An additional provision of
Rs.1,500 crore has to be made for food, fertiliser and export subsidies. The additional
requirement of food subsidy is because of the delay in increasing issue prices to
absorb the impact of higher procurement prices. The higher provision for export
subsidy is because of settlement of claims in the pipeline for cash compensatory
support and continuance of benefits for deemed exports. In respect of fertilisers the
 8
increase is due to the reduction in prices of urea and higher input costs. In addition,
I have provided Rs.340 crore as one-time assistance to farmers for purchase of
fertilisers whose prices were decontrolled. Ministry of Home Affairs has to be provided
additional funds for meeting security-related expenditure in the wake of disturbed
conditions in certain parts of the country. While an assessment of the actual
requirements is being made, I have for the present included in the Revised Estimates
an additional provision of Rs.285 crore. If a further provision becomes inescapable,
we shall come to the House for the necessary Supplementary Grants. These and
other increases have been offset by a reduction of Rs.1,300 crore in the requirements
for loans to States against small savings collections. The decline in small savings
collections has been a matter of concern and Government has taken measures to
improve the rate of return to the investors. As a consequence, the collections have
shown an up-trend in recent months. As a result of all these developments, total
non-plan expenditure is higher by Rs.3,278 crore as compared with the budget
estimates.
3 3 . On the plan side, there is an increase in budgetary support for the Central
Plan for certain sectors. An additional provision of Rs.630 crore is being made for
the National Renewal Fund, which is a key element in our strategy for economic
reforms. Similarly an additional provision of Rs.250 crore has been made for
strengthening schemes in the social sectors such as Health and Family Welfare.
The provision for Rural Development is being augmented by Rs.500 crore.
3 4 . Central assistance to State and Union Territory Plans is being augmented
by Rs.1,228 crore mainly for externally aided projects where the pace of
implementation justifies an allocation larger than in the Budget Estimates.
3 5 . Taking Plan and non-Plan expenditures together, the total provision in
the Revised Estimates is Rs.1,24,726 crore against Rs.1,19,087 crore in the Budget
Estimates.
3 6 . Against these additional expenditures, revenue receipts have also been
higher because of better collections and higher royalty on offshore crude oil. Capital
receipts under market loans and small savings receipts are lower than in the
Budget Estimates; but this is offset by the higher receipts from 364-days treasury
bills, which is a new instrument designed to develop a market for Government
securities.
3 7 . The total receipts in the Revised Estimates are Rs.1,17,524 crore compared
to Rs.1,13,698 crore in the Budget Estimates. The Budget deficit is estimated at
Rs.7,202 crore and the fiscal deficit for the year is now placed at Rs.36,722 crore.
These figures are somewhat higher than envisaged in the Budget Estimates but
within tolerable limits for macro-economic stability.
3 8 . I now turn to the Budget Estimates for 1993-94.
3 9 . The resource constraints facing us last year imposed a tight leash on the
development programmes we could finance in 1992-93. The total size of the Central
Plan in 1992-93 (BE) was only 12.6% higher than in the previous year. With the
improvement in the fiscal situation achieved in the course of 1992-93, and the
moderation in inflation, we are now in a position to give a boost to the Plan, while
ensuring continued improvement in the fiscal deficit. Accordingly, the Central Plan
outlay for 1993-94 has been fixed at Rs.63,936 crore which is almost 32% higher
than the figure of Rs.48,407 crore in 1992-93.
 9
4 0 . The Central Plan will be financed to the extent of Rs.23,241 crore from
budget support which is almost 26 per cent higher than the budget support of
Rs.18,501 crore in 1992-93. The balance of the Central Plan outlay of Rs.40,695
crore will be met from internal and extra-budgetary resources compared with
Rs.29,906 crore in 1992-93, representing a step-up of 36%. I am providing Rs.18,010
crore for Central assistance for States and UT Plans in 1993-94 compared to
Rs.16,111 crore in 1992-93. The total budgetary support from the Central
Government Budget to the Central and State Plans increases by almost 19% from
Rs.34,612 crore in 1992-93 to Rs.41,251 crore in 1993-94.
4 1 . The large increase in budget support for the Plan has enabled a substantial
step-up in Central Plan programmes in the social sectors and rural development
which depend upon budgetary resources. The outlay for the Department of Rural
Development next year has been enhanced by a massive 62% to Rs.5,010 crore.
Both employment generation and capital formation in rural areas will receive a
major boost. The allocation for the Jawahar Rojgar Yojana is being increased to
Rs.3,306 crore compared with the current year ’s level of Rs.2,046 crore. This is
aimed at creating 1100 million mandays of employment. It is proposed to train 3.5
lakh young persons in rural areas under the Training of Rural Youth for Self
Employment (TRYSEM) programme. For the rural water supply programme, the
provision has been increased substantially from Rs.460 crore in 1992-93 to Rs.740
crore next year. Higher allocations have also been provided for the Integrated Rural
Development Programme. The programmes of decentralised planning and
development will receive a massive stimulus as a result of the strengthening of
Panchayati Raj institutions as envisaged in the Constitution (72nd Amendment)
Bill, 1991.
4 2 . The development of human resources is given high priority in the Eighth
Plan; Hon’ble Members are also aware that education is an area which is very close
to my heart. I am, therefore, particularly happy to announce that the outlay for
education is being increased from Rs.952 crore to Rs.1,310 crore, which is a step
up of 37.6%. Universal provision of primary education and adult literacy of
satisfactory quality, particularly for girls and women, is a pre-requisite for the
modernisation of the economy and the society. I am happy to inform Honourable
Members that our total literacy campaigns are breaking new grounds, and are now
being implemented in 182 districts covering approximately 430 lakh adult learners.
A new scheme is being launched for the improvement of primary education in
educationally backward districts and in districts where the total literacy campaigns
have been successful, leading to an enhanced demand for primary education. In
these districts, districts specific and population specific plans for achieving
universalisation of elementary education are being prepared. Twenty to twenty-five
districts out of about 200 educationally backward districts where female literacy is
below national average, will be taken up for preparation of districts plans in 1993-
94. In the sphere of higher and technical education, modernisation and upgradation
would receive high priority. Keeping in view the aspirations of the North Eastern
region, the government has decided to set-up a university in Nagaland and an
Indian Institute of Technology in Assam
4 3 . For Health, the provision is Rs.483 crore, which is 60% higher than the
level of Rs.302 crore in the current year ’s Budget. A major part of the provision will
be for national programmes for control of communicable and other diseases. The
Family Welfare programme is of overriding national importance; the provision under
 10
this head is being stepped up from Rs.1,000 crore for the current year to Rs.1,270
crore for the next year. A programme to improve the quality of family planning
services in Uttar Pradesh is being launched at a cost of US $ 325 million, with
assistance from USAID. In addition, with the aim of reducing maternal mortality,
under the Social Safety Net Scheme, assistance will be provided for improvement of
infrastructure at Primary Health Centres in 90 demographically backward districts.
4 4 . The National Commission for Women set up last year is looking into various
important issues relating to women. For the integrated child development services
the provision is Rs.474 crore compared to Rs.360 crore in the current year. This
will enable us to strengthen the infrastructure set up of the scheme. The provision
for the Ministry of Welfare has been increased from Rs.530 crore to Rs.630 crore.
This includes Rs.73 crore for the liberation and rehabilitation of Safai Karmcharis.
A provision of Rs.247 crore has been made for special Central assistance for
Scheduled Castes component plan. The operations of the National Scheduled Castes
Finance and Development Corporation and the National Backward Classes Finance
and Development Corporation will be further expanded.
4 5 . The Government regards agriculture as a sector of prime importance for
the national economy. The budgetary allocation for the plan schemes of the Ministry
of Agriculture including Animal Husbandry and Dairying is being increased by
36% from Rs.1,408 crore to Rs.1,918 crore. In addition, the bulk of the outlay on
agriculture is in the State Plans.
4 6 . The requirements of the infrastructure sectors such as Petroleum and
Natural Gas, Power, Telecommunications, Railways and Transport have also not
been neglected. Investment programmes in these sectors are implemented through
public enterprises or departmentally run commercial undertakings and these
organisations are expected to finance their plan outlay through their internal and
extra budgetary resources. The plan outlay for Petroleum and Natural Gas has
been nearly doubled to Rs.12,114 crore from the current year ’s level of Rs.6,208
crore. The outlay for Power has been increased by 22% from Rs.5,167 crore in the
current year to Rs.6,269 crore. The outlay for Roads has been stepped up from
Rs.464 crore to Rs.593 crore. The outlay for Chemicals and Petrochemicals has
also been stepped up from Rs.763 crore to Rs.1,206 crore. The Plan outlay for the
Railways has been increased from Rs.5,700 crore to Rs.6,900 crore including
Rs.400 crore for the Konkan Railway Corporation Ltd.
4 7 . Turning to non-Plan expenditure, I would like to draw the attention of the
House to the tremendous burden of interest payments. The provision for 1993-94
is Rs.38,000 crore compared with Rs.32,500 crore in the current year. The high
interest burden is due to the rising volume of government debt, which itself reflects
the large fiscal deficits, incurred year after year. However, with the reduction in the
fiscal deficit and hence in the Government’s borrowings, the growth of this item is
expected to decelerate sharply by 1995-96.
4 8 . For Defence expenditure the provision has been increased from Rs.17,500
crore in the current year to Rs.19,180 crore next year. The requirements on account
of fertilisers and export subsidies will be significantly lower reflecting the impact of
the measures already taken to rationalise these subsidies. The expenditure on the
Farm Loan Waiver scheme will be Rs.500 crore; with this, the Government’s
commitment for payment under the scheme will be fulfilled. I am providing Rs.3,000
 11
crore for food subsidy as against Rs.2,800 crore in the current year. It will be the
endeavour of Government to keep the burden of food subsidy at a reasonable level
and to ensure at the same time that the vulnerable sections of society are fully
protected. Excluding the expenditure on interest, the provision for other non-plan
expenditure in 1993-94 is about Rs.3,180 crore lower than the Revised Estimates
for the current year. As in previous years, no separate provision is being made for
additional dearness allowance which may become payable next year. The additional
expenditure on this account will have to be absorbed by all Ministries within the
approved budget provision.
4 9 . Coming to receipts, gross tax revenues at the existing level of taxation are
estimated at Rs. 89,389 crore compared to Rs. 78,782 crore in the current year.
States’ share of taxes next year is estimated at Rs.22,590 crore as against Rs.
20,525 crore in the current year’s Revised Estimates. I am taking a credit of Rs.
3,700 crore for market borrowings as against the current year’s level of Rs. 3,670
crore. External assistance, net of repayments, is estimated at Rs. 6,819 crore as
against Rs.5,374 crore in the current year. Net small savings collections next year
are estimated to reach the current year’s level of Rs. 5,500 crore despite heavy
maturities falling due next year. As in the current year’s Revised Estimates, I am
taking credit of Rs. 3,500 crore for receipts from disinvestment of equity in public
enterprises. Total receipts at the existing levels of taxation are estimated at
Rs.130,990 crore and total expenditure at Rs.131,323 crore leaving a gap of Rs.
333 crore.

PART B
5 0 . I now turn to the tax proposals for 1993-94.
5 1 . In framing these proposals I have been acutely conscious of the conflicting
requirements of comprehensive reform of the tax structure on the one hand, and
the need to protect revenues to finance the large increase in the Plan, on the other.
Last year significant reforms were made in personal income taxation based on the
recommendations of the Chelliah Committee. Reform of corporate taxation was
deferred until the detailed recommendations of the Chelliah Committee were received.
These have since been received. The Committee has also recently submitted its
final report on indirect taxes, recommending significant reduction in customs duties
as well as rationalisation and simplification of excise duties.
5 2 . I accept the broad thrust of the Chelliah Committee’s recommendations
on both direct and indirect taxes. We must move as rapidly as possible to a regime
of moderate tax rates in direct taxation, which will encourage better compliance
especially if supplemented by efforts at broadening of the tax base. We must also
move to a regime of low to moderate customs duties which is essential for efficient
and competitive industrialisation. Our excise duties should also be simplified with
fewer rates and our long-term aim should be to move to a Value Added Tax System.
However, a nationwide value added tax system cannot be introduced overnight.
There has to be a broad agreement among the Centre and the States on the design
of such a system. In order to promote informed discussion and debate, I am
requesting the National Institute of Public Finance and Policy to prepare the design
of a possible value added tax system.
 12
5 3 . Although all the major recommendations of the Chelliah Committee are
important, they cannot be implemented immediately for the simple reason that tax
reform, which typically involves lower tax rates collected on a broader base, often
involves a loss of revenue in the short run. Fiscal experts tell us that the loss of
revenue will be made up in the medium term, but there is no guarantee that this
will happen immediately, and Finance Ministers have to look after the short term
if they want to survive in the medium term. I hope the House will agree with me
that a phased transition is needed.
5 4 . A key issue in phasing the transition is whether to do a little on all fronts
or to make decisive changes in certain areas, with a clear declaration of progress
to be made in other areas in future. I have thought over this matter carefully and
I feel that decisive action in critical areas is more important than marginal
improvements on all fronts. The most critical area for action at present is customs
duties. Despite the adjustments in customs duties in the last two budgets, our
duties are still much higher than in most of our competitor countries, especially on
capital goods. With these duties, and the resulting high capital costs, our producers
will never be able to compete in world markets. Nor can we expect new investment,
both domestic and foreign, to flow into areas with export markets in view, if high
customs duties make them uncompetitive. Yet it is such investments that we need
most at present if we want to reduce our dependence on external assistance. We
cannot and must not continue with the approach of setting up industries aimed
solely at the domestic market in the belief that replacing imports ipso facto
contributes to self reliance, without considering at what cost we are effecting the
replacement. In fact, replacement at unduly high cost contributes to inefficient
industrialisation, an inability to export and a permanent dependence on external
assistance. We must take a bold initiative in this area while taking due care to
protect the legitimate concerns of our industry. Normally, the revenue loss from
customs duty reduction could have been made up through higher excise duties.
However, there are compelling reasons for rationalising and reducing excise duties
over a wide range of industries because many of our duties are too high and parts
of industry are also suffering from recessionary conditions.
5 5 . In these circumstances, Hon’ble Members will appreciate that I have limited
room for maneuver in the area of direct taxes. Major reform of the corporate tax
structure, along the lines recommended by the Chelliah Committee is undoubtedly
desirable. However, for the reasons indicated, it will have to be postponed to the
next year.
5 6 . I would like, however, to give a stimulus to new investment in those States
in which all the districts are industrially backward. Accordingly, I propose to give
a five-year tax holiday, commencing from the year of production, for new industrial
undertakings located in all the North-Eastern States, Jammu & Kashmir, Himachal
Pradesh, Sikkim, Goa and Union Territories of the Andaman and Nicobar Islands,
Dadra and Nagar Haveli, Daman and Diu, Lakshadweep and Pondicherry.
5 7 . Electricity is a critical input for the future growth of our economy. I therefore
propose to introduce a five-year tax holiday in respect of profits and gains of new
industrial undertakings set up anywhere in India for either generation or generation
and distribution of power. The five-year tax holiday will begin from the year of
generation of power.
5 8 . The five-year tax holiday, in both these cases, will be part of section 80-
 13
IA of the Income-tax Act. At the end of the five-year period, these units will be
entitled to the existing deduction under section 80-IA for the remaining period.
5 9 . To promote a cleaner and healthier environment, I propose to allow
depreciation admissible on plant and machinery relating to environment protection
and pollution control at 100 per cent instead of the existing 40 per cent. of capital
cost under the Income-tax Rules.
6 0 . Hitherto, our institutions of higher learning have been almost entirely
dependent on Government funds. As government funds are limited, we must find
ways of funding these institutions from industry. This will also bring them closer
to industry and more responsive to its needs. I, therefore, propose to raise the
income tax deduction given to contributions to approved universities, institutes of
technology, institutes of management and equivalent institutions from 50 per cent.
at present to 100 per cent.
6 1 . A strong science and technology base is an essential prerequisite for a
modern, progressive economy. Indian scientists and technologists have proved,
time and again, that they are second to none in the world, given the right work
atmosphere, proper motivation and adequate facilities. Indian industry needs to
spend a lot more on research and development. In doing so, I would encourage
industry to make use of the facilities offered by our national laboratories and
research institutes. To that end, I propose to introduce a weighted deduction of
125 per cent. of the contribution out of income from business or profession for
research programmes in approved national laboratories and institutions carrying
out research and development in natural and applied sciences. This weighted
deduction will be available only for research programmes determined by the users
and the producers of research, and approved by the prescribed authority.
6 2 . I propose to extend the five-year tax holiday under section 10A of the
Income-tax Act, at present available to units set up in the Free Trade Zones, to
units set up in Software Technology Parks and Electronic Hardware Technology
Parks. In July 1991, I had introduced a 100 per cent deduction for three years in
respect of income derived from export of software. Software exports have done well
and I propose to extend the concession for one more year i.e. for assessment year
1994-95.
6 3 . Under the scheme for permitting Foreign Institutional Investors in our
capital market, we had indicated that such investors would be liable to tax at 20
per cent. on investment income and 10 per cent on long term capital gains. I also
propose to extend a concessional rate of tax of 30 per cent in respect of short-term
capital gains for such investors.
6 4 . As I have already mentioned, a substantial reform of personal taxation
was carried out last year based on the recommendations of the Chelliah Committee.
I propose to leave the rate structure and exemption limit unchanged and make
only a few modifications.
6 5 . Last year, because of severe resource constraints, I was compelled to
retain the surcharge on personal income above Rs.1 lakh at 12 per cent. I had
hoped to be able to remove the surcharge in the current year but I am constrained
to continue with it for one more year. However, I propose to raise the standard
deduction from salary income from Rs.12,000 to Rs.15,000 and the standard
deduction for working women with incomes upto Rs.75,000 from Rs.15,000 to
Rs.18,000.
 14
6 6 . In recognition of the hardship to old people in these days of inflation, I
had given a tax rebate of 10 per cent last year to senior citizens whose gross total
income is below Rs.50,000. I propose to raise the tax rebate to 20 per cent and
further increase the income limit from Rs.50,000 to Rs.75,000.
6 7 . Last year, I had announced that a scheme for giving Advance Rulings in
respect of transactions involving non-residents would be worked out. The scheme
has been drawn up and I am bringing forward legislative proposals for the creation
of a statutory authority, headed by a retired Judge of the Supreme Court. I do hope
that the scheme will be welcomed by non-residents.
6 8 . I propose to extend the simplified scheme of presumptive taxation
introduced last year to small road transport operators operating, hiring or leasing
one transport vehicle.
6 9 . Payments made under Voluntary Retirement Schemes to public sector
employees were fully exempt from income tax; last year I extended this exemption
to private sector employees. I propose now to extend this facility to employees of
statutory authorities and local authorities.
7 0 . Recognising the trauma of bringing up a handicapped child, I had, last
year increased the deduction permissible for guardians of handicapped dependants
under the income-tax law from Rs 6000 to Rs.12000. I now propose to further raise
this deduction to Rs.15000. I also propose to allow a deduction in respect of income
of handicapped minors clubbed with the income of their parent to the full extent of
the child’s income upto a maximum of Rs.20,000.
7 1 . In my first Budget Speech in July 1991, I had proposed the setting up of
the National Foundation for Communal Harmony to provide assistance to the
children of families affected by communal riots. The Foundation has since been
established under the aegis of the Home Ministry. I now propose to extend the
benefit of 100 per cent. deduction under section 80G of the Income-tax Act in
respect of donations made to the Foundation. I also propose to exempt the income
of the National Foundation for Communal Harmony fully from income tax.
7 2 . At present, charitable trusts and institutions have to seek approval every
three years from the Commissioner of Income tax in order that donations to them
are eligible for tax exemption. To reduce paper work and simplify the procedure, I
propose to increase the maximum period of approval by the Commissioner to five
assessment years.
7 3 . I would like to see India gain prominence, not only in the global economy,
but also in the world of sports. There are provisions in the Income-tax Act to allow
exemption in respect of income of approved sports associations or institutions and
to grant 50 per cent. deduction in respect of donations made to them. I propose to
amend the Rules relating to eligible projects or schemes under section 35AC of the
Act to include promotion of sports in such activities. This would provide 100 per
cent. deduction in respect of spending on approved sports projects and schemes.
7 4 . Last year, I had proposed the setting up of a National Court of Direct
Taxes for expeditious settlement of litigation in direct tax matters. The proposal
has been examined in detail and I hope soon to bring forward legislation in this
regard. In regard to a Direct Taxes Code, the Government will take a final view,
taking into account the recommendations of the Chelliah Committee on the subject.
 15
7 5 . The Wealth-tax Act was considerably recast last year and the basis of
taxation was shifted from wealth to unproductive assets. There has been persistent
demand that a residential dwelling is a universal necessity and should not be
subjected to wealth-tax. Hence, I propose to exempt the value of one residential
house or part thereof from the levy of wealth-tax.
7 6 . Last year, I had exempted residential houses, motor cars, etc. held as stock-in-
trade from the levy of wealth-tax. I now propose to exempt urban land held as
stock-in-trade. However, to discourage speculation in the guise of stock-holding, I
propose to restrict the exemption to three years beginning from the year in which
the land is acquired.
7 7 . The exemption limit for purposes of gift-tax was fixed at Rs.20,000 some
years ago. I agree with the recommendations of the Tax Reforms Committee that
this limit needs to be revised and, therefore, propose to raise it to Rs.30,000.
7 8 . Gifts made by a person to any dependant relative in respect of marriage
of the relative is exempt from gift-tax only up to Rs.10,000, whereas vast expenditures
on ostentatious marriages go scot-free. In order to encourage savings and productive
investment, I propose to raise the exemption limit at the time of the marriage of a
dependant relative from Rs.10,000 to Rs. 30,000.
7 9 . As an incentive to the export drive which has to be kept up at all costs, I
propose to exempt all banking companies from the levy of Interest-tax on export
credit provided by them.
8 0 . The various changes that I have proposed would result in a loss of Rs.300
crore of which the States’ share would be Rs. 194 crore. The amount involved is
very small – less than 2 per cent of the gross direct tax collections. I am ignoring
it in the expectation that better tax collection would cover this loss.
8 1 . I now turn to the proposals relating to indirect taxes.
8 2 . Since 1973, we have been levying a separate auxiliary duty in addition to
the basic customs duty. In order to simplify the tariff structure and the assessment
process, I propose to do away with the separate auxiliary duty and merge it with
the basic duty.
8 3 . Our first priority in restructuring customs duty should be in the area of
capital goods and project imports since these duties affect the incentives for new
investment. Last year the duty on projects and general machinery was brought
down from 80% to 55%. This is still too high compared with rates in competitor
countries and a further reduction is necessary. I, therefore, propose to lower the
import duty on projects and general machinery to 35%. Projects in certain priority
sectors such as, power, coal mining and petroleum refining currently attract a duty
rate of 30%. I propose to reduce the rate to 25% in the case of coal mining and
petroleum refining. In view of the special importance of the power sector, the duty
on power projects is being reduced to 20% and this rate is also being extended to
machinery required for modernisation and renovation of power plants.
8 4 . The House can rest assured that in restructuring duties on capital goods,
I have made every effort to protect the legitimate interests of domestic capital goods
industry. We have had extensive discussions with various Ministries as well as
representatives of concerned industries. In order to ensure that lower duties on
 16
imported machinery do not hurt the domestic capital goods industry, it is necessary
to lower the import duty on components, to enable our manufacturers to compete
effectively. I therefore, propose to reduce to 25% the duty on components of general
machinery which presently is either 40% or 35%. In order, however, to ensure that
domestic industries producing such components are not adversely affected, I propose
to impose countervailing duty on such components at 10% with full facility of set-
off under MODVAT.
8 5 . At present there are a number of other capital goods, including various
types of machine tools, which attract different rates of duty in the range of 60% to
110%. There are also instruments which attract duties varying from 40% to 110%.
I propose to rationalise this structure into three duty rate slots, viz., 40%, 60% and
80%. The rationalisation involves generally a duty reduction between 20 to 30
percentage points. Consequential reduction is being made in the rates of duty on
specified parts and components.
8 6 . Hand-operated tools are capital goods for artisans and skilled workers
and currently attract duties varying from 40% to 110%. I propose to prescribe a
uniform rate of 40% for all these tools.
8 7 . The logic of reducing duties on capital goods requires lowering of duties
on metals and metal goods as well, as these are the basic raw materials of the
domestic capital goods industry. Accordingly, to help domestic producers, I propose
to lower the customs duty rates on ferrous metals by 10 to 20 percentage points in
most cases. In line with these changes the import duty on steel scrap is being re-
fixed at 15%. The import duty on specified refractory raw materials is being reduced
to 30%. Turning to non-ferrous metals, I propose to reduce the duty rates by 10 to
55 percentage points in most cases. The resulting rates on unwrought and unalloyed
forms will vary from 25% to 50% and on wrought forms from 70% to 80%.
8 8 . The duty structure for chemicals is characterised by a multiplicity of rates
and many irrationalities. Input duties are often out of line with duties on finished
products. I, therefore, propose to restructure the duty rates on chemicals with a
view to significantly lowering duty rates at the upper end and also ensuring that
the duty rates on inputs are not generally higher than the duty on end products.
The present duty rates on basic feed stocks such as, ethylene, propylene, butadiene,
benzene, styrene and ethylene dichloride vary between 25% and 80%. These rates
are being replaced by a uniform low duty rate of 15%. The duties on xylenes,
paraxylene, toluene, acrylonitrile and cumene are being reduced to 40%. The duties
on DMT, PTA and MEG which represent a higher stage of production, are being
reduced and unified at 70%. In the case of caprolactum, however, the duty is being
increased from 50% to 60%, in order to adequately protect the interests of the
domestic units.
8 9 . The electronics industry has the potential of becoming a world class
industry contributing to our export effort and to employment generation. I propose
to take up this challenge. The rates of duty on project imports and on specified
capital goods for electronics attract duty at either 30% or 50% at present. I propose
to reduce these rates to a uniform rate of 25%. The import duties on raw materials,
piece-parts and components at present are levied at 40%, 60% and 80%. These
rates are being reduced to 20%, 35% and 50%, respectively. The import duty on
specified raw materials for the manufacture of optical fibre cables is being drastically
 17
reduced from 90% to 20% in recognition of the urgency of extending and modernising
the telecom sector.
9 0 . In order to strengthen our export capability in existing export-thrust areas
such as textiles, leather, marine products, gems and jewelry, etc. where we have a
comparative advantage, I propose to reduce the import duty on specified capital
goods for these sectors from 40% to 25%. In addition, certain recommendations
have been made by the Groups on Extreme Focus items for export for augmenting
the export potential of certain sectors such as food processing, horticulture and
floricultural industries. Accordingly, the import duty on specified items for these
sectors is being reduced to 25%.
9 1 . The ship-breaking industry is employment intensive and an important
source of raw materials for the secondary sector of our steel industry. In order to
encourage the growth of this industry, I propose to prescribe a lower merged duty
of customs at 5% ad valorem. The ferrous materials obtained from breaking up of
such ships etc. which are presently subject to excise duty are being fully exempted.
9 2 . Our film industry is one of the largest in the world in terms of the
footage of films produced. Although it has achieved this status without much
need for incentives, it is now facing greater competition from the electronic media,
and deserves some special encouragement. I, therefore, propose to reduce the
duties on jumbo rolls of cine positive films from 55% to 25% and on finished cine
film rolls from about 65% to 40%. I also propose to reduce the duty on negative
cine films from about 35% to 25%.
9 3 . In order to encourage the development of non-conventional energy sources,
especially solar energy, the import duty on specified raw materials and items of
this industry is being reduced by 15 to 20 percentage points. In respect of wind-
operated electricity generators I propose to reduce the import duty from 40% to
25%.
9 4 . As a gesture of goodwill towards Bangladesh, I propose to fully exempt the
famous Jamdanee saris from payment of import duties. Small-scale units, eligible
for excise duty exemption for clearances to domestic area are at present required
to pay excise duty on goods exported by them to Nepal and Bhutan. I propose to
exempt these from this levy. I hope these steps will make a contribution towards
improving trade with SAARC countries.
9 5 . At present, accredited press cameramen have the facility of importing
photographic equipment free of duty upto a limit of Rs.60,000 but no such facility
is available to other journalists to import specialised equipment such as, laptop
computers, personal computers, fax machines and typewriters. I have often wondered
whether this explains why my photographs in the Press are better than the editorial
comments! As a measure of my commitment to encourage modern technology in
Indian journalism, and in recognition of the sterling role played by our Pressmen
in creating a wider appreciation of issues of economic reform in the country, I
propose to allow accredited journalists also a one time facility to import such
equipment duty free upto a value of Rs.60,000.
9 6 . The duty rate on certain specified items of baggage was recently reduced
from 255% to 150%. As a measure of simplification, I propose to reduce the general
baggage rate itself from 255% to 150%.
 18
9 7 . In line with these reductions in import duties for individual sectors, and
keeping in mind the present exchange rate, there is scope for reduction in the
maximum rate of duty on all goods. Accordingly I propose to reduce the maximum
rate from 110% to 85% except for a few items including passenger baggage and
alcoholic beverages.
9 8 . I am aware that Honourable Members will be concerned that lowering of
import duties and import liberalisation may put too much pressure on our industry
and make it vulnerable to unfair competition and dumping. I would like to assure
Honourable Members that these issues have been carefully considered and the
proposed changes will not put undue pressure on industry. The change in the
exchange rate over the past two years has created considerable room for duty
reduction without hurting domestic industry. Besides, I am also reducing duties on
raw materials and inputs which will help to reduce cost for our producers, enabling
them to compete more effectively. Even with these changes, duties on finished
products will be well above the long term structure recommended by the Chelliah
Committee. We can move to that goal in phases over the next few years. As for
unfair competition through dumping, our anti-dumping laws are already operational
and action under these laws will be taken expeditiously whenever it is needed. I
may mention that provisional action has recently been taken in one case.
9 9 . In last year ’s Budget export duties had been imposed on iron ore and
unpolished granite. Certain difficulties faced by these sectors have since been brought
to my notice. I, therefore, propose to withdraw the export duty on iron ore and
unpolished granite.
1 0 0 .I turn now to my proposals relating to excise duties. These are guided by
the need to simplify the rate structure, to give some relief on articles of mass
consumption, help the domestic capital goods industry so as to increase its
competitiveness and also reduce capital costs, assist industries suffering .c.from
depressed demand conditions, and to provide relief to small-scale industry.
1 0 1 .A surcharge by way of special excise duty has been levied since 1988, and
the rate is currently 15% of the basic excise duty. As a measure of simplification,
I propose to merge the special excise duty with the basic excise duty rates while
also rationalising the resulting duty rates.
1 0 2 .I propose to give some relief from taxation on a large number of articles of
mass consumption as a measure of protection to the common people, who have
been hard hit by inflation. Coffee, tea and instant tea are being fully exempted from
excise duty. I also propose to reduce excise duty on vanaspati from Rs.1900 to
Rs.1500 per metric ton. I propose to fully exempt footwear made by units under
KVIC as well as those run with cash assistance received under the Integrated Rural
Development Programme, irrespective of the value limit. In respect of footwear
manufactured by other units, I propose to enhance the present value limit for the
purpose of exemption from Rs.75 to Rs.125 per pair. I also propose to reduce the
excise duty:
- on evaporative coolers from 23% to 10%;
- on electric fans from 17.25% to 10%;
- on specified domestic electrical appliances from 23% to 15%;
 19
- on dry cell batteries from 34.5% to 25%;
- on printing and writing ink from 17.25% to 10%;
- on radio sets from 23% to 10%;
- on tooth powder from 17.25% to 10%;
- on noodles and roasted cereals from 17.25% to 10%;
- on biscuits from 11.5% to 7.5%;
- on plastic moulded luggage from 34.5% to 25%;
- on mattresses and bedding articles of cellular rubber from 69% to 30%.
1 0 3 .At present the excise duty on capital goods and instruments varies from
11.5% to 23%. In order to lower capital costs and stimulate investment, I propose
to reduce the excise duty on a large number of capital goods and instruments to a
uniform rate of 10%. For the power sector, I am proposing an even lower rate of
5%.
1 0 4 .Revival of industrial growth is a key element in the strategy for 1993-94.
Sectors such as the automotive sector, television and the refrigeration and air-
conditioning industries are currently suffering from recession. Workers employed
in these industries face an uncertain future. Revenue prospects will also suffer if
the present trend is not reversed. I, therefore, propose to provide a significant relief
to these industries by way of reduced incidence of excise duties. I expect them to
respond positively to this stimulus.
1 0 5 . In order to encourage the public transport sector, I propose to reduce
excise duty from 23% to 15% on non-petrol driven commercial vehicles for carrying
goods and passengers. Correspondingly, the excise duty on the chassis of such
vehicles will also stand reduced to 15%. I also propose to fully exempt excise duty
on body building on chassis of buses and similar passenger vehicles. The excise
duty on three-wheelers is being reduced from 23% to 15%. I also propose to reduce
the excise duty on motor cars from 55% to 40%.
1 0 6 .I propose to reduce the specific excise duty on colour television sets from
rates at present varying from Rs.1925 to Rs.4785 per set to rates varying from
Rs.1250 to Rs.2200 per set.
1 0 7 .The rates of excise duty on refrigerators presently vary from Rs.575 to
Rs.5750 per refrigerator depending on their capacity. I propose to reduce the rates
to Rs.400 to Rs.3500 per refrigerator. Other refrigerating appliances, including
those used for cold storage in the agriculture sector currently attract an ad valorem
duty of 69%. This is far too high as it affects the growth of food processing and
preservation industries. I, therefore, propose to reduce the duty to 20%. I propose
to reduce excise duty on air-conditioners from rates varying from Rs.13800 to
Rs.85100 per unit at present to rates varying from Rs.7000 to Rs.70000 per unit
depending on its capacity. In respect of compressors for air-conditioner of capacity
not exceeding 7.5 tonnes, I propose to reduce the excise duty from Rs.6900 to
Rs.5500 per compressor.
1 0 8 .I propose to reduce the excise duty on bulk plastic resins such as low and
 20
high-density polyethylene, polyvinyl chloride, polystyrene, etc. from 46% to 35%.
This measure will benefit small-scale units manufacturing plastic products.
1 0 9 .Metals are the basic raw materials of industry and the Tax Reforms
Committee has suggested reduction of excise duty in this category. I, therefore,
propose to rationalise the existing duty structure on metals. On ferrous metals, the
ad valorem rates generally vary between 11.5% and 23%. I propose to rationalise
the structure into two slabs, 12.5% and 15%. Aluminium has duty rates ranging
from 23% to 40.25%. I propose to replace these rates by a uniform rate of 25%.
Other non ferrous metals like copper, zinc, lead etc. attract duty rates varying from
11.5% to 34.5%. I am proposing a uniform duty of 15% for these. Certain ferrous
materials are still subjected to specific rates of duty. I have proposed some upward
adjustment in these rates taking into account the price increase since last year.
1 1 0 .As a measure of environment protection, and in order to save wood, I
propose to reduce the excise duty on plywood from 34.5% to 20%. I also propose
to include pulp made from rice and wheat straws in the scheme of full excise duty
exemption for production of writing and printing paper and uncoated craft paper
containing not less than 75% of pulp made from bagasse, jute, etc. This will widen
the scope for using non-conventional raw materials in the manufacture of paper.
1 1 1 .Currently, excise duty is being levied on mechanised, semi-mechanised,
non-mechanised and cottage sectors of the match industry at Rs.3.15, Rs.2.10,
Rs.1.75 and Re.0.75 per hundred boxes respectively. The Government of Tamil
Nadu has brought to my notice certain difficulties faced by this industry and also
certain anomalies in the structure. Accepting this suggestion, I propose to reduce
the rates to Rs.2.40, Rs.1.25, Re.1.00 and Re.0.50 respectively and also to restrict
the existing concessions in the cottage sector only to units which are registered co-
operative societies or recognised by KVIC or the State KVIB.
1 1 2 .The excise duty on cosmetics and everyday toilet preparations such as,
talcum powder, shampoos, face creams, shaving creams, etc. is very high at 120.75%.
These items are now being increasingly used by a wide section of the people for
personal care. I have received several representations from the trade, consumers
and women’s organisations for reduction of excise duty. I have also received
complaints regarding the growth of spurious products and other abuses related to
the evasion of this very high duty. I, therefore, propose to reduce the excise duty on
cosmetics and toilet preparations from 120.75% to 70%.
1 1 3 .I propose a marginal upward revision in the specific rates of excise duties
levied on tyres, tubes and flaps.
1 1 4 .I also propose to revise upwards the specific rates of excise duty on
molasses from Rs.172.50 to Rs.200 per tonne.
1 1 5 .The small-scale sector has been a source of strength to Indian industry
and a nursery for new entrepreneurship. The central excise duty exemption scheme
for this sector has contributed significantly to its development along with other
measures taken by the Central and State Governments. I propose to simplify the
scheme and restructure it to give additional incentives to the smaller units and at
the same time respond to certain recommendations of the Estimates Committee
and the Public Accounts Committee.
 21
1 1 6 .I propose to enhance the limit for exemption from registration from Rs.7.5
lakh at present to Rs.10 lakh. This will free a large number of the smaller units
from the necessity of registration, and at the same time enable the tax authorities
to devote greater attention to the comparatively larger units. At present, excise
duty is completely exempted from the first Rs.20 lakh of turnover for units producing
goods under one chapter of the excise tariff, and the limit is Rs.30 lakh if the goods
produced are under more than one chapter of the tariff. I propose to enhance the
duty exemption limit to Rs.30 lakh for all units. This should benefit a large number
of units in the lower segment of the small-scale sector.
1 1 7 .As part of the restructuring, I feel that the larger units in this sector can
contribute a little more to the exchequer. At present, the excise duty payable above
the zero duty limit and upto Rs.75 lakh is normal duty minus 10 percentage
points, subject to a minimum of 5% ad valorem. I propose to retain this for clearances
upto Rs.50 lakh in a financial year. For clearances beyond Rs.50 lakh and upto
Rs.75 lakh, the concessional rate will be normal duty minus 5 percentage points,
subject to a minimum of 5% ad valorem.
1 1 8 .At present, buyers of goods from small-scale manufacturers, get a notional
credit under MODVAT which is 5 percentage points more than the central excise
duty actually paid by the latter. The Public Accounts Committee has found certain
irregularities in the operation of this facility. The Tax Reforms Committee has also
not favoured continuance of this special dispensation, which essentially helps the
large-scale user industry. I, therefore, propose to withdraw the higher notional
credit which the buyers of goods produced by the small-scale units are getting at
present. They will receive MODVAT credit only on the basis of duty actually paid.
1 1 9 .In respect of cosmetics and refrigerators and air-conditioning appliances,
I propose to liberalise the excise duty concessions for the small-scale sector having
regard to price escalation over the years. I propose to extend full exemption in
respect of clearances from Rs.5 lakh at present to Rs.15 lakh. Thereafter, clearances
upto Rs.30 lakh in a financial year would attract 50% of the normal duty. Clearances
above Rs.30 lakh in a financial year will attract normal duty. The liberalised scheme
of exemption will be available only to those units whose value of clearances does
not exceed Rs.50 lakh in a financial year.
1 2 0 .All the proposed changes in the small-scale sector will take effect from 1 st
April, 1993.
1 2 1 .I now turn to certain proposals relating to agriculture, textiles and health
sectors, covering both customs and excise duties.
1 2 2 .Agriculture is the key to our economic growth, and deserves special fiscal
incentives aimed at modernisation and diversification of this sector. I propose to
reduce the import duty on various items of machinery used for agriculture,
horticulture, forestry, poultry keeping, etc. from 55% to 25%. I propose to reduce
the import duty on rice transplanters from 40% to 15%. I also propose to reduce
the import duty on grand parent poultry stocks from 105% to 40%. The import
duty on certain amino acids is proposed to be reduced from 65% to 15%.
1 2 3 .In respect of out-board motors used for fishing, I propose to reduce the
import duty from 40% to 15%.
1 2 4 .I propose to reduce the import duty on specified pesticides from 110% to
 22
75%. The import duty on certain pesticide intermediates is being reduced from
rates ranging between 65% and 110% to 50%.
1 2 5 .I propose to reduce the import duty on specified goods for horticulture
and green houses to 25%.
1 2 6 .At present, tractors of engine capacity above 1800cc and trailers attract a
total excise duty of 17.25% and 23% respectively. I propose to reduce the excise
duty on them to 10% and 15% respectively.
1 2 7 .I have a package of excise duty concessions for the textile industry. Next to
agriculture, it is the largest employer in the country. The present excise duty rates
on polyester and nylon filament yarn are higher as compared to other types of yarn.
Substantial capacities have been set up in the synthetic sector of fibre and yarn. As
part of a long-term policy of bringing synthetic fabrics within the reach of the common
man, I feel there is a need to reduce the excise duty rates in this sector. Hence, I
propose to reduce the excise duty on polyester filament yarn from Rs.80.60 to Rs.69
per kg. and on nylon filament yarn from Rs.71.50 to Rs.57.50 per kg. I also propose
to reduce excise duty on polyester staple fibre from Rs.13.65 to Rs.12.65 per kg. and
on viscose staple fibre from Rs.15.60 to Rs.14.95 per kg. On polypropylene filament
yarn, I propose to reduce the excise duty from Rs.32.50 to Rs.28.75 per kg. I further
propose to reduce excise duty on acrylic staple fibre from Rs.15.60 to Rs.14.95 per
kg.
1 2 8 .Health-care deserves special treatment. I propose to reduce import duty
on specified bulk drugs at 110% or 80% to 25%. I also propose to fix a uniform rate
of 50% on specified drug intermediates which currently attract import duties varying
from 60% to 110%. In respect of homoeopathic medicines, I propose to reduce
import duty from 40% to 25%.
1 2 9 .Indigenous manufacture of medical equipment deserves all encouragement.
At present, full exemption from import duty is available to certain parts of specified
life saving electronic medical equipments. To help in accelerating the indigenisation
process, I propose to extend full exemption to such parts for the manufacture of
specified non-electronic life-saving medical equipments also. In respect of
components for the manufacture of certain other medical equipments, I propose to
reduce import duty from 45% and 25% at present to 15%. Further, for the same
reason, I propose to fully exempt specified sight-saving equipments from excise
duty and to lower excise duty on some medical equipments to 10%.
1 3 0 .I propose to reduce the import duty on aseptic form-fill-seal machines for
packing intravenous fluids by the pharmaceutical industry from 40% to 15%.
1 3 1 .I have also proposed certain amendments in the Finance Bill seeking to
effect changes in the excise and customs tariffs which are generally in the nature
of enabling provisions and have no revenue significance. Besides, there are proposals
for amendment of some of the existing notifications. In order to save the time of the
House, I do not propose to recount them.
1 3 2 .The proposal in regard to changes in the excise duties outlined above are
likely to result in a revenue loss of Rs.2249 crore as conventionally calculated.
However, I expect that as a result of the many steps that the Government is taking,
including the duty reductions, the production of excisable goods will go up, and the
 23
loss will therefore be partially offset by a gain of about Rs.1000 crore on this
account. Out of the net loss of revenue in excise duties the Centre’s share will be
Rs.708 crore and that of States Rs.541 crore.
1 3 3 .The proposed restructuring of customs duties results in a net loss of
Rs.3273 crore. This revenue loss will be entirely borne by the Centre.
1 3 4 .The net impact of my proposals on customs and excise duties taken together
amount to a revenue loss of Rs.4522 crore on indirect taxes. The impact on the
Centre’s revenue is a loss of Rs.3981 crore and that on States’ is Rs.541 crore. I
believe this is a temporary loss and is necessary to impart a new dynamism to
India’s economy. In the medium term, this loss will be more than made up by
increased efficiency, competitiveness and faster growth of the economy.
1 3 5 .Copies of notifications giving effect to the changes in customs and excise
duties effective from the 28th February, 1993 will be laid on the Table of the House
in due course.
1 3 6 .Taking into account the revenue loss arising from my proposals relating
to indirect taxes the budget deficit for 1993-94 is estimated at Rs.4314 crore and
the fiscal deficit at Rs.36,959 crore.
1 3 7 .Mr. Speaker, Sir, the world around us is changing very rapidly, becoming
more integrated as a marketplace and also more competitive. Other developing
countries are successfully transforming themselves to meet these challenges. We
cannot afford to stay out of this process, appearing to be absorbed with obscurantist
preoccupations and sectarian divisions. The solution lies precisely in harnessing
the considerable energies of our people, especially the young, to the exciting task
of economic rejuvenation. I have used this Budget as an opportunity to put economic
and social development firmly back on the national agenda. This is the only way to
show the world that India is a nation on the move and is determined to succeed.
1 3 8 .It is India’s destiny to be a major player on the global economic and
political scene. For that we need a vibrant and rapidly expanding economy with
deep and abiding concern for the poor and the under-privileged. Politics has to be
a purposeful instrument for realising our cherished goals. There is no scope for
confrontation or cold war tactics when it comes to dealing with the nation’s social
and economic objectives. We need wisdom, sobriety, firmness of purpose and above
all national unity.
1 3 9 .As Swami Vivekananda used to say there is an element of divinity in each
human being. We have to create an environment in which this divine potentiality
can be mobilised for building a strong economy and a just society. This is the
challenge that our political system must face squarely. I venture to think that this
budget focusses the nation’s attention on this imperative task.
1 4 0 .Sir, I commend the Budget to this august House.
[27th February, 1993]
 1

Budget 1992-93
Speech of
Shri Manmohan Singh
Minister of Finance
29th February, 1992

PART A

Sir,
I rise to present the budget for 1992-93.
2 . The fiscal year now drawing to a close has been a difficult one by any
standards. It has been a year of crisis and of crisis management. It has also been
a year of great economic challenges and bold new initiatives.
3 . Honourable Members would recall that when the new Government assumed
office eight months ago, we inherited an economy on the verge of collapse. Inflation
was accelerating rapidly. The balance of payments was in serious trouble. The
foreign exchange reserves were barely enough for two weeks of imports. Foreign
commercial banks had stopped lending to India. Non-Resident Indians were
withdrawing their deposits. Shortages of foreign exchange had forced a massive
import squeeze, which had halted the rapid industrial growth of earlier years and
had produced negative growth rates from May 1991 onwards.
4. This is the grim legacy we inherited.
5 . Our first and immediate challenge was to arrest the slide and restore
India’s credibility both domestically and in the eyes of the world. To achieve this
objective we had to take immediate measures to avert a default in international
payments and also take steps to restore macro-economic balance in the economy
in the short run, with a view to controlling inflation and reducing the balance of
payments deficit to a manageable level. Our medium term objective was to place
the economy back on the path of high and sustainable growth.
6 . The new Government took several initiatives in pursuit of these objectives.
We took emergency measures to prevent a default in external payments, which
would have been highly disruptive. The previous Government had already decided
to use a part of the gold held by the Reserve Bank of India to mobilise temporary
liquidity abroad. We did not consider it prudent to reverse this decision. But we
promised to redeem the gold at the earliest opportunity and we have kept our word.

1
 2
We began the process of restoring macro-economic balance by seeking to reduce
the fiscal deficit which had grown very large in the previous year. We also embarked
on a medium term programme of structural reform, including new initiatives in
trade policy and industrial policy aimed at improving the efficiency, productivity
and international competitiveness of Indian industry. Our longer term objective is
to evolve a pattern of production which is labour intensive and generates larger
employment opportunities in productive higher income jobs, and reduces the
disparities in income and wealth between rural and urban areas.
7 . Production was bound to suffer in a year of crisis and this has happened
in 1991-92. Agricultural production was below target in the kharif season, but
prospects for the rabi crop look good. Industrial production suffered because of
severe import compression and tight credit conditions. However, the infrastructure
sectors, which are the foundation on which future industrial growth depends, have
done well. Overall, I expect GDP growth in 1991-92 to be around 2.5%. I expect a
distinct improvement in 1992-93, and a return to high growth in 1993-94. However,
this revival can be achieved only if we persevere unflinchingly with the process of
stabilisation and economic reform begun in the current year.
8 . Stabilisation and structural adjustment are never painless or quick,
especially when we are dealing with imbalances and structural rigidities which
have built up over several years. It will take sustained effort, over at least three
years, to bring the economy back to a path of rapid and sustainable growth. A firm
commitment to austerity, the pursuit of excellence and the promotion of efficiency
and productivity for the benefit of the common people has to be an integral part of
this effort. Given our limited resources, our people cannot afford to copy the soulless
consumerism and the wasteful life styles of the affluent countries of the West.
Conspicuous consumption has to be actively discouraged. The virtues of thrift have
to be emphasised. The owners of wealth, as Gandhiji used to say, must learn to
regard themselves as trustees of society. We cannot postpone structural reform
and adjustment, but we must ensure that the burden of adjustment on the poorer
and weaker sections of our society is ameliorated to the maximum possible extent.
We are travelling through difficult and uncharted terrain, where no action is without
attendant risks, and success will not always be immediate. We need patience,
perseverance and national cohesion if we are to succeed.
9 . It has been alleged by some people that the reform programme has been
dictated by the IMF and the World Bank. We are founder members of these two
institutions and it is our right to borrow from them when we need assistance in
support of our programmes. As lenders, they are required to satisfy themselves
about our capacity to repay loans and this is where conditionality comes into the
picture. All borrowing countries hold discussions with these institutions on the
viability of the programmes for which assistance is sought. We have also held such
discussions. The extent of conditionality depends on the amount and the type of
assistance sought. However, I wish to state categorically that the conditions we
have accepted reflect no more than the implementation of the reform programme
as outlined in my letters of intent sent to the IMF and the World Bank, and are
wholly consistent with our national interests. The bulk of the reform programme is
based on the election manifesto of our Party. There is no question of the Government
ever compromising our national interests, not to speak of our sovereignty.
 3
1 0 . Although the full fruit of our policies will take time to materialise, I am
happy to report to the House that we have made substantial progress even in this
short space of eight months. We have achieved our most immediate objective of
restoring India’s credibility and pulling the economy back from the slide into financial
chaos. Our foreign exchange reserves have been rebuilt to about Rs.11,000 crores.
Non-Resident Indians are no longer withdrawing their deposits. We have successfully
concluded arrangements with multi-lateral financing institutions such as the IMF,
the World Bank and the Asian Development Bank to obtain quick disbursing funds
to support the balance of payments in the current year.
1 1 . Inflation remains a difficult problem, and one to which we attach the
highest priority, because inflation hurts the poor and the fixed income earner most
of all. Inflation was accelerating in June 1991, when our Government came to
power, and the annual rate of inflation reached a peak of 16.7% in August 1991.
Since then, the rate of inflation has come down to about 12%, but I am painfully
conscious that this is still far too high. We are determined to bring inflation under
control. This is why the Budget for 1991-92 focussed on the need for fiscal discipline.
I am confident that as we persevere with fiscal discipline in 1992-93, and this we
must do if we want to bring prices under control, the rate of inflation will come
down substantially in the coming fiscal year.
1 2 . Our ability to fight inflation has been considerably enhanced by the
improvement in our foreign exchange reserves. This has enabled us to relax the
restrictions imposed last year on imports, thus ensuring near normal availability of
essential imports in the months ahead. This will help production and ease inflationary
pressure. The comfortable reserves position has also given the Government greater
flexibility to finance additional imports of essential items to deal with shortages
and break inflationary expectations.
1 3 . The Government will remain fully vigilant on the prices front and will use
the Public Distribution System to counter inflation and in particular to protect the
poorer sections of the population from high prices and shortages. The Prime Minister
announced on 1st January this year the launching of the revamped Public
Distribution System in about 1700 of the most backward blocks of the country. We
are determined to ensure that foodgrains and essential commodities reach the poor
and the under-privileged in adequate quantities and at affordable prices.
1 4 . Next to inflation, our major problem in the short term is the management
of the balance of payments. We have averted collapse and gained some flexibility,
but a sustained improvement in our external payments position requires much
more. Our export earnings have suffered badly this year, mainly because of the
disruption of trade with the former Soviet Union, and also because of recessionary
conditions in world markets. As a result, we have not been able to finance our
normal import requirements.
1 5 . There are some who argue that all we need to do to solve our balance of
payments problem is to compress our imports. I would like to point out that import
compression has already been carried to the extreme and any further compression
can only be at the cost of both growth and employment. Imports of non-essential
consumer goods should certainly continue to be discouraged. However, we must
recognise that the only lasting solution to our balance of payments problem lies not
in compressing imports but in a rapid expansion of exports. A growing economy
 4
needs a growing volume of imports of fuel, and other industrial inputs and also of
capital goods embodying modern technology. This is not to deny the importance of
self-reliance, but self-reliance in today’s world of integrated global markets cannot
be achieved merely by reducing import dependence and insulating the economy
from the world. Following that path will only lead to more import controls and
promote inefficiency and corruption. It will perpetuate an environment in which
Indian entrepreneurs will not have the flexibility they need to compete with other
developing countries in world markets. The resulting inability to export will actually
make us more, rather than less, dependent on the outside world. Our vision of a
self-reliant economy should be of an economy which can meet all its import
requirements through exports, without undue dependence on artificial external
props such as foreign aid. I suggest to this august House that this is precisely the
vision of self-reliance as bequeathed to us by Jawaharlal Nehru as elaborated in
the Third Five Year Plan, and translated to the realities of today’s world.
1 6 . While introducing the new trade policy last year, Government had indicated
that it would be our objective to move towards convertibility of the rupee on the
current account. The achievement of convertibility is a sign of economic strength
and true self reliance. We are now ready to take the next important step in this
direction by introducing a new system of partial convertibility. The new system is
designed to provide a powerful boost to our exports as well as to efficient import
substitution. It will further reduce the scope for bureaucratic controls which
contribute to both inefficiency and corruption. It will also greatly reduce the incentive
for illegal transactions in foreign exchange. Under the new system all foreign
exchange remittances, whether earned through exports of goods or services, or
remittances, will be converted into rupees in the following manner: 40% of the
foreign exchange remitted will be converted at the official exchange rate while the
remaining 60% will be converted at a market determined rate. The foreign exchange
surrendered at official exchange rates will be available to meet the foreign exchange
requirements of essential imports such as petroleum and oil products, fertilisers,
defence and life saving drugs. All other imports of raw materials, components and
also capital goods will be made freely importable on open General Licence but the
foreign exchange for these imports will have to be obtained from the market. There
will be a specified ‘negative list’ of raw materials, components and capital goods
which will continue to be importable only against licences. There will be no change
in the import policy for consumer goods which will remain restricted as at present.
Foreign exchange required for other payments on private account including travel,
debt service payments, dividends, royalties and other remittances will also have to
be obtained at the market rate.
1 7 . The new system will replace the system of Eximscrips. There will be no
need to issue Eximscrips for each export transaction as the new system will operate
through the banks. Instead of a premium on Eximscrips, exporters will have the
benefit of the premium on 60% of their earnings in the foreign exchange market.
What is more, the incentive for earning foreign exchange will now be available to
remittances from our workers abroad. There is no reason why our workers, who
earn foreign exchange by the sweat of their hard labour abroad, should be denied
incentives presently given to exporters of goods and professional services. I salute
our workers from Kerala and other states working abroad. What I have announced
today is a small token of our appreciation of their magnificent contribution to
India’s foreign exchange earnings.
 5
1 8 . With these changes we will have achieved a major simplification of trade
policy, eliminating licensing and the associated bureaucratic delays and inefficiencies
over a wide range of items. We will also have introduced a self-balancing system to
manage a large part of the balance of payments. The total volume of imports will be
automatically regulated by the available volume of foreign exchange. Scarcity of
foreign exchange will be reflected in a premium which will accrue to exporters and
to those making remittances thus providing a built in incentive to increase this
flow. The details of the new exchange system are being notified by the Reserve
Bank of India. The changes in trade policy are being notified separately by the
Commerce Ministry.
1 9 . One of the reasons why foreign exchange is diverted to illegal channels is
the illegal import of gold. It is time we took a bold step to recognise the realities of
the situation and legalise the import of gold. Government proposes to allow returning
Indians and NRIs to import 5kg of gold per passenger with a modest import duty
provided the gold as well as the import duty is financed from foreign exchange
earned abroad.
2 0 . Many Honourable Members of this House have suggested that the
Government should introduce a Gold Bond, which would help to mobilise the idle
gold resources of ordinary citizens to supplement official reserves. I had indicated
in Parliament that this should be considered only when the balance of payments
situation improves, and adequate confidence has been built in the capacity of the
Government to manage the economy. This has now been achieved. Our reserves
are large and do not need supplementing, but I see no reason why patriotic citizens
should be denied the opportunity to contribute their mite to the development of
India’s economy. I propose to introduce a scheme under which citizens can obtain
a Gold Bond in return for gold. The bond would be for a period of five to seven
years and would be liquidated by return of gold, or equivalent value, at the option
of the holder. It would enjoy a small interest, which will not attract income-tax. The
bonds will also be free of wealth tax and gift tax. As an added incentive, holders of
such bonds will not be asked any questions about the source of the gold holding.
The Reserve Bank of India is preparing a detailed proposal along these lines.
2 1 . One of the initiatives of the new Industrial Policy is a new approach towards
foreign investment, which can play a vital role in upgrading our technology levels,
integrating our industry into the global economy, and bringing in non-debt resources.
The Government proposes to actively encourage foreign investment in critical
infrastructure sectors where capacities are inadequate and needs for investment
are large. A policy to encourage private investment, including foreign investment,
in the Power sector has already been announced. Another area which is critical for
our future development, and for management of the balance of payments, is the
hydro-carbon sector. Government has already announced that joint ventures will
be permitted in both exploration and development, including development of existing
fields. The Government will welcome proposals for private investment, including
foreign investment, in production, refining and marketing of oil and gas, with a
view to maximising the growth potential of this crucial area.
2 2 . Concern is sometimes expressed that the policy of welcoming foreign
investment will hurt Indian industry and may jeopardise our sovereignty. These
fears are misplaced. We must not remain permanent captives of a fear of the East
 6
India Company, as if nothing has changed in the past 300 years! India as a nation
is capable of dealing with foreign investors on its own terms. Indian industry has
also come of age, and is now ready to enter a phase where it can both compete with
foreign investment, and also cooperate with it. This is the trend all over the world
and we cannot afford to be left out. The House can rest assured that we have
enough policy instruments at our disposal to ensure that enterprises with foreign
equity function in accordance with our national priorities.
2 3 . The new approach to industrial policy calls for a review of regulations
such as the Foreign Exchange Regulation Act, which introduced a great deal of
detailed administrative control over companies where the foreign equity exceeded
40% and also on non-resident Indians. The Reserve Bank of India has recently
liberalised the procedure by granting general exemption from several of these controls
applicable to Indian companies with foreign equity and to non-resident Indians
returning to India. There are other restrictions which prevent Indian companies
and Indian residents from entering into various types of commercial relations with
companies abroad without prior approval. These provisions are out of line with the
needs of today’s economy, where Indian businesses will have to deal extensively
with their counterparts abroad, requiring expeditious decision making. The
Government proposes to introduce comprehensive amendments to the Foreign
Exchange Regulation Act to bring it in line with the requirements of the new policy.
2 4 . In my Budget speech last year I had referred to the importance of financial
sector reform and had announced the establishment of a Committee on the Financial
System. The Narasimham Committee has submitted its report which has been
tabled in Parliament. While commending the progress made by the banking system
in several directions, the Committee has drawn attention to serious problems posed
by the deterioration in the financial health of the system because of low profitability,
poor portfolio quality and inadequate provisioning for bad debts. The Committee
has made comprehensive recommendations for reform covering all aspects of
banking, including the introduction of better capital adequacy norms, better
provisioning for bad debts, rationalisation of the provisions for directed lending
and the associated interest rate structure. The thrust of the Committee’s
recommendations is to move to a more efficient and competitive banking system
including a larger role for the private sector. Many of the recommendations can be
implemented very quickly. Others need further consideration. The Government
proposes to implement the recommendations of the Committee in a phased manner.
2 5 . As a first step in implementing the recommendations of the Narasimham
Committee, the Government has decided to begin a phased reduction in the Statutory
Liquidity Ratio (SLR) which at present locks up large quantities of bank funds in
relatively low yielding Government securities. Accordingly, the SLR on incremental
domestic liabilities of the commercial banks is being reduced from 38.5% to 30%
with effect from 1992-93. This reduction is in line with the proposed reduction in
the fiscal deficit, which will reduce the Central Government’s need to borrow from
commercial banks. It will release funds for banks to expand credit to agriculture
and industry. The market borrowing of the States will not be affected. Steps are
also being taken to develop an active market for Government securities which will
make Government less dependent on statutory borrowing from the banks in future.
2 6 . In view of the decline that has already taken place in the rate of inflation,
 7
it is possible to provide some relief in the interest rates charged by the Banks on
commercial advances. Honourable Members will be pleased to know that the Reserve
Bank of India is separately notifying a reduction in the floor level of interest rates
on commercial advances by one percentage point.
2 7 . Financial sector reform also includes reform of the capital markets, which
will increasingly play a vital role in mobilising and allocating resources from the
public. Several initiatives announced in my Budget speech last year have since
been implemented. The Securities and Exchange Board of India (SEBI), has now
been established on a statutory basis. As we gain experience, additional powers
will be given to SEBI to strengthen its capability. The Government has also issued
guidelines which will govern the operation of new private sector mutual funds.
Government has also decided to give permission to companies with a good track
record to issue convertible debentures or equity to investors abroad and to extend
to these issues the same tax benefits as are available for Offshore Mutual Funds.
This will enable domestic companies to tap the large pool of equity funds available
in world capital markets. We will also consider ways of allowing reputable foreign
investors, such as pension funds, to invest in our capital markets, with suitable
mechanisms to ensure that this does not threaten loss of management control.
2 8 . The role of the Controller of Capital Issues in the Finance Ministry needs
to be reviewed, especially in the context of the emerging industrial and financial
scenario. The practice of Government control over capital issues, as well as over
pricing of issues, has lost its relevance in the changed circumstances of today. It is
therefore proposed to do away with Government control over capital issues including
premium fixation. Companies will be allowed to approach the market directly
provided the issues are in conformity with published guidelines relating to disclosure
and other matters related to investor protection. Government proposes to bring
necessary legislation to implement this decision.
2 9 . In presenting the Budget for 1991-92 I had announced the Government’s
intention to establish a National Renewal Fund with the objective of ensuring that
the cost of technological change and modernisation does not fall too heavily on the
workers. This Fund was intended to provide a social safety net which would protect
the workers from the adverse consequences of technological transformation. The
Government has now established the Fund. The Fund will provide assistance to
cover the cost of retraining and redeployment of labour arising as a result of
modernisation and restructuring, and also provide compensation to labour affected
by restructuring of an industrial unit. Government also proposes to approach
multilateral financial institutions to meet part of the requirement for the National
Renewal Fund. It is estimated that about Rs.1000 crores would be available from
the International Development Association to be used for social safety net schemes
under the Fund including special schemes for unorganised sector workers. In this
context we would work out a scheme to upgrade the technology of handicrafts
which employ a very large number of people in the decentralised sector. Honourable
Members may rest assured that the Government is firmly resolved to protect the
interests of labour while dealing with the problems of industrial sickness and
structural reforms.
3 0 . Agriculture is the foundation of our national prosperity and no strategy of
economic development can succeed in our country if it does not ensure rapid
growth of production and employment in agriculture. Nor can we hope to provide
 8
sufficient jobs for our growing rural labour force unless we can transform the
economy of our rural areas. This calls for a multi-pronged strategy involving effective
implementation of land reforms, large investments in irrigation and drainage,
improvement in water management systems, control of land degradation,
strengthening of the credit system and improvements in agricultural extension and
research. Much of this effort has to be made by the State Governments since
Agriculture is a State subject, and it is our hope that State Governments will give
these issues the highest priority. The Centre on its part is firmly committed to
continued funding and revamping of the various poverty alleviation schemes, which
are a major element in our development strategy.
3 1 . Special attention needs to be paid to supporting innovative ideas for
generating income and employment in rural areas through support to various types
of agri-business. As an experimental measure, Government proposes to set up a
Small Farmers’ Agri-Business Consortium as an autonomous corporate entity funded
by the Reserve Bank of India, NABARD and IDBI. The Consortium will include
representation from various Development Boards dealing with individual crops and
Public Sector Corporations dealing with agriculture and agro-industries, private
sector companies, banks, scientific organisations and farmers’ associations. The
Consortium will function on the principles of economic efficiency, environmental
soundness and social equity and will organise 12 major projects in 1992-93 in
different parts of the country, based on a mix of enterprises with active participation
by State Governments and farm families. The programme will be expanded as we
gain experience. We must begin a new chapter in our agricultural history where
farm enterprises yield not only more food, but more productive jobs and higher
income in rural areas.
3 2 . I now turn to the Revised Estimates for 1991-92. Our major macro-
economic objective in 1991-92 was to reduce the fiscal deficit in order to restore
macro-economic balance in the economy. I am happy to inform the House that we
have succeeded in this objective.
3 3 . The Budget Estimates for 1991-92 provided for a total expenditure of
Rs.113,422 crores. Unlike in the past, when Revised Estimates of expenditure
showed substantial increases over Budget Estimates, this year they are marginally
lower by Rs.320 crores. On the revenue side there has been a large shortfall of Rs.
3760 crores in customs revenue owing to the severe import compression during
most of the year, but this has been partially offset by higher realisation from excise
duties and income tax so that the shortfall in gross tax revenues is Rs.1869 crores.
The, non-tax revenues and capital receipts are also significantly higher. As a result
total receipts are estimated at Rs.106,070 crores which is higher than the Budget
Estimates of Rs.105,703 crores.
3 4 . The Budget deficit in the Revised Estimates for 1991-92 is Rs.7032 crores
which is lower than the Budget Estimate of Rs.7719 crores, and much lower than
in 1990-91, when the budget deficit reached Rs.11,347 crores. The fiscal deficit,
which takes into account all borrowing, is Rs.37,792 crores in the Revised Estimates.
This is almost identical to the figure of Rs.37,727 crores in the Budget Estimates,
and is much lower than Rs. 44,650 crores in 1990-91. With this, we have successfully
reduced fiscal deficit from about 8.4% of GDP in 1990-9 to around 6.5% in
1991-92.
 9
3 5 . The reduction in the deficit was made possible by enforcement of strict
discipline on the expenditure side. Certain additional expenditure provisions became
necessary after the Budget was presented. The most notable of these was the
additional requirement for fertiliser subsidy, consequent on the decision to restrict
the price increase from 40% proposed initially to only 30%, and also the fact that
the rupee cost of imported fertilisers was higher than assumed in the Budget
Estimates. As a result, the provision for fertiliser subsidy has been increased from
Rs.4000 crores in the Budget Estimates to Rs.4800 crores in the Revised Estimates.
Even this amount does not fully cover the subsidy claims for 1991-92 and some
amount will spill over into the next year as is normal commercial practice. A separate
provision of Rs.405 crores has been included in the Revised Estimates for the
scheme for supplying fertilisers to small farmers at the pre-revised prices.
3 6 . I have also had to increase the Budget provision for food subsidy by
Rs.250 crores on account of the delay in increasing issue prices. An extra amount
of Rs.550 crores has also been provided for the export subsidy. This subsidy was
abolished on 3rd July 1991, but the claims in the pipeline appear to be much more
than was originally anticipated. These demands for additional expenditure have
however been offset by savings located within the sanctioned Budgets of various
Ministries.
3 7 . The difficult resource position in 1991-92 had its impact on Plan
expenditure. Overall resource constraints forced the Government to restrict Budget
support for the Central Plan and the Revised Estimates for this item are 7% less
than Budget Estimates. Despite the marginal reduction, efforts were made to ensure
that projects of high priority are not affected, and the reduction has been achieved
mainly by regulating the release of funds to match the actual progress of schemes
on the ground. However, Central Assistance for State and UT Plans was stepped up
by Rs. 651 crores, mainly on account of larger rupee requirements of externally
aided projects.
3 8 . The House will be happy to note that even though the Central Government’s
own expenditure in the Revised Estimates is below the Budget Estimates, the total
transfer to the States by way of share of taxes, and Central Plan assistance is
higher than the Budget Estimates by Rs. 1683 crores. This more than offsets the
shortfall in small savings loans of Rs.1365 crores. We have not allowed our fiscal
difficulties to come in the way of meeting our obligations to the States in any way.
3 9 . I now turn to the Budget Estimates for 1992-93. The Eighth Five Year
Plan commences from 1st April 1992 and aims at the objective of achieving near
full employment in a period of ten years. The investment requirements of every
sector are large, and it is important that Plan allocations should enable implementing
agencies to make a good start, especially in the infrastructure sectors. However we
have had to work within the limits imposed by the continuing need to restore
macro-economic balance, which is essential if we are to contain inflation and manage
the balance of payments. This calls for a further reduction in the fiscal deficit in
1992-93. Larger Plan expenditure can be accommodated within a smaller fiscal
deficit if, apart from increasing tax and non- tax revenues, Government’s non-Plan
expenditure can be contained. I must admit that this has been a daunting task.
4 0 . Interest charges are the largest single item of non-Plan expenditure and
account for Rs. 32,000 crores in the Budget Estimates for 1992-93. This represents
 10
an increase of Rs. 4750 crores over the Revised Estimates for 1991-92, which is
larger than the increase in total non-Plan expenditure of Rs. 4405 crores. This
means that in 1992-93 all other items of non-Plan expenditure taken together are
actually lower than in the current year. Honourable Members will appreciate that
interest charges are a committed expenditure, reflecting the cumulative effect of
past deficits. This item can be controlled only by reducing the reliance on borrowed
funds, and I intend to do this by reducing the fiscal deficit for 1992-93. However,
the benefit of this action will be felt only by Finance Ministers presenting the
Budget in future. I venture to think that my successors as Finance Minister will be
able to sleep far more peacefully than has been my lot thus far.
4 1 . For the Defence Services I am providing Rs. 17,500 crores, an increase of
7% over the provision of Rs. 16,350 crores in the current year. Combined with
some economies and tight expenditure control, I am confident that this allocation
will enable our armed forces to fulfil their responsibilities in ensuring the security
and defence of the nation.
4 2 . In the election Manifesto of our Party, we had committed ourselves to find
an innovative solution to the long standing demand of Defence pensioners for ‘One
Rank One Pension’. An Empowered Committee, under the chairmanship of Raksha
Mantri and comprising ex-servicemen and Members of Parliament representing the
major political parties has looked into the issue and its recommendations have
been accepted by the Government. Accordingly, Government has sanctioned ad
hoc increase in the pension rates applicable to Defence personnel. This decision
effective from 1.1.92 will benefit over six lakh Armed Forces pensioners of all
ranks, of whom over two lakhs are Jawans, some of whom retired after 1.1.86.
Government has also ordered grant of ex-gratia Family Pension to the families of
deceased Reservists not in receipt of Family Pension. These benefits will entail an
expenditure of over Rs. 120 crores per annum at current rates of dearness relief.
4 3 . Subsidies are another important component in non-Plan expenditure. Last
year, Food, Fertiliser and Export subsidies were the three major subsidies and
their rapid growth has been one of the main factors behind the unchecked growth
of non-Plan expenditure. We made an important change this year by abolishing
export subsidies. However, some subsidy payments still remain in the pipeline, and
I am providing Rs. 480 crores on this account.
4 4 . Food subsidy is a part of our system of food security for the poorer and
weaker sections of our population and is a basic element in our social policy. I am
providing an allocation of Rs. 2500 crores on this account which should be sufficient
for the normal requirements of the system. The revamped Public Distribution System
being implemented in 1700 backward blocks will require an additional allocation of
Rs. 250 crores on account of the additional subsidy and also the cost of constructing
a large number of godowns with a capacity of 3 lakh tonnes. The allocation for
these items will be augmented in the course of the year to meet the requirements
fully.
4 5 . This brings me to fertiliser subsidy which has grown into the largest
single subsidy in our system. There is no doubt that fertiliser is an essential
ingredient for agricultural production, and agricultural development is vital not
only for economic growth in general, but also to ensure rising levels of income and
employment in rural areas. In 1980-81, the fertiliser subsidy was 12% of the total
allocation in the Central and State Plans taken together for Agriculture, Rural
 11
Development, Special Area Programmes and Irrigation and Flood Control. It increased
to 33% in 1991-92. A Parliamentary Committee is currently looking into the whole
issue of fertiliser pricing and subsidy including alternatives for restructuring the
subsidy. I propose to wait for the report of this Committee and take a view, on this
matter later in the year. Taking all factors into account, I am making a provision of
Rs. 5000 crores for fertiliser subsidy in 1992-93.
4 6 . Other items of non-Plan expenditure have been tightly constrained in the
allocations provided to keep the fiscal deficit within manageable levels. I have
requested my colleagues in all Ministries to review the expenditure control system
in their Ministries to ensure that every possible step is taken to enforce economy
so that the provisions being made in the Budget Estimates are not exceeded. As in
the last two years, in the Budget Estimates for 1992-93 also no separate provision
is being made for the additional dearness allowance installments that may become
payable in that year. All Ministries will be expected to absorb the additional
expenditure on this account within the approved Budget provisions.
4 7 . With these provisions, the total allocation for non-Plan expenditure stands
at Rs.84,475 crores, higher by Rs. 4,405 crores compared to the Revised Estimates
for 1991-92. But then, as I mentioned earlier, the increase in interest expenditure
alone is Rs.4,750 crores. Honourable Members would appreciate that the large
requirements for interest and subsidies make it difficult to reduce non-Plan
expenditure further and this limits the extent to which the budget can support
Plan expenditure. Nevertheless, I have tried to provide adequately for all the critical
areas of Plan expenditure.
4 8 . Central assistance for the Plans of States and Union Territories is being
stepped up from Rs. 14,710 crores in Budget Estimates 1991-92 to Rs. 16,111
crores in 1992-93. This increase of Rs. 1401 crores, coupled with an increase of
Rs. 2237 crores in the share of taxes, even at the existing levels of taxation, should
enable the States to substantially increase the allocations for the various Plan
programmes.
4 9 . The total Central Sector Plan outlay for 1992-93 has been fixed at Rs.48,407
crores. This is based on budgetary support for the Plan of Rs. 18,501 crores, and
a contribution of Rs. 29,906 crores from internal and extra-budgetary resources of
the various undertakings/enterprises. The internal and extra-budgetary resources
show a sharp increase of 25% over the current year’s level and this is critical to
achieve the substantial increase in the Plan outlays of the various infrastructure
sectors. Thus the outlay for the Railways stands increased from Rs. 5325 crores in
the current year’s Budget Estimates to Rs. 5700 crores in the next year’s Plan;
Shipping from Rs. 617 crores to Rs. 1222 crores; Civil Aviation from Rs. 433 crores
to Rs. 1036 crores; Telecommunications from Rs. 3203 crores to Rs. 4500 crores
and Fertiliser industry from Rs. 411 crores to Rs. 1234 crores. The outlay for
Power has been fixed at Rs.6411 crores, and for Petroleum at Rs. 6054 crores.
5 0 . The allocation for Rural Development Programmes in the Budget is Rs.2610
crores, which is somewhat lower than the Budget Estimates of 1991-92 though it
is higher than the Revised Estimates. This however presents only part of the total
effort we are making in support of the weaker sections in our rural areas. The
Government is deeply conscious of its special responsibility to protect the poorer
sections of our society, especially in rural areas from the burdens that would
otherwise be forced upon them as the economy goes through the process of macro-
 12
economic stabilisation and economic restructuring. It is therefore proposed to
earmark an additional allocation of Rs. 500 crores from the corpus of the National
Renewal Fund for employment generation schemes to supplement the normal
employment generation through the Jawahar Rozgar Yojana, particularly in those
areas where the pressure for such employment is seen to be more than in earlier
years. The additional allocation of foodgrains, through the Public Distribution System
in the 1700 most backward blocks at a subsidised rate is another important step
for protecting these vulnerable sections of society from the pressure on prices.
Taking the proposed additional allocations on these accounts together with the
Plan provision in the Budget, the total allocation to rural development would show
a substantial increase over the current year.
5 1 . The Plan outlay for the Family Welfare programme has been stepped up
from Rs. 749 crores in the current year to Rs. 1000 crores next year reflecting the
Government’s firm commitment to tackle the population problem. The outlay for
the programmes of the Ministry of Welfare has also been increased from Rs. 479
crores to Rs. 530 crores reflecting fully Government’s commitment to protection of
the weaker sections of society.
5 2 . Despite severe resource constraints, most of the other sectors which are
largely dependent on budgetary support for their Plan outlays have been provided
at least the same order of budget support as in the current year. I would have liked
to provide more but we also have to live within the constraint of available resources.
I would particularly like to point out that we must give up the practice of judging
the quality of our Plan effort by the increase in the outlays provided for in the
Budget. Our resources are scarce and there is a vast unexploited potential for
improving the productivity of available resource use. There has to be much tighter
scrutiny of various claims on resources and much greater emphasis on how to get
more out of available resources. We cannot simply spend our way into prosperity.
5 3 . Gross tax receipts at existing rates of taxation are estimated next year at
Rs.75,541 crores compared to Rs. 67,300 crores in the current year’s Revised
Estimates. The States’ share of taxes is placed at Rs. 18,492 crores showing an
increase of Rs.1293 crores over the current year ’s Revised Estimates. Non-tax
revenues next year show an increase of Rs. 2689 crores over the current year ’s
Revised Estimates. This includes Rs. 416 crores of deferred dividends from the
Railways. Next year ’s estimates assume an increase of Rs. 423 crores from dividends
and profits of public sector enterprises. Unlike in the past, it is proposed to ensure
that these enterprises transfer as dividend or surplus profits, a reasonable part of
their post tax profits instead of determining the dividend payable merely on the
basis of capital investment. The Reserve Bank of India will also be transferring a
larger share of its profits.
5 4 . Under Capital Receipts, I have taken credit for market borrowing of Rs.
5000 crores. This is significantly lower than the amount of Rs. 7500 crores in the
Budget Estimates for the current year and reflects our objective of reducing the
fiscal deficit and consequently the recourse to borrowed funds. External assistance
including grants, but net of repayments, is estimated at Rs. 5374 crores.
5 5 . The disinvestment in public sector equity undertaken in the current year
has been successfully completed. There is scope for continuing this process in
1992-93 with a view to raising non-inflationary resources for development. I am
 13
accordingly taking credit for a receipt of Rs. 2500 crores from further disinvestment
of equity holding in public sector enterprises. In addition to this amount, Government
will consider a further sale of equity of Rs. 1000 crores to provide resources to the
National Renewal Fund in 1992-93, which can be used for various schemes of
assistance to workers in the unorganised sector, including women workers, who
may be adversely affected by the process of economic restructuring. These resources
will also be used to fund the special employment creating schemes in backward
areas which I have mentioned earlier.
5 6 . Thus, at existing rates of taxation, total receipts are placed at Rs. 114,
215 crores and total expenditure at Rs. 119,087 crores. This leaves a gap of Rs.
4872 crores.
PART B
5 7 . While presenting the budget last year, I drew attention to the need for a
comprehensive reform of both the direct and indirect tax system and had explained
that lack of time had made it difficult to do as much as I would have liked in this
regard. Subsequently, the Government set up a Tax Reforms Committee under the
Chairmanship of Dr. Raja J. Chelliah. The Committee has since submitted its
Interim Report. The Report distills the wisdom of some of our most distinguished
experts on the complex subject of reform of both direct and indirect taxes and I
have drawn heavily upon it in framing my Budget proposals. The summary of
recommendations contained in the Report is separately being placed in Parliament
to enable fuller appreciation of the analysis of the Committee and the rationale for
its recommendations.
5 8 . There is a consensus among fiscal experts, based on experience gained all
over the world, that a moderately progressive tax structure combined with strong
enforcement is the best way of encouraging honesty and voluntary tax compliance.
The Chelliah Committee has endorsed this view and has recommended that our
direct tax system would be more effective if the income tax regime had lower rates
of taxation, with a narrower spread between the entry rate and the maximum
marginal rate, and a minimum of tax incentives. I agree with this assessment and
I propose to restructure the personal income tax in the following manner. I propose
to enhance the exemption limit for income tax levy from Rs.22,000 at present to
Rs.28,000. This will provide substantial relief to the taxpayers in the lower income
group and I am sure it will be welcomed by the Honourable Members, many of
whom had urged such an adjustment even last year. I hope this will convince them
that I am an attentive and sensitive listener to what goes on in this august House.
I further propose that there will only be three tax rate slabs, with the entry rate of
20 per cent. applicable upto Rs. 50,000, a middle slab of 30 per cent. upto
Rs.1,00,000 and a maximum rate of 40 per cent. above Rs.1 lakh. A corresponding
revision is also being made in the case of specified Hindu undivided families. Because
of the severe resource constraints, I am compelled to retain the surcharge at 12 per
cent. for one more year; but this will be payable only by those whose income
exceeds rupees one lakh.
5 9 . With the reduction in tax rates, a number of tax exemptions, which
conferred large benefits on higher income tax payers are no longer justified. I,
therefore, propose to abolish the deductions under sections 80L, 80CCA and 80CCB
 14
of the Income-tax Act. The computation of income from house property is also
being rationalised in respect of certain deductions presently being allowed. The
provision under section 88, which provides for tax rebate in respect of specified
savings such as Life Insurance, Provident funds etc. will however continue, as
these are normally availed of by fixed salary earners. In fact, I propose to widen its
scope by including within its purview contributions to Pension Funds set up by the
National Housing Bank and by Mutual Funds. I am also providing that those who
wish to continue contributing to the savings schemes which until now qualified for
deduction under section 80CCA and 80CCB, can get tax rebate under Section 88
of the Income-tax Act.
6 0 . It is said that the child is the father of man, but some of our taxpayers
have converted children into tax shelters for their fathers. The tax law provides for
clubbing of income from gifts given by parents but this does not apply to other
income, including income from other gifted assets, and the practice of cross gifting
is widely used to evade clubbing. The Chelliah Committee has recommended that
in order to plug this loophole, which accounts for a substantial leakage of revenue,
the income of a minor child should be clubbed with that of the parent. There is
merit in this suggestion and I propose to accept it. Recognising however the existence
of a number of child prodigies, especially child artistes in our country, I propose to
exclude their professional income, as also any wage income of minors, from the
purview of such clubbing. The practice of clubbing the income of minor children
with that of the parent for tax purposes is in vogue in a number of countries.
6 1 . The revenue loss on account of the restructuring of income-tax rates as
traditionally estimated will be Rs.1500 crores. However, this will be offset by the
proposed abridgement in the concessions and tax exemptions and the change in
the tax treatment of minor ’s income. If, as I expect, lower tax rates will lead to
better tax compliance, there will be a net revenue gain even though it is not possible
to quantify it. If tax-payers cooperate with me and revenue earnings go up
significantly, I propose to reward the tax-payers with a further cut in income tax
rates. The ball is now in their court.
6 2 . In a country with a population of over 800 million, hardly 7 million persons
pay income and corporate tax. It is therefore necessary to attract new taxpayers
into the tax net. With this end in view, I propose to introduce a presumptive tax
system in respect of shop keepers and other retail traders with an annual turnover
below Rs. 5 lakhs. In order to enable them to avoid the difficulty of maintaining
detailed account books, filing a complicated tax return and going through the
normal assessment procedure, a simplified scheme has been worked out under
which the taxpayer will give only brief particulars of his turnover and pay just
Rs.1400 as tax for that year. This should enable potential taxpayers in this category
to overcome their psychological hesitation of getting into the tax system. The scheme
is being introduced on a purely optional basis and is intended only for those who
may have taxable income and wish to avail of this simplified procedure. With the
increase in the exemption limit to Rs.28,000, those with a turnover of less than Rs.
2.5 lakhs to Rs.3 lakhs may well find that they do not have to pay this presumptive
tax.
6 3 . The present tax treatment of long term capital gains has been criticised
on the ground that the deduction allowed in computing taxable gain is not related
to the period of time for which the asset has been held. It does not take into
 15
account the inflation that may have occurred over time. The Chelliah Committee
has suggested a system of indexation to take care of the problem and I propose to
accept its recommendation. Taxable capital gains will be computed by allowing the
cost of the asset to be adjusted for general inflation before deducting from the sale
proceeds. The adjustment factor for each year will be notified by the Central
Government. The long term capital gains thus computed will be taxed at 20 per
cent. in the case of individuals and HUFs, 40 per cent. in the case of companies,
firms, associations of persons and bodies of individuals, and 30 per cent. in the
case of others. The new system will favour those whose capital gains accrue over a
longer period, while those making capital gains over a shorter period will pay a
higher tax. This is as it should be. The cut off date for valuation is also being
shifted from 1st April, 1974 to 1st April, 1981. With these changes, I propose to
withdraw the standard deduction in computing taxable capital gains and also the
exemptions under section 54E for capital gains invested in specified assets and
section 53 in respect of capital gains arising from sale of residential house.
6 4 . 1While I am simplifying the income-tax structure, I should extend some
concessions directly to certain categories of taxpayers who deserve sympathetic
consideration from the Government.
6 4 . 2Many individuals have to maintain handicapped dependants which often
imposes a heavy burden upon them and this is a burden which we should lighten
as much as we can. I therefore propose to increase the deduction available to such
persons from Rs.6,000 at present to Rs.12,000 per year. Further, the scope of this
tax concession is being made available to all taxpayers irrespective of their income.
6 4 . 3Women who take up employment deserve special consideration and
encouragement. I, therefore, propose to increase the standard deduction from
Rs.12,000 to Rs.15,000 in the case of working women having total income upto
seventy five thousand rupees. I hope this will convince Honourable lady members
of this House about my commitment to the cause of social and economic uplift of
Indian women. The only quid pro quo I expect from them is to defend the budget
regardless of their party affiliations.
6 4 . 4Taking note of the financial difficulties often encountered by persons in
old age and as a token of my regard for such senior citizens, I propose to give a tax
rebate of 10 per cent. on the net tax payable by persons who have completed 65
years of age and whose gross total income is below Rs.50,000.
6 4 . 5Having regard to the fluctuating nature of income earned by authors,
playwrights, artists, musicians, actors and sportsmen and in recognition of their
contribution to the enrichment of the cultural life of the nation, the tax rebate for
them in respect of specified savings under section 88 of the Income-tax Act will be
increased from 20 per cent. to 25 per cent.
6 4 . 6The victims of the Bhopal Gas Disaster are to get compensation on the
basis of the Supreme Court judgement. Having regard to the human dimensions of
the tragedy, I propose to exempt, in all cases, the compensation received by such
recipients from income tax liability.
6 4 . 7I have received several representations for widening the scope of exempting
medical expenses for both salaried and self-employed persons. I propose to
substantially liberalise the provisions relating to hospitalisation and medical
 16
insurance. Tax benefits to salaried persons will no longer be limited to treatment in
a few government recognised hospitals only. Similarly, for self-employed persons,
the deduction available for medical insurance is being enhanced from Rs. 3,000 to
Rs. 6,000.
6 4 . 8Exemption from income-tax is now available to the employees of the public
sector on payments made under the Voluntary Retirement Schemes. I propose to
extend the benefit of the exemption, subject to certain guidelines, to the employees
in the private sector as well.
6 5 . There has been a long standing criticism that by subjecting the income of
both partnership firms as well as the partners to taxation, we are engaging in
double taxation. The Chelliah Committee has also stressed that double taxation in
this regard should be avoided. I agree that we should avoid double taxation and I
propose, as a measure of relief, to treat the firm as a separate tax entity and do
away with the taxation of the same income in the hands of partners. I propose to
allow deduction towards interest and salary payments made to partners from the
income of the firm and then tax the balance income in the hands of the firm at a
flat rate of 40 per cent.. The proportion of deduction allowed decreases with the
income level of the firm and is so designed that the total tax incidence on small
firms and professional firms will be reduced. The partners will not be taxed on
their share in the income of the firm though they will be liable to pay tax on salary
and interest income. This method will result in enormous simplification from the
point of view of taxpayers as well as tax administration as the proposed scheme will
do away with complexities, associated with the procedure relating to registration of
firms, rectification of partners’ assessments when firms’ assessments are revised,
etc.
6 6 . Last year, I introduced provisions relating to tax deduction at source in
respect of interest on term deposits with banks and commission payments. There
has, however, been considerable criticism from taxpayers about the implementation
of these provisions. I have also received representations from a number of Members
of Parliament seeking withdrawal of these provisions. The system of tax deduction
at source is a useful tool and one of the well recognised methods of enforcing tax
compliance in many countries. However, a harassed Finance Minister has to be
sensitive to the opinions of Honourable members of Parliament even when they
differ from his own convictions. Therefore, I propose to withdraw these two provisions.
6 7 . The Wealth-tax Act, 1957 has far too many exemptions making its
administration enormously complicated. The valuation of certain assets such as
shares also presents problems, since very high market values reflecting speculative
activity can lead to a heavy burden on shareholders who are long term investors.
There is also no distinction at present between productive and non-productive
assets. The Chelliah Committee has suggested that, in order to encourage the
taxpayers to invest in productive assets such as shares, securities, bonds, bank
deposits, etc. and also to promote investments through Mutual Funds, these financial
assets should be exempted from wealth tax. Wealth tax should be levied on
individuals, Hindu undivided families and all companies only in respect of non-
productive assets such as residential houses including farm houses and urban
land, jewelry, bullion, motor cars, planes, boats and yachts which are not used for
commercial purposes. The Committee has further suggested that such tax should
be at the rate of one per cent., with a basic exemption of Rs.15 lakhs. I propose to
 17

accept this recommendation and I hope this change will encourage investments in
productive assets and discourage investment in ostentatious non-productive wealth.
6 8 . Earlier in my speech I have referred to the importance which the
Government attaches to the capital market and the special role of mutual funds
including private sector mutual funds. In order to treat all mutual funds alike in
tax matters, I propose to exempt from income tax mutual funds in both public
sector and private sector recognised by the Securities and Exchange Board of
India. I had also referred to the scheme permitting Indian Companies to issue
convertible bonds and equity to investors abroad. I propose to tax the income and
capital gains from these issues at a concessional rate of 10 per cent., as is applicable
to Offshore mutual funds. It is hoped that these measures will give a new thrust to
the capital market in the country.
6 9 . Last year, I had extended expenditure tax to cover air-conditioned
restaurants in order to mop up additional resources. I have received several
representations that this provision falls heavily on innumerable restaurants and
small establishments which are patronised mainly by the middle class. It has been
suggested that air conditioning in restaurants, unlike in homes, is no longer a
luxury item of the rich. The largest number of such complaints have come from
Bombay. Having lived in Bombay for two and a half years, I have special regard for
the citizens of this great city. This has been reinforced by their voting behaviour in
the recent elections to the Municipal Corporation. I, therefore, feel a special obligation
to respond. I propose to withdraw this levy as far as the restaurants are concerned.
However, I have made certain changes in the scope of the Expenditure-tax Act
relating to hotel receipts. I propose to enhance the qualifying limit for liability
relating to room charges of the hotel from the present Rs.400 per day to Rs.1200
per day. In view of the exchange rate adjustments undertaken recently, there is no
longer any need for exempting expenditure made in foreign exchange from the tax.
I am, accordingly, withdrawing this exemption.
70 . With a view to providing support to the cooperative sector, I propose to
exempt all cooperative societies including urban cooperative societies engaged in
the business of banking from the purview of Interest-tax Act.
7 1 . I recognise the need for a reform of the corporate tax system. This is also
an area where rates of taxation need to be lowered and I would like to give advance
notice of my intention to begin lowering them as soon as possible. However, as the
detailed recommendations of the Chelliah Committee on corporate taxation are yet
to be received, I propose to defer major restructuring in this area until after I have
received its recommendations. Accordingly, for the present there will be no change
in the rate structure as well as the surcharge. In this budget, I propose to make
just two changes. Ordinarily, depreciation and investment allowance carried forward
from earlier years is set off against the current income. In line with the rationalisation
of depreciation allowance brought about last year, I propose that in respect of
assessment year 1992-93, the quantum of set off for carried forward depreciation
and investment allowance in the case of companies, where such amount exceeds
Rs.1,00,000, shall be limited to two-third of such amount and the remaining one-
 18
third will be allowed to be adjusted in the assessment year 1993-94. Further,
having regard to the widespread criticism that the Income-tax Act has artificial
ceilings in regard to certain business expenses, I am liberalising some of the items
on the basis of the recommendation of the Chelliah Committee.
7 2 . Having regard to the complexities in tax laws, I have been receiving
representations that the Government should give Advance Rulings whenever a
taxpayer has doubts about the tax liability in respect of intended transactions. This
practice obtains in a number of countries. There are certain practical difficulties in
implementing such a suggestion. However, in the interest of avoiding needless
litigation and promoting better taxpayer relations, a scheme for giving Advance
Rulings in respect of transactions involving non-residents, is being worked out and
will be put into operation soon. The scope of this can be extended subsequently on
the basis of experience gained. The Government is also planning to set up the
National Court of Direct Taxes in order to ensure that litigation in direct tax matters
is settled expeditiously. Along with this, the Government would also like to bring
forward, as soon as possible, a Bill on Direct Taxes Code, integrating therein all the
three direct taxes so as to make the law easily understandable and tax administration
simple.
7 3 . I do not propose to take up the time of the House with other minor changes
in the Direct Tax Laws.
7 4 . My proposals on direct taxes are estimated to yield a net revenue gain of
Rs. 795 crores. Of this amount, Rs. 435 crores will accrue to the States.
7 5 . I now turn to the proposals relating to indirect taxes.
7 6 . A long standing complaint of our industry, and of experts in trade policy
is that our customs tariff rates are too high and increasingly out of line with the
trends in our competitor countries, all of whom have reduced tariffs to very moderate
levels. My colleague the Honourable Commerce Minister has repeatedly told me
that we cannot expect to compete with these countries in world markets if we
persist with high tariff rates which have the effect of creating a high cost industrial
structure. This is in line with the directions I had indicated in my budget speech
last year. The Chelliah Committee, which was asked to look into all aspects of
customs duties, has recommended reduction in the general level of tariffs, a reduction
in the dispersion of the tariff rates and a rationalisation of the system with abolition
of numerous end-use exemptions and concessions. The Committee has also rightly
suggested that the process of reform should be gradual, so as to moderate the
impact of the adjustment, both in terms of possible revenue loss and the pace at
which domestic industry is exposed to competition. I propose to act on these
recommendations by making a substantial start in this budget on reforming the
customs tariff structure.
7 7 . Last year I had begun the process of reducing import duties by lowering
the ad valorem rates of basic plus auxiliary duties of customs to a maximum of
150%. I now propose to lower the peak tariff level further by reducing the basic
plus auxiliary rates of import duties (inclusive of specific duties) to a maximum of
110% with the exception of passenger baggage and alcoholic beverages. The loss of
revenue on account of this proposal as traditionally estimated is Rs. 1700 crores,
though I feel it could be much lower in practice.
 19
7 8 . My next proposal relates to the duty on capital goods. The general duty on
capital goods, including project imports, is currently at 80% which is below the
peak rate of 110%. However, there is a good case for giving priority to reducing the
duty on capital goods because high duty on capital goods constitutes a permanent
increase in the cost of production for the life of the unit. In order to encourage new
investment in export oriented industries, we should move to a lower duty rate on
capital goods at an accelerated rate. I, therefore, propose to reduce the duty rate on
project imports and general machinery from 80% to 60%. In the case of capital
goods including project imports for electronics industry, I propose to reduce the
import duty from 60% to 50%. In relation to capital goods for projects of coal
mining and crude petroleum refining, I propose a deeper reduction in the import
duty prescribing a uniform rate of 30%. In the case of power projects, the present
concessional duty rate of 30% or 40% is being rationalised to a uniform rate of
30%. I also propose to reduce the import duty on other capital goods currently
attracting duty above 80% by 10 percentage points. The existing concession in the
duty rates available to the components of specified machinery enabling those items
to be imported at rates below the rate applicable to the machinery is proposed to
be continued. These changes will not adversely affect the competitive position of
the Indian capital goods industry especially in view of the exchange rate adjustment
effected last year. These proposals involve a loss of revenue of about Rs.840 crores.
7 9 . In view of the reduction of tariff peaks, I have also taken the opportunity
to remove some of the end-use notifications for concessional duty imports. In this
process of rationalisation, some duties may go up marginally. However, in view of
the overall reduction of duty rates, industry should be able to absorb such marginal
increases.
8 0 . In my last budget I had proposed certain rationalisation of the rates of
auxiliary duty of customs. I propose to further rationalise the auxiliary duty structure
by reducing the number of duty slabs to four. The loss of revenue on this account
is estimated at Rs. 125 crores.
8 1 . Agriculture is the bedrock on which our economic development depends
and the vital inputs for this sector have always been accorded a preferential tax
treatment. In line with this principle, I propose to reduce the duty rate on 15
specified pesticides from 110% at present to 75%, by adding them to the list of
pesticides eligible for this concession. I also propose to reduce the import duty on
two pesticide intermediates from the present level of 120% to 65%. So also I propose
to exempt three specified pesticide intermediates completely from excise duty. These
proposals involve a revenue loss of about Rs.8 crores.
8 2 . Successful agricultural development calls for injection of new seeds which
can increase productivity and imported seeds and planting material can help in
this process. I, therefore, propose to fully exempt from import duty, oil seeds, seeds
of vegetables, flowers and ornamental plants; tubers and bulbs of flowers; cuttings
or saplings of flower plants; and seeds of fruit-plants and pulses, for the purpose
of sowing and planting. In order to ensure efficient transplanting of seedlings, I
also propose to reduce the import duty on rice transplanters from 80% to 40%.
8 3 . The petrochemical industry suffers from high duty rates on certain basic
feed stocks which are the building blocks of the industry. There is a case for duty
reduction and rationalisation in this area. I, therefore, propose to reduce the import
duty on propylene from 120% to 80%, on butadiene from 55% to 40% and on
benzene from 40% to 25%. I also propose a uniform import duty of 40% for ethyl
 20
benzene and styrene which are essential inputs for the manufacture of polystyrene.
Similarly, I propose to reduce import duty on certain specified feed stocks which
find use in the manufacture of polyethylenes from 120% to 40%. The loss of revenue
on account of the proposals would be around Rs.26 crores.
8 4 . As a measure of relief to the asbestos cement industry which serves the
housing, water supply and irrigation sectors, I propose to reduce the import duty on
asbestos fibre from 90% to 70%. The proposal involves a loss of revenue of Rs.18
crores.
8 5 . Films in our country have become an important vehicle of national
integration. I have therefore to worry about the economic health of this important
industry. In order to give relief to the film industry, which is facing increasing
competition from cable TV and video, I propose to reduce the import duty on
unexposed colour negatives of cinematograph film by 20 percentage points from
the existing level. The loss of revenue involved in the proposal is Rs.8 crores.
8 6 . I propose to reduce the import duty on specified items of machinery required
for the manufacture of fly ash and phosphogypsum bricks and building components.
8 7 . Last year as a relief to the newspaper industry I had exempted standard
newsprint fully from customs duty. I feel my support base in the Press could do
with some strengthening. I now propose to fully exempt glazed newsprint which is
presently attracting import duty of Rs.550 per metric ton from payment of duty.
The proposal involves a revenue loss of about Rs. 3 crores.
8 8 . I have already mentioned that import of gold by Indians including persons
of Indian origin as part of their baggage will now be allowed. Every such passenger
will be allowed to bring upto five kilograms of gold and the import duty on such
gold will be Rs.450 per 10 grams, which works out to about 15% in ad valorem
terms. This duty will be payable in convertible foreign exchange. I am confident
that this step will be welcomed by all, except those engaged in the hitherto profitable
business of smuggling this metal into the country.
8 9 . The restructuring of customs duty being attempted in this Budget is the
beginning of a process in which our customs duties are gradually reduced, over a
three to four year period, to levels comparable with those in other developing
countries. I would like to reassure Honourable Members that they need have no
fear that the process of reducing duties will lead to the de-industrialisation of
India. On the contrary, the reduction is necessary to give the Indian industry an
environment in which it can increase its competitiveness through absorption of
technology and greater integration with the world economy. This is essential if we
are to achieve true self reliance. We shall take effective promotional measures to
build up the competitive strength of Indian industry. The proposed restructuring of
customs duty, together with the other changes in customs duty results in a net
loss of Rs. 2023.35 crores. The loss is estimated in the conventional way and it is
possible that it may be overestimated if we allow for a substantial improvement in
the balance of payments, permitting a larger volume of imports and, therefore, a
higher level of customs revenue.
9 0 . In the field of excise duties, I have been guided by the objectives of
rationalising the excise duty structure, providing reliefs where necessary and, of
course, raising additional resources to offset the revenue loss from restructuring of
customs tariffs.
 21
9 1 . While presenting the budget for 1991-92, I had referred to my intention to
rationalise and simplify the procedures, rules and regulations pertaining to indirect
taxes so that the delays in the system are eliminated and the interface between the
tax collector and the tax payer is reduced to the minimum. I propose to make an
advance in this direction by abolishing licensing controls on production and
manufacture under the Central Excises and Salt Act, 1944. The assessees would
simply be required to register themselves with the central excise authorities. At
present assessees are required to get their central excise licences renewed every
five years. Registration will be valid as long as the assessee continues the
manufacturing activity. I am proposing suitable amendments in the law to this
end.
9 2 . Honourable Members would be aware that a Settlement Commission was
established in 1976 under the Income-tax Act, 1961. I propose to set up a Settlement
Commission, on similar lines, for dealing with customs and central excise disputes
between the Department and the assessee. I trust this will help in speedy settlement
of tax disputes.
9 3 . Honourable Members may also recall that a law was enacted in 1986 for
the establishment of an appellate tribunal for the adjudication of disputes relating
to the determination of the rates of duties of customs and central excise and to the
valuation in pursuance of Article 323-B of the Constitution. Due to unavoidable
reasons, the tribunal could not be established. I propose to introduce legislation to
suitably amend the Customs and Central Excise Revenues Appellate Tribunal Act,
1986 and set up the tribunal.
9 4 . The housing sector is important, both socially and for employment
generation and as such deserves special treatment. I propose to fully exempt from
excise duty bricks and tiles having a minimum content of 25% of red mud, which
is a waste product of aluminium industry. I also propose to fully exempt light
weight concrete building blocks from excise duty. Further I propose to reduce the
excise duty on pre-fabricated buildings from 15% to 5%. I also propose to fully
exempt doors and windows made of plastic, iron and steel which incidentally would
conserve our dwindling forest cover. Further, I propose to exempt completely panel
doors which are currently attracting 30% excise duty. The proposals involve a
revenue loss of about Rs. 4 crores.
9 5 . The glass container industry has been going through a lean period. I
propose to reduce excise duty on glass containers from 40% to 30%. The excise
duty on glass containers manufactured by semi-automatic process and mouth
blown process will also be reduced from the existing levels of 30% and 15% to 20%
and 10%, respectively. The proposals involve a revenue loss of Rs. 30 crores.
9 6 . At present there is a wide dispersion of duty rates among various sectors
of the textile industry. My primary aim is to simplify and rationalise the tariff
structure and to reduce the duty differential between the various textile fibres and
yarns.
9 7 . I propose to rationalise and restructure the excise duty on cotton yarn
and cellulosic spun yarn. On cotton yarn, I propose to reduce the multiplicity of
rates by having only five duty slabs. Excise duty on cellulosic spun yarn is also
being similarly rationalised by having three slabs.
 22
9 8 . I also propose to raise the basic excise duty on viscose fibre from Rs.
10.50 to Rs 12 per kg., on viscose filament yarn from Rs. 12 to Rs 15 per kg., and
on acrylic fibre from Rs. 9.24 to Rs 12 per kg. The duty rates on polyester blended
yarns are also being rationalised.
9 9 . Rags and synthetic waste are both raw materials for the shoddy woollen
industry. I propose to equate the import duty incidence on both at 110%.
1 0 0 .With a view to raising the revenue from additional excise duty the proceeds
of which go to the States, I propose to increase the duty on processed cotton fabrics
by restructuring the duty slabs.
1 0 1 .Several units in the nylon and polyester filament yarn industry are passing
through difficult times. As a measure of relief, I propose to reduce the excise duty
on nylon filament yarn from Rs. 63 to Rs 55 per kg and also to reduce the import
duty on caprolactum from 80% to 50%. I also propose to reduce the excise duty on
polyester filament yarn from Rs.70 to Rs.62 per kg.
1 0 2 .To promote use of jute by the handloom sector, I propose to fully exempt
jute yarn in hanks from excise duty. Similarly, jute products manufactured in
rural areas by registered co-operative societies, women’s co-operatives, etc. are
also proposed to be fully exempted from excise duty.
1 0 3 .As a measure of relief to the silk industry, I propose to reduce the import
duty on raw silk from 55% to 30%.
1 0 4 .The package of proposals relating to the textile industry involve a revenue
reduction of about Rs. 25 crores.
1 0 5 .I would now take up the proposals for rationalisation and additional revenue
mobilisation.
1 0 6 .At present excise duty is levied on ad valorem basis on some commodities
and at specific rates on others. Over the years, for administrative reasons, ad
valorem duties have been steadily replaced by specific rates or ad valorem-cum-
specific rates. Ad valorem duties are preferable to specific duties as they ensure
buoyancy in revenue on account of increase in prices, and the Chelliah Committee
has recommended switching over to ad valorem rates for a number of commodities.
It has also recommended that where specific rates are retained, the same should
be revised every year taking into account the price inflation. I propose to make a
modest beginning by switching over to the ad valorem mode of levy where feasible.
1 0 7 .In respect of major non-ferrous metals, namely, copper, lead and zinc and
products thereof, I propose to fix a uniform ad valorem levy of 10% in the place of
existing specific rates of duty. As regards iron and steel, the excise duty on primary
and semi-finished forms thereof is generally charged at specific rates of duty. For
administrative reasons, I propose to retain the specific rates of excise duty on items
like ingots and certain rolled products like bars, rods, etc., other than of stainless
steel. In respect of these products, I propose to raise the existing rates, which are
presently between Rs. 300 and Rs. 1800 per metric ton to rates between Rs. 400
and Rs. 2000 per metric ton. However, in respect of iron forgings and other steel
products, I propose to prescribe a uniform excise duty of 10%. The proposals
involve a revenue gain of about Rs.400 crores.
 23
1 0 8 .In my budget speech last year, I mentioned that every Finance Minister
has to do his bit to curb smoking which is injurious to health. This injury to health
is continuing and I would be failing in my duty if I did not make one more attempt
to use the fiscal instrument in this worthy cause. While I do not propose to increase
the duty on non-filter cigarettes of less than 60 mm in length, the duties on all
other cigarettes are being raised by Rs.30 to Rs.100 per thousand depending on
the length. The gain in revenue from the proposals is of the order of Rs.325 crores.
1 0 9 .I propose to increase the excise duty on certain plastic resins, namely,
polystyrene, low density polyethylene, high density polyethylene and polypropylene
from 30% to 40%. The revenue gain from the proposal is Rs. 165 crores.
1 1 0 .Watches attract a very low rate of duty of 5% which is out of line with the
general duty structure. I propose to raise the rate to 10%. The revenue gain from
the proposal is estimated to be Rs. 12 crores.
1 1 1 .I propose to increase the excise duty on cement from Rs. 215 to Rs. 290
per metric ton. The excise duty on cement produced in mini cement plants will also
go up from Rs. 90 to Rs.165 per metric ton, thus maintaining the existing duty
differential of Rs. 125 per metric ton in favour of mini cement plants. However, I
propose to reduce the duty on white cement from 40% to 35% to bring the incidence
closer to that on ordinary cement. The estimated revenue gain from these proposals
is Rs. 376 crores.
1 1 2 .I propose to raise the excise duty on paints from the existing levels of 15%
and 30% to 20% and 35% respectively. The revenue gain on account of the proposal
is estimated to be Rs. 35 crores.
1 1 3 .I propose to increase the excise duty on organic surface active agents
from 25% to 30%. The proposal would yield an additional revenue of Rs. 50 crores.
1 1 4 .At present two-wheelers such as motorcycles and scooters attract excise
duty in slabs of 10%, 15%, 20%, 25% and 30% depending on the engine capacity.
I propose to rationalise the duty structure by levying a uniform duty of 15% on all
two-wheelers of engine capacity upto 75 cc and 25% on all others whose engine
capacity exceeds 75 cc. I also propose to increase the excise duty on light commercial
vehicles from 10% to 15%. The proposals involve a revenue gain of Rs.80 crores.
1 1 5 .I propose to increase the excise duty on cocoa and cocoa based preparations
from 15% to 25%. The proposal involves a revenue gain of Rs. 24 crores.
1 1 6 .I propose to increase the excise duty on wires and cables by five percentage
points from the present levels. The additional revenue from the proposal is expected
to be of the order of Rs. 60 crores.
1 1 7 .I also propose to revise upwards the existing specific rates of excise duty
on tyres, tubes and flaps. However, I propose to reduce the duty on moped tyres
from Rs. 30 to Rs.25 per tyre. The proposals involve a revenue gain of Rs. 40
crores.
1 1 8 .Special excise duty is being levied at present at the rate of 10% of the
basic excise duty; certain essential items such as tea, coffee, sugar, matches,
 24
kerosene and vanaspati are fully exempted. In addition, high speed diesel oil and
two wheelers attract special excise duty at 5%. I now propose to raise the special
excise duty on products which are presently attracting a 10% rate of duty to 15%.
However, this increase will not be applicable to petroleum products. I also propose
to exempt from this increase certain consumer durables like motor cars and
consumer electronics such as television sets, as these industries are passing through
a difficult phase. This proposal involves a revenue gain of Rs.1025 crores.
1 1 9 .The changes in trade policy introduced last year have eliminated the
differential incentives for export at higher stages of manufacture. While a uniform
pattern of incentive is generally to be preferred, there is a case for introducing
some disincentives for exports of certain primary products where the same product
can be easily exported in value added form. I propose to impose an export duty of
10% on exports of certain types of finished leather and on unpolished granite in
order to encourage exporters to shift to leather products and polished granite. I am
also imposing an export duty of 5% on iron ore. The proposals are expected to yield
an additional revenue of Rs.142 crores.
1 2 0 .I have also proposed certain amendments in the Finance Bill seeking to
effect changes in the excise and customs tariff. These amendments are generally
enabling provisions and have no revenue significance. Besides, there are proposals
for amendment of some of the existing notifications. In order to save the time of the
House, I do not propose to recount them.
1 2 1 .The proposals with regard to changes in excise duty outlined above are
likely to yield additional revenue of Rs. 2515.70 crores. The concessions and reliefs
announced aggregate to Rs. 304.80 crores. Out of the net additional sharable
revenue from excise duties of Rs. 2210.90 crores, the Centre’s share would be Rs.
1146.53 crores and the States’ share Rs. 1064.37 crores.
1 2 2 .The net impact of my proposals on customs and excise duties taken together
amount to an additional mobilisation of only Rs. 187.55 crores on indirect taxes.
Since the loss in customs duties falls entirely on the Centre whereas the gain in
excise revenue is shared with the States the impact on the Centre’s revenue is a
loss of Rs. 876.82 crores while the States will gain as much as Rs. 1064.37 crores.
1 2 3 .Copies of notifications giving effect to the changes in customs and excise
duties effective from the 1st March, 1992, will be laid on the Table of the House in
due course.
1 2 4 .Taking direct and indirect taxes together the changes I have proposed are
expected to result in a net revenue loss of Rs.517 crores to the Centre while the
States will gain Rs.1500 crores. Consequently the estimated year end budget deficit
of the Centre for 1992-93 will be Rs.5389 crores and the fiscal deficit for that year
will be Rs.34408 crores.
1 2 5 .Our nation will remain eternally grateful to Jawaharlal Nehru for his
vision and insistence that the social and economic transformation of India had to
take place in the framework of an open society, committed to parliamentary
democracy and the rule of law. India’s development is of tremendous significance
for the future of the developing world. To realise our development potential, we
have to unshackle the human spirit of creativity, idealism, adventure and enterprise
that our people possess in abundant measure. We have to harness all our latent
 25
resources for a second industrial revolution and a second agricultural revolution.
Our economy, polity and society have to be extraordinarily resilient and alert if we
are to take full advantage of the opportunities and to minimise the risks associated
with the increasing globalisation of economic processes. We have to accept the
need for reform if we are to avoid an increasing marginalisation of India in the
evolving world economy. The economic policy changes brought about by our
Government in the last eight months are inspired by this vision. Our party is an
inheritor of great traditions of national service. True to this heritage, we commit
ourselves to providing a firm and purposeful sense of direction to the reform process
so that this ancient land of India regains its glory and rightful place in the comity
of nations. This budget represents a contribution to the successful implementation
of this great national enterprise, of building an India free from the fear of war, want
and exploitation, an India worthy of the dreams of the founding fathers of our
republic. We shall pay any price, bear any burden, make any sacrifice to realise
those dreams. India is on the move again. We shall make the future happen.
1 2 6 .Sir, I commend the Budget to this august House.
[29th February, 1992]
 1

Budget 1991-92
Speech of
Shri Manmohan Singh
Minister of Finance
24th July, 1991

PART A

Sir,
I rise to present the budget for 1991-92. As I rise, I am overpowered by a
strange feeling of loneliness. I miss a handsome, smiling, face listening intently to
the Budget Speech. Shri Rajiv Gandhi is no more. But his dream lives on; his
dream of ushering India into the twenty-first century; his dream of a strong, united,
technologically sophisticated but humane India. I dedicate this budget to his inspiring
memory.
2 . The new Government, which assumed office barely a month ago, inherited
an economy in deep crisis. The balance of payments situation is precarious.
International confidence in our economy was strong until November 1989 when
our Party was in office. However, due to the combined impact of political instability
witnessed thereafter, the accentuation of fiscal imbalances and the Gulf crisis,
there was a great weakening of international confidence. There has been a sharp
decline in capital inflows through commercial borrowing and non-resident deposits.
As a result, despite large borrowings from the International Monetary Fund in July
1990 and January 1991, there was a sharp reduction in our foreign exchange
reserves. We have been at the edge of a precipice since December 1990 and more
so since April 1991. The foreign exchange crisis constitutes a serious threat to the
sustainability of growth processes and orderly implementation of our development
programmes. Due to the combination of unfavourable internal and external factors,
the inflationary pressures on the price level have increased very substantially since
mid-1990. The people of India have to face double digit inflation which hurts most
the poorer sections of our society. In sum, the crisis in the economy is both acute
and deep. We have not experienced anything similar in the history of independent
India.
3 . The origins of the problem are directly traceable to large and persistent
macro-economic imbalances and the low productivity of investment, in particular
the poor rates of return on past investments. There has been an unsustainable
increase in Government expenditure. Budgetary subsidies, with questionable social

1
 2
and economic impact, have been allowed to grow to an alarming extent. The tax
system still has many loopholes. It lacks transparency so that it is not easy to
assess the social and economic impact of various concessions built into its structure.
The public sector has not been managed in a manner so as to generate large
investible surpluses. The excessive and often indiscriminate protection provided to
industry has weakened the incentive to develop a vibrant export sector. It has also
accentuated disparities in income and wealth. It has worked to the disadvantage of
the rural economy. The increasing difference between the income and expenditure
of the Government has led to a widening of the gap between the income and
expenditure of the economy as a whole. This is reflected in growing current account
deficits in the balance of payments.
4 . The crisis of the fiscal system is a cause for serious concern. The fiscal
deficit of the Central Government, which measures the difference between revenue
receipts and total expenditure, is estimated at more than 8 per cent of GDP in
1990-91, as compared with 6 per cent at the beginning of the 1980s and 4 per cent
in the mid-1970s. This fiscal deficit had to be met by borrowing. As a result,
internal public debt of the Central Government has accumulated to about 55 per
cent of Gross Domestic Product (GDP). The burden of servicing this debt has now
become onerous. Interest payments alone are about 4 per cent of GDP and constitute
almost 20 per cent of the total expenditure of the Central Government. Without
decisive action now, the situation will move beyond the possibility of corrective
action.
5 . The balance of payments situation is most difficult. The current account
deficit, which was about 2 per cent of GDP for several years, is estimated to be
more than 2.5 per cent of GDP in 1990-91. These persistent deficits, which were
inevitably financed by borrowings from abroad, have led to a continuous increase
in external debt which, including non-resident Indian (NRI) deposits, is estimated
at 23 per cent of GDP at the end of 1990-91. Consequently, the debt service burden
is estimated at about 21 per cent of current account receipts in 1990-91. These
strains were stretched to a breaking point on account of the Gulf crisis last year.
The balance of payments has lurched from one liquidity crisis to another since
December 1990. The current level of foreign exchange reserves, in the range of
Rs.2500 crores, would suffice to finance imports for a mere fortnight.
6 . The price situation, which is of immediate concern to the vast mass of our
people, poses a serious problem as inflation has reached a double digit level. During
the fiscal year ending 31st March 1991 the wholesale price index registered an
increase of 12.1 per cent, while the consumer price index registered an increase of
13.6 per cent. The major worrisome feature of the inflation in 1990-91 was that it
was concentrated in essential commodities. The prices of these commodities rose
inspite of the three good monsoons in a row and hence the three successive bumper
harvests. Inflation hurts everybody, more so the poorer segments of our population
whose incomes are not indexed.
7 . There is no time to lose. Neither the Government nor the economy can live
beyond its means year after year. The room for maneuver, to live on borrowed
money or time, does not exist any more. Any further postponement of macro-
economic adjustment, long overdue, would mean that the balance of payments
situation, now exceedingly difficult, would become unmanageable and inflation,
 3
already high, would exceed limits of tolerance. For improving the management of
the economy, the starting point, and indeed the centre-piece of our strategy, should
be a credible fiscal adjustment and macro-economic stabilisation during the current
financial year, to be followed by continued fiscal consolidation thereafter. This process
would, inevitably, need at least three years, if not longer, to complete. But there
can be no adjustment without pain. The people must be prepared to make necessary
sacrifices to preserve our economic independence and restore the health of our
economy.
8 . In the macro-management of the economy, over the medium-term, it should
be our objective to progressively reduce the fiscal deficit of the Central Government,
to move towards a significant reduction of the revenue deficit, and to reduce the
current account deficit in the balance of payments. It is only such prudent
management that would enable us to curb the exponential growth in internal and
external debt and limit the burden on debt servicing, for the Government and the
country, to manageable levels. Indeed, we must make a conscious effort to reduce
the internal debt of the Government and the external debt of the nation, so that we
rely more and more on our own resources to finance the process of development.
During the period of transition, it shall be our endeavour to minimise the burden
of adjustment on the poor. We are committed to adjustment with a human face. It
will also be our endeavour that the adjustment process does not adversely affect
the underlying growth impulses in our economy. We do not have time to postpone
adjustment and stabilisation. We must act fast and act boldly. If we do not introduce
the needed correctives, the existing situation can only retard growth, induce recession
and fuel inflation, which would hurt the economy further and impose a far greater
burden on the poor.
9 . Macro-economic stabilisation and fiscal adjustment alone cannot suffice.
They must be supported by essential reforms in economic policy and economic
management, as an integral part of the adjustment process, reforms which would
help to eliminate waste and inefficiency and impart a new element of dynamism to
growth processes in our economy. The thrust of the reform process would be to
increase the efficiency and international competitiveness of industrial production,
to utilise for this purpose foreign investment and foreign technology to a much
greater degree than we have done in the past, to increase the productivity of
investment, to ensure that India’s financial sector is rapidly modernised, and to
improve the performance of the public sector, so that the key sectors of our economy
are enabled to attain an adequate technological and competitive edge in a fast
changing global economy. I am confident that, after a successful implementation of
stabilisation measures and the essential structural and policy reforms, our economy
would return to a path of a high sustained growth with reasonable price stability
and greater social equity.
1 0 . Thanks to the efforts of Pandit Jawaharlal Nehru, Indira Gandhi and Rajiv
Gandhi, we have developed a well diversified industrial structure. This constitutes
a great asset as we begin to implement various structural reforms. However, barriers
to entry and limits on growth in the size of firms, have often led to a proliferation
of licensing and an increase in the degree of monopoly. This has put shackles on
segments of Indian industry and made them serve the interests of producers but
not pay adequate attention to the interests of consumers. There has been inadequate
emphasis on reduction of costs, upgradation of technology and improvement of
 4
quality standards. It is essential to increase the degree of competition between
firms in the domestic market so that there are adequate incentives for raising
productivity, improving efficiency and reducing costs. In the pursuit of this objective,
we have announced important changes in industrial policy which will bring about
a significant measure of deregulation in the domestic sector, consistent with our
social objectives and the binding constraints on the balance of payments.
1 1 . The policies for industrial development are intimately related to policies
for trade. There can be no doubt that protection was essential in the initial phase
of our industrial development, so that we could go through the learning period
without disruption. The past four decades have witnessed import substitution which
has not always been efficient and has some times been indiscriminate. The time
has come to expose Indian industry to competition from abroad in a phased manner.
As a first step in this direction, the Government has introduced changes in import-
export policy, aimed at a reduction of import licensing, vigorous export promotion
and optimal import compression. The exchange rate adjustments on 1st and 3rd
July 1991 and the enlargement and liberalisation of the replenishment licence
system constitute the two major initial steps in the direction of trade policy reform.
They represent the beginning of a transition from a regime of quantitative restrictions
to a price based mechanism.
1 2 . After four decades of planning for industrialisation, we have now reached
a stage of development where we should welcome, rather than fear, foreign
investment. Our entrepreneurs are second to none. Our industry has come of age.
Direct foreign investment would provide access to capital, technology and markets.
It would expose our industrial sector to competition from abroad in a phased
manner. Cost, efficiency, and quality would begin to receive the attention they
deserve. We have, therefore, decided to liberalise the policy regime for direct foreign
investment in the following manner. First, direct foreign investment in specified
high priority industries, with a raised limit for foreign equity at 51 per cent, would
be given prompt approval, if equity inflows are sufficient to finance the import of
capital goods at the stage of investment and if dividends are balanced by export
earnings over a period of time. Second, foreign equity upto 51 per cent would be
allowed for trading companies primarily engaged in export activities. Third, a special
board would be constituted to negotiate with a number of large international firms
and approve direct foreign investment in selected areas; this would be a special
regime to attract substantial investment that would provide access to high technology
and to world markets.
1 3 . For the founding fathers of our Republic, a public sector that would be
vibrant, modern, competitive and capable of generating large surpluses was a vital
element in the strategy of development. The public sector has made an important
contribution to the diversification of our industrial economy. But there have been
a number of shortcomings. In particular, the public sector has not been able to
generate internal surpluses on a large enough scale. At this critical juncture, it has
therefore become necessary to take effective measures so as to make the public
sector an engine of growth rather than an absorber of national savings without
adequate return. This has been widely accepted, but thought and action in this
regard are still far apart. To bridge this gap, the portfolio of public sector investments
would be reviewed so as to concentrate the future operations of the public sector
in areas that are strategic for the nation, require high technology for the economy,
 5
and are essential for the infrastructure. In order to raise resources, encourage
wider public participation and promote greater accountability, upto 20 per cent of
government equity in selected public sector undertakings would be offered to mutual
funds and investment institutions in the public sector, as also to workers in these
firms. Public enterprises which are chronically sick and which cannot be turned
around, will be referred to the Board for Industrial and Financial Reconstruction
(BIFR), or to a similar high-powered body to be set up, for the formulation of revival
or rehabilitation schemes; a social security mechanism will be created to fully
protect the interests of the workers likely to be affected by the rehabilitation packages
of the BIFR. Autonomy in management, and corresponding accountability, would
be provided through a system of memorandums of understanding between the
Government and public sector enterprises.
1 4 . Our banking system and financial institutions are at the very core of the
financial infrastructure in the economy. The widening and deepening of our financial
system have helped the spread of institutional finance over a vast area and have
contributed significantly to the augmentation of our savings rate, particularly
financial savings. This has been a most commendable achievement, but our financial
system has developed certain rigidities and some weaknesses which we must address
now . The objective of reform in the financial sector would be to preserve its basic
role as an essential adjunct to economic growth and competitive efficiency, while
improving the health of its institutions. In this task, it is essential to ensure capital
adequacy, introduce prudential norms and improve profitability of our commercial
banks and financial institutions. There are no magic solutions. These are complex
issues which need careful consideration. Therefore, I propose to appoint a high
level committee to consider all relevant aspects of structure, organisation, functions
and procedures of the financial system. This committee would advise the Government
on appropriate measures that would be needed to enhance the viability and health
of our financial sector so that it can better serve the needs of the economy without
any sacrifice of the canons and principles of a sound financial system.
1 5 . Interest rates are a crucial dimension of the financial sector. In the formative
stages of the development of credit markets, administrative intervention in interest
rates is both necessary and desirable. At the present stage of our development,
however, we can begin to relax the degree of intervention and impart a greater
flexibility to the structure of interest rates. The Reserve Bank of India has already
taken an important step in this direction, by stipulating a floor rate of interest and
providing freedom to commercial banks to charge interest rates above the floor
level based on their perceptions of risk. The Government proposes to extend a
similar freedom to term-lending financial institutions, where the minimum interest
rate would be 15 per cent, and these institutions would be free to charge an
interest rate in accordance with their perception of the creditworthiness of borrowers.
With the exception of tax free bonds for the public sector, it is also proposed to
remove all restrictions on interest rates for debentures, both convertible and non-
convertible, floated in the capital market. The interest rate on such debt instruments
will hereafter be governed by market forces, and the credit rating of such debt
instruments will become an integral part of the capital market process. In
consultation with the Reserve Bank of India, the Government would continue to
watch the structure of interest rates. Recently, interest rates payable on bank
deposits have been increased. I now propose to do a similar thing with regard to
 6
interest rates payable under the small savings schemes. Our ultimate objective is
to achieve a significant reduction both in the nominal and the real interest rates.
This would be possible if the rate of inflation is reduced significantly over the next
three years.
1 6 . While presenting the budget for 1987-88, our former Prime Minister the
late Shri Rajiv Gandhi had assured this House that for a healthy growth of capital
markets, for protecting the rights of investors and for preventing trading malpractices
the Government would set up a separate Board for the regulation and orderly
functioning of the Stock Exchanges and the securities industry. Although the Board
was set up, legislation to give the Board adequate powers was unfortunately not
enacted. This shall now be done forthwith and full statutory powers will be given to
the Securities and Exchange Board of India for administering the relevant provisions
of the Securities Contracts (Regulation) Act and the Companies Act. Transferring
these powers from the Controller of Capital Issues and the Government to an
independent body would enable it to effectively regulate, promote and monitor the
working of the Stock Exchanges in the country. A comprehensive package of reforms
relating to trading on the Stock Exchanges, including a system of national clearing
and settlement and setting up of a central depository, is also under active
consideration.
1 7 . In regard to Mutual Funds, some progress towards evolving a competitive
structure has been made in the last few years with encouraging results. For many
investors, mutual funds are a more suitable investment vehicle than direct ownership
of shares. The Government is already giving tax incentives for equity-linked savings
schemes offered through mutual funds. The Government has now decided to further
promote the development of mutual funds by throwing the field open to the private
sector and joint sector mutual funds. In order to safeguard the interests of the
investing public, and to encourage a healthy growth of the capital markets, a
comprehensive set of guidelines is being evolved for the operation of all mutual
funds. Consideration will also be given to enactment of legislation for this purpose.
1 8 . A comprehensive review of policies and procedures bearing on Non-resident
Indian investments shall be carried out and further relaxations made in order to
remove all procedural difficulties and impediments to the setting up of industrial
and other ventures by Non-resident Indians. New sectors shall be made available
to NRIs for investment on a non-repatriation basis, including housing, infrastructure
and real estate development. For example, at present, NRIs of foreign nationality
are required to obtain specific permission under section 31 of the Foreign Exchange
Regulation Act (FERA) to acquire residential property. It is now proposed to provide
general exemption from this provision to such persons. However, rental income
and proceeds from the sale of such housing will be non-repatriable. For facilitating
interaction with the Central Government, to serve as a focal point for NRIs,
Government proposes to establish a Chief Commissioner for Non-resident Indians.
I would urge State Governments, also, to establish an office of a Commissioner for
Non-Resident Indians.
1 9 . I believe that the time has come to evolve a more transparent institutional
mechanism for fixing tariffs and domestic prices in sectors where there might still
be need for protecting Indian industry against foreign competition and for the
determination of administered prices, particularly in the area of public utilities. For
 7
this purpose, we propose to restructure the Bureau of Industrial Costs and Prices
and to transform it into a Tariff Commission.
2 0 . As we enter the last decade of the twentieth century, India stands at the
cross-roads. The decisions we take and do not take, at this juncture, will determine
the shape of things to come for quite some time. It should come as no surprise,
therefore, that an intense debate rages throughout the country as to the path we
should adopt. In a democratic society it could not be otherwise. What can we learn
from this debate? The most important thing that comes out clearly is that we
cannot realise our goal of establishing a just society, if we abandon the planning
process. But India’s future development depends crucially on how well the planning
process is adapted to the needs of a fast changing situation. I believe that without
an intelligent and systematic coordinated resource use in some major sectors of
our economy, development will be lopsided. It will violate deeply cherished values
of equity and it will keep India well below its social, intellectual and moral potential.
But our planning processes must be sensitive to the needs of a dynamic economy.
Over centralisation and excessive bureaucratisation of economic processes have
proved to be counter productive. We need to expand the scope and the area for the
operation of market forces. A reformed price system can be a superior instrument
of resource allocation than quantitative controls. But markets can only serve those
who are part of the market system. A vast number of people in our country live on
the edges of a subsistence economy. We need credible programmes of direct
government intervention focussing on the needs of these people. We have the
responsibility to provide them with quality social services such as education, health,
safe drinking water and roads. In the same way, the development of capital and
technology intensive sectors, characterised by long gestation periods, such as
transport and communications and energy will need to be planned with much
greater care than ever before. The control of land and water degradation, which
threatens the livelihood of millions of poor people in this country, will also require
effective Government leadership and action.
2 1 . The challenge that we are facing is without precedent. In its initial stages,
the Industrial Revolution in the western world concentrated on the creation of
wealth, unmindful of the social misery and inequity which characterised this process.
The democratisation of the polity came much later. The socialist experiment in
charting a new path for accelerated industrial transformation of an underdeveloped
economy and polity did achieve considerable success in developing technological
and military capabilities, accumulation of capital for rapid industrial growth and
human resources development, in countries such as the USSR. But recent
developments have shown that this approach too suffered from major weaknesses,
particularly in its allocative efficiency, in the management of technical change,
control of environmental degradation and in harnessing the vast latent energy and
talents of individuals. In India, we launched an experiment under the leadership of
Pandit Jawaharlal Nehru, an experiment which sought to unite the strengths and
merits of different approaches to accelerated development of our backward economy.
We have achieved considerable success in the field of development, modernisation
and greater social equity. However, we are yet far from realising our full potential
in all these areas. We have to accomplish the unfinished task, while remaining
steadfast in our allegiance to the values of a democratic system.
2 2 . At the same time, we must restore to the creation of wealth its proper
 8
place in the development process. For, without it, we cannot remove the stigma of
abject poverty, ignorance and disease. But we cannot accept social misery and
inequity as unavoidable in the process of creation of wealth. The basic challenge of
our times is to ensure that wealth creation is not only tempered by equity and
justice but is harnessed to the goal of removal of poverty and development for all.
2 3 . For the creation of wealth, we must encourage accumulation of capital.
This will inevitably mean a regime of austerity. We have also to remove the stumbling
blocks from the path of those who are creating wealth. At the same time, we have
to develop a new attitude towards wealth. In the ultimate analysis, all wealth is a
social product. Those who create it and own it, have to hold it as a trust and use
it in the interest of the society, and particularly of those who are under-privileged
and without means. Years ago, Gandhiji expounded the philosophy of trusteeship.
This philosophy should be our guiding star. The austerity that Gandhiji practised
and preached is a necessary condition for accelerated economic development in the
framework of a democratic polity. The trusteeship that he prescribed for the owners
of wealth captured the idea of social responsibility.
2 4 . In highlighting the significance of reform, my purpose is not to give a fillip
to mindless and heartless consumerism we have borrowed from the affluent societies
of the West. My objection to the consumerist phenomenon is two-fold. First, we
cannot afford it. In a society where we lack drinking water, education, health,
shelter and other basic necessities, it would be tragic if our productive resources
were to be devoted largely to the satisfaction of the needs of a small minority. The
country’s needs for water, for drinking and for irrigation, rural roads, good urban
infrastructure, and massive investments in primary education and basic health
services for the poor are so great as to effectively preclude encouragement to
consumerist behaviour imitative of advanced industrial societies. Our approach to
development has to combine efficiency with austerity. Austerity not in the sense of
negation of life or a dry, arid creed that casts a baleful eye on joy and laughter. To
my mind, austerity is a way of holding our society together in pursuit of the noble
goal of banishing poverty, hunger and disease from this ancient land of ours.
2 5 . Let me now turn to fiscal adjustment during the current financial year.
The beginning of any attempt to correct the fiscal imbalance in the economy must
be directed at a reduction in expenditure and an increase in income of the
Government, so as to reduce the fiscal deficit. In the medium-term, however, our
fiscal regime would be sustainable only if revenue receipts not only meet revenue
expenditure but also provide a sufficient surplus to finance capital expenditure
that does not yield direct economic returns as such, as in defence or in social
sectors. Even this would not suffice if investment expenditures in the budget do
not earn an adequate return. The elimination of structural imbalances in our fiscal
system would require a reduction both in the fiscal deficit and in the revenue
deficit as a proportion of GDP. The Union Budget for 1991-92 is an essential first
step in this direction.
2 6 . It must be recognised that the necessary reduction in the fiscal deficit,
during 1991-92, is a stupendous task. The interim budget presented to Parliament
in March 1991 estimated the fiscal deficit at Rs.38475 crores. But this estimate
was based on assumptions about certain decisions that have not been implemented.
The postponement of the regular budget has made a formidable task even more
difficult because almost four months of the financial year have now elapsed without
 9
any effort at fiscal correction. Indeed, past trends in revenue and expenditure
suggest that, without any corrective action on our part, the fiscal deficit during
1991-92 could well reach a level of more than Rs.52000 crores. The difference
between the two sets of figures provides the real measure of the fiscal correction
needed during the current financial year.
2 7 . According to provisional data available, the more narrowly defined budget
deficit, as measured by borrowing through short term Treasury bills, for 1990-91
at Rs.11430 crores was significantly higher than the revised estimate of Rs.10722
crores, largely due to a substantial revenue shortfall, particularly in corporation
tax revenues. This highlights the handicap with which we begin. Let me now present
the scenario for 1991-92.
2 8 . The increasing levels of non-plan expenditure, financed through borrowing,
have led to an exponential increase in interest payments by the Government. The
revised estimates for interest payments during 1990-91, at Rs.21850 crores,
accounted for as much as 38 per cent of the net revenue receipts of the Central
Government. Interest payments during 1991-92, estimated at Rs.27450 crores,
constitute 42 per cent of the net revenue receipts of the Central Government at
existing rates of taxation. If the present trends continue without any correction,
then interest payments could well account for more than 50 per cent of the net
revenue receipts of the Central Government by 1994-95. These magnitudes and
proportions only serve to highlight the gravity of the situation and the acute need
for a substantial adjustment in non-plan expenditure over the next three years.
2 9 . The revised estimate for total non-plan expenditure in 1990-91 was
Rs.76761 crores. In the normal course, even with the strictest scrutiny but in the
absence of specific measures for reducing expenditure, this non-plan expenditure
would have increased to a level of Rs.89000 crores in 1991-92. Any attempt at
fiscal correction during the current financial year can be meaningful only if non-
plan expenditure is reduced by at least 10 per cent from the level it would otherwise
reach.
3 0 . The single largest component of non-plan expenditure is interest payments.
Even if there is a drastic reduction in Government borrowing during this year,
interest payments would still be in the range of Rs.35000 crores in the next financial
year. The exponential increase in interest payments can be brought under some
measure of control, by 1994-95, only through a strict discipline on government
borrowing for a period of three years.
3 1 . The second largest component of non-plan expenditure is the allocation
for the defence sector, where the provision in the revised estimates for 1990-91 was
Rs.15750 crores. No attempt at containing non-plan expenditure can succeed if
defence is to be excluded. At the same time, it is absolutely essential to ensure that
a quest for economy in expenditure does not in any way compromise national
security. We must, therefore, seek to limit expenditure without diluting the efficiency
and effectiveness of our defence services. Keeping in view all these considerations,
it has been decided to provide an outlay of Rs.16350 crores for defence in the
current year.
3 2 . Honourable Members are aware that export subsidies have been abolished
with effect from 3 July 1991. The export sector is being adequately compensated
through the adjustments in the exchange rate and the expansion of the
Replenishment Licensing System which were implemented at the beginning of July.
 10
Consequently, it is now necessary to provide only Rs.1224 crores for export subsidies
in the budget estimates for 1991-92, as compared with the earlier estimated
requirement of Rs.4200 crores, yielding a saving of as much as Rs.3000 crores
during the remainder of this year.
3 3 . In so far as fertiliser subsidies are concerned, with effect from this evening,
low analysis fertilisers such as calcium ammonium nitrate, ammonium chloride,
ammonium sulphate and sulphate of potash will be free from price and movement
controls. There will be an increase of 40 per cent, on an average, in the price of all
other fertilisers. In addition, in respect of single super phosphate, there shall also
be a ceiling on the subsidy per tonne payable to producers so as to move towards
total deregulation in the next few years; this should act as an incentive for all high
cost units to reduce costs and improve efficiency. The necessary notifications in
this regard are being issued separately, today, by the Ministry of Agriculture.
3 4 . The economic rationale for an increase in the price of fertilisers is so
obvious that it does not need to be stated. Nevertheless, I would like to draw the
attention of the House to the fact that there has been no increase in fertiliser prices
since July 1981. In these ten years, there has been a continuous increase in the
procurement prices of paddy and wheat, as also in the market prices of other
crops, received by the agricultural sector. Farmers will be compensated for the
proposed increase in the price of fertilisers through suitable increases in procurement
prices.
3 5 . We would continue to ensure that 50 per cent of the plan resources are
invested in the agricultural and rural sector. The provision for the continuing schemes
for assistance to small and marginal farmers for dug wells and shallow tubewells
would be doubled. The ceilings on assistance in difficult areas, where the water-
table is very low, would be removed. Similarly, the provision for assistance for fresh
water and brackish water aqua-culture and for oilseeds and pulses production
would be substantially stepped up. New schemes are being drawn up to popularise
small tractors and matching implements, drip and sprinkler irrigation in areas
where water is scarce, and quality seeds in low yield areas. Another new scheme
that would be implemented from this kharif season is for providing assistance to
State Governments, cooperative societies, and farmers’ groups to provide blanket
plant protection cover on payment of a small fee in large identified areas under
cotton or pulses. It would also be possible to demonstrate the advantages of
integrated pest management in these areas. In order to safeguard any possible loss
in production because of increase in fertiliser prices, and any decline in consumption,
the credit structure would be strengthened to ensure adequate availability of credit
particularly to the small and marginal farmers. Simultaneously, soil testing
laboratories and farm advisory services all over the country would be strengthened
to ensure efficient use of fertilisers and popularise the use of bio-fertilisers. We
would also identify a few irrigation projects that can be completed in this very year
and ensure that these are provided the necessary funds. The other new initiatives,
also, would not be starved of funds. As far as possible our emphasis will be on
provision of quality services to our farmers and not on hand outs and subsidies.
3 6 . The sugar subsidy which is costing the exchequer about Rs.350 crores
per annum is indeed an aberration, which crept into the system from January
1990, when the increase in the levy price paid to producers was not matched by a
simultaneous increase in the issue price for consumers in the public distribution
system. Small quantities of sugar are made available, mostly in metropolitan and
 11
urban areas, under the public distribution system at Rs.5.25 per kg. whereas the
price that most people pay in the market is around Rs.10 per kg. Government has
decided that this subsidy should be abolished forthwith. Consequently, the issue
price of sugar under the public distribution system will be increased by 85 paise
per kg. to Rs.6.10 per kg. with effect from this evening. At the same time, the
public distribution system is being strengthened to serve more effectively the weaker
sections of our population, particularly the rural poor, having special regard to
their basic needs for foodgrains such as rice and wheat. The provision for food
subsidies in the current year is being stepped up to Rs.2600 crores, as compared
with only Rs.1800 crores provided in the interim budget and Rs.2450 crores provided
in the revised estimates for 1990-91.
3 7 . As a result of the exchange rate adjustments, at the beginning of July
1991, there would be an increase in the rupee value of the import bill for crude oil
and petroleum products. It is, therefore, necessary to raise the prices of petroleum
products for domestic consumers. This would also help to restrain the growth in
consumption of petroleum products. The price of motor spirit, domestic LPG and
aviation turbine fuel for domestic use would be raised by 20 per cent. The prices of
other petroleum products, excluding diesel and kerosene for non-industrial
use,would be raised by 10 per cent. The price of kerosene, for non-industrial use,
would be reduced by 10 per cent which means a 50 per cent roll-back in relation
to the increase in the price that came into effect on 15 October 1990. Even in a
most difficult financial situation, this is being done to protect the poor for whom
kerosene is an essential source of light and fuel. While there will be no increase in
the price of diesel, I would endeavour to protect the interests of the farmers who
use diesel. For this purpose, I shall hold discussions with State Governments. The
proposed increases in the prices of petroleum products will come into effect from
this evening, and the necessary notification in this regard is being separately issued
by the Ministry of Petroleum and Natural Gas.
3 8 . For non-plan expenditure, excluding interest payments, defence, and major
subsidies, the total provision in the budget estimates for 1991-92 is Rs. 28,073
crores, reflecting a reduction of Rs. 1538 crores compared with the provision in the
revised estimates for 1990-91. If we take into account the fact that no separate
provision has been made for the payment of additional installments of dearness
allowance by Ministries and Departments in the current year, the total reduction in
such other non-plan expenditure will exceed Rs. 2000 crores. In recent years, it
has been the usual practice to issue instructions to Ministries that such additional
requirements should be accommodated within the approved budget estimates. This
has invariably resulted in some programmes on the plan side being deprived of
adequate resources. It is my intention to effect maximum possible economies in the
non-plan administrative expenditure. Therefore, all Ministries have been requested
to prioritise their activities so that those which figure at the bottom of the list can
be abridged, while those which have outlived their utility can be abandoned
altogether. This exercise has already been initiated by all Ministries and is expected
to be completed by the end of August 1991. With this approach, the proposed
reduction in other non-plan expenditure, which I am promising to the House,
would be brought about in a more meaningful manner without leading to a reduction
in the provision for plan programmes.
3 9 . There is one large component of non-plan expenditure that is a burden on
 12
the exchequer. I refer to the Government’s obligation under the Rural Debt Relief
Scheme. Unfortunately, there was a gross under-estimation of the total fiscal liability
under this scheme which was introduced last year. In addition to the sum of Rs.
1500 crores provided in the revised estimates for last year, we have to provide Rs.
1500 crores in the current year. But this is not all. We may need a similar provision
in the next year.
4 0 . As a result of the major adjustments in the sphere of expenditure, which
I have outlined in my speech, the budget estimate for total non-plan expenditure in
1991-92 stands at Rs. 79,697 crores. It is simply not possible to reduce interest
payments in the short term. The provision for non-plan expenditure, excluding
interest payments, in the current year represents a reduction of 4.9 per cent
compared with the provisions in the revised estimates for 1990-91, and a reduction
of almost 15 per cent in relation to what we would have had to provide this year,
but for the specific correctives that are being introduced. We have, thus, more than
fulfilled our commitment to reduce non-plan expenditure by 10 per cent, which
was stated in our Party’s election manifesto.
4 1 . The election manifesto of the Congress Party identifies areas for special
emphasis in our strategy of development. These include a substantial augmentation
of employment programmes, the construction of dwelling units for the weaker
sections of our society, an expansion of the programme for irrigation wells and so
on. This would need a change in, and some reorientation of, plan priorities, with a
shift towards investment in rural areas and expenditure on programmes designed
for the benefit of the poor. Our strategy would, of course, be reflected in the Eighth
Five Year Plan, which would now commence on 1 April 1992. It shall be our
endeavour to finalise the Eighth Plan document by the end of this calendar year, so
that the annual plans for 1992-93, as well as the budgets of the Centre and the
States for that year, reflect the changed priorities.
4 2 . As the Vote on Account had earlier been taken only to cover the expenditure
in the first four months, this budget has had to be presented before the end of
July, 1991. We have, thus, not had the time to re-orient the Annual Plan for 1991-
92 to reflect fully our various concerns. Moreover, this year ’s annual plan has had
to be situated in the context of the massive fiscal correction that we have to put
through. In fact, it was first felt that it would be necessary to effect a substantial
reduction in budget support for the Central Plan and Central Plan assistance for
the States. I am, however, happy to inform the House that with the substantial
cuts proposed in non-plan expenditure, it is now possible to protect the flow of
Central Plan assistance to States and Union Territories at the level of Rs. 14710
crores, as reflected in the interim budget for 1991-92. The Central plan outlay
would, however, show a modest increase at Rs. 42969 crores with a budget support
of Rs. 19015 crores.
4 3 . I am aware that in basic infrastructure areas such as power, coal,
communications and petroleum, we will have to set our sights much higher. In the
present situation, characterised by an acute shortage of foreign exchange, it is, in
particular, imperative to augment substantially the domestic production of coal,
crude oil, natural gas and electrical energy. Efforts will also have to be made on a
crash basis for promoting utmost economy in use of energy through more efficient
technologies in industry, agriculture, transport and domestic sectors. The
 13
transmission and distribution line losses would also have to be brought down
drastically from the present high level of 22 per cent. We shall address ourselves to
all these tasks once we are through with taking stock of the situation. It is my
earnest hope that, by then, thanks to the fiscal corrections now being put through,
the resources position would improve, giving us the necessary flexibility. For the
present, it has been my endeavour to maintain essential investment through
appropriate support for the Central Plan despite binding constraints on the
e x c h e q u e r.
4 4 . In preparing this budget, I have sought to ensure that the burden of fiscal
adjustment does not fall on State Governments. It is my belief that the Central
Government must set an example by introducing fiscal correctives, and it is my
hope that the State Governments would move in this direction as soon as possible.
In particular, I would urge them to ensure prompt payment of dues owed by the
State Electricity Boards to the National Thermal Power Corporation, Coal India and
the Indian Railways. We cannot allow State level enterprises to become an instrument
of unplanned and unauthorised transfer of resources from the Centre to the States.
That is neither fair nor equitable. This practice must, therefore, stop forthwith.
Simultaneously, State Governments must take effective steps to improve their fiscal
performance and streamline the working of their public enterprises. They should
not expect me to reward fiscal laxity by permitting them to have recourse to
unauthorised overdrafts from the Reserve Bank of India. I want them to be an
active partner in the accomplishment of the difficult task of restoring the fiscal
health of the country.
4 5 . The process of macro-economic adjustment, which is being initiated with
this budget, would take at least three years to complete. This adjustment must
have a human face. Therefore, during the period of transition, we shall do everything
that is possible to minimise the burden of adjustment on the poor. To some extent,
the poor would be protected as the rate of inflation comes down. We shall make
determined efforts to control inflation and the price rise. The fiscal strategy of this
budget will make a major contribution in this regard. In addition, it will be our
endeavour to provide protection to the poor in the form of enhanced outlays in the
social sectors. Employment creation and poverty eradication in rural India will
continue to receive the highest priority. At the same time, Government is committed
to the uplift of the weakest and the most vulnerable sections of our society.
4 6 . The plan outlay for the Ministry of Rural Development is being stepped up
from Rs.3115 crores last year to Rs. 3508 crores this year. Within this, the outlay
for employment programmes alone is Rs.2100 crores. The various employment
oriented programmes should make it possible to provide nearly 900 million man-
days of employment. If, this year, we are not aiming at the target of 1000 million
man-days mentioned in our manifesto it is because the season when there is
maximum need for such employment is already over. The Eighth Plan now under
formulation will spell out a comprehensive strategy and programmes to achieve the
long term employment objectives, and targets such as those relating to the
construction of irrigation wells, urban night shelters and Sulabh Shauchalayas,
dwelling units for poor backward classes, scheduled castes and scheduled tribes in
the villages, mentioned in our Party’s election manifesto.
4 7 . The provision for the rural water supply scheme is being stepped up to
Rs.758 crores, so as to make it possible to set aside Rs. 250 crores for ensuring
 14
complete coverage of ‘no-source problem villages’ by the end of 1992-93. The earlier
expectation was that these villages would be covered only by the end of the Eighth
Plan period. The late Shri Rajiv Gandhi had attached great priority to this programme
and had set up a Technology Mission for this purpose. The programme, which is
now being named after Shri Rajiv Gandhi, will be accelerated. We will ensure that
resource constraints do not stand in the way of achieving the target.
4 8 . It is a matter of deep concern that we have still not been able to put an
end to the dehumanising practice of manual removal of night-soil. The allocation
for this programme has in the past been less than adequate. It has now been
decided not only to accelerate the programme for the conversion of dry-latrines
but also to step up the allocation for the rehabilitation and retraining of scavengers.
Towards this end, the allocation for the programme has been increased by Rs. 25
crores and more funds, to the extent necessary, would be provided during the
course of the year. Inclusive of the increased provision for this programme, the
total outlay for the programmes of the Ministry of Welfare, which is concerned
with the welfare of scheduled castes, scheduled tribes and other weaker sections
of our society, is being stepped up from Rs. 364 crores in 1990-91 to Rs. 479
crores in 1991-92. The outlay for the Department of Women and Child
Development, dealing with perhaps the two most disadvantaged segments of our
population among the poor, is being enhanced from Rs. 330 crores last year to
Rs. 400 crores this year. For Health and Family Welfare, I am providing a plan
outlay of Rs. 1051 crores in 1991-92 as compared with Rs. 950 crores in 1990-
91.
4 9 . The allocation of resources for investment in social sectors is of utmost
importance for the development of human resources. In this context, there is no
need for me to emphasise the importance of education, in particular, elementary
education. Our efforts to restructure and revitalise the economy can succeed only
if we invest in our people. Particular attention has to be paid to the provision of
quality education to children belonging to the scheduled castes, the scheduled
tribes and other economically and socially backward classes. Children who belong
to the category of first generation learners need special care and attention. If the
equality of opportunity is to acquire its true significance, quality education must
not remain the exclusive privilege of the children of the rich. The Government is
committed to ensure that, whatever be our constraints, the programmes of education
will not be allowed to suffer for want of financial support. Every effort will be made
to ensure that the constitutional directive of providing free and compulsory education
upto the age of 14 years becomes a reality before we enter the twenty first century.
In the sphere of higher education and technical education, more resources are
needed for modernisation and diversification, but, at the same time, an effort must
be made to secure optimum results from the existing investments in these
institutions. The requirements of education are vast and we shall have to seek
innovative ways of finding resources. Budget support provided by the Central
Government and the State Governments are an important source, but cannot
continue to remain the only source. I am raising the allocation for education from
Rs.865 crores in 1990-91 to Rs.977 crores in 1991-92. This allocation is not
commensurate with my deep commitment to education and the priority that is
attached by the Government to the education sector. I would have liked to do more
but we must learn to live with the constraints on the exchequer.
 15
5 0 . We have the third largest number of scientists and technologists in the
world. Yet, technology development in our country has not been commensurate
either with this number or the investments that we have been making in the
science and technology sectors in our successive Five Year Plans. This gap would
have to be bridged through a suitable reorientation of the Science and Technology
Policy and the way paved for relating science and technology more intimately to the
requirements of our development, as well as for better upgradation, absorption,
adaptation and assimilation of new technologies. This task has become imperative
as we prepare ourselves to be an internationally competitive economy.
5 1 . Government has also decided on five new initiatives. The first of these is
the establishment of a Corporation for the welfare of the backward classes, a task
that the Congress manifesto has included for completion within the first 100 days.
The details of the structure and duties of this Corporation are being finalised by
the Ministry of Welfare and will be announced before the end of this session.
5 2 . Government will establish a National Renewal Fund, with a substantial
corpus. The main objective of this fund will be to ensure that the cost of technical
change and modernisation of the productive apparatus does not devolve on the
workers. This fund will provide a social safety net which will protect the workers
from the adverse consequences of the technological transformation. I visualise that
this fund will grow in size and State governments will also contribute to its corpus
in due course. The fund will not merely provide ameliorative measures for the
workers affected in the course of technical change but, more importantly, provide
retraining to them, so that they are in a position to remain active productive partners
in the process of modernisation.
5 3 . The third programme relates to the care of children of families affected by
communal riots. These riots are a blot on the fair name of our Republic. Our
Government is deeply committed to the protection and advancement of all religious
and cultural minorities. Effective steps will be taken to prevent recurrence of
communal violence. At present there are arrangements to provide compensation of
varying amounts to the riot affected families. But experience shows that such
compensation does not always protect the interests of children of the riot affected
families. These children then grow up into disgruntled and disorganised adulthood.
They become an easy prey to the propaganda of anti-social elements and the
obscurantist, fundamentalist forces of reaction. To protect the interests of such
children, look after their welfare and in particular their education, the Government
proposes to set up a National Foundation for Communal Harmony as an autonomous
non- government organisation. The Central Government will make a significant
contribution to this Foundation in 1991-92. I invite State Governments as well as
industry and trade to make liberal contributions for this noble cause.
5 4 . The fourth programme is to promote national integration through a scheme
for enabling the youth of each part of the country to go in large numbers and work
for short periods in other parts of the country, giving them an opportunity to
mingle with people of different regions and languages. A similar step in this direction
has already been taken in the Navodaya Vidyalaya Programme. This will now be
strengthened and extended on a national basis.
5 5 . The fifth programme relates to promotion of South-South cooperation. We
 16
as a nation are committed to close cooperation and sharing our development
experience, knowledge and expertise with non-aligned and other developing countries.
There is immense scope for Indian scientists, technicians, engineers, teachers,
social workers and farmers to contribute to the development process in the third
world. Our experience in various fields can be of great relevance and assistance to
many developing countries particularly in Asia and Africa. It is our hope to arrange
for participation of at least 500 volunteers in different nation building tasks, in
selected developing countries, in the coming year. The details of the programmes
will be worked out and announced before the end of the session.
5 6 . The House will also be pleased to learn that in acceptance of a
recommendation of the South Commission presided over by Dr. Julius K. Nyerere,
the former President of Tanzania, we propose to set up a National Committee under
the chairmanship of the Prime Minister for mobilising public opinion in support of
South-South cooperation and for advising our Government for devising concrete
action programmes in this regard. This committee will consist of representatives of
Government, trade and industry, trade unions and members of learned professions.
5 7 . The Rajiv Gandhi Foundation has been established to perpetuate the
memory of the great leader and to promote the ideals and objectives for which he
lived and laid down his life. This Foundation, among other things, will lay particular
emphasis on research and action programmes relating to the application of science
and technology for development, propagation of literacy, the protection of the
environment, the promotion of communal harmony and national integration, the
uplift of the under-privileged, women and handicapped persons, administrative
reforms and India’s role in the global economy. As a homage to the late Shri Rajiv
Gandhi and in support of the laudable objectives of the Foundation, Government
has decided to contribute Rs.100 crores to the Foundation at the rate of Rs.20
crores per annum for a period of five years beginning from the current year.
5 8 . Pending determination of the exact amounts that will be necessary for
each of these new initiatives, a lump sum provision of Rs.250 crores has been
included in the plan outlay of the Ministry of Finance.
5 9 . The budget provision for total expenditure in 1991-92 is Rs.113422 crores,
of which Rs.79697 crores is non-plan expenditure and Rs.33725 crores is plan
expenditure.
6 0 . In the sphere of revenue receipts, at the existing rates of taxation, gross
tax revenues are estimated at Rs.66218 crores during the current financial year,
compared to Rs.58916 crores in the revised estimates of last year. The payment to
States of their share of taxes is placed at Rs.15643 crores in 1991-92 as against
Rs.14535 crores in the revised estimates for 1990-91. Thus, the net revenue receipts
of the Centre, including non-tax revenue, are estimated to increase from Rs.57381
crores in 1990-91 to Rs.65524 crores in 1991-92.
6 1 . In the sphere of capital receipts, market borrowings are placed at Rs.7500
crores this year, which is lower than Rs.8000 crores last year; this is part of a
conscious effort to reduce the borrowing of the Central Government which would,
in keeping with the past trends, have gone up by about 10 per cent. The net
collections on account of small savings are estimated at Rs.8000 crores, which are
at the same level as the revised estimates for last year. In addition, the Government
 17
has decided to disinvest upto 20 per cent of its equity in selected public sector
undertakings in favour of mutual funds and investment institutions in the public
sector, which is expected to yield Rs.2500 crores to the exchequer during the
current financial year. This disinvestment would broad-base the equity, improve
the management and enhance the availability of resources in these enterprises.
6 2 . The net receipts on account of external assistance, excluding grants, are
placed at Rs.3510 crores compared to Rs.3984 crores in the revised estimates of
1990-91. While the increase in the loan repayment and interest payment liabilities,
as a consequence of the recent exchange rate adjustments, is fully reflected in the
budget estimates, the likely increase in the rupee value of external assistance
following the exchange rate adjustments is still under assessment. To the extent
that these receipts increase, there will also be a corresponding increase in
expenditure when the assistance is passed on to the concerned projects or schemes
for which such assistance is received. These changes, which will thus be budget
deficit neutral, will be incorporated at the stage of revised estimates.
6 3 . Taking into account other changes in receipts and expenditure, total
receipts at the existing rates of taxation are estimated at Rs.103698 crores, while
total expenditure is estimated at Rs.113422 crores. Therefore, without additional
resource mobilisation, the budget deficit is estimated at Rs.9724 crores, the revenue
deficit at Rs.15859 crores, and the fiscal deficit at Rs.39732 crores.

PART B
6 4 . Honourable Members would have observed that expenditure adjustment
constitutes the core of the proposed fiscal correction during the current financial
year. But the process of fiscal adjustment cannot be complete without revenue
measures to increase the income of the Government. I now seek the indulgence of
the House to present the reliefs, the incentives and the levies in the sphere of direct
taxes.
6 5 . The revenue from direct taxes, both as a proportion of GDP and as a
percentage of total tax revenues, has registered a steady decline over time. This
trend has to be reversed, so as to restore equity in, and balance to our fiscal
system. Resources for development must be raised from those who have the capacity
to pay. For this purpose, we must place greater emphasis on direct taxes. This calls
for increased rates wherever necessary and a better tax compliance. At the same
time, rationalisation of the system, which reduces the maximum marginal rate of
tax, simplifies the procedures, reduces the plethora of concessions, and brings the
average rates of income tax at various levels of income to more appropriate levels,
is necessary. The time available before presenting the budget was simply not enough
to formulate basic structural changes. Yet, I have made a conscious effort to move
one step forward in this direction.
6 6 . Nobody can deny the existence of large scale tax evasion, both in terms of
income and in terms of wealth. Unless I find substantial improvement in tax
compliance in the next few months, Government will have no choice but to take
strong measures to make the tax evader pay a sufficiently high price for such
delinquency. Before coming down heavily on tax evaders, I would like to give them
 18
a last opportunity to come clean. The black money so mobilised will be utilised for
the achievement of social objectives such as slum clearance and low cost housing
for the rural poor.
6 7 . I propose to institute a scheme, under which any person would be allowed
to make a deposit with the National Housing Bank on or before close of business
on 30th November, 1991. Thereupon, forty per cent of such deposit would be
deducted and set apart as a special levy, which would form the corpus of a fund in
the National Housing Bank. This fund will be utilised for financing slum clearance
and low cost housing for the poor, in accordance with guidelines and priorities laid
down by the Government. The depositor would be allowed to draw the balance
amount in one or more installments through account payee cheques for any stated
purpose of his choice. There will be no lock-in period for this deposit. Persons
making such deposits will not be required to disclose the source of funds from
which the deposits are made. In other words, the monies deposited would be provided
complete immunity from enquiry and investigation. The provisions of Direct Tax
Laws would, however, apply to the net deposits after deduction of the special levy,
from the date of the deposit. The levy itself would not be an allowable deduction in
the computation of income of the person concerned. Necessary legislation in this
regard will be introduced shortly, in this session of Parliament. The details of the
scheme and its date of commencement will also be announced soon.
6 8 . The Income-tax Act contains a provision under which tax payers can avail
of the facility of waiver of penalty and interest on the amount disclosed once in a
life-time. To those who have already availed of this facility, I propose to give just
one more opportunity to disclose their unaccounted incomes. The Finance Bill
contains a proposal for making suitable amendments to section 273A of the Income-
tax Act for this purpose.
6 9 . The Settlement Commission was set up to provide an opportunity to
assessees to declare their undisclosed income and wealth. Under the existing
procedures, the Commissioner of Income Tax can, on certain grounds, object to
admission of an application by the Settlement Commission. This results in
unnecessary delay. This provision is, therefore, being deleted. The Settlement
Commission will, however, continue to call for and take into account the
Commissioner ’s report, provided it is furnished within a period of six months.
7 0 . Our election manifesto has promised that we will promote reinvestment of
profits, by suitable tax exemptions, in areas where there is crying need for massive
investment such as low and middle income group housing, highways, roads and
bridges, non-conventional energy, school buildings and supply of drinking water. I,
therefore, propose to make a provision in the Income-tax Act to provide deduction,
in computing taxable profits of a taxpayer carrying on a business or profession, of
the entire amount paid for financing projects or schemes promoting social and
economic welfare. To ensure optimum use of scarce resources, I propose to set up
a National Committee of eminent persons to identify areas requiring support and
for recommending specific projects and schemes. A similar deduction will be allowed
also in the case of taxpayers not carrying on any business or profession.
7 1 . As a token of my commitment to education and research and in recognition
of the significant role they have to play in our development process, I propose to
 19
extend certain tax concessions that will help in the funding of social science research
and provide some incentive to authors and publishers.
7 2 . At present, only taxpayers carrying on a business or profession get
deduction for sums paid to any approved university, college or other institutions
for research in social sciences related to the class of business carried on by them.
I consider that there is a case for providing more tax incentives for social science
research. I, therefore, propose to allow the same100 per cent deduction in respect
of sums paid for research in these areas whether related to business or not. I also
propose to allow this deduction to taxpayers not carrying on any business or
profession.
7 3 . The role of books, particularly in the context of our National Literacy
Mission as well as the National Education Policy cannot be overemphasized. To
encourage publication of better and less expensive books and to give a fillip to the
publishing industry, I propose to revive, with effect from the current accounting
period, the deduction of twenty per cent of profits from publication of books for a
period of 5 years. To encourage the publication of quality text books in various
Indian languages I also propose to revive the 25 per cent deduction from professional
income of authors of text books in Indian languages. This will also be available for
a period of five years, beginning with the current income-earning period.
7 4 . Offshore country funds are emerging as important channels for attracting
foreign institutional investment particularly from non resident Indians. India made
a beginning in this direction in 1989. Of late, however, there are signs of diminishing
interest of foreign institutional investors in off-shore India country funds. The
comparative national tax structure is one of the key factors affecting the direction
of international financial flow. I, therefore, propose to substantially reduce the rate
of tax on dividend income received by the off-shore funds from the units of UTI or
other mutual funds and on long-term capital gains from such units. On dividend
income the proposed rate of tax will be 10 percent as against the existing rate of 25
percent. On long-term capital gains, I propose to have the same rate of 10 percent
as against the effective rate of about 45 percent at present.
7 5 . In the light of our deep emotional involvement with the struggle of the
Black majority in South Africa and as a further affirmation of our commitment to
South-South cooperation, I propose that donations to the AFRICA FUND be entitled
to 100 per cent deduction under section 80G of the Income-tax Act.
7 6 . The Government is committed to the welfare of our unfortunate
handicapped citizens. In an effort to mitigate in some small measure their hardship,
I propose to increase the deduction available under Section 80 U of the Income-tax
Act in respect of totally blind or physically handicapped persons, from fifteen
thousand rupees to twenty thousand rupees. The benefit of this tax concession is
also proposed to be extended to partially blind persons.
7 7 . Promotion of housing activity ranks high in Government’s socioeconomic
priorities. Towards this objective, I propose to extend the benefit of tax rebate
under section 88 of the Income-tax Act also to contractual schemes floated by
public housing corporations like HUDCO and State Housing Boards along the lines
of the Home Loan Account Scheme of the National Housing Bank. Further, the tax
rebate under section 88 will also be available in relation to installment/repayment
 20
of loans towards cost of land and also in cases where the house was purchased or
constructed before 1st April, 1987.
7 8 . Our software industry has made considerable progress in recent years.
However, there is still a vast unexploited potential for growth. It is time we make
all-out efforts to capture the overseas software market. With this objective, I propose
to extend the tax concession under section 80HHC of the Income-tax Act to export
of software. With this concession, the exports of this industry should register rapid
growth.
7 9 . I also propose to extend the concession under section 80HHC to the export
of processed minerals.
8 0 . I consider that scientific, technical and professional skills, knowledge and
experience possessed by our professionals in various fields like architecture,
accounting etc. have an increasing capacity to earn foreign exchange for the country.
Many of them carry on their professions as individuals or partnership firms. To
enable them to benefit from the tax concession available under section 80-O, I
propose to extend, to the non-corporate assessees, the concession presently available
only to the corporate sector.
8 1 . In order to encourage development of tourist infrastructure in regions
where such facilities are almost non-existent today, I propose to exempt from
Expenditure Tax for a period of ten years expenditure incurred in new approved
hotels set up in hilly and other remote areas. I also propose to allow to such hotels
a deduction of 50 per cent from their profits instead of the normal 30 per cent
under section 80-I, subject to certain conditions.
8 2 . As a token of my appreciation of the role of a healthy capital market in the
development of our economy, I propose to raise the basic deduction of Rs 10,000
now available under section 48 of the Income-tax Act in respect of long-term capital
gains to Rs 15,000.
8 3 . As indicated earlier, I wish to take some positive steps to reverse the trend
of decline in the proportion of direct tax revenues to total revenues. I therefore
propose to raise additional resources this year through a greater reliance on direct
taxes. I now turn to my proposals for ensuring better tax compliance and moblising
revenues through the imposition of additional taxes.
8 4 . To enable the Government to identify income earners, most of whom would
not otherwise declare their income or would not declare their full income, I propose
to extend the scheme of tax deduction at source to cover new areas of payments in
the nature of commissions, interest paid by banks on time deposits and withdrawals
from the National Savings Scheme. To minimise the inconvenience for small
depositors, tax will be deducted at source only in respect of payments in excess of
Rs.2500 per year. Those receiving payments in excess of the limit but not having
taxable income will have the facility of collecting payment with no tax deduction by
filing a declaration in the prescribed manner.
8 5 . The present provision for offsetting short-term capital losses against income
leads to tax avoidance. I, therefore, propose that any loss on transfer of a capital
asset will be set off only against gain from transfer of another capital asset. This is
 21
only logical. It should also stop the practice of buying short-term capital losses
being resorted to by some unscrupulous tax payers.
8 6 . Over the years, those with an instinct for gambling have increasingly
patronised the races. I propose to withdraw the income-tax exemption of Rs.5000
in respect of earnings from races, including horse races. I am sure that persons
who place bets will now also have the added pleasure of sharing their earnings
from races with the Government.
8 7 . Professor Kaldor once observed that no civilised society should have a
maximum marginal rate of income tax higher than 45 per cent. We are firmly
committed to a tax system which is simple, credible, yet progressive, in which
people realise that honesty is the best policy. I expect to make a beginning in this
direction as soon as we can overcome the present fiscal difficulties. I am confident
that this process can be completed before the end of the five year term of our
Government. Tax payers can help to accelerate the process of tax reform if all of
them resolve to pay their income-tax dues fully and promptly. In the midst of a
fiscal crisis however, such a change is not feasible. We must wait for better times.
The best I can do under the circumstances, is what I propose to do this year : keep
the personal income-tax rate structure including the surcharge unchanged. That I
have not added to the burden of the taxpayer is, in itself, a relief.
8 8 . I have received several representations that wealth-tax rates need to be
rationalised. I see considerable merit in these representations. However, taking into
account the needs of revenue and also for want of time, I propose to make no
change in the rates of wealth-tax.
8 9 . For the purposes of levy of wealth-tax, the rules of valuation of assets aim
at capturing their market value, or near about, as on the valuation date. I find that
a distortion has crept into these rules. When an individual holds any asset in his
name its valuation is at the market value. However, if a group of persons holds its
assets through an investment company the taxable value of these assets gets reduced
considerably because it is based on the book value and not on the market value. I,
therefore, propose to remove this anomaly by providing that in valuing unquoted
shares of an investment company, the break-up value of the share will be determined
after revaluing the assets of the company at their market value.
9 0 . I feel disappointed that the phenomenal growth in the output, value added
and profits of the corporate sector, in recent years, has not been appropriately
reflected in corporate tax collections. The experience of the preceding financial
year, in particular, is a matter of serious concern. I am, therefore, raising the
corporate tax rate for widely held companies, from 40 to 45 per cent. A corresponding
increase of 5 percentage points from 45 to 50 per cent is being made in the corporate
tax rate for closely held companies. I also propose to continue the existing surcharge
of 15 per cent.
9 1 . The traditional distinction in corporate tax rates between trading companies
and industrial companies has outlived its utility. I therefore propose to remove this
distinction.
9 2 . I recognise that in the medium term the rates and structure of corporate
taxation have to be consistent with the needs of an economy aiming to become
internationally competitive. I shall attend to this task as soon as we have overcome
the present fiscal crisis.
 22
9 3 . In our economy, labour is abundant and capital is scarce. These economic
realities have to be reflected in our fiscal policy. Yet, over the years, the Indian
economy has witnessed a disturbing shift towards greater capital intensity in
production. This has led to distortion and avoidable hardship in cases where labour
is replaced, or employment potential reduced, by resort to capital intensive methods
of production, even in cases where such a shift is not justified on other economic
and technical considerations. Fiscal incentives have been conducive to such a
shift. While there can be no compromise with the imperatives of technological
upgradation and continuous modernisation, the tendency towards excessive capital
intensity in our industry must be checked.
9 4 . The rates for depreciation prescribed in 1987, in relation to plant and
machinery, are far too generous and provide much more than is needed to
compensate for wear and tear. These rates of depreciation do not reflect the true
economic life of business assets. An asset would be almost fully written off in six
years at the present rate of 33.33 per cent applicable to the bulk of plant and
machinery. I think an eight year period would be more reasonable taking into
account the pace of technological change in India, the true economic life of the
business assets, and the need to discourage tax induced replacement of assets.
Therefore, I propose to reduce the general rate of depreciation for machinery and
plant from 33.33 per cent to 25 per cent. I also propose to reduce the rate of
depreciation for aeroplanes, motor buses, motor taxis and some other equipments
from 50 per cent to 40 per cent, which would mean almost complete recoupment
of cost in six, instead of five years. However, to encourage use of energy saving
devices and renewable energy devices, I propose to continue to provide 100 per
cent depreciation on such items of plant and machinery as also some others.
Further, I also propose to restrict the rates of depreciation to 50 per cent of the
normal rates of depreciation in cases where the asset is used for less than 6
months in a year.
9 5 . Tax support to special institutions may be necessary in their nascent
stage. However, it should not be extended in perpetuity. Such institutions must
strive to become self-reliant. The Industrial Development Bank of India (IDBI) has
been enjoying complete tax exemption in respect of its income since its inception,
unlike other public financial institutions. I propose to withdraw this tax exemption,
which is no longer necessary.
9 6 . In 1987, the Government had introduced a tax on ostentatious expenditure.
It is in the form of a tax of 20 per cent of expenditure incurred in hotels where the
room rent exceeds Rs.400 per day. I propose to extend the coverage of this tax to
the expenditure incurred in restaurants providing superior facilities like air-
conditioning. This tax will be levied at the rate of 15 per cent of such expenditure.
9 7 . In view of the binding fiscal constraints and the need to mobilise resources,
I propose to revive the interest-tax which was first introduced in 1974 and withdrawn
in 1978, re-introduced in a modified form in 1980 and finally withdrawn in 1985.
I am enlarging, slightly, the coverage of this tax. The new tax will be levied on the
gross amount of interest received by all banks, financial institutions and non-
banking financial companies in the corporate sector on loans and advances made
in India. These institutions would reimburse themselves by making necessary
adjustments in the interest rates charged from borrowers. The proposed tax is
 23
expected to raise the cost of borrowing and yield revenue to the Government. It
should, therefore, have both monetary and fiscal impact.
9 8 . The proposed tax will be levied at the rate of 3 per cent of the gross
amount of interest earned by banks, financial institutions and financial companies
on loans and advances made in India. Interest received on transactions between
the various credit institutions will be exempted from the proposed tax. The proposed
tax will operate prospectively and interest accruing before 1st October, 1991 will
not be taxed. The proposed tax will be allowed as a deduction in computing taxable
income under the Income-tax Act.
9 9 . I do not propose to take up the time of the House with other minor changes
in the Direct Tax Laws.
1 0 0 .My proposals on direct taxes are estimated to yield a net revenue gain of
Rs.2139 crores. Of this amount, Rs.97 crores will accrue to the States.
1 0 1 .Honourable Members of the House are aware that the balance of payments
situation is exceedingly difficult. In order to attract larger inflows of foreign exchange,
I propose to introduce two schemes.
1 0 2 .Under the first scheme, I propose that remittances in foreign exchange
can be made to any person in India. Even if the remittance is received as a gift by
the donee in India, it would not be subjected to gift tax. The source of funds out of
which the remittances are made would not be subject to scrutiny under the Direct
Tax Laws and Exchange Control Regulations. In other words, I propose to provide
immunity for such remittances under these laws. The provisions of Direct Tax
Laws will apply in the normal manner to the rupee proceeds of these remittances.
The scheme will come into immediate effect and will be open until close of business
on 30th November 1991. The details of the scheme will be announced by the
Reserve Bank of India. I also propose to introduce the necessary legislation in this
regard as early as possible before this House.
1 0 3 .Under the second scheme, the State Bank of India would issue India
Development Bonds to be denominated in US dollars. These bonds will be available
for purchase by non-resident Indians and their overseas corporate bodies. There
will be no ceiling for investment in these bonds which will have a maturity period
of five years. The bonds will be fully transferable among non-resident Indians.
Interest from the bonds will be exempt from income tax. The bond itself would also
be exempt from wealth tax until maturity. For the non-resident holder, the face
value of the bond and the interest thereon would be repatriable with exchange rate
protection. The bonds can also be gifted to residents, who would be provided with
amnesty and immunity, as in the first scheme for inward remittances. Such amnesty
and immunity will be available only to the first resident donee. The gift would be
exempt from gift tax. The resident donee bond holder would also be entitled to
exchange rate protection, and the same exemption from income tax and wealth tax,
until maturity, but the proceeds will be paid only in rupees in India and would not
be remittable abroad. The bonds will be available for sale at all important branches
of the State Bank of India abroad until close of business on 30th November 1991.
The details of the scheme will be announced by the Reserve Bank of India. I would
also bring before this House the necessary legislation at the earliest.
1 0 4 .In formulating my proposals on indirect taxes, I have kept in mind the
wider context. In keeping with the promises made in the election manifesto of our
 24
party, we have also to ensure that prices of essential commodities and goods used
by the common man are kept well under check. Conspicuous consumption must
be curbed and the burden of taxation should be borne by the more affluent sections
of the society. In the light of these imperatives, I have attempted to structure the
proposals for customs and excise levies in a manner that indigenous industries are
encouraged, and, at the same time, imports of items required for export production
are not thwarted. In the long term, if revenues are buoyant and tax compliance
improves, I expect to bring down the rates of customs and excise levies. Even now,
some moderation in import duties is being attempted and a more broad-based
effort may be attempted to streamline the structure and reduce the rates in the
next budget. I have also tried to ensure that the proposed changes improve
competitiveness of the industrial sector, particularly the export oriented industries.
1 0 5 .It is my intention to rationalise and simplify the procedures, rules and
regulations pertaining to indirect taxes, so that the delays in the system are
eliminated, and the interface between the tax collector and the tax payer is reduced
to the minimum. Given the paucity of time, it has not been possible to undertake
such an exercise in this budget, but we should be able to formulate concrete
measures soon as a part of structural reforms in the tax system.
1 0 6 .Recent years have witnessed an excessive reliance on indirect taxes for
additional resource mobilisation. This escalates costs, fuels inflation and is regressive
in its impact. Therefore, I have not relied on indirect taxes as the major source of
resource mobilisation. Indeed, the overall impact of my proposals for customs and
excise levies is revenue negative in so far as the Central Government is concerned.
1 0 7 .In the sphere of customs duties, over time, the objective of protection for
infant industries and the need to raise revenues have led to a situation where
import duties prescribed for certain items are inordinately high and, in several
cases, more than 300 percent. As a measure of reform, I propose to reduce the ad
valorem rate of basic plus auxiliary duties of customs to a maximum of 150 per
cent where it is more than that at present, thereby eliminating the tariff peaks
above 150 per cent. The only exceptions that would remain hereafter are imported
alcoholic beverages and passenger baggage. The revenue loss on this account would
be Rs.132 crores in a full year.
1 0 8 .In view of the deterioration in the fiscal situation last year, auxiliary duty
of customs was increased across-the-board, with effect from 15th December, 1990,
so as to mobilise additional resources. The increase was not quite rational and was
asymmetric in its incidence. In some cases, the auxiliary duty went up by 20
percentage points - from 5 per cent to 25 per cent and from 30 per cent to 50 per
cent, while in some others, by just 5 percentage points i. e., from 45 per cent to 50
per cent. This steep and uneven increase imposed a very high burden of duties on
certain items, and also led to distortions in the overall rate structure. In order to
remove the anomalies which had been created and rationalise rates of duties, I
propose to give a duty relief of 10 percentage points to almost every item which
suffered an increase of 20 percentage points. Moreover, on certain items, which are
important from the point of view of environmental protection, export promotion,
saving of foreign exchange and so on, I propose to roll back the rates to levels
prevailing before 15th December, 1990. These items include waste paper, wood in
the rough, jigat used in the manufacture of Agarbattis, ethylene, machinery for fuel
injection equipment and certain items of machinery for printing and the newspaper
 25
industry. These proposals will result in a revenue loss of Rs.472 crores in a full
y e a r.
1 0 9 .The prevailing rates of import duty on capital goods for general projects
and machinery are, in general, high. While I cannot make a substantial reduction
at this stage because of the revenue implications, which are considerable, I propose
to reduce the level of duties from 85 per cent to 80 per cent. In tandem, the rate
of duty on their components is also being reduced by 5 percentage points, from the
existing levels of 65 or 70 percent. This proposal would mean a revenue loss of Rs.
167 crores in a full year.
1 1 0 .A technology upgradation scheme was launched in 1987 by the late Shri
Rajiv Gandhi. Under this scheme, fiscal relief was provided on import of capital
equipment for the manufacture of power generation equipment, paper machinery,
textile machinery and many others to promote domestic production of such
machinery. The scheme has been instrumental in bringing about considerable
improvement in the quality of machines produced in India. In order to give a
further thrust to the scheme, I propose to expand the list of machinery items which
will now attract a concessional duty of 50 per cent. The revenue loss on this
account is estimated at Rs. 5 crores in a full year.
1 1 1 .We have recently taken several innovative steps to give an impetus to our
exports. I would now like to outline some fiscal measures which will give a further
boost to the export effort.
1 1 2 .At present 100 per cent export oriented undertakings or units in a free
trade zone are allowed to divert a certain proportion of their production to the
domestic market. However, the present stipulation, that excise duty payable must
be equal to the import duty, has proved to be a deterrent. These units have to be
fostered if they are to compete effectively in the international market; for this
purpose they should not be prevented from creating a niche in the domestic market.
Accordingly, I propose to reduce the excise duty on the goods, permitted to be sold
in the domestic market under the scheme, to a level which would be equivalent to
half the import duty leviable on such goods subject, inter alia, to the condition that
the duty would not be less than the excise duty levied on similar items produced
in the domestic tariff area.
1 1 3 .To promote the growth of the marine products industry, fiscal relief has
been given by way of customs duty concession on specified machinery items required
by this industry. I propose to extend the duty concession to a few more items of
such machinery. Out of my concern for the welfare of our fishermen, I also propose
to fully exempt from excise duty specified yarns which are generally used for making
fish-nets.
1 1 4 .In order to encourage the growth of the finished leather industry and also
as a measure of export promotion, I propose to reduce the basic and auxiliary
duties of customs on polyurethane film and foil, as well as polyols from 150 per
cent to 40 per cent. The duty on isocyanates is being reduced from 120 per cent to
40 per cent. The import duty on two important leather preservatives, namely TCMTB
and PCMC, is being reduced from over 150 per cent to 50 per cent. These
preservatives will replace certain other chemicals which are suspected to have
carcinogenic effects. I also propose to extend the concessional duty, available at
 26
present to specified capital goods required by the leather industry to a few more
items of such machinery.
1 1 5 .Synthetic cubic zirconium, which is the closest imitation of natural
diamonds, has the potential to provide job opportunities for a large number of
artisans. The jewelry made therefrom also has a significant export potential. In
order to encourage indigenous manufacture of cubic zirconium, I propose to reduce
the import duty on the raw materials viz. zirconium oxide and yttrium oxide to the
level of 40 per cent from the present level of over 150 per cent.
1 1 6 .Our Government attaches the highest priority to agriculture. One of the
promises made in our election manifesto is to provide a massive thrust to food
processing and other agro-based industries, in an endeavour to increase the income
of farmers, create employment opportunities, diversify the rural economy and foster
rural industrialisation. As an important step in this direction, I propose to exempt
agro-based products such as sauces, ketchup, butter, cheese, skimmed milk powder,
vegetable oils, jams, jellies and juices, canned fruits and dried vegetables, certain
soya products, starches and preparations of meat and fish from excise duties
altogether. I am doing so to promote the diversification of our agricultural economy,
to increase the farmers’ share of the consumer ’s income spent on processed
agricultural products, to promote rural industrialisation based on agricultural
produce and to encourage the adoption of modern post-harvest technologies. The
measures I have proposed, I expect, will also lead to some reduction in consumer
prices of such products, providing relief to the harassed consumers in a period of
rising prices. The revenue loss will be Rs.84 crores but I am convinced that the
overall gain to the economy will more than offset the loss to the exchequer.
1 1 7 .As a relief to the agro-based jute industry, which has been beset with
chronic problems, I propose to reduce the excise duty on products which contain
a minimum of 35 per cent of jute fibre from Rs.660 to Rs.330 per metric ton.
1 1 8 .At present a number of specified bulk pesticides and pesticide intermediates
enjoy concessional import and excise duties. I propose to extend the duty concession
to a few more bulk pesticides and pesticide intermediates. The proposals involve a
revenue loss of about Rs.11 crores in a full year.
1 1 9 .There is a money credit scheme in vogue to encourage the use of minor
oils for the manufacture of soaps. I propose to increase the money credit of Rs.640
per metric ton that is currently available in respect of rice bran oil used in the
manufacture of soap to Rs. 1000 per metric ton. In addition, I propose to include
some more non-conventional oils and solvent extracted oils in the scheme. This
would also help in generating more employment for our tribal women. These
proposals involve a revenue sacrifice of about Rs 10 crores in a full year.
1 2 0 .The MODVAT scheme was introduced in 1986 to minimise the cascading
effect of indirect taxes. The scheme has been well received by the industry, and
there have been persistent demands for its extension to other areas. I propose to
reintroduce the scheme in respect of aerated waters, and also to extend it to cover
man-made fibres and filament yarns in respect of their inputs. While extending the
scheme to fibres and yarns, I do not propose to raise the duty on those fibres and
yarns on which the duty was increased as recently as December, 1990. On other
fibres and yarns, the duty rates have been adjusted with a view to retaining the
collection of excise duties at the earlier level. But duties on polypropylene
 27
monofilament and multifilament yarns are being increased to raise additional
revenue. In respect of aerated waters also, I do not propose any increase in duty.
The proposals involve a revenue loss of about Rs.230 crores in a full year. I expect
that the benefit would be passed on to the consumers in the form of reduced
prices.
1 2 1 .I propose to rationalise the existing excise duty rates on polyester blended
yarns. As an anti-evasion measure, I also propose to charge additional excise duty
on cotton fabrics containing 40 per cent or less of polyester at the same rates as
applicable to cotton fabrics containing more than 40 per cent of polyester. The
proposals involve a revenue gain of about Rs. 23 crores in a full year.
1 2 2 .In our effort to make essential drugs available to the people at affordable
prices, I propose to fully exempt five specified anti-epileptic formulations from
excise duty. At present, some drug intermediates and bulk drugs carry a concessional
rate of import duty. I wish to extend the concession to a few more drug intermediates
and bulk drugs, and grant concessions in excise duties to a few more drug
intermediates.
1 2 3 .In keeping with our commitment to give special priority to cottage, khadi
and village industries, I propose to give some excise duty concessions to this sector.
At present, footwear of value not exceeding Rs.100 per pair manufactured in rural
areas by registered co-operative societies, women’s societies or by institutions
recognised by KVIC, are fully exempted. I propose to raise the value limit of exemption
to Rs. 150 per pair. Further, I propose to extend to synthetic detergents the benefit
of full exemption from excise duty that is presently available to specified products
when manufactured in rural areas by registered co-operative societies, women’s
societies, institutions recognised by KVIC etc.
1 2 4 .I would now like to outline some of the steps that I propose for the protection
of our environment and for ecological security. In view of our dwindling forest
cover, we must conserve our scarce resources. Therefore, as I have stated earlier,
the import duty on waste paper and wood in the rough is proposed to be rolled
back to the rates that were prevailing before 15th December, 1990. I also propose
to fully exempt from excise duty aluminium doors, windows and their frames so as
to encourage the use of aluminium in the place of wood in construction activities.
Fly ash is a pollutant. It can, however, be put to productive use in the manufacture
of bricks and other construction materials. In order to encourage such use, I propose
to fully exempt from excise duty various building components containing more
than 25 per cent of fly ash or phosphogypsum. I also propose to exempt
phosphogypsum which is one of the bye-products of the fertilizer industry from
excise duty to encourage its use by farmers.
1 2 5 .Few would disagree that I am one of the most harassed Finance Ministers
in recent times. To perform the onerous task before me, I need support from the
Press. As a gesture of goodwill, I propose to exempt standard newsprint from import
duty which is, at present, Rs. 450 per metric ton. I have already proposed to bring
down the rates of import duty on certain specified machinery and equipment required
by the printing and newspaper industry to the levels that were obtaining before
15th December 1990. The monetary limit of duty free import of photographic goods
by accredited cameramen of the Press is being raised from the present level of Rs.
30,000 to Rs. 60,000. These proposals involve a revenue loss of over Rs. 9 crores
in a full year.
 28
1 2 6 .Ever since my appointment as Finance Minister, I have had to spend long
hours in office. This has quite naturally made my wife very unhappy. The House
will agree that it is not good for the health of our economy if the Finance Minister
of the country has strained relations with his own finance minister at home. I
propose that the total exemption from payment of excise duty currently available to
utensils made of aluminium, copper and stainless steel be extended to certain
other household items particularly tiffin boxes.
1 2 7 .The same consideration has induced me to propose a reduction in the
excise duty on specified tableware produced by semi-automatic process from the
present level of 20 per cent to 15 per cent. Mindful of the need for peace at home
and also taking into account the labour intensive nature of the manufacture of
glassware by the mouth blown process, I propose to reduce the excise duty on such
glassware to 15 per cent uniformly. Some people may not applaud my action. But
I am sure most housewives harassed by the ever rising price level will appreciate
my action.
1 2 8 .In keeping with the commitment in our election manifesto, I shall make
every effort to ensure that indirect taxes do not unduly add to the prices of essential
commodities. Of the items listed in the manifesto, at present, there is no excise
duty on salt, cycles, newsprint, post cards, inland letters and envelopes, and certain
varieties of stoves. Cotton sarees and dhoties attract only additional excise duty in
lieu of sales tax which accrues wholly to the State Governments. I have earlier
proposed to fully exempt edible oils from excise duty. Electric bulbs of upto 60
watts, are already exempt from excise duty. I now propose to fully exempt electric
bulbs, of higher wattage, which presently attract a duty of Re. 1 per bulb, from the
payment of excise duty. Energy efficient chulhas, too, would be exempted from
excise duty. I also propose to reduce the excise duty on two wheelers of engine
capacity exceeding 50 cc but not exceeding 75 cc from 20 per cent to 15 per cent.
1 2 9 .I recognise that the tax reliefs I have given, by themselves, constitute only
a small step towards the realisation of the objective mentioned in our manifesto in
regard to prices of essential commodities. In pursuit of this objective, I propose to
invite the representatives of industry and trade to sit together with our Government
to work out modalities as to how best we can contribute to the realisation of the
price objectives listed in our election manifesto, for the benefit of the common man.
1 3 0 .In order to promote tourism which is an important means of earning
foreign exchange, I propose to reduce the import duty on adventure sports equipment
from rates ranging from about 100 to 300 percent to 40 per cent.
1 3 1 .In keeping with the recent exchange rate adjustments of the rupee, I
propose to raise the baggage allowances including duty free limits for bona fide
gifts suitably; for instance the general duty free allowance for personal baggage is
being raised from Rs.2000 to Rs.2400.
1 3 2 .Let me now turn to the major proposals for additional revenue mobilisation.
1 3 3 .At present special excise duty is being levied at the rate of 5 per cent of
the basic excise duty. I propose to raise it to 10 per cent. Since the increase is only
a percentage of the basic excise duty, the impact of the additional levy would be
minimal on prices. For instance, in respect of any article on which the basic excise
 29
duty is say, 20 percent, the increase would be only 1 percent of the value. Tea,
coffee, sugar, kerosene, matches, and vanaspati, being items of mass consumption,
would remain exempt from special excise duty. In addition, I am ensuring that the
increase in special excise duty will not apply to diesel and two wheelers. The proposal
involves a revenue gain of Rs. 1010 crores in a full year, a substantial portion of
which will accrue to the States.
1 3 4 .One of the promises made in our election manifesto is to evolve policies
and measures to curb conspicuous consumption. In pursuance of this, I propose
to increase the excise duty rates on refrigerators, air-conditioners including
compressors, motor cars, audio and video cassette tapes, video cassettes, picture
tubes, colour television sets, VCRs and VCPs.
1 3 5 .I propose to increase the excise duty on refrigerators by amounts varying
from Rs.200 to Rs.800 depending upon the capacity, and in the case of air-
conditioners, by amounts varying from Rs.2000 to Rs.30000. I also propose to
raise the excise duty on compressors for air conditioners of a capacity not exceeding
7.5 metric ton by Rs. 1800. The expected additional revenue from these proposals
is about Rs.91 crores in a full year.
1 3 6 .Motor cars at present attract excise duty at the rate of 50 per cent. I
propose to increase the excise duty to 60 per cent. The duty on taxis at 30 per cent
will, however, remain unchanged. The proposal will yield an additional revenue of
Rs.150 crores per year.
1 3 7 .I propose to increase the excise duty on audio cassette tapes from Rs 3 to
Rs 5 per sq. metre and on video cassette tapes from Rs 10.50 to Rs 15 per sq.
metre. The estimated revenue gain from the proposal will be Rs.29 crores in a full
y e a r.
1 3 8 .As regards colour television sets, I propose to increase the excise duty by
Rs.500 and Rs.750 per set, depending on the screen sizes. I propose to raise the
excise duty on colour picture tubes as well. I am exempting all black and white
television sets from excise duty and shifting the burden to picture tubes. I also
propose to increase excise duty on VHS type VCRs and VCPs by Rs.400 per set and
Rs. 250 per set, respectively, and on other types of VCRs and VCPs, from 25 per
cent to 30 per cent. The revenue gain on this account is Rs. 66 crores in a full year.
1 3 9 .Every Finance Minister has to do his bit to curb smoking, which is injurious
to health. I must also fall in line and add to the tax on cigarettes. In respect of non-
filter cigarettes, I propose to raise the duties by Rs.10 to Rs.25 per thousand
cigarettes depending upon the length. In respect of filter cigarettes, the increase
will be between Rs.35 and Rs.125 per thousand cigarettes. However, filter cigarettes
exceeding 85 mm will attract the ceiling rate prescribed in the excise tariff. This
will give us additional revenue to the extent of Rs. 300 crores in a full year.
1 4 0 .The excise duty on hand-made branded biris is Rs 3.75 per thousand.
Although the duties on cigarettes have been increased almost every year, excise
duties on biris have remained unchanged since 1986. I feel that biri smokers
should not be denied the opportunity of increasing their share of contribution to
the national exchequer. I accordingly propose to increase the duty on hand-made
branded biris, other than paper rolled biris to Rs 4.50 per thousand. Paper rolled
biris will attract a duty of Rs.10 per thousand. The present exemption on other
 30
hand made biris would, however, continue. The expected additional revenue is
Rs.33 crores in a full year.
1 4 1 .Pan masala not containing tobacco attracts a specific rate of excise duty.
I propose to raise the excise duty on the same by Rs.5 and Rs.10 per kg. depending
on its value. This involves a revenue gain of Rs.4 crores in a full year.
1 4 2 .The excise duty on sugar, which is levied on a specific basis, has remained
unchanged since 1983, with the result that the ad-valorem incidence has come
down as the price of sugar has increased considerably over this period. In ad
valorem terms, the present incidence of excise duty on levy sugar is more than the
incidence on free sale sugar. In order to correct the situation, I propose to increase
the excise duty on free sale sugar from the present level of Rs.50 to Rs.71 per
quintal. This would mean an additional tax burden of 21 paise per kilogram of free
sale sugar which costs about Rs.10 per kg in the market place. This proposal is
expected to yield an additional revenue of Rs.122 crores in a full year. I would like
to make it clear that I am not proposing any increase in excise duty on levy sugar
which is sold through the public distribution system.
1 4 3 .I propose to exclude khandsari sugar from the list of items chargeable to
additional excise duty. The State Governments will be free to levy sales tax on
khandsari sugar, if they so desire.
1 4 4 .Molasses which is a bye-product of the sugar industry is presently subject
to excise duty at the rate of Rs.120 per metric ton. A substantial portion of molasses
is used in the manufacture of liquor. In the circumstances, it can bear a higher
rate of duty. Accordingly, I propose to increase the excise duty on molasses to
Rs.150 per metric ton. The estimated revenue gain from the proposal is Rs.13
crores in a year.
1 4 5 .The details of the revenue implications of the measures announced are
given in the Explanatory Memorandum to the Finance Bill.
1 4 6 .I have also proposed certain amendments in the Finance Bill seeking to
effect changes in the Customs Act, and excise and customs tariffs. These include
certain consequential amendments to the customs tariff based on the amendments
to the Harmonised Commodity Description and Coding System which has been
adopted by our country in terms of the International Convention on the Harmonised
System. The amendments are merely enabling provisions and do not have significant
revenue implications. Besides, there are proposals for amendment of some of the
existing notifications. In order to save the time of the House, I do not propose to
recount them.
1 4 7 .The increases in excise duties will lead to a revenue gain of Rs.1799.00
crores while the reliefs will amount to Rs. 358.06 crores in a full year. The net
revenue gain from excise duties is thus Rs.1440.94 crores in a full year, of which
the States will get Rs.750.04 crores leaving the balance of Rs.690.90 crores for the
Centre. The proposals in regard to changes in the customs duties imply a revenue
loss of Rs.822.52 crores and a revenue gain of Rs.78.00 crores in a full year. The
net impact of the proposals relating to customs duties is a loss of Rs.744.52 crores
in a full year. Thus, as compared with the additional net revenue of Rs.696.42
crores from customs and excise duties, the States would gain Rs.750.04 crores,
while the Centre would lose Rs. 53.62 crores in a full year.
 31
1 4 8 .Copies of notifications giving effect to the changes in customs and excise
duties effective from 25th July 1991, will be laid on the Table of the House in due
course.
1 4 9 .The proposals I have made in regard to direct taxes will yield Rs.2139
crores of which Rs. 97 crores will accrue to the States and Rs.2042 crores to the
Centre. My proposals in regard to customs duties will involve a net revenue loss of
Rs.510 crores in the current year while those relating to Union excise duties are
estimated to yield a net additional revenue of Rs. 988 crores in the remaining part
of the current year of which Rs. 515 crores will be the share of States and Rs. 473
crores will be retained by the Centre. Taking both direct and indirect taxes into
account, the net gain to the Centre in the current year is estimated at Rs. 2005
crores and with this, the budgetary deficit of the Centre for the current year is
estimated at Rs. 7719 crores, the revenue deficit at Rs. 13854 crores and the fiscal
deficit at Rs. 37727 crores.
1 5 0 .Sir, I have now nearly come to the end of my labour. Before I conclude, let
me end on a personal note. Years ago, in a letter which Jawaharlal Nehru wrote to
the young Indira Gandhi, he advised her that in dealing with the affairs of the State
one should be full of sentiment but never be sentimental. But the House will forgive
me if on an occasion like this I cannot avoid being somewhat sentimental.
1 5 1 .I was born in a poor family in a chronically drought prone village which
is now part of Pakistan. University scholarships and grants made it possible for me
to go to college in India as well as in England. This country has honoured me by
appointing me to some of the most important public offices of our sovereign Republic.
This is a debt which I can never be able to fully repay. The best I can do is to pledge
myself to serve our country with utmost sincerity and dedication. This I promise to
the House. A Finance Minister has to be hard headed. This I shall endeavour to be.
I shall be firm when it comes to defending the interests of this nation. But I
promise that in dealing with the people of India I shall be soft hearted. I shall not
in any way renege on our nation’s firm and irrevocable commitment to the pursuit
of equity and social justice. I shall never forget that ultimately all economic processes
are meant to serve the interests of our people. It is only through a commitment to
social justice and the pursuit of excellence that we can mobilise the collective will
of our people for development, to give it a high moral purpose and to keep alive the
spirit of national solidarity. The massive social and economic reforms needed to
remove the scourge of poverty, ignorance and disease can succeed only if backed
by a spirit of high idealism, self sacrifice and dedication.
1 5 2 .The grave economic crisis now facing our country requires determined
action on the part of Government. We are fully prepared for that role. Our party will
provide an effective Government to our country. Our people are our masters. We
see the role of our Government as one of empowering our people to realize their full
potential. This budget constitutes a vital component of a comprehensive vision, a
well thought out strategy and an effective action programme designed to get India
moving once again.
1 5 3 .Sir, I do not minimise the difficulties that lie ahead on the long and
arduous journey on which we have embarked. But as Victor Hugo once said, “no
power on earth can stop an idea whose time has come.” I suggest to this august
House that the emergence of India as a major economic power in the world happens
to be one such idea. Let the whole world hear it loud and clear. India is now wide
awake. We shall prevail. We shall overcome.
1 5 4 .With these words, I commend the budget to this august House.
[24th July, 1991]
 Interim Budget 1991-92
Speech of
Shri Yashwant Sinha
Minister of Finance
4th March, 1991

Sir,
I rise to present the interim Budget for the year 1991-92.
2 . The new Government, which assumed office in mid-November 1990,
inherited an economic situation of crisis proportions. The budget deficit of the
Central Government reached a level of Rs. 13,000 crores, on 30th November 1990,
as a consequence of revenue shortfalls and expenditure overruns. The Wholesale
Price Index registered an increase of 8.5 per cent, while the Consumer Price Index
rose by 11.9 per cent, during the first eight months of the current financial year.
The sharp deterioration in the balance of payments situation led to a rapid depletion
of foreign exchange reserves, which dropped to Rs. 3142 crores at the end of
November 1990 and this sum was not even sufficient to finance imports for one
month.
3 . These developments were not an unfortunate coincidence, but were the
outcome of shortcomings in the macro-management of the economy in the past. I
say this neither in a spirit of acrimony nor with a desire to apportion blame. But
the time has come for the Government to share its concerns with the Parliament
and the people, in an endeavour to evolve a national consensus, so that the
restoration of the health of the economy is perceived as a collective responsibility.
4 . Macro-economic imbalances which have been large and persistent are at
the root of the problem. The fiscal deficits of the Government had to be met by
borrowing at home. The current account deficits of the economy were inevitably
financed by borrowing from abroad. The burden of servicing the accumulated internal
and external debt has now become onerous. I need hardly stress that neither the
Government nor the economy can live beyond its means for long. The room for
maneuver, to live on borrowed money or time, has been used up completely. The
soft options have been exhausted.
5 . It is not surprising that the persistent fiscal imbalances have accentuated
inflationary pressures in the economy and strained the balance of payments. Thus,
even at the beginning of the current financial year, the economy was in a serious
fiscal crisis and faced a very difficult balance of payments situation. These problems
 2
have been sharply exacerbated by the oil shock and the dislocations caused by the
crisis and the war in the Gulf. We have experienced a deterioration in the fiscal
situation. Consumers are faced with double digit inflation. The economy is faced
with a balance of payments crisis. The impact of the Gulf war on the economy, in
the year to come, is difficult to assess fully at this point of time. The level at which
international oil prices would stabilise thereafter cannot be predicted.
6 . On assumption of office, we could not have waited and allowed a further
deterioration in the budgetary situation. Therefore, without losing any time, I
introduced a package of measures to mobilise additional revenue. Steps were taken
to improve tax compliance and revenue collections. The strictest possible control
was exercised on expenditure. At the same time, I had also assured the Parliament
that the Government attached a very high priority to fiscal consolidation, even if it
meant hard decisions and difficult choices which had been postponed for long. I
would like to stress, once again, that my commitment to fiscal adjustment in 1991-
92 remains firm and irrevocable.
7 . In the difficult set of circumstances, where the uncertainties remain, we
shall need some more time to evolve a comprehensive strategy for restoring the
health of the economy. In formulating the Budget, we want to ensure that such a
macro-economic adjustment does not disrupt the rhythm of the growth process
and does not place a burden on the poor. What is more, the process of fiscal
correction needs to be situated in a medium term perspective. We are engaged in
the formulation of a comprehensive approach which would provide a satisfactory
and sustainable solution to these problems. This needs time. I would, therefore,
plead with the House to wait until the regular Budget for 1991-92 is presented in
May 1991.
REVISED ESTIMATES FOR 1990-91
8 . In presenting the interim Budget, I would like to begin with a brief account
of the Revised Estimates for the current financial year. The Revised Estimate of
total expenditure for the Budget of 1990-91 is Rs. 1,06,717 crores which reflects a
significant increase over the original Budget Estimate of Rs. 94,535 crores. For a
more appropriate comparison, however, the original Budget Estimate should be
adjusted to Rs. 99,309 crores, to include small savings loans to State Governments
and a part of the capital expenditure of the Railways previously netted against
receipts, which would make it consistent with the Revised Estimate. The increase
would be off-set, to the extent of Rs.4,100 crores, by matching receipts. Thus, the
net increase in expenditure would be Rs. 3,308 crores. This expenditure overrun is
attributable, in significant part, to some unexpected post-budget developments
during the current financial year which were beyond the control of Government.
9 . Additional loans to State Governments, following larger collections of small
savings, account for Rs. 2,270 crores. In addition, the Revised Estimates also
include loans of Rs. 521 crores to States to meet a part of their opening deficits
with the Reserve Bank of India, while another Rs. 966 crores has been provided to
write-off loans to States as recommended by the Ninth Finance Commission.
1 0 . Interest payments would be Rs. 1000 crores higher than the Budget
Estimates. Pensions for defence personnel would be Rs. 170 crores more. The
 3
repatriation of Indian citizens from Kuwait would impose an unanticipated burden
of Rs. 300 crores on the exchequer. The scheme of rural debt relief, which was not
adequately provided for in the budget, would require another Rs. 500 crores.
Technical credits would be Rs. 800 crores more than estimated because there is a
temporary imbalance in trade under the rupee payment arrangements. The Revised
Estimates for major subsidies exceed the Budget Estimates by Rs.1,034 crores.
The increase in food subsidies, at Rs. 250 crores, is attributable to sugar, in which
the increase in issue prices to producers implemented in January 1990 was not
followed by an increase in issue prices for consumers in the public distribution
system. The increase in fertiliser subsidies, at Rs. 400 crores, is a consequence of
the increase in the domestic prices of naphtha and the increase in the landed costs
of imported fertilisers. The increase in export subsidies, at Rs. 384 crores, is because
Cash Compensatory Support, given at ad valorem rates, is a function of the rupee
value of exports.
1 1 . Gross tax revenue is expected to be Rs. 58,916 crores, which is Rs. 862
crores less than the budget estimates of Rs. 59,778 crores. Income tax and
Corporation tax are estimated to yield Rs. 134 crores and Rs. 261 crores, respectively,
more than the budget estimates, largely as a result of the post budget additional
resource mobilisation during the current year. However, customs duties and excise
duties are expected to yield Rs. 660 crores and Rs. 625 crores, respectively, less
than the budget estimates, despite the post budget additional resource mobilisation
during the current year. Non-tax revenue is expected to be Rs. 419 crores larger.
Capital receipts are expected to register an improvement of Rs. 4,399 crores, of
which Rs. 2,500 crores will be from small savings collections.
1 2 . Revised estimates of total receipts and total expenditure show that the
current year is likely to end with a budget deficit of Rs. 10,772 crores compared to
Rs. 7,206 crores estimated at the time of the budget. I would like to stress that, but
for the measures implemented in the past three months, in the spheres of both
revenue and expenditure, this budget deficit would have been significantly higher.
It is a matter of concern that the additional expenditures have to be met from
additional borrowings, thus pushing up the estimated fiscal deficit in the current
year to Rs. 43,331 crores from Rs. 36,795 crores envisaged in the budget. The
increase in the fiscal deficit is, to some extent, beyond the control of the Government
due to the autonomous buoyancy in small savings collections, as a result of which
the provision for loans to State Governments against small savings collections has
gone up by Rs. 2,270 crores in the revised estimates. Were it not for this factor, the
fiscal deficit, now estimated at 8.59 per cent of GDP, would have been 8.14 per cent
of GDP.
BUDGET ESTIMATES FOR 1991-92
1 3 . I shall now turn to the interim budget for 1991-92, which is being presented
for the purpose of a Vote-on-Account to enable Government to meet essential
expenditure during the first four months of the next financial year. The Demands
for Grants and the Annual Financial Statement, which are for the entire financial
year, would be revised as necessary and finalised at the time of presentation of the
regular budget.
 4
1 4 . At this stage, budget support for the Central Plan outlay in 1991-92 is
placed at Rs. 18,550 crores, while Central assistance for the plans of States and
Union Territories is placed at Rs. 14,710 crores for 1991-92. On this basis, the
outlay for the Central Plan would be Rs.42,148 crores, while the plan outlay of
States and Union Territories, including special area programmes, would be about
Rs. 29,300 crores. It has been my endeavour to provide the maximum possible
support to programmes for the poor and the weaker sections of society, specially in
the rural areas.
1 5 . We have stressed economy and austerity in non-plan expenditure in order
to maintain levels of investment and sustain the momentum of growth. Thus, I
have taken great care to ensure that non-plan expenditure is kept at the barest
minimum level next year. In absolute terms, the total non-plan expenditure would
increase by a marginal amount from Rs.76,761 crores in the current year to
Rs.76,907 crores next year.
1 6 . No provision has been made for additional installments of dearness
allowance that may become payable next year. I am requesting all Ministries and
Departments to absorb this additional liability within their budgeted outlay by
effecting suitable economies. The provision for payment of loans to States, on account
of their share of small savings, is placed at Rs. 4,500 crores next year against Rs.
6,770 crores in the Revised Estimates for the current year. This reduction is due to
the proposed transfer of the National Savings Scheme to the Bharat Bachat Bank,
to be set up soon.
1 7 . The provision for defence expenditure during the next year is placed at
Rs.16,850 crores. To meet the obligation of the Government under the scheme of
rural debt relief introduced this year, a provision of Rs. 1,500 crores is also being
made for the next year.
1 8 . In our quest for fiscal consolidation, it is essential to rationalise expenditure
on subsidies. As a first step in this direction, I propose to reduce the budgetary
allocations for the major subsidies on exports, fertilisers and food from Rs.9,550
crores in the Revised Estimates for 1990-91 to Rs.8,616 crores in the Budget
Estimates for 1991-92. In my view, a better targeting of subsidies for the poor and
the needy, combined with an improvement in management, should make it possible
to attain the desired objectives within these allocations.
1 9 . In the sphere of receipts, at the existing rates of taxation, gross tax revenue
is estimated at Rs.65,354 crores next year, compared to the revised estimate of
Rs.58,916 crores in the current year. The payments to States of their share of taxes
is placed at Rs.15,900 crores next year as against Rs.14,535 crores in the current
year. Thus, the net revenue receipts of the Centre, including non-tax revenue, are
estimated to increase from Rs.57,381 crores in 1990-91 to Rs.63,584 crores in
1991-92. Under capital receipts, market borrowings are placed at Rs.7,500 crores
next year which is lower than Rs.8,000 crores in the current year. Budgetary
receipts from net collections of small savings are estimated at Rs.6,000 crores in
1991-92 as compared with Rs.8,000 crores in 1990-91 on account of the transfer
of the National Savings Scheme to the new Bharat Bachat Bank, proposed to be set
up. External assistance excluding grants but net of repayments is expected to be
Rs.4,000 crores in the next year as against Rs.3,984 crores in the current year.
 5
2 0 . It has been decided that Government would disinvest upto 20 per cent of
its equity in selected public sector undertakings, in favour of mutual funds and
financial or investment institutions in the public sector. This disinvestment, which
would broad-base the equity, improve management and enhance the availability of
resources for these enterprises, is also expected to yield Rs.2,500 crores to the
exchequer in 1991-92. The modalities and details of implementing this decision,
which are being worked out, would be announced separately.
2 1 . Taking into account the other variations in receipts and expenditure, total
receipts at the 1990-91 rates of taxation are estimated at Rs.1,00,190 crores, while
total expenditure is estimated at Rs.1,10,167 crores, so that the budget deficit,
without additional resource mobilisation, would be Rs.9,977 crores.
2 2 . The increases in the budgetary provisions for plan expenditure and other
important categories of expenditure are related to, and depend upon, the magnitude
of total receipts that emerges in the regular budget. The interim period, before the
presentation of the regular budget, would be utilised for a close scrutiny and review
of all these expenditure provisions, so as to ensure that the fiscal deficit of the
Central Government is about 6.5 per cent of GDP in 1991-92. The increases in
provisions, wherever these are substantial, could not therefore be taken fully into
account in determining the provisions for which the Vote-on- Account is to be
sought, except in respect of items such as interest payments, salary or pension
payments and statutory grants to State Governments. I am requesting all Ministries,
Departments and public sector undertakings of the Central Government not to
take up any new schemes and not to enter into any fresh major commitments
during this period. All Ministries and Departments will also be advised to observe
utmost economy in expenditure and austerity would continue to be the watchword
of the Government.
2 3 . I propose to introduce a Finance Bill which seeks to continue the existing
rates of Income tax in the financial year 1991-92. There is no change in the rates
of Customs and Central Excise duties. However, provision has been made in the
Finance Bill for the continuance of the auxiliary duties of Customs and special
duties of Excise at the existing rates in the next financial year.
[Interim-4th March 1991]
 SPEECH OF PROF. MADHU DANDAVATE MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1990-91

Sir,
1. I deem it a great privilege to have the opportunity to present the first
Budget of the new Government.
2. Over a hundred days ago winds of political change swept the country. The
new Government, which secured a massive vote of confidence of this Honourable
House, transcending political affiliations, made a tryst with the nation to respect and
implement the mandate it received from the people.
3. Let me, at the outset, deal with the economic situation that we inherited
from the previous Government. I do so not in a spirit of acrimony but with a view to
revealing to the House the ground realities. The Central Government’s budgetary deficit
was Rs.13,790 crores as on Ist December, 1989, a level nearly double the deficit
projected for the whole year in the 1989-90 budget. Wholesale prices had risen by 6.6
per cent since the beginning of the financial year. The balance of payment was under
strain and foreign exchange reserves (excluding gold and SDRs) were down to around
Rs.5000 crores. Stocks of foodgrains had fallen to 11 million tonnes.
4. On a broader scale, the Economic Survey which was placed on the Table
of the House only a few days ago deals with the current economic situation. I will not
go into details but only highlight a few key points.
5. There has been some slowing down of growth in 1989-90. GDP is expected
to rise by 4 to 4.5 per cent, industrial output by about 6 per cent and agricultural
output by 1 per cent or so on the peak level reached in the previous year.
6. The price rise this year affects several commodity groups and the pressure
of inflation is clearly linked to the fiscal imbalance. The budget deficit and money
supply growth have been running well above target. The Revised Estimates for 1989-
90, which I will present a little later, indicate that the budget deficit is expected to be
substantially higher than Rs.7337 crores projected in the budget estimates for 1989-
90. The growth rate of aggregate monetary resources was 16.5 per cent from the
beginning of the financial year to 23rd February, 1990.
7. As regards the trade performance this year, exports have grown at the rate
of 38 per cent and imports at 21 per cent in rupee terms in the first nine months of the
year. But the pressure on reserves continues as the improvement on trade account is
not sufficient to counter-balance the increase in debt-service obligations.
1
 8. I have drawn attention to these features in order to highlight the constraints
within which the new Government has to look for ways of fulfilling its mandate.
9. The first task of the new Government was to contain the rise in prices. A
Cabinet Committee on Prices was formed and effective steps were taken to increase
the supply of essential commodities, break the inflationary psychology and contain
inflation. The price situation, however, remains a matter for concern and the
management of inflation is one of the priority areas for this Government.
10. Adequate stocks of foodgrains are essential for maintaining price stability
and our economic security. The Government has given a high priority to stepping up
procurement efforts and to rebuilding of stocks. As a result, the procurement of rice
has touched a new high of about 10 million tonnes already. Foodgrains stocks in the
central pool have been augmented and stand at 11.67 million tonnes at the beginning
of February compared to 8.34 million tonnes at the same time last year. Special attention
has been given to increasing supplies of essential commodities and streamlining the
Public Distribution System. Market intervention operations are being undertaken to
stabilise open market prices of some sensitive commodities.
11. Another major problem before the country is the strain on our balance of
payments position. In the last few years, large trade and current account deficits have
been financed through depletion of foreign exchange reserves and growing recourse
to foreign borrowings. To combat the pressures on the balance of payments and to
ensure a viable situation over the Eighth Plan period, exports must command the
highest priority. The alternative of higher foreign borrowing to finance our essential
import requirements runs the risk of mortgaging our hard won economic independence.
This is clearly unacceptable. Therefore, the new Import Export Policy 1990-93, to be
announced on 1.4.1990, will accord top priority to exports and will give special
encouragement for exports which earn high net foreign exchange. The priority for
exports will also be reflected in our industrial policy and later I will outline some
fiscal measures to promote export production.
12. Our import bill for bulk items is increasing rapidly. The oil consumption,
for example, has been rising at the rate of around 8 per cent in the recent past. There
has been a huge outflow of foreign exchange on this account. India’s foreign debt has
been doubled in the last five years. This has added to our vulnerability. The trend has
to be reversed. I am convinced that our people will make any sacrifice and meet any
challenge in order to preserve our economic independence and spirit of self-reliance.
We are ready to go through a period of austerity and hardship in order to avoid excessive
foreign borrowings.
13. The fiscal imbalance is the root cause of the twin problems of inflation
and the difficult balance of payments position. One of the targets of the Seventh Five
Year Plan which was over achieved was deficit financing. While the projected deficit
in the 7th Plan period was Rs.14000 crores, in reality it was more than double.
2
 14. The management of the deficit will require the containment of expenditure
growth. 1 can assure the House that we will spare no effort to reduce the burden of
administrative expenditure. * But the restraint of expenditure also requires careful
consideration of other areas of public spending which involve implicit or explicit
subsidies. We have to ask ourselves whether these subsidies are really reaching the
people they are meant to serve or whether there is a better way of providing the same
benefit.
15. On the revenue side, the real issue is of tax compliance. Tax evasion is
rampant. This generates black money and has other serious adverse effects on the
economy, such as fuelling inflation and conspicuous consumption. Black money is
also generated by shortages, artificially pegged prices and detailed physical controls.
The “leakages” from public expenditure programmes also cause serious distortions in
the economic and social structure of our society.
16. We will launch a sustained and multi-pronged drive against proliferation
of black money which is a social sin and an economic evil. To improve tax compliance,
we shall combine reasonable tax rates and simpler tax laws with effective tax
administration and strong deterrents against evasion. The Revenue Department is being
instructed to pay special attention to vulgar display of ill-gotten wealth, particularly
on occasions, such as wedding receptions. We will come down with a heavy hand on
those who give vent to their pomp and money power, by circumventing our laws and
frittering away the scarce resources of the nation. The Economic Intelligence Bureau
is being revamped to coordinate action against tax evaders and black money operators.
The Act on “benarni” transactions will be recast to make it more difficult for economic
offenders to hold wealth in “benami” forms.
17. Administrative curbs against black money must be backed by economic
measures. We must reduce the scope of discretionary powers which provide sustenance
to black money. Our economic policies will place greater reliance on general, non-
discretionary, fiscal and financial instruments and will reduce the role of ad hoc
discretionary physical controls.
18. I have also received some suggestions from Honourable Members and
fiscal experts on incentive scheme for “unearthing” of black money and channelling it
into desired directions. The advantage claimed for such schemes is that, instead of
being used for conspicuous consumption or unproductive investment, the unaccounted
money can be diverted to create jobs or to serve some other socially useful purpose.
The disadvantage is that these schemes generally provide for a more concessional tax
treatment of the black money than the rates normally applicable. The different schemes
tried out in the past did not yield much and were open to misuse. Human ingenuity
manifests itself in strange ways. In the past, it found expression in converting the
bearer bonds, issued with the laudable objective of bringing out black money, into
alternate currency that exchanged hands at a premium. Thus the instrument to render
3
black money white was itself used with vengeance to reconvert white money into
black!
19. Nevertheless, in the present situation, when our needs are large and
resources are tight, there is perhaps a case for introducing a time-bound scheme which
would permit undeclared incomes and hidden wealth to be used for one or more social
purposes, such as, slum clearance, building of houses for lower and middle income
groups, and setting up of specified agro-based industries in rural/backward areas.
Subject to certain conditions, the source of monies declared under this scheme need
not be questioned. There could be a suitable flat rate of tax on such income.
20. The Government would like to have a thorough debate in the Parliament
before introducing a scheme of this type. I would very much welcome the views of the
Honourable Members during the budget debate. In the light of these discussions the
Government will take the final decision.
21. Domestic trade in gold is regulated under the Gold Control Act which
was introduced in 1963 with the broad objective of curbing the demand for gold. The
Act has been largely ineffective. It has also caused hardship and harassment to small
goldsmiths. There is not much point in continuing with such an ineffective legislation.
The Government, therefore, proposes to abolish the Gold Control Act. This step would
benefit many artisans and small goldsmiths all over the country. At the same time, we
will use the Customs Act more vigorously to prevent smuggling of gold.
22. Let me now turn to some issues of long-term development.
23. In the traditional growth pattern, while the poor at the grass root level
suffered in silence without much benefit of growth trickling down to them, the affluent
at the. top lived in splendid isolation and monopolised most of the gains of economic
growth. The new Government rejects this trickle down theory of development. Instead,
it would work for growth with equity ensured through employment oriented planning
in which the decentralised institutions, of the four pillars state, aptly described by Dr.
Ram Manohar Lohia as the ‘Choukhamba Raj’ will play a pivotal role.
24. Our first priority is employment In the eighties, our economy grew at
around 5 per cent or more. But, according to a recent report of the National Sample
Survey the number of persons who are chronically unemployed increased from 8
million in 1983 to 12 million in 1987-88. In addition, there are a vast number who are
underemployed and whose earnings from work fall well short of a decent minimum.
We believe that “every citizen has the right to productive and gainful work in order to
live meaningfully and with dignity”. We would like to introduce an Employment
Guarantee Scheme. However, the cost of doing so in all parts of the country are huge,
and we do not have the necessary resources at this juncture. Nevertheless, it is proposed
to make a beginning on an Employment Guarantee Scheme for the drought prone
areas and areas with an acute problem of rural unemployment The allocation for the
4
employment schemes of the Department of Rural Development will be supplemented,
to the extent feasible, during the course of the year.
25. Faster growth of agriculture must be an important part of this strategy. We
have achieved impressive growth in yields in the areas of good irrigation but yields
remain very low in large harts of the country which are rainfed or semi-arid. Our
strategy for agricultural development must focus on increasing output in these areas
through greater investment in irrigation, land development, and soil and moisture
conservation. These investments will increase production. They will also generate
greater absorption of labour in agriculture. Parallel to this effort, regions of high
productivity should aim at diversification of agriculture and development of agro-
based processing industries. This will provide the economic linkages between the
rural economy and growing markets in urban areas, as well as potential markets abroad.
26. The country had adopted an Industrial Policy Resolution in 1956, which
through the years, has governed our broad strategy for industrial development. It is
surprising that there is no similar Agricultural Policy Resolution. Ibis Government
will remove this lacuna. We will lay the basic foundations of agricultural development
through the adoption of an Agricultural Policy Resolution. This will represent our
national commitment in respect of a sector which is the hub of our economy. We
invite all sections of the people to interact with the Government on the formulation of
this Policy Resolution.
27. We are committed to ensuring that 50 per cent of the investible resources
are deployed for the development of agriculture and rural development We have made
a beginning, in this year’s Central Plan in which the share of the rural sector in
budgetary support for the Central Plan will go up from 44 per cent in 1989-90 to 49
per cent in 1990-91. In addition, on the non-Plan side we are providing Rs.1000 crores
for debt relief, and Rs.4000 crores for the fertilizer subsidy, which also go to benefit
rural areas.
28. The steps for the inclusion of the land reforms legislation in the Ninth
Schedule of the Constitution have already been initiated and the necessary constitutional
amendment will be introduced. Simultaneously, various measures for the restructuring
of the land relations are being worked out and we hope to initiate steps in this direction
after due consultation with the State Governments.
29. Over the years, poor farmers, artisans and weavers have accumulated debt
which they are unable to repay. They have been caught up in a vicious circle of
indebtedness and low incomes which keeps them in perennial poverty. In order to
relieve our farmers from the burden of debt, an assurance was given in the National
Front’s manifesto that relief will be provided to farmers with loans upto Rs.10,000 as
on 2nd October, 1989. I am glad to inform the House that we are now ‘ ready with the
scheme of implementation of debt relief to fulfil the promise, and redeem the pledge
given to the kisans and artisans.
5
 30. It is proposed to introduce a scheme for providing debt relief which will
have the following features. The relief will be available to borrowers who have taken
loans upto Rs.10,000 from public sector banks and Regional Rural Banks. The relief
will cover all overdues as on 2nd October, 1989 including short-term as well as term
loans. There will be no limit on the size of the borrower’s land holdings. However,
wilful defaulters, who in the past did not repay loans despite their capacity to do so,
will be excluded. The Central Government will compensate the public sector banks
and Regional Rural Banks suitably for the debts which are thus written off. Many of
those who filed insolvency petitions and had taken loans below Rs.10,000 which were
overdue as of 2nd October, 1989 will also be covered under the scheme.
31. The State Governments may also wish to introduce a scheme on the same
lines in respect of cooperative banks within their purview. Subject to the constraint of
resources, the Central Government will consider suggestions for helping State
Governments in implementing a debt relief scheme on the same pattern in respect of
cooperative credit institutions under their control.
32. I consider the debt relief measure as a positive step which will enable our
farmers, artisans and weavers to increase their productivity. It is at the same time
necessary to ensure that there is no erosion of the credibility of the banking system.
Once the past over-dues are cleared, it is reasonable to expect that loans taken for
current operations will be serviced promptly. The Scheme should contribute to better
agricultural recoveries and better identification of wilful defaulters, who do not deserve
any sympathy. Banks are being asked to set up a system of maintaining a proper credit
history of their borrowers covered under the Scheme. The Government would also
like to make it clear that the Scheme will not be extended nor will it be repeated.
33. The Government proposes to introduce changes in the formula for
computing costs of production of agricultural crops for price fixation so as to take full
account of all costs. In particular the formula will take into account
(1) valuation of labour (including family labour) on the basis of statutory
minimum wage, or actual wage, whichever is higher,
(2) the remuneration for the managerial and entrepreneurial efforts of the
farmer,
(3) adjustment of procurement/support prices for the escalation in input costs
between the announcement of the prices and the arrival of the crop in the
market.
The new formula will be reflected in the procurement support prices to be
announced for the next kharif season. As procurement prices are revised in line with
costs, the revision of issue prices is also unavoidable. In future, the Government will
announce revision in procurement and issue prices at the same time even though these
may take effect on different dates.
6
 34. The threat to our environment can no more be ignored. It has been estimated
that around 130 million hectares of land is degraded through soil erosion, salinity,
total loss of tree cover, etc. Our forests are under pressure from a variety of sources.
In urban areas, air and water pollution from industry, transport and other sources is
widespread. A healthy environment is part of the quality of life and a productive
environment is the basis for development. Our emphasis on rural development and
decentralisation will allow us to integrate environmental considerations into the design
of development.
35. Let me now turn to another area of great concern-that of unemployed
youth. All of us who travel in our constituencies have seen the plight of young people
able and willing to work, but unable to find employment. A long-term solution to this
problem has to come from a shift to a more employment-oriented growth strategy. But
as an immediate step we have decided to give a boost to measures which will assist
the youth of this country to acquire the skills that will improve their prospects for
gainful employment. A comprehensive Vocational Training Project has been taken up
covering 28 States and Union Territories. The Project will improve the quality of
craftsmen training, apprenticeship training and advanced training of industrial workers.
We also propose to link training and the provision of credit support for self-employment.
36. Under the leadership of Dr. B.R. Ambedkar thousands belonging to the
Scheduled Castes had embraced Buddhist religion in 1956 to seek liberation from
caste oppression to which they were subjected for centuries. However, in the eyes of
the orthodoxy the social stigma on the Scheduled Castes was not erased even after
their conversion to Buddhism. It has, therefore, been decided by the Union Government
that all the facilities and privileges that were available to the Scheduled Castes will be
available to them from the Union Government even after their conversion to Buddhism.
37. A strategy for greater absorption of labour in agriculture has to go hand in
hand with faster growth of industry and balanced development of infrastructure,
specially power and transport. It is self evident that higher investment and faster
growth in incomes in agriculture can be sustained only if industrial production increases
to meet the rising demand for inputs and wage goods in particular. This Government
will give priority to accelerating industrial growth in a competitive and non-monopolistic
environment. The Government will review and simplify the Industrial Licensing Policy
to ensure that licensing does not become an instrument for preventing competition
and perpetuating monopolies.
38. The Khadi, Village and Small scale sector has a special role to play in any
strategy for employment-oriented industrial development. We will work for the
harmonious development of cottage, small and large industries and give protection
against encroachment of large scale on small scale and small scale against cottage
wherever necessary.
7
 39. The withdrawal of the 15 per cent Central Investment Subsidy for
Backward Areas has affected the growth of small scale industries. We must take industry
to the people and not people to the industry. We propose to reintroduce a Central
Investment Subsidy for small scale units in rural areas and backward regions.
40. A major problem faced by small industries is delay in the settlement of
bills by large units. The provision of factoring services in which the task of realisation
of the bill is taken on by an intermediary is one way of mitigating this. The House will
be glad to know that some steps towards this end have already been taken by the
Reserve Bank of India.
41. The problems of women entrepreneurs in the cottage and small sector are
of particular concern to us. The provisions regarding margin money and seed capital
for women entrepreneurs will be reexamined and liberalised.
42. There is a single window scheme for grant of working capital along with
term assistance to new projects in the small scale sector by State Financial Corporations.
This arrangement facilitates setting up of small scale units without waiting for
finalisation of working capital limits from banks. The present limits of project cost for
determining eligibility for such composite loans is being raised from Rs.5 lakhs to
Rs.10 lakhs.
43. Reserve Bank has issued guidelines for provision of credit and
rehabilitation of viable small scale units. These guidelines, are intended to assist the
small scale sector and not create hurdles in its path. Banks are being asked to implement
them faithfully.
44. The public sector is vital to our country’s development. It has played a
major role in broadening the base for industrial and technological development in this
country. The overall working results for the first six months of this financial year
show a significant improvement in net profit from Rs.694 crores last year to Rs.1103
crores this year. In 1990-91, Central sector enterprises will finance 46 per cent of their
plan investment from internal resources. We are committed to making the public sector
more efficient and result-oriented so that it can generate more surpluses which can be
ploughed back for development.
45. The health of the public enterprises depends crucially on the commitment
of its employees and their full participation in management. It has been suggested that
one way of securing this is to give workers a share in ownership either through stock
option schemes or sale of shares to workers or to trusts owned by workers. Since the
equity of public enterprises is not quoted in the market, arrangements will have to be
worked out to determine the sale and purchase price of such worker’s shares. I invite
suggestions from Honourable Members on the merits of this idea and how it could be
implemented.
8
 46. We are also firmly committed to the healthy development of capital
markets, and to strengthen the role of public financial institutions. The institutions
will be given functional autonomy. However they must also be accountable for their
actions. The institutions will not be party to corporate battles and clandestine takeovers.
The government would like to create an atmosphere and a culture where financial
institutions can function objectively without fear or favour.
47. There has been some concern about the role of financial institutions in
relation to their intervention in the capital market. I have asked these institutions to
frame suitable guidelines so that their actions are not only objective but seen to be so.
Each financial institution is expected to operate in the interest of its depositors and
investors consistent with national priorities. There may be occasions when there is an
abnormal and persistent upward or downward movement in share prices because of
concerted bull or bear pressures. In such situations, the financial institutions will play
a stabilising role in the capital market.
48. The growth of banking since nationalisation has been phenomenal. The
banking system has been extended to the remotest part of our country. Banks are now
playing a vital role in mobilising peoples’ savings and channelling them into productive
areas. At the time of nationalisation, only 14 per cent of the bank credit was provided
for the priority sector covering sections, such as, agriculture, rural development and
small industries and businesses. Today, this proportion is nearly 45 per cent. This is
the measure of the success of nationalisation.
49. There is one aspect of banking operations which is of concern to me. This
is the low credit deposit ratio in some regions. A variety of factors determine this
ratio. I have asked the Reserve Bank of India to pay special attention to this problem
and further improve credit delivery in such areas consistent with financial discipline.
50. Our bank managers and employees are, as a group, the most qualified,
dedicated and hard working. But it is also a fact that the level of public satisfaction
with the banking services is not as high as it should be. Over the years, perhaps some
structural rigidities have crept in. These need to be removed. There is need for greater
competition and greater operational flexibility in respect of banking services. The
banking culture has to be made more responsive to the needs of the public. I am
requesting the Reserve Bank of India to set up a Committee of Bankers, bank employees,
depositors and borrowers to consider these aspects and make recommendations to the
Government.
51. The previous Government had announced the formation of the Securities
Exchange Board of India (SEBI) in 1987. Three years have passed and the legislation
for giving statutory authority to SEBI has not been introduced. We will ensure that
this is done in this budget session.
52. Science and technology is the mainspring of development. We are proud
of the capabilities that we have built up in critical areas like agriculture, space research,
9
atomic energy and defence. We will aim at utilising the talent of our scientists and
engineers towards two basic ends: ,
- the development of appropriate technologies for agriculture, non-
conventional and renewable energy and other employment intensive
activities,
- the establishment of a strong base of self reliance in critical areas of
modern technology.
Public spending on R & D, incentives for the use of indigenous technologies
and policies to guide private research efforts will be oriented towards these objectives.
53. There is a large community of Indians settled abroad. They have achieved
tremendous success in their chosen professions and occupations. True to the rich
tradition of our ancient culture, their physical location has not weakened the strong
intellectual, philosophical and social links that they have with the country of their
origin. The Government will continue to provide special facilities for them to invest
their savings in this country. The procedures will be simplified so that they can function
with a sense of confidence and in line with declared national policy.
54. Let me now turn to the Revised Estimates for 1989-90 and the Budget
Estimates for 1990-91.
Revised Estimates for 1989-90
55. Revised Estimates of Expenditure for the current year show an increase
of Rs.5620 crores over the Budget Estimates. Of this, Rs.4958 crores are on non-Plan
account and Rs.662 crores on Plan account.
56. Honourable Members are aware of the strains on our security environment
which unfortunately coincide with the strains on our economy. Hence, on the non-
Plan side, Defence Services are being provided additional Rs.1500 crores to meet
their essential requirements and committed expenditure. The provision for fertilizer
subsidy will be Rs.950 brores more, mainly due to larger imports and clearance of
arrear claims. There is an increase of Rs.276 crores in food subsidy, mainly for clearing
arrears due to Food Corporation of India. An additional provision of Rs.468 crores has
been made for export promotion and market development. Interest payments will be
Rs.710 crores higher. The Government is of the view that the amount of compensation
to be paid to the victims of the Bhopal Gas tragedy under Court order is too meagre
for the magnitude of sufferings of these innocent people. The matter is under review
in Court and in the meantime Government have decided to pay interim relief for the
victims for which a provision of Rs.320 crores has been made which, inclusive of
bank interest over a period of 3 years, will amount to Rs.360 crores. The increases are
partly offset by savings in some areas notably in the lump sum provision made for
dearness allowance consequent on transfer of liability on this account to the budget of
the Ministries/Departments.
10
 57. On the Receipt side, while collection from Corporation Tax and Customs
duties are expected to more or less reach Budget estimates, the receipts from Union
excise duties are estimated to be Rs.599 crores less than the budget. Income-tax
collections, on the other hand, are expected to be more by Rs.755 crores. States’ share
of taxes including the sums payable to States on the basis of collection figures certified
by the C&AG for the earlier years are placed at Rs.13232 crores against Rs.12438
crores at the budget stage, i.e. Rs.794 crores more. The shortfall in net revenue receipts
is expected to be more than off set by larger receipts from small savings, provident
fund collections and special deposits of non-government provident funds, etc.
58. The overall deficit for the current year is now estimated at Rs.11750
crores against the budget estimate of Rs.7337 crores.
Budget Estimates for 1990-91
59. The next financial year is the beginning of the Eighth Five Year Plan.
This Government is irrevocably committed to planned economic development, and to
making the plan more meaningful to the people. As a part of the new strategy, in the
next year’s Plan, we have provided more for those programmes and schemes which
benefit the people directly. We have favoured those programmes that create more
jobs, generate self-employment opportunities, improve the living environment in our
villages and strengthen our agriculture. This is the surest route to overcome poverty.
An increase of 31.7 per cent on last year’s budget estimate is being provided for
Agriculture and Allied Services, without taking into account the budget provision of
Rs.1000 crores for the debt relief for farmers, weavers and artisans. The allocation for
anti-poverty programmes, which are spread over different budget heads is being
increased by about 23 per cent over last year’s budget estimate. This includes the
outlay for employment programmes in rural and urban areas which is being increased
by 30 per cent on last year’s budget estimate.
60. We have a firm commitment to accord highest priority to agriculture and
rural development and our thrust and actions are in conformity with that commitment.
61. For the Central Plan 1990-91, I propose an outlay of Rs.39,329 crores - an
increase of Rs.4,883 crores or 14.2 per cent over the current year’s outlay. Of this,
Rs.17,344 crores will be provided as budgetary support and the balance of Rs.21,985
crores will be mobilised by the public sector enterprises through their internal resources
as well as borrowings.
62. For the year 1990-91, an outlay of Rs.905 crores is proposed for the
Department of Agriculture and Cooperation which represents an increase of 17.5 per
cent over the budget estimates for the current year. In addition, I am also proposing an
outlay of Rs.155 crores for agricultural Research and Education compared to the
provision of Rs.110 crores in 1989-90 - an increase of 41 per cent.
11
 63. I have already referred to the intention of the Government to make a
beginning in respect of an Employment Guarantee Scheme. The Annual Plan outlay
proposed for the Department of Rural Development is Rs.3,115 crores. It is my intention
to provide some additional funds, within the constraint of resources, to enable an
Employment Guarantee Scheme to be introduced in selected areas.
64. The Government is pledged to securing a fair deal for the most oppressed,
exploited and deprived sectors of the society, namely, the Scheduled Castes and
Scheduled Tribes. It is proposed to make a provision of Rs.320 crores for the schemes
for Scheduled Castes and Scheduled Tribes in the Annual Plan 1990-91 as against
Rs.269 crores in 1989-90 BE. The Special Central Assistance to Special Component
Plans and Tribal Sub-Plans of States has also been increased.
65. The Government would intensify the efforts for eradication of illiteracy.
The very fact that millions of voters in the country have to identify the names of
candidates on the ballot papers only from the election symbols is itself a symbol of the
extent of illiteracy. We have made 25 per cent increase in allocation for National
Literacy Mission. Special attention to vocational programmes at all levels will be
given. The process of modernisation of technical education, and support to thrust and
frontier areas in science and technology will be maintained. I am proposing an outlay
of Rs.865 crores for the Department of Education during 1990-91.
66. In all the programmes of health and family welfare services, special
attention will be paid to the needs of the rural people. I am proposing an outlay of
Rs.950 crores for the Ministry of Health and Family Welfare for 1990-91
67. The Government attaches great significance to the welfare of the weak,
the poor and the deprived living in the urban areas. Major initiatives for employment,
low cost sanitation for liberation of scavengers and provision for night shelters are
proposed to be launched. The plan outlay of the Urban Development Sector is being
increased to Rs.272 crores in 1990-91 from Rs.89 crores in 1989-90BE for this purpose.
68. The Annual Plan outlays for 1990-91 for the infrastructure sectors are
proposed to be stepped up. The outlays for Petroleum and Natural Gas is proposed to
be increased by 18.6 per cent, Railways by 12.4 per tent and Power by about 10
percent.
69. The details regarding Central Plan outlays for these and other sectors are
in the Budget documents. I do not wish to take the time of the House in making my
speech a substitute for the-voluminous budget documents, and thus deprive the Members
of the excitement of reading these documents’.
70. Honourable Members will be happy to know that the Central assistance
for State and UT Plans next year will be Rs.12,848 crores, including the Plan revenue
grants recommended by the Finance Commission as against Rs.10,450 crores excluding
drought assistance provided in Budget Estimates for the current year. Ibis represents
a substantial step up of 22.9 per cent.
12
 71. Budget Estimates for the next year provide Rs.64,515 crores for non-Plan
expenditure as against Rs.59,220 crores in Revised Estimates for the current year. The
main increase next year is under interest payments provision for which goes up from
Rs.17,710 crores this year to Rs.20,850 crores next year.
72. The Government have appointed a Committee to consider the issue of
One Rank One Pension in all its aspects. The Report of the Committee is expected by
end of March, 1990 and government will take further action thereafter.
73. For Defence Services, a provision of Rs.15,750 crores has been made in
the Budget Estimates. This increase in the defence expenditure is not of our choice. It
is the direct result of the situation on our borders.
74. Freedom struggle is indivisible and therefore it has been decided that
those who fought for Goa’s liberation from the Portugese rule will be eligible for
Union Government’s pension and all other benefits available to other freedom fighters.
75. The Ninth Finance Commission has submitted its second report covering
the period 1990-95, a copy of which was laid on the Table of the House last week
along with a statement of decisions of Government on the recommendations. These
have been taken into account while framing the Budget for next year. The
recommendations of the Finance Commission accepted by Government will cast an
additional burden of the order of Rs.773 crores on the Central Budget in 1990-91.
76. Government are alive to the important issue of checking proliferation of
Government expenditure especially in non-priority and non-developmental areas. I
am requesting all the Ministries and Departments to absorb the liabilites on account of
additional instalments of D.A. which will be payable next year from within the budget
provisions made for them by effecting economics and eliminating non-essential
expenditure. I am, therefore, including only a nominal provision of Rs.100 crores in
the next year’s budget as lump sum provision for D.A. This is mainly to meet the
possible requirements of small Departments with limited budgets who may not find it
possible to absorb D.A. increases to the full extent.
77. On the Receipts side, Gross Tax Revenue at the 1989-90 rate of taxation
is estimated at Rs.57988 crores and the net tax revenue after payment to States of their
share of taxes is placed at Rs.43507 compared to Rs.37798 crores in the Revised
Estimates for die current year.
78. I have taken a credit of Rs.8000 crores on account of market borrowings
as against Rs.7,400 crores in the current year. External assistance net of repayment is
expected to be of the order of Rs.4327 crores in the next year as against Rs.3901
crores in the current year. Taking into account the other variations in receipts and
expenditure the overall deficit for next year at the 1989-90 rate of taxation is estimated
at Rs.9165 crores.
13
 PART B
79. Having taxed your patience so far, now let me turn to other areas of
taxation and reliefs for which you must have been waiting impatiently. Let me begin
with my proposals in respect of direct taxes. I am introducing certain major changes
in the rate structure for personal income-tax with a view to providing relief to low and
middle income groups, and to make the savings linked incentives more equitable for
taxpayers in different income slabs. My first proposal to raise the exemption limit is
in fulfilment of a promise made in the National Front manifesto. I am raising the
exemption limit for personal income taxation from Rs.18,000 to Rs.22,000. Roughly,
one million persons will go out of the tax net as a result of this change. In deciding the
new limit, I have had to balance two conflicting considerations. On the one hand, it is
a fact that the lower income groups have been affected the most by price rise, and
there is a case to raise the exemption limit. On the other hand, an increase in the limit
narrows the tax base and involves substantial loss of revenue as the benefit of the
increase is spread over all taxpayers, and is not confined to the lower end of the
income levels. Experts have often argued that keeping in view our per capita income,
raising of the exemption limit is not justified. However, as I temperamentally prefer to
avoid taking extreme positions, I have chosen the middle course which I believe is fair
and reasonable.
80. As further measure of relief to the lower and middle income groups, I am
extending the lowest rate of 20% from the present limit of Rs.25,000 to Rs.30,000.
81. Last year, a surcharge at the rate of 8 per cent was introduced for financing
employment programmes. Dropping this employment surcharge would have brought
into question my irrevocable commitment to employment oriented planning. I, therefore,
have no choice but to continue this surcharge. This will now be applicable beyond
taxable income of Rs.75,000 as against the present limit of Rs.50,000.
82. As the Honourable Members are aware, the existing schemes of tax
incentive to promote savings are based on deductions from income. A person gets tax
relief at the highest marginal rate of tax applicable to him. Accordingly, it confers
higher amount of tax benefit to a person with higher income vis-a-vis a person with a
lower income. With a view to removing this inequity, I propose to introduce a system
of tax rebate on the gross amount of savings under section 80C. Under the new system,
a person contributing to provident fund, life insurance, National Savings Certificates,
etc. as earlier, will now be entitled to a tax rebate calculated at the rate of 20%, on
such savings. The maximum tax rebate allowable will be Rs.10,000 generally and
Rs.14,000 in the case of authors, playwrights, artists, musicians, actors, sportsmen
and athletes. This is broadly equivalent to she maximum relief available now. All
persons will get the same amount of tax benefit on a given amount of savings,
irrespective of their levels of income. The low income taxpayer will benefit.
14
 83. Let me illustrate the impact of the above proposals. A person with a salary
income of Rs.3,500 per month, i.e. Rs.42,000 per year, who saves Rs.8,000 per year
in provident fund and insurance presently pays Rs.1,000 per year as tax. Under the
new dispensation, he will not have to pay any tax at all. The upper income group will
have to save Rs.50,000 to get the full relief of Rs.10,000. Under the old system they
would have got the same relief by saving only Rs.39,500. I may mention in passing,
that the new system of a uniform tax rebate will also lead to a substantial simplification
in tax deduction at source by employers.
84. As a further incentive to save, I propose to increase the limit available for
the savings incentives under section 80CCA from Rs.30,000 to Rs.40,000. Since the
savings under this are on a ‘netting’ principle and are added back to income when
withdrawn, the present system of deduction from taxable income will continue.
85. In addition to this, the Equity Linked Savings Scheme (ELSS) announced
last year has how been finalised on a ‘netting’ principle. Investment in units under the
Scheme, will be eligible for deduction upto a maximum of Rs.10,000 from the total
income. The annual return on the investment in the units will be eligible for tax
concession under section 80L. On repurchase of the units by the Mutual Funds, the
capital amount representing the cost of the units win be taxed as income in the year of
repurchase and the excess will be liable to tax as capital gains. The Equity Linked
Savings Scheme will eventually replace the present deduction under section 80CC.
Meanwhile, this provision is being extended for investments made upto 31st March,
1991.
86. In an effort to mitigate in some small measure, the hardship of parents or
guardians of physically handicapped or mentally retarded persons with incomes upto
Rupees sixty thousand per annum, I propose allowing a deduction of Rs.6,000 from
the parent’s or guardian’s total income to cover expenses on medical treatment, training
and rehabilitation of such persons.
87. I propose to increase the deduction in respect of professional income
from foreign sources, available to authors, playwrights, artists, musicians, actors and
sportsmen including athletes, from the existing rate of 25% to 50% of the income, or
75% of the foreign exchange brought into India, whichever is higher. In the case of
professors, teachers and research workers also, the present provision has been liberalised
to allow deduction of 75% of the foreign exchange brought into India.
88. I will now make my proposals in regard to corporate taxation. The corporate
sector has often claimed that the rate of Corporate Tax is high and that this inhibits
growth as well as tax compliance. On closer scrutiny, I find that the rate is only
seemingly high, because the system provides too many exemptions. After all the
admissible exemptions and deductions, the effective rate falls drastically. Many large
and high profit making companies had been able to escape the tax net and were paying
zero tax for a long time. That is why the contribution of the corporate sector to tax
15
revenue was not commensurate with the profits they earned; nor with the needs of
national development. The tax system also tilted the balance in favour of capital
intensive production.
89. To ensure better tax compliance, I propose a twin strategy. I am abolishing
major incentives like Investment Allowance and Investment Deposit Account with a
view to closing the escape route for the corporate sector to go out of the tax net; and
having closed that route, I propose to fix the tax rate for widely held domestic companies
at 40% with corresponding changes in rates for other domestic companies. This twin
strategy will raise the effective tax rate and will also give substantial additional revenue
of Rs.800 crores.
90. The only major deductions that will now be permitted are those relating
to foreign exchange earnings and for setting up new industrial undertakings. The
deduction for setting up new industries is being raised from 25 per cent to 30 per cent
in the case of companies and from 20 per cent to 25 per cent for others. The period
during which the benefit can be availed of is being extended from 8 to 10 yew.
91. With the abolition of the major exemptions, there is a case for also
removing the special provision regarding tax on minimum profits contained in section
115 of the Income-tax Act. Accordingly, I propose to discontinue that provision with
effect from the assessment year 1991-92.
92. I am also introducing an important change in the taxation of inter-corporate
dividends. At present 60% of the dividend income received by a domestic company
from another is exempt from tax. There is a tendency towards holding of personal
wealth in the form of companies which are in effect closely-held. In order to encourage
genuine investment activity while at the same time discouraging the use of corporate
framework for holding personal wealth, I propose to exempt dividends received by
domestic companies from other domestic companies to the full extent to which they
themselves declare dividends during the relevant period. However, scheduled banks
and public financial institutions would, in substance, continue to be governed by the
provisions of section 80M as they presently stand.
93. The result of the reform of the corporate tax system proposed by me will
be to increase the buoyancy, simplify the tax structure and make it neutral as between
small and large companies. At the same time, it will provide strong incentive for
export and for investment in new industrial undertakings.
94. Many small scale industries are organised as partnerships. I propose to
raise their exemption limit from Rs.10,000 to Rs.15,000 and to lower the tax rates
suitably.
95. Restoration of ecologically degraded areas fulfils the objectives of
employment generation, enhances the supply of fuel wood and fodder and also
contributes to the overall social, economic and environmental stability of the rural
16
areas. In order to promote afforestation, I propose to extend the provisions of section
35CCB and section 80GGA to taxpayers who contribute to a fund or programme for
afforestation approved by the prescribed authority.
96. As in the case of personal income tax. I propose to continue the existing
surcharge of 8% on corporate taxpayers also on all incomes above Rs.75,000.
97. I also propose to make a major change in the taxation of gifts. At present,
gifts are taxed in the hands of the donor, but there is no limit on the amount which a
donee can show as having been received by way of gifts. Because of this, the mechanism
of gifts is used to split up capital and launder black money. Some instances have also
come to notice recently where attempts have been made to explain away wasteful and
ostentatious expenditure on marriage receptions and other functions as having been
financed out of gifts. With a view to curbing such practices, I have decided to substitute
the present gift-tax on donors with a donee based gift-tax. Any person, who claims his
assets or his expenditures as having been financed from gifts, will now be liable to a
gift-tax on a graduated scale. Thus he will have the pleasure of transferring a part of
his bounty as a gift to the exchequer.
98. The primary purpose of the donee-based gift-tax is not to raise revenue
but to check tax evasion and conspicuous consumption. In order to take care of
legitimate gifts, there will be a basic exemption limit of Rs.20,000 per year. In the
case of total gifts exceeding Rs.20,000 but not exceeding Rs.50,000, gift-tax will be
levied at 20 per cent; for total gifts exceeding Rs.50,000 but not exceeding Rs.2,00,000
at 30 per cent; and for total gifts exceeding Rs.2,00,000 at 40 per cent. In addition, I
also propose to allow for a substantially higher limit of rupees one lakh for gifts
received from all sources by an individual at the time of marriage. Further, gifts
received in foreign exchange through official channels will also be exempt.
99. I propose to make the new system applicable in respect of gifts made on
or after 20th March, 1990. Consequently, the existing Gift-Tax Act taxing the gifts in
the hands of donors will cease to be operative in respect of gifts made on or after that
date.
100. Legislation to give effect to this new scheme is proposed to be introduced
during the current session of Parliament.
101. I do not propose to take up the time of the House with other minor changes
in the Direct Tax Laws.
102. As I mentioned earlier, there will be a gain in revenue from corporate tax
to the extent of Rs.800 crores. The loss in revenue from income-tax other than corporate
tax after providing for better compliance is expected to be Rs.250 crores. There will,
therefore, be an additional accrual of Rs.550 crores in respect of direct taxes.
17
 103. Sir, I shall now deal with my proposals relating to indirect taxes. The
main thrust of the proposals is on simplification and rationalisation. Simultaneously,
I have also attempted to mobilise some resources in a manner dud does not hurt the
common man and at the same time helps to curb elitist consumption. A major emphasis
has been on strengthening impulses for growth and exports. Significant changes in
duty structure are also proposed to develop a quality culture in our industry. I have
also not failed to give relief to the deserving sectors, particularly small scale industry,
agriculture and environmental protection. All these measures have been described in
some detail in the Explanatory Memorandum to the Finance Bill and I shall deal
briefly with the more important of these proposals.
104. Presently, the import duty rates are widely dispersed. With a view to
rationalising the rates and bringing down their multiplicity, the total of the basic and
auxiliary duty rates of customs are being placed in a limited number of slots in the
range of zero to 125% in respect of most items. Further, as a step towards rationalisation
and simplification of the Central Excise Tariff, the duty rates are proposed to be recast
for a large number of goods. Though as a result of the rationalisation, the duty rates
on certain commodities may marginally go up or down, the proposals on the whole are
intended to be broadly revenue neutral. The reduction in 6e number of rates in each
Chapter of the Tariff will simplify assessment. It will be our endeavour to ensure a
measure of stability for the ad valorem rates.
105. First, I shall take up the proposals which are in the nature of concessions
in customs and excise duties.
106. Agriculture is a priority area in our framework of development and tax
rates are already kept low on most of the inputs used in this sector. Specified pesticides
and pesticide intermediates enjoy concessional rates of import duty of 70% and 60%
respectively. I propose to reduce the import duty on a few more specified bulk pesticides
and pesticide intermediates to these levels. The proposal involves a revenue loss of
about Rs.16 crores.
107. In order to encourage the use of rape-seed oil and mustard oil, of which
there is an abundant production in the country, I propose to completely exempt refined
rape-seed oil and mustard oil which are currently attracting excise duty of Rs.750 per
tonne. The revenue loss on account of this proposal is estimated to be Rs.8 crores.
108. I propose to remove excise duty on pickles altogether in the hope that this
will lend some flavour and spice to my budget.
109. Excise duty on coffee is presently levied at the rates of Rs.78 and Rs.105
per quintal depending upon the variety. As a measure of relief to the coffee growers,
I propose to reduce the duty to a uniform level of Rs.50 per quintal. This concession
involves a revenue loss of Rs.4 crores.
18
 110. Marine products constitute a major thrust area of the country’s exports. In
order to make imported prawn feed more economical, I propose to reduce the duty on
this item to 25%. In order to help modernisation of food processing and sea food
industries, I propose to extend the concessional rate of import duty of 40% now
available to certain specified machinery, to a few more items.
111. With a view to reducing the cost of cattle feed, I propose to completely
exempt molasses used in its manufacture from the whole of excise duty. I also propose
to prescribe concessional import duty of 40% in respect of certain items of equipment
required in cattle breeding and dairying.
112. I propose to exempt fully foot-valves of certain specifications from excise
duty in order to promote efficiency of agricultural pumps.
113. Presently, kraft paper and kraft paper-board used for apple packaging in
Himachal Pradesh, Jammu and Kashmir and Uttar Pradesh are exempted from excise
duty, as a measure to conserve forest wealth. I propose to extend this concession to
packaging of all horticulture produce all over the country. This is expected to result in
a revenue loss of Rs.5 crores.
114. I propose to extend M11 exemption from excise duty to hand made paper
and paper board manufactured by units of Khadi and Village Industries Commission
even when power is used in the process of sheet forming. I also propose to enhance
the value limit for the purposes of excise duty exemption on footwear from Rs.75 to
Rs.100 per pair in respect of such footwear made by units under KVIC as well as
those run with the assistance of IRDP.
115. In addition to the measures outlined in the earlier part of my speech for
the promotion of small scale sector, I also propose to extend some more fiscal
concessions to this sector. Presently, small scale units are allowed complete exemption
from excise duty in respect of clearance of goods upto a value of Rs.15 lakhs in case
such goods fall under only one Chapter of the Central Excise Tariff. I propose to
increase this value limit to Rs.20 lakhs. The total exemption available to goods cleared
upto a value limit of Rs.30 lakhs, when such goods fall under more than one Chapter
of the Tariff, will remain unchanged. The increase in exemption limit for small scale
units involves a revenue loss of Rs.67 crores. The scheme of notional credit of 5% in
the case of inputs manufactured in the small scale sector is also being continued for
one more year from the Ist April, 1990. Further, the limit of value of clearance of
goods in a financial year for the purpose of obtaining a central excise licence is being
increased from the existing level of Rs.10 lakhs to Rs.15 lakhs. It has also been
decided that the licensed small scale units having value of clearances upto Rs.20 lakhs
in a year will henceforth be required to furnish only quarterly returns of production,
clearance and duty payment. These changes are proposed to take effect from the lst
April, 1990.
19
 116. In order to reduce the prices of life saving drugs, I propose to exempt
certain finished formulations containing Rifampicin, which is an anti-TB drug, from
central excise duty. Specified bulk drugs which are required for the manufacture of
certain fife saving medicines are also being exempted from customs duty. I propose to
reduce the import duty on certain specified drug intermediates to 90%. These proposals
involve a loss of revenue of nearly Rs.17 crores.
117. We are all aware of some recent tragedies involving unhygenically packed
intravenous fluids. In order that the pharmaceutical industry is encouraged to employ
latest techniques of aseptic packaging, I propose to reduce the import duty on aseptic
form fill seal machines for use by that industry from the present level of 147.25%
to 40%.
118. Certain life saving equipments are eligible for complete exemption from
import duty. I propose to extend this benefit to certain specified instruments and
implants for physically handicapped persons. I also propose to give some concessions
in customs duty to components of hearing aids.
119. I propose to reduce the import duty on homeopathic medicines as well as
on certain inputs for the manufacture of such medicines. This involves a revenue loss
of about Rs.5 crores.
120. With a view to giving an impetus to industrial production and to boost
exports, I propose to grant some concessions to capital goods and machinery.
121. There has been a feeling-that our exports are not able to face international
competition due to high cost of imported capital equipment. A scheme is being worked
out for making available to registered manufacturer-exporters the facility of import of
capital goods at concessional rate of duty against suitable export obligation. Broadly,
capital goods upto a specified value limit imported under the scheme would be eligible
to a concessional import duty of 25%. This will be subject to the condition that goods
of a minimum of three times the value of the imported capital goods are exported
within four years from the date of importation., The details of this scheme will be
announced in the new Import and Export Policy.
122. Concessional import duties have been prescribed from time to time on
machinery required for various export thrust sectors. I propose to extend the concession
to specified items of machinery for rubber belting industry and forged hand tool industry.
The concession involves a revenue loss of Rs.8 crores.
123. In order to promote investment and strengthen indigenous capital goods
sector, I propose to reduce the excise duty on such machinery on a selective basis by
5 percentage points. This concession will lead to loss of revenue to the extent of Rs.60
crores. I am one of those who believe that the indigenous capital goods sector is
integral to our search for self-reliance. 1 hope, the reduction in excise duty will make
our capital equipment more competitive and spur modernisation.
20
 124. With a view to encouraging industrial units to invest in quality upgradation
and strengthen quality control, I propose to prescribe a concessional import duty of
40% on specified instruments and equipments. The proposal involves a revenue loss
of Rs.30 crores. Ibis substantial revenue loss is worthwhile in the interest of improving
the quality of indigenous products.
125. In the interest of better environmental protection and pollution control. I
propose to extend the present concessional customs duty of 40% to some more specified
air and water pollution control equipments. At the same time, I propose to reduce the
excise duty on certain specified pollution control equipments from 15% to 5%.
126. Heavy investments are required for the upgradation of the facilities
available at the airports. I propose, as a measure of relief, to reduce the import duty on
navigational, communication, air traffic control and landing equipments imported by
the National Airports Authority of India to a level of 25%. The proposal involves a
revenue loss of Rs.7.5 crores.
127. In order, to promote establishment of telecommunication network in rural
areas, I propose to reduce the excise duty on specified telecommunication equipment
from the existing rate of 20% to 15%. This will lead to a revenue loss of Rs.15 crores.
128. I propose to reduce the excise duty on dry cell batteries from 35% to
30%. The relief will involve a revenue loss of Rs.10 crores.
129. It has been represented that film industry is facing difficulties on account
of video piracy. In order to help combat this menace by simultaneous release of prints
in a number of cinema houses, I propose to fully exempt feature films from excise
duty. The proposal would involve a revenue loss of Rs.8 crores. I hope, with this
incentive, the films which had gone into slow motion will regain their lost momentum.
130. In order to give relief to the newspaper industry, I propose to reduce the
import duty on standard newsprint by Rs.100 per tonne.
131. As a matter of administrative simplification, I propose to shift the incidence
of excise duty from truck body building activity, which is mostly in the unorganised
sector, to motor vehicle chassis.
132. Now I move on to a package of proposals relating to the textile industry.
These aim mainly at simplifying and rationalising the tariff structure, minimising the
scope for evasion and ensuring a lower rate of duty for most varieties of cheaper
fabrics. There are essentially two sets of proposals. The first relates to duty
rationalisation at the fabric stage and the second, to changes in excise and import
duties on man-made fibres and yarns as well as the intermediates used to produce
them.
133. There is a growing concern about the plight of the handloom weaver. It is
widely believed that one of the main causes of the distress is the neutralisation of the
21
tax concessions given to this sector by wide-spread tax evasion at the processing
stage. There is thus a near unanimous view in favour of transferring the excise duty
from fabrics to yam, which I share. However, in the case of man-made fabric, the
entire duty is by way of additional excise duty in lieu of sales tax. Therefore, any
change in the duty structure can be made only in consultation with the States. I propose
to consult the Chief Ministers shortly in this regard.
134. A part of the duty on cotton fabrics is, however, in the shape of basic
excise duty. As a first step, I propose to transfer the whole of the basic duty on cotton
fabrics to yarn. As the hank yarn used by handlooms will continue to be exempted, the
price differential between hank yarn and cone yarn would be widened and this should
greatly improve the competitiveness of the handloom sector.
135. Since at present the additional excise duty at the processing stage cannot
be shifted to yarn without consultation with the States, I have attempted to rationalise
the duty structure on fabrics. The number of slabs in the case of manmade fabrics is
being reduced in a manner that the duty on fabrics becomes more equitable and the
administration of tax laws more efficient. The rationalisation will also, I believe,
greatly reduce evasion and consequently improve realisation.
136. Let me turn to man-made fibres, yams and the intermediates used to produce
them. Honourable members will recall that duties were reduced substantially on man-
made textiles in 1985 and 1988. While the incidence of taxes was lowered, there have
been complaints that the consumer did not get the corresponding benefit I have thus
tried to revise die duty structure keeping in mind the ability of different sectors to bear
the additional burden. This will also help the competitiveness of the handloom sector
where the dominant fibre is cotton. The major changes I am proposing are:
- imposition of a basic excise duty of Rs.4.40 per kg. on PTA and Rs.3.60
per kg. on DMT which will yield Rs.80 crores,
- increase in the basic excise duty on polyester filament yarn from around
Rs.50 to Rs.55 per kg. and on nylon filament yam from around Rs.37 to
Rs.50 per kg. yielding additional revenue of Rs.156 crores,
- increase in the basic excise duty on viscose staple fibre from around Rs.7
to Rs.8.50 per kg. leading to a revenue gain of Rs.15 crores,
- reduction in the basic duty on polyester staple fibre from around Rs.14 to
Rs.8.50 per kg. involving a revenue loss of Rs.65 crores and
- some reduction in the basic duties on various polyester blended yams.
137. In order to ensure a measure of price discipline in this industry, I propose
to reduce import duties,
- on DMT and PTA from 195% to 150%,
22
 - on NFY from 130% to 100%,
- on PFY from 205% to 180% and
- on VSF from 55% to 40%.
The revenue loss from these duty reductions will be marginal since actual imports
am not expected to be significant.
138. Keeping in view the sharp decline in the international price of MEG, I
propose to raise the import duty on this item from 90% to 150%. This will result in an
additional revenue of nearly Rs.48 crores.
139. Honourable Members may recall that for providing cheap cloth to the
weaker sections of the society and to encourage the development of the handloom
sector, additional excise duty under Textiles and Textile Articles Act was levied in
1978. The present rate of this duty is generally 13.64% of the basic excise duty. In
addition to this duty, a cess at the rate of 2.5 paise per square metre is levied on fabrics
for the purpose of developing khadi and other handloom industries. I propose to merge
both these levies by raising the additional duty from 13.64% to 15% of the basic
excise duty.
140. There are certain other rationalisation measures relating to textiles including
marginal adjustment of duty rates on acrylic fibre, polypropylene staple fibre and
filament yarn etc., without significant revenue implications.
141. The jute industry needs encouragement for diversification of its products.
I propose to fully exempt jute blankets, floor coverings, mattings and bleached, printed
and dyed jute fabrics from excise duty. Full exemption available to jute yam supplied
to KVIC units is also being extended to the handicraft sector.
142. I hope, having relished so far the liberal reliefs, the Honourable Members
will not now grudge some revenue earning measures.
143. The family members of my smoker friends would, I am sure, be expecting
an increase in the rates of excise duty on cigarettes in the interest of the health of the
smokers. I will not disappoint them. The increase in duty will be 15 paise for the
cheaper cigarettes and 75 paise in the case of costlier cigarettes per packet of ten.
There will be no change in the duty rate on non-filter cigarettes of length upto 60 mm.
1 would hasten to add that I do not propose any change in the excise levy on biris.
This measure is estimated to yield additional excise revenue of Rs.131 crores. I shall
be more than happy if my actual collections are much less due to fall in cigarette
consumption.
144. Some sympathetic increase in the excise duty rates on pan masala is also
being made to yield additional revenue of Rs.6 crores.
23
 145. I propose to increase the excise duty on cocoa and cocoa preparations
from 10% to 15%, on jams, marmalades etc. from 5% to 10% and on ice cream from
nil to 10%. The revenue gain from these measures will be of the order of Rs.26 crores.
146. The House will agree that items used by the affluent sections of the society
must bear a higher burden of levies. I propose to increase the excise duty on certain
items like microwave oven, washing machine, certain sophisticated varieties of audio
systems, video cassette recorder and player, electronic games and relatively high priced
cooking ranges.
147. I propose to increase the excise duty on motor cars from 35% to 40%.
This measure will yield additional revenue to the tune of Rs.79 crores. I do not propose
to make any change in the excise duty on two wheelers and tractors.
148. The specific duty rates of excise on refrigerators, air-conditioners of
capacity upto 1.5 tonnes and automotive gas compressors are being increased. I propose
to enhance the excise duty on car air-conditioning parts including those forming the
kit from 40% to 65%. These proposals involve a revenue gain of Rs.14 crores.
149. Tyres and tubes, except for a few varieties, are currently subject to central
excise levy at specific rates. On these items, owing to recurring increase in prices, the
duty incidence in ad valorem terms has come down. As a corrective measure, I propose
to raise the existing specific rates on tyres and tubes. However, I do not propose any
increase of duty on tractor, trailer and two wheeler tyres and tubes. This, along with
certain other rationalisation measures, is likely to yield a revenue gain of about Rs.40
crores.
150. I propose to raise the specific rates of basic duties of excise on iron and
steel. The increase will generally be Rs.500 per tonne in the case of stainless steel
items and Rs.100 per tonne in the case of other items. In the case of downstream
dutiable products, MODVAT credit would continue to be available. The revenue gain
from this proposal is of the order of Rs.104 crores.
151. Presently, the total rate of import duty on most of the stainless steel and
articles thereof is 345%. I propose to bring down the rate to the level of 200%. The
proposals in regard to customs duties on these and other steel items are expected to
result in the loss of revenue to the tune of Rs.10 crores.
152. At present, the country has a surplus production of aluminium. In order to
discourage imports, I propose to increase the basic customs duty on aluminium ingots
by Rs.3500 per tonne.
153. Major plastic raw materials attract excise duty ranging from 30% to 65%.
However, the rate of duty on polystyrene is only 20%. As a measure of rationalisation,
I propose to increase this rate to 30%. The proposal is expected to yield additional
revenue of Rs.5 crores.
24
 154. I propose to increase the basic excise duty on paste grade PVC used in the
manufacture of leather cloth from Rs.15000 to Rs.20000 per tonne as an anti-evasion
measure. The excise duty rates on PVC coated textiles are also proposed to be revised
upwards. These measures are expected to yield Rs.17.5 crores.
155. At present, various categories of paints and varnishes are liable to excise
duty at different rates ranging between 15% and 35%. I propose to rationalise the
rates by keeping only two levels of duty at 15% and 30% as against the present five
rates. The proposal involves prescribing a uniform excise duty of 15% on insulating
varnishes and water based paints and 30% on oil based and plastic based decorative
paints. The proposal would yield a revenue of Rs.9 crores.
156. Currently special excise duty at the rate of 1/20th of the basic duty of
excise is being levied on indigenously produced goods. However, for the computation
of countervailing duty of customs on imported goods, special excise duty is not taken
into account. I do not think such a distinction is warranted. I propose to subject the
imported goods to countervailing duty on the basis of the excise duty inclusive of
special excise duty. This proposal is expected to yield customs revenue of Rs.60
crores.
157. The Baggage Rules relating to free allowance admissible to passengers
arriving from foreign countries are being modified. The general free allowance is
being increased from the existing level of Rs.1250 to Rs.2000 per passenger. There
will be a uniform duty rate of 250% for baggage in excess of this limit as against the
existing 175% and 245%. 1 also propose to prescribe a uniform duty rate of 25% on
specified articles brought by passengers coming from abroad after a period of stay of
more than one year, subject to certain conditions. The revised measures will take
effect from the 1st April, 1990.
158. Provision is being made for continuance of auxiliary duty of customs and
special excise duty at the existing rates.
159. As the Honourable Members are aware, Inland Air Travel Tax was
introduced in the Budget of last year. The tax is leviable at 10% of one component of
the total air fare, namely, basic fare. I propose to levy the tax at the existing rate on the
full air fare. The estimated revenue gain from the proposal will be Rs.15 crores.
160. As I mentioned in the earlier part of my speech, in recent years our
consumption of petroleum products has risen sharply. Honourable Members are also
aware that petroleum prices abroad have been hardening. The greater dependence on
import has led to a large outflow of foreign exchange and higher overall foreign
borrowing. It has now become necessary to review the domestic prices of petroleum
products. Keeping in view the interests of the common man, there will be no increase,
I repeat, no increase in prices of kerosene and LPG cylinders. There will also be no
increase in prices of naphtha for fertilizers and other uses. natural gas, furnace oil for
25
industry, bitumen for roads and low speed diesel oil for farmers. Among the selected
items whose prices are being revised with effect from this midnight are motor spirit,
high speed diesel oil and aviation turbine fuel for domestic users. While the price of
motor spirit is being raised by Rs.1.25 per litre ex-storage, the price of high speed
diesel oil will go up by 54 paise per litre. The price of aviation turbine fuel will
increase by Rs.1320.45 per kilolitre. The increase in retail prices will vary from State
to State depending on transportation charges and the incidence of local taxes and
levies. I propose to mop up a part of the gain accruing to the oil companies as a result
of price revision. The import duty on crude oil is being increased from Rs.1060 to
Rs.1500 per tonne. This will yield a revenue of Rs.836 crores.
161. The government is compelled to perform this painful duty of increasing
the prices of some petroleum products. But these are the hard options forced on us by
the grave fiscal situation, rising external debts, and the difficult balance of payments
position. We could have postponed these options only at the peril of our economic
independence and self-reliance.
162. I have also proposed certain amendments in the Finance Bill seeking to
effect changes in the excise and customs tariffs. These amendments are generally
enabling provisions and have no revenue significance. Besides, there are proposals for
amendment of some of the existing notifications. In order to save the time of the
House, I do not propose to recount them.
163. The proposals in regard to changes in die excise duties outlined above are
likely to yield additional revenue of Rs.778.63.crores. The concessions and reliefs
announced aggregate to Rs.388.44 crores. Out of the net additional shareable revenue
from excise duties of Rs.390.19 crores, the centre’s share would be Rs.217.12 crores
and the States share is Rs.173.07 crores.
164. My tax effort in respect of customs duties will bring in Rs.979.79 crores.
Net of reliefs amounting to Rs.144.76 crores, the additional revenue from customs
duties accruing to the Centre will be Rs.835.03 crores. Besides, the changes in the
Inland Air Travel Tax would yield Rs.15 crores.
165. Copies of notifications giving effect to the changes in customs and excise
duties effective from the 20th March, 1990 will be laid on the Table of the House in
due course.
166. I now have something to say on behalf of my Honourable colleague, the
Minister of Communications. Postal Service is highly employment intensive and salary
and allowances constitute a major part of the operating expenses of the Postal
Department. The grant of additional instalments of Dearness Allowance and increases
in other operational expenses add significantly to these costs. The postal rates do not
meet even the direct cost of most of the services. A revision of tariff for some postal
services has, therefore, become unavoidable. However, in the interest of the common
26
man and cheap and wider dissemination of information, there will be no change in the
tariff for ordinary postcards and registered newspapers. The rate of printed postcard,
which is used mainly for business purposes, is being raised from 40 paise to 60 paise,
of inland letter card from 50 paise, inclusive of the stationery charge, to a consolidated
amount of 75 paise, and of envelopes to a uniform rate of Re. one for every 20 grains
without any stationery charge. There are also certain other changes which are explained
in the memorandum circulated alongwith the Budget documents. The changes would
take effect from a date to be notified after the Finance Bill is passed. The revisions
proposed are estimated to yield an additional revenue of about Rs.207 crores in a full
year and about Rs.172 crores in 1990-91.
167. Honourable Members will recall that the 46th Constitution Amendment
Act, 1982 gave enabling powers to the Parliament to levy a tax on consignment of
goods where such consignment takes place in the course of inter-state trade or
commerce. However, there have been differences of opinion on the modalities of
implementation of this law and the matter has been discussed in various meetings of
the Chief Ministers. The broad parameters have now been settled and a Committee of
Chief Ministers was appointed to work out the guidelines for granting exemptions
from this tax, both by the Centre and the States. I propose to consult the Chief Ministers
shortly to take a final view in the matter.
168. I had earlier mentioned that the budget deficit at the existing rates of
taxes would be Rs.9165 crows. Taking into account the net additional yield from the
modifications proposed in direct and indirect taxes and the revised postal tariff, the
deficit for the next year is estimated at Rs.7206 crores. Honourable Members will
note that this deficit is substantially lower than the deficit of Rs.11750 crores in the
revised estimates of 1989-90. In order to give the right signal and contain inflationary
pressure, I have also tried to keep next year’s deficit even lower than the budget
estimate of Rs.7337 crores for the current year.
169. It is my firm determination that the deficit provided for in the budget
should not be exceeded. A half-yearly review of the actual developments in the
budgetary situation will be made, and the people and the Parliament kept informed
about the performance in relation to the deficit.
170. We need to make our fiscal and tax system more stable and predictable.
The system of making a large number of changes in the tax rates and tax laws every
year, apart from introducing uncertainty, casts a severe burden on the administrative
system. It also affects compliance and increases litigation. While some changes in tax
rates and laws are inevitable, it is desirable to keep the basic structure stable at least
for some time. With this end in view, the Government will present a document on the
Long Term Fiscal Policy to Parliament.
171. With this, I have come to the end of my labours. We faced a fiscal situation
which constituted a threat to the economic strength and stability of our country. The
27
choice before us was to let things drift, borrow more and consume more or to take the
corrective action now, however difficult. We have made our choice. We have taken
some resources from the rich and used them to give some relief to the poor and the
common man.. We have begun a process to restrain the budgetary deficit and contain
the inflationary pressure. We have tilted the balance of planning and investment towards
the rural areas and in favour of employment.
172. As a man of science, wedded to non-doctrinaire socialism, I consider
experimentation and its results the touchstone on which can be tested the relevance of
all social and economic perceptions and policies.
173. This is the essence of pragmatism and the quintessence of the unending
quest of socio-economic experimenters like Gandhiji, Jaya Prakash and Acharya
Narendra Dev.
174. Mr. Speaker, with my irrevocable commitment to such a pragmatic
approach, I present this Budget to this august House as a short term device to move
steadily, and yet resolutely, towards the long term objective of ensuring growth with
equity and self-reliance. In this endeavour, I seek the wholehearted support of the
people through their chosen democratic instrument - this honourable Parliament.
175. Sir, I commend the Budget to the House.
[19th March, 1990]

28
 SPEECH OF SHRI S.B. CHAVAN MINISTER OF FINANCE
INTRODUCTING THE BUDGET FOR THE YEAR 1989-90

Sir,
1. I rise to present the Budget for the year 1989-90. The Budget is an
instrument for achieving the basic objectives of planned development which, broadly,
are growth, modernisation, self-reliance and social justice. In each of these areas, we
have made substantial progress. There are clear signs of an acceleration in the growth
rate of our economy during the eighties. The pace of modernisation, particularly in
industry and infrastructure has increased greatly because of the policies pursued by us
for the past few years. The movement towards self-reliance has been maintained by
the sustained growth in exports. And most important of all, our commitment to the
goals of social justice has been demonstrated in the major initiatives that we have
taken in anti-poverty and employment programmes and in the fulfilment of essential
needs. These long-term objectives provide the framework within which the Budget
for 1989-90 has been formulated.
2. The Annual Budget has to pursue these long-term objectives within the
context of the short-term economic situation. The Economic Survey for the year
1988-89, which was laid on the Table of the House a few days ago, deals with the
economic situation in some detail. I will only highlight a few key points.
3. The performance of the Indian economy in the past few years has shown
unmistakable features of strength. The first is the resilience of the economy when
confronted with the severe disruption caused by drought and floods. Last year, my
predecessor, when presenting the Budget, had referred to this and indicated that the
gross domestic product would grow perhaps by 1 to 2 per cent. I am happy to inform
the House that the latest estimates of economic performance in the drought year of
1987-88 indicate that, despite the drought, GDP grew by 3.6 per cent. This
commendable performance in a year of drought has been followed by vigorous growth
in the current year and we expect the GDP to grow by 9 per cent or more in real terms.
Both the rate of growth of GDP in the drought year and the pace of recovery in the
post-drought year, are significantly higher than those in earlier periods of drought. I
may add that the average growth rate of GDP in the first four years of the Plan will
exceed the Plan target of 5 per cent.
4. The performance in the agricultural sector in these past two years gives
grounds for hope. Last year, despite the severe drought and floods, foodgrains
production was 138 million tonnes, only marginally lower than in the previous year,
showing that our policies to contain the impact of the drought were successful. This
1
year, foodgrains production is expected to exceed the target of 166 million tonnes.
Oilseeds, cotton and sugar production are expected to reach record levels. The sector
continues to demonstrate a high potential for growth.
5. The growth in output in a period of stress, the careful management of the
food economy by the Government, and the special measures taken to boost agricultural
production and provide relief to those affected by drought have ensured that inflation,
as measured by the Wholesale Price Index, was limited to 10.6 per cent in 1987-88.
The rate of inflation in the current year has been under 5 per cent up to the end of
January, 1989 Government is concerned about the pressure on prices, but it is a matter
of some satisfaction that this pressure has been generally lower than in previous
droughts. Government remains fully vigilant on this crucial front and are determined
to ensure effective containment of inflation.
6. The second encouraging feature of economic performance in recent years,
is the sustained growth of industrial sector and improved performance in the field of
infrastructure. For 4 years in succession, manufacturing output has grown by over 8
per cent per year which is a clear vindication of the industrial policy of the Government.
There is a spirit of optimism in industry which is reflected in the generally good
corporate performance and buoyant conditions in the capital market. Electricity
generation has increased steadily and the plant load factor of thermal plants has gone
up from 50.1 per cent in 1994-85 to 56.5 per cent in 1987-88. Targets for capacity
creation in the power sector set for the Seventh Plan are expected to be achieved. In
the Railways the quantity of freight carried has increased in the first three years of the
Seventh Plan by an amount as large as the total increase over the previous 10 years.
More important, there has been a steady improvement in productivity over these years.
A particularly welcome feature is the improvement in the performance of the basic
materials industries. In the first nine months of this year, production of saleable steel
by the integrated steel plants rose by 10.1 per cent, of cement by 12 per cent, nitrogenous
fertilisers by 26.2 per cent and phosphatic fertilisers by 64.5 per cent when compared
with the corresponding period last year.
7. The performance of Central Public Sector Enterprises has shown
improvement. In the first six months of this year the provisional results of 179 operating
enterprises show that their net profit rose to Rs.694.19 crores from Rs.59.79 crores in
the corresponding period of 1987-88.
8. We are committed to a policy of supporting the growth of our public
sector. However, we recognise that some changes are required to ensure a higher
level of performance, particularly with regard to resource generation. With a view to
granting greater autonomy to public sector enterprises consistent with their
accountability, the Government has been signing Memoranda of Understanding with
some of the Public Sector Undertakings. The MOU indicates the responsibilities of
the enterprise in fulfilling certain physical, financial and social objectives including
2
resource generation, and of the Government, in turn, for supporting the enterprise in
fulfilling various objectives and targets set for the enterprise. Eleven Public Sector
Undertakings signed MOUs with the Government for the year 1988-89. Seven more
Public Sector Undertakings will sign MOUs for the year 1989-90. The Government
has constituted a High Level Committee under the Chairmanship of Cabinet Secretary
to evaluate the performance of MOU signing companies and their administrative
Ministries in fulfilling their obligations under die MOU.
9. I have referred to the resilience of the economy and the improved growth
performance in industry and infrastructure because these are the strengths that will
allow us to pursue even more vigorously our basic objectives of raising the living
standards of the poor and strengthening the economic independence of our country.
But I would be failing in my duty if I do not also draw the attention of the House to
certain problem areas.
10. One area that needs more attention is the stimulation of savings and the
containment of the budget deficit. We have always prided ourselves on being a nation
with a high savings rate, and our culture has always emphasised the virtues of simple
living and frugality. Budgetary policy must reinforce these virtues of thrift both through
positive incentives to stimulate savings and through measures to restrain luxury
consumption. I will indicate later in the speech the specific measures that we propose
to take towards this end.
11. Equally important, and in some sense more significant, is the prudent
management of public expenditure: Sometimes, it is assumed that Government
expenditure, as commonly understood, is all on the wages and salaries of Government
servants and on goods and services purchased by the Government Departments to
fulfil their functions. This is far from being the case. In actual fact the direct
consumption expenditure of the Central Government on defence and Government
Administration is less than one quarter of the total expenditure. A little under one
tenth of the Budget is for the direct capital expenditure of the Central Government.
As much as two-thirds of the Budget expenditure really take the form of financial
transfers to other spending entities by Way of interest, subsidies, grants, loans, etc. In
fact, a significant part of what is shown as expenditure in the Budget is only the
financial inter-mediation of funds shown as a capital receipt on the one side and as
expenditure in the form of loans or equity investment on the other.
12. I am drawing attention to the structure of the expenditure side of the
Central Budget in order to emphasise that the exercise of due prudence is not merely
a matter of economy instructions regarding staff or travel or purchases. That is certainly
important. But it is as important, in fact even more important, to consider other items
of expenditure like subsidies, grants and loans, many of which are embedded in specific
schemes and programmes. We must ask ourselves whether we are getting value for
money from these subsidies, schemes and programmes. In many cases the desired
3
result could be achieved at a lesser cost by better targetting, consolidation of multiple
programmes, greater decentralisation linked to mobilisation of local resources. We
will ensure that such an evaluation forms the basis for the schemes/programmes that
will form part of the Eighth Plan.
13. The balance of payments is another area of concern. A certain amount of
pressure on external payments is unavoidable in a situation where we have urgent
needs for investment and modernisation which inevitably require expansion of imports.
It is for this reason that Government have attached high priority to expanding exports
to pay for the imports the economy needs. Our policies in this regard have been
successful and in the past two years our exports have increased quite rapidly-over 25
per cent in 1987-88 and 24 to 25 per cent in the first nine months of the current
financial year. But at the same time, the import bill has also increased sharply, especially
so in the first half of this year. This surge in the import bill is partly due to the
foodgrains and edible oil imports necessitated by last year’s drought and partly to the.
sharp increase in the international prices of metals, chemicals and edible oils. Apart
from this, our debt repayment liabilities were relatively high. The limited availability
of concessional finance has compelled us to increase the share of commercial
borrowings, but we have tried to keep these within limits that are manageable. We do
not envisage any difficulty in servicing our external debt.
14. The Indian economy has a great deal of underlying strength. The sustained
growth of industrial sector and the investments made in modernisation and upgradation
will show results in terms of higher exports. Ibis in fact is the real answer to the
balance of payments problem. I have every hope that the momentum of export growth
will be sustained and enhanced. If necessary, we must be prepared to restrain domestic
consumption to some extent in certain areas in order to release supplies for export.
15. We have resisted the temptation to cope with the short-term difficulties in
our balance of payments by ad hoc import regulation through detailed import licensing.
Such a process would be self-defeating as it will disrupt the economy, inhibit exports
and weaken our attempts at modernisation. The composition of our imports has changed
greatly during the eighties. In 1980-81, 65 per cent of our imports consisted of a few
bulk commodities like foodgrains, edible oils, fertilizers, petroleum and metals where
direct import regulation through foreign exchange allocations is relatively easy. In
1987-88, these bulk commodities accounted for only 33 per cent of our imports. The
other imports cover a vast range of raw materials, capital goods, chemicals and industrial
components. Direct regulation of these through foreign exchange allocations is difficult
and could well lead to delays and inefficiency. Hence, the non-bulk import bill has to
be managed through more effective use of indirect instruments.
16. Later in this speech I will put before you some measures to discourage
low priority imports which go towards the consumption of upper income groups. Kit
culture based consumerism is not the objective of our industrial and trade policy and
must be discouraged.
4
 17. Industrial policy has an important role to play in stimulating production
which can substitute efficiently for imports. Towards this end the Government will
ensure that domestic production of items which are imported in substantial quantity is
maximised and will re-examine and remove any restrictions which stand in the way.
18. Let me now turn to the special thrust areas in this Budget.
Anti-Poverty Programmes:
19. Successive budgets have sought to tackle the basic problems of poverty
and unemployment directly, a process which has been greatly accelerated since 1980-
81. In that year, actual expenditure on rural development, social services and food
and cloth subsidies amounted to Rs.1,971 crores in the Central Budget. The greater
part of the expenditure in these areas is for directly targeted programmes to improve
employment and the earning capacity of the poor and of vulnerable groups like
scheduled castes and tribes, and weaker sections, provide them with basic services
like education, health-care and water supply, and subsidise some items of essential
consumption. In 1988-89 the Budget Estimates provided Rs.8,652 crores for the same
activities.
20. I have not included in this total the expenditure on agriculture and the
fertilizer subsidy which has increased from an actual expenditure of Rs.1,179 crores
in 1980-81 to a Budget provision of Rs.4,343 crores in 1988-89.
21. Under the Integrated Rural Development Programme (IRDP) over 25
million families below the poverty line have been assisted to take up income generating
activities. The total investment under this Programme since the beginning of the
Sixth Plan has been over Rs. Ten thousand crores, including the term credit provided
by the financial institutions.
22. I am happy to inform the Hon’ble Members that under the twin programmes
of employment generation for the rural poor, viz., National Rural Employment
Programme (NREP) and Rural Landless Employment Guarantee Programme (RLEOP),
67 crore mandays of employment were generated during 1987-88 as against the target
of 50 crore mandays.
23. The present strategy of direct attack on rural poverty through the existing
major programmes of self-employment and wage-employment will be continued and
made more cost effective.
24. Employment is the most urgent need of our people. Much of the
employment growth will come from growth in agriculture and in labour-intensive
agro-processing industries and services. However, a direct attack on the problem of
unemployment is essential. We, therefore, propose to give a special thrust to all
programmes of employment generation. It is proposed to merge NREP/RLEGP into
a single programme, and to decentralise its implementation. This merged programme
will operate throughout the country and will be funded 75 per cent by the Centre.
5
 25. Poverty and unemployment are intense in certain disadvantaged regions
and existing employment programmes fall short of needs. Hence, in addition to the
reorganised national programme it is proposed to launch a new intensive rural
employment programme which will provide additional funds to selected 120 districts
which are backward and suffer from acute unemployment.
26. In this year when we are celebrating the birth centenary of Pandit
Jawaharlal Nehru, the architect of modern India, there is perhaps no better way of
remembering him than to intensify our efforts to remove poverty and unemployment.
This programme is a further major step in that direction. It will be named after
Panditji to reflect the deepest aspiration of our people.
27. This new programme will allow fuller employment opportunities to at
least one member of each family living below the poverty line. The funds for this
scheme will be in addition to the provision available to the district under the NREP
and RLEGP Programmes. These funds will be merged and locally useful schemes
will be taken up to maximise employment opportunities and the creation of productive
assets. We hope that the enhancement of the provision for employment through this
new scheme will ensure substantial improvement in living standards of the poor and
an increase in the productive and socially useful assets in these areas. The details of
the programme will be announced later. The provision for this new programme will
be Rs.500 crores in 1989-90. Including this, the provision for employment programmes
will be Rs.1.711 crores in 1989-90. I propose to cover the cost of the new programme
basically by mobilising additional resources from those who already have substantial
incomes and the benefit of gainful employment. I will revert to this later in my
speech.
28. We welcome further efforts in this direction by State Governments.
Recently, the Constitution has been amended to raise the upper limit for the profession
tax to Rs.2,500. We urge State Governments to use this enabling provision to mobilise
additional resources for expanding employment.
29. Additional employment will help poor households to raise their standard
of living. But in addition a more direct effort at improving the condition of women
and children is necessary. I therefore propose a new programme for the free distribution
of saris to destitute women. As for children the ongoing Integrated Child Development
Services Programme will be greatly expanded to cover 500 more blocks in addition to
over 1700 already covered. This programme is aimed at raising the health, nutrition
and educational status of poor children.
30. The total outlay for rural development, social services and on food and
cloth subsidies will be Rs.9374 crores in this Budget.
31. The implementation of anti-poverty and social services programmes takes
place largely through State Plans. Many of these programmes are externally assisted.
6
At present 70 per cent of assistance received under externally aided projects is made
available to State Governments as additional Central assistance. It is proposed to
modify these arrangements to enhance the additional central assistance made available
to the States to 100 per cent for assistance received under externally aided projects in
the social services sector, and for programmes which have a direct bearing on poverty
alleviation. This decision will make available substantially more resources to the
States than under the present arrangements, and will facilitate additional investments
by them in these vital sectors. Sectors which are expected to benefit from this decision
are Agriculture, Rural Development, Irrigation, Environment, Health, Family welfare,
Nutrition, Women’s Development, Education, Housing, Water Supply and Urban
Development.
Agriculture
32. Agriculture is the mainstay of our population and a priority sector in our
Plans. Today the incidence of taxes on agricultural outputs and inputs is minimal and
in fact substantial subsidies are provided both in the Central and State Budgets.
33. As I mentioned earlier, Plan and non-Plan expenditure on agriculture and
the fertilizer subsidy has gone up sharply since 1980-81. This year also provision is
being stepped up and will reach a level of Rs.5173 crores.
34. Credit is a major input for agricultural production. In order to increase
the flow of credit to agriculture, the target for direct finance to agriculture by Public
Sector banks, which was raised last year from 16 per cent to 17 per cent of their total
outstanding advances is being further raised to 18 per cent to be achieved by the end
of 1989-90. With this change the total credit to be made available to agriculture by
commercial banks, Regional Rural Banks and Co-operative banks will increase by
over Rs.4,000 crores in 1989-90. Hon’ble Member; are aware that the rate of interest
on crop loans upto Rs.15,000 was reduced last year and the reduction varied between
1 1/2 per cent and 2 1/2 per cent. With a view to extending the scope of relief, the
Reserve Bank of India is today issuing instructions reducing the rate of interest charged
on crop loans between Rs.15,000 and Rs.25,000 to 12 per cent from the existing
maximum rate of 14 per cent.
35. One area of concern is the pace of implementation of irrigation projects
in the States. In addition, the gap between the potential created and utilisation of
irrigation, leaves much to be desired. The decision to provide higher additionality for
external assistance for agriculture and irrigation which I have referred to earlier will
add to the funds available for these purposes in State Plans. My hope is that this will
help in ensuring better utilisation of aid funds and quicker completion of projects.
36. The rapid growth in incomes in our rural economy will require not merely
higher production but also diversification of crops, better post-harvest technology,
processing of agricultural products into higher value products, etc.
7
 37. The new Ministry of Food Processing Industries, the first of its kind in
the developing countries, was established in July, 1988 to provide for a dynamic
relationship between the farmer and industry so that there is better utilisation of
agricultural products, greater addition of value to rural produce, generation of massive
employment in rural areas, enhancement of the net level of rural incomes and induction
/Of modem technology in the processing of food. Another objective of the Ministry
is to promote utilisation of the large scale wastages which take place in the pre and
post harvest handling of fruits and vegetables, thereby improving the economic
utilisation of food produced as well as enhancing the nutritional inputs available to
the people. Later in my speech I will indicate some fiscal incentives to provide a
greater stimulus to these industries.
Housing
38. The Government attaches very high priority to housing. It is an activity
that meets a very essential need and that is capable of generating a very substantial
volume of employment. In pursuance of this, the Government has formulated a
comprehensive National Housing Policy. In the field of housing finance several new
initiatives were taken in 1988-89. The Reserve Bank of India has liberalised the terms
and conditions of housing loans. The Life Insurance Corporation has launched a new
scheme known as Bima Niwas Yojana which will enable policy holders to receive
financial assistance for purchase or construction of flats.
39. The National Housing Bank has been established and has now become
operational. Promotion of a healthy housing finance system and providing adequate
finance to the housing sector are the principal functions of the Bank. In formulating
its financing policies, the Bank will adopt the motto of the small man first. It has
accordingly announced its re-finance scheme in respect of loans given for low income
housing of upto 40 square metres. Similarly, in land development and housing projects
financed by it, the Bank will ensure that not less than 75 per cent of the plots to be
thus developed or houses to be built, will be for those seeking built-up accommodation
upto 40 square metres.
40. The prospect of owning a house is a major incentive for saving. We have,
therefore, decided to establish a new scheme called the Home Loan Account Scheme
which will be launched by the National Housing Bank in co-operation with scheduled
banks. To facilitate participation by all segments of the community especially in rural
areas, the minimum contribution to the saving scheme is fixed at Rs.30 per month or
Rs.360 per annum. The savings will earn interest at 10 per cent per annum. Any
individual. not owning a house anywhere will be eligible to join the scheme. After
saving for a minimum period of five years, a member will be eligible for a loan equal
in amount to a multiple of the accumulated savings including interest Specific efforts
will be made to link up the Home Loan Account Scheme with the registration for land
or house allotment by public agencies. I will propose certain tax concessions for
these savings.
8
Industrial Development
41. Let me now turn to the industrial sector. I have referred to the good
performance of the industry and infrastructure sector. We believe that the changes
with regard to industrial licensing, price and distribution controls and trade policy that
we have made over the past few years have paid rich dividends. The underlying
theme of these policy changes is to promote both growth and efficiency by stimulating
domestic competition, technology acquisition and modernisation. Our industrial
structure is now very complex. Many segments have reached a certain degree of
maturity. In this situation it is possible for us to relax many of our detailed regulations
and yet remain in control over the direction of development through a judicious use of
fiscal and credit policies. In furtherance of this approach, the Government has decided
to decontrol the pricing and distribution of cement and aluminium with immediate
effect.
42. Since the partial decontrol of cement from 28th February, 1982, the cement
industry has witnessed an impressive growth. The production of cement which was
21.01 million tonnes in 1981-82 is slated to increase to 43.5 million tonnes in 1988-
89 and 49 million tonnes in 1989-90. Over this period, the levy obligation has been
progressively decreased and a fair price for the levy cement has been given. These
policies have led to the stoppage of imports since 1985. In fact the country is now in
a position to export cement. Our long term strategy is to increase the production to 65
million tonnes by the end of the Eighth Plan and 87 million tonnes by the end of the
Ninth Plan. At present, the levy obligation works out to less than 20 per cent of the
total output of the industry. It has now been decided that all price and distribution
controls on the cement industry be removed with effect from 1st March, 1989. To
ensure the availability of cement at reasonable prices in the remote and hilly regions
of the country, a suitable subsidy scheme is being worked out.
43. With the progressive commissioning of the National Aluminium Company
(NALCO), India has made great strides in the production of aluminium metal. After
achieving a record production of 278,000 tonnes in 1987-88, production in 1988-89 is
estimated to go up by 30 per cent to about 360,000 tonnes. During 1989-90 aluminium
production is likely to increase by another 20 per cent to reach a level of 435,000
tonnes. NALCO is also exporting alumina and some aluminium and will earn about
Rs.200 crores in foreign exchange during 1988-89. India has thus emerged not only
self-sufficient in aluminium metal but will generate exportable surplus in the years
ahead. In view of this the Government has decided to decontrol the price and
distribution of aluminium with effect from 1st March, 1989.
44. The dispersal of industry to backward areas remains a major plank of our
industrial policy. The principal barrier to industrial development in backward areas is
the lack of infrastructure. Recently, the Government has announced a new approach
to this in the form of the Growth Centre Scheme. In the first phase 61 growth centres
will be taken up and provided with infrastructure facilities of a high order. I have
9
provided Rs.20 crores as the Central contribution for this scheme in 1989-90 Plan
and, depending on the pace of implementation, this will be enhanced, if necessary.
45. Let me now turn to the operation of capital markets. A substantial volume
of personal savings now flows through the financial instruments traded in this market
in fact, the breadth and depth of our financial structure is an asset that we must use to
mobilise savings and channel it into productive directions. Our rural households are
showing growing interest in investing in bonds, debentures and shares . However, the
provision regarding tax deduction at source is a disincentive. We have already raised
the limit below which there will be no tax deduction at source to Rs.2,500 for dividends.
I propose to do the same for interest payments on bonds and debentures.
46. The flow of savings into the Capital Market is directed very much to
fixed interest bonds and debentures. However, industrial development also requires
risk capital in the form of equity. In order to stimulate the flow of personal savings
into equity, the Government intends to introduce an Equity-Linked Savings Scheme.
The Scheme will operate through UTI and recognised Mutual Funds and investments
will be eligible for tax deductions on the basis of net annual additions to such savings.
Details of the Scheme will be announced shortly.
47. The dynamism shown by the industrial sector is to a certain extent the
result of our effort to stimulate competition. However, as the industrial environment
becomes more competitive, we will need effective measures for coping with the
problems of industrial sickness. Some arrangements are in place under the Sick
Industrial Companies (Special Provisions) Act, 1985. However, it is necessary that
we take steps before this stage of sickness is reached to encourage and stimulate
potentially sick units to rehabilitate themselves. In order to do this, the Government
intends to work out an excise relief scheme for weak units to provide them with a
proportion of their excise payments as part of a diversification, modernisation or
rehabilitation package approved by designated Financial Institutions.
Other Areas
48. Let me now turn to couple of other areas where I propose some changes.
49. The Government has been examining the utility of the Gold Control Act
to see whether it has served its purpose or not and whether it requires any modification.
In the fight of this examination the Government proposes to modify the Gold Control
Act with a view to keeping a measure of control over primary gold only. This is
expected to benefit hundreds of thousands of goldsmiths and artisans who will be able
to freely conduct their age-old traditional profession and provide better service to the
customers in terms of quality, purity and price. Further this will lead to a boost in the
export of gold jewellery which has been stagnant. The details will be worked out and
necessary legislation will be introduced soon.
50. I have referred to the need to give a stimulus to savings and have already
referred to two measures directed towards this end -the Home Loan Account Scheme
10
and the Equity Linked Savings Scheme. Several initiatives in the area of small savings
have been taken in the recent years. I am happy to report to the House that the Indira
Vikas Patra, introduced in 1986 and the Kisan Vikas Patra introduced in 1988 are
attracting a substantial volume of savings. These two savings instruments do not
carry any tax concessions. I propose to introduce a new National Savings Certificate
Series VIII which will carry an interest rate of 12 per cent and will be eligible for tax
concession under Section 80C but not under Section 80L. The existing National
Savings Certificates Series VI and VII will be discontinued. This is part of the process
of rationalisation of savings incentives.
51. I am conscious of the need to protect the savings of workers in the provident
fund and their right to gratuity. The Employees Provident Fund Act has been modified
to raise the minimum contribution to 8 113 per cent and this enhanced contribution
has taken effect from 1st August, 1988. The Payment of Gratuity Act has been amended
to provide for compulsory insurance of gratuity liabilities or the setting up of a gratuity
fund under income-tax rules where the pattern of investment will be as prescribed by
the Government from time to time. It is proposed to implement these provisions soon
after framing necessary rules.
52. As the Hon’ble Members are aware, this Government has, in the recent
past, taken various measures to help pensioners. The Government is keen to ensure
that pension and pensionary benefits are sanctioned and paid promptly and procedures
for disbursement simplified. Towards this end, the Government has decided to further
simplify the procedure of pension payment to civil pensioners who draw their pension
from banks. The proposed simplification envisages that the two intermediary agencies
of Accountants General and District Treasuries will not be involved in this work
which will be handled by a new Office of Chief Controller of Accounts (Pensions) in
the Ministry of Finance. The entire work of pension payment and accounting thereof
will be computerised. The new system is proposed to be introduced during 1989-90.
53. I also propose some fiscal relief on family pensions and a new savings
scheme for retiring Government employees with certain tax concessions which I will
revert to later.
54. Our freedom fighters have made great sacrifices in our struggle for
independence. In this year when we are celebrating the birth centenary of one of the
greatest leaders of this struggle, it is but appropriate that we raise the pension for
freedom fighters to Rs.750 as a mark of the nation’s gratitude.
55. I shall now turn to the Revised Estimates for 1988-89 and the Budget
Estimates for 1989-90.
Revised Estimates 1988-89
56. Since the presentation of the Budget for the current year, additional
provisions have become necessary for certain inevitable increases in expenditure.
11
Budget support for Central Plan has to be increased by Rs.771 crores. The increases
mainly relate to settlement of claims arising out of crop insurance scheme, subsidy for
setting up of industries in backward areas, strengthening of equity base of Power
Finance Corporation, payment to Shipping Companies to meet commitments made by
the erstwhile Shipping Development Fund Committee and passing on to financial
institutions rupee equivalent of external credits extended to them.
57. Central assistance for State and U.T. Plans is expected to be Rs.421
crores higher mainly due to special assistance that has to be provided to Punjab for
financing its Plan outlay.
58. On the non-Plan side an additional provision of Rs.300 crores is required
for export promotion and market development. Subsidy on indigenous fertilizer will
also be higher by Rs.250 crores. A marginal increase of Rs.200 has been made in
defence expenditure. An additional provision of Rs.497 crores will be required for
defence pensions on the basis of actual claims arising out of revision of defence
pension rates. Grant assistance to States affected y floods has to be increased by
Rs.100 crores. Provision of certain facilities in Punjab necessitated by security
considerations has cost Rs.71 crores.
59. There have been other increases as well. All these would have resulted in
a much higher order of increase in non-Plan expenditure and in deficit financing.
Government have taken a number of measures to contain the increase in expenditure
and improve receipts.
60. Ministries and Departments were instructed to locate savings to meet to
the maximum extent possible the increases in expenditure including the liability for
additional instalments of dearness allowance and bonus sanctioned to Government
employees during the year. The economy instructions issued last year were continued
this year also. As a result of these measures, the increase in non-Plan expenditure has
been contained.
61. Gross tax revenue is expected to yield Rs.776 crores more. The
improvement is mainly in Union Excise duties, Customs duties and Corporation Tax.
Under non-Tax Revenue the profit on imported edible oils is expected to show a sharp
reduction owing to an increase in international prices. Capital receipts are expected
to show significant improvement. Total receipts of Government are now estimated at
Rs.67843 crores as against Rs.66076 crores in the Budget estimates. Total expenditure
is estimated at Rs.75783 crores as against the Budget estimate of Rs.73560 crores.
The overall deficit for the year is now estimated at Rs.7940 crores. Thus, in spite of
the large additional burden thrown on the budget and the various concessions given it
has been ensured that overall deficit does not increase substantially.
Budget Estimates 1989-90
62. Next year being the last year of the Seventh Five, Year Plan period every
effort has been made to ensure that maximum resources are made available for
12
development. Budgetary support for Central Plan including special additional provision
of Rs.500 crores for new economic programmes is placed at Rs.16,964 crores. Internal
and extra budgetary resources for Central Plan are estimated at Rs.17,482 crores. The
total Central Plan outlay for 1989-90 will thus be Rs.34,446 crores against the current
year’s approved outlay of Rs.28,715 crores showing a step up of nearly 20 per cent.
63. Hon’ble Members will be happy to note that in real terms the actual outlay
in the Central Sector for the five years would be around 115 per cent of the original
Seventh Plan outlay.
64. The Central Plan for 1989-90 places a great deal of emphasis on agriculture,
rural development and related areas. A new strategy for agricultural planning has
been developed on the basis of different agro-climatic regions. The provision for
agriculture and irrigation in the Central Plan has been stepped up to Rs.1408 crores.
I also propose allocation of Rs.495 crores for the Department of Fertilizers.
65. The programmes of Rural Development are central to our Plan strategy.
Inclusive of the provision for the new programme, the provision in the Central Plan
for this sector has been stepped up by 28.4 per cent. For promoting rural
industrialisation, the reorganised Khadi and Village Industries Commission has planned
to expand and diversify its activities. Besides identifying 33 new industries for
promotion in the current year, 41 other industries will be taken up for development in
the future in a phased manner.
66. The provision for social services in the Central Plan is being stepped up
to Rs.3396 crores. The main emphasis in the social welfare programme in the Annual
Plan 1989-90 will be on development of services for early childhood care, women’s
development, prevention of disabilities and rehabilitation of the affected persons. In
order to meet these goals, a large expansion is envisaged in programmes like Integrated
Child Development Service (ICDS), income-generating schemes for poor and destitute
women, education, training and economic rehabilitation of disabled persons. Adequate
attention will be given to creating awareness regarding the rights of women, campaign
against the atrocities inflicted on them and also against the social evils like child
marriage, dowry, drug abuse, etc.
67. The Seventh Plan has been characterised by a special thrust towards human
resources development. The approach, strategies and major thrust areas included in
the Seventh Five Year Plan and the priority programmes of the National Policy on
Education 1986, taken up in 1987-88 are being continued. Emphasis is given on
universalisation of elementary education, eradication of adult illiteracy,
vocationalisation. of secondary education, improvement and consolidation of quality
and standards of higher education and modernisation and removal of obsolescence in
technical education.
68. In order to maintain the tempo of growth that has been attained in recent
years, it is necessary that we continue to invest in the expansion and modernisation of
13
our infrastructure sectors. Hence, the outlays in the Central Plan for Power development
have been raised by 38.6 per cent, for Railways by 15.6 per cent and for
Telecommunications by 56.6 per cent.
69. Major public sector projects in the industrial sector included in the Seventh
Plan have either been completed or are expected to be completed in the last year of the
Plan. These include the expansion of Bhilai Steel Plant, Stage I of Visakhapatnarn
Steel Plant, the Aluminium Complex of NALCO in Orissa, the gas based fertilizer
plants at Bijaippur, Aonla, Namrup III, the Caprolactam project at Udyogmandal,
captive power plants at Durgapur, Barauni, Panipat and Bhatinda and the Maharashtra
Gas Cracker Complex.
70. In the industry sector adequate outlays have been provided in the Annual
Plan 1989-90 for productive schemes and projects of on-going nature which would be
commissioned during the last year of the Seventh Plan, as wen as for initiating the
necessary preliminary action for the Eighth Plan.
71. Central assistance for the Plans of State and Union territory Governments
is placed at Rs.10,850 crores against the current year’s Budget level of Rs.9,714
crores. Total expenditure from Central Budget on Plan account will be Rs.27,814
crores next year as against current year’s Budget level of Rs.25,714 crores.
72. Government is aware of the extremely difficult circumstances in which
our brave armed forces have been carrying out their arduous responsibilities of
defending our country. The whole nation owes its grateful thanks to them for ensuring
the security of our borders and for bringing credit to our country when called upon to
help other friendly countries in their hour of need. At the same time, all of us recognise
that there is continuing need for implementing measures for greater cost effectiveness
in our expenditure on defence. My colleagues in the Ministry of Defence have already
introduced a number of measures to improve the cost effectiveness of such expenditure.
Keeping this in view I have provided for a sum of Rs.13000 crores for Defence during
the coming year. I assure the House that Government will not falter in ensuring the
highest level of defence preparedness.
73. Provision for food, fertilizer and export promotion subsidies next year is
Rs.7,412 crores against Rs.6,841 crores in the current year’s Revised Estimates. Interest
charges next year are estimated at Rs.17,000 crores against Rs.14,150 crores in the
current year. Grants to States as a result of the recommendations of the Ninth Finance
Commission are estimated to be Rs.612 crores higher than in the current year. An
additional provision of Rs.152 crores has been made next year for expenses in
connection with the General Elections. The deficit of Department of Posts is estimated
to be. Rs.97 crores higher than in the current year.
74. Every effort has been made to contain the growth. of non-Plan expenditure
and only the barest minimum provisions have been allowed. Total non-Plan expenditure
14
in 1989-90 is estimated at Rs.54,347 crores against Rs.48,877 crores in the Revised
Estimates for the current year.
75. Coming to Receipts, Gross Tax Revenue at the existing rate of taxation is
estimated at Rs.49,588 crores. After payment of Rs.12,054 crores to States as their
share of taxes and Rs.50 crores to local bodies in Union territories as assignment of
revenue, the net accrual to Centre is estimated at Rs.37,484 crores against Rs.32,652
crores in the current year. Market borrowings are placed at Rs.7,400 crores against
Rs.7,250 crores in the current year. External assistance net of repayment is placed at
Rs.3,722 crores against Rs.3,216 crores in die current year. Taking into account the
variations in other receipts and expenditure, the overall deficit for next year at existing
rates of taxation is estimated at Rs.8240 crores.

PART B
76. I now turn to my tax proposals for 1989-90.
77. For most people taxation is vexation. I will only say that we raise resources
through taxation to fulfil a larger common purpose and seek to return to people a
benefit which is greater than the cost they bear.
78. My budget proposals are guided by the objectives and economic
perspectives I have outlined earlier. More specifically the proposals are oriented to
the following ends:-
- promoting productive employment,
- protecting the consumption standards of the poor,
- discouraging non-essential luxury consumption particularly when it is
import intensive,
- providing some relief to middle income taxpayers,
- maintaining the tempo of industrial modernisation and growth,
- containing the budget deficit for 1989-90.
79. Now I turn to the budget proposals regarding the direct taxes.
80. The Hon’ble Members are aware of the high priority the Government
attaches to creation of productive employment. As I mentioned earlier, a number of
schemes are already being implemented to generate employment in rural areas to
benefit the vulnerable sections of our society. However, we feel that a time has come
for taking initiative to make a substantial dent on the problem of unemployment. To
this end, as already stated, Government proposes to introduce a new intensive rural
employment programme, to be called Jawaharlal Nehru Rojgar Yojana. In order to
15
mobilise resources for this programme, I propose to levy a surcharge at the rate of 8
per cent. on resident taxpayers with incomes above Rs.50,000/- from assessment year
1990-91. I am sure that those who are privileged to have employment in a society,
where there are so many who are deprived, will not mind this sacrifice in the interest
of creating employment for those not so fortunate.
81. The Government has maintained stability in the direct tax rates during the
last four years. However, it has often been represented that a 25 per cent. tax at the
entry point discourages many taxpayers in coming to the tax net voluntarily.
Accordingly, it is proposed to reduce the rate of tax for individuals in the entry slab of
Rs.18000-25000 from the present rate of 25 per cent. to 20 per cent.
82. This House is aware of the fact that in order to mobilise resources to meet
the requirements of the drought in 1987 and its after-effects in 1988, a surcharge on
income-tax and wealth-tax was levied. I do not propose to continue the Wealth Tax
and Income-Tax surcharge from the assessment year 1989-90 and 1990-91 respectively.
83. The combined effect of the changes that I am proposing with regard to the
employment surcharge and the changes in the rate structure will be such that a person
with a taxable income of below Rs.56,000/- will pay less tax than at present. The
entire burden of additional direct-tax will fall on those with a taxable income above
Rs.56,000/- per annum. The revenue effect of this surcharge will be Rs.500 crores. I
have no doubt that the House will welcome this socially progressive measure.
84. With a view to curbing conspicuous consumption, I propose to enhance
the rate of expenditure tax under the Expenditure Tax Act, 1987, as applicable to
certain hotels, from 10 per cent to 20 per cent. This will yield an additional Rs.30
crores.
85. I now come to some measures for providing relief.
86. To meet the housing needs of the citizens has always been an important
policy objective of the Government. In his Budget Speech for 1987-88, the Prime
Minister envisaged a high priority for the housing sector and had announced the decision
to set up a National Housing Bank. Necessary legislation in this regard has been
passed and the National Housing Bank has become operational. In order to help the
National Housing Bank mobilise resources in its nascent stage, I propose to provide
that the deposits made in the Home Loan Account Scheme of the National Housing
Bank as well as the repayment of housing loan taken from the Bank will qualify for
deduction provided under section 80C of the Income-tax Act. The investment will
also be exempt from wealth-tax subject to the overall ceiling of Rs.5 lakhs. Further,
the taxpayers will now get a tax concession under section 54E on capital gains if the
sale proceeds are invested in the bonds and debentures issued by the National Housing
Bank.
16
 87. Poultry farming is emerging as an important activity for enhancing nutrition
and providing employment. I, therefore, propose to provide tax exemption to the
income from poultry fanning at the rate of thirty-three and one-third per cent. of such
income. This measure should go a long way in encouraging investment in this area.
88. Retiring Government employees are often on the look out for investment
opportunities with a good post-tax return. With this view, it is proposed to set up a
deposit scheme in which a retiring employee may invest the whole or part of his
retirement benefits for a block period of three years. The interest on this investment
will be free from income-tax. Further, this investment will also be exempt from
wealth-tax. The present ceiling of exemption of wealth upto Rs.5 lakhs in respect of
wealth in certain specified forms will also not apply to such deposits.
89. As a measure for providing relief to the widows and heirs of deceased
employees, I propose to amend the provisions of the Income-tax Act, to provide a
standard deduction at the rate of thirty-three and one-third per cent., subject to a
maximum of Rs.12,000/-, for the recipient of family pension also. Similarly, it is
proposed to extend the benefit of deduction of Rs.15,000/-, already available to
permanently physically handicapped persons, to persons who are mentally retarded.
90. Hon’ble Members are aware that under the Constitution Amendment Act,
1998 the ceiling of tax on professions has been raised from Rs.250 to Rs.2,500 per
annum with the object of enabling the State Governments to raise additional resources.
I hope that the States will take full advantage of this. I propose to provide that this tax
be allowed as a deduction in computing the income under ‘Salaries’.
91. Following the announcements made in the budget speech for 1988-89,
Government has formulated schemes setting up the Exchange Risk Administration
Fund and issued guidelines for venture capital companies I funds which provide
assistance to new entrepreneurs. In order to extend fiscal support to these funds. I
propose to extend certain tax concessions to them.
92. Revenue loss, if any. on account of the proposed relief measures is expected
to be made up through be made up through better compliance and better collection.
93. By a notification of the President issued on 7th November. 1988, the
Income-tax Act stands extended to the State of Sikkim from assessment year 1989-90.
In view of some operational difficulties, I now propose to extend the ‘Income-tax Act,
1961 to Sikkim only from the assessment year 1990-91. The Wealth-tax Act and the
Gift-tax Act have already been extended from 1990-91 assessment year by the Central
Government’s notification.
94. I shall now proceed to deal with my proposals relating to indirect taxes.
95. In formulating these proposals, I have been guided by the imperative need
for raising additional resources. In doing so, I have taken care to see that items of
17
mass consumption are not unduly affected and that the burden falls largely on relatively
affluent sections of the population.
96. As the House is aware, problems of evasion of excise duties through
undervaluation and related administrative problems have led to specific rather than ad
valorem duties on a large number of commodities. In fact, of the total excise revenue,
about 70% is derived from commodities carrying duties at specific rates. In the case
of many commodities which are subject to specific rates of excise duty, the duty
incidence is at substantially lower than what it was when the specific duties were
fixed originally. There has to be a system whereby all specific rates are revised
upwards periodically keeping in view price increases. I propose to make a beginning
in this regard in this Budget by increasing the existing specific duty rates of a substantial
number of commodities by a modest five per cent of current rates with suitable rounding
off. I hasten to add that I have taken care to ensure that items of mass consumption
are kept outside the purview of this adjustment. The items on which t ‘ here will be
no change in the rates of excise duly include sugar, tea, coffee, petroleum products
like kerosene, diesel and motor spirit, biris, vegetable oils, vanaspati, cotton yarn and
fabrics, jute yarn and fabrics and electric bulbs and fluorescent tubes. Similarly, the
existing exemption for newsprint and specified paper intended for use in the printing
of textbooks or other books of general interest remains unaltered.
97. It is expected that the upward revision of specific rates will yield an
additional excise revenue of Rs.220 crores.
98. There are some commodities which are charged to excise duty at specific
rates and which would call for a higher rate of adjustment than what has been proposed
in general. I now come to my proposals in regard to these commodities.
99. In the case of iron and steel, the specific rates of duty have not been
changed significantly for over a decade now. As a revenue raising measure, I propose
to raise the rates of duty on these items. The duty on pig iron is proposed to be
increased from Rs.80 to Rs.200 per tonne. On steel items other than stainless steel,
such as ingots, billets, bars, rods, etc. presently attracting duty of Rs.365 per tonne,
I propose to increase the duty to Rs.500 per tonne. The duty on certain hot rolled flat
products such as sheets, strips, etc. is Proposed to be raised from Rs.500 to Rs.700
per tonne. In respect of certain cold rolled flat products such as sheets and strips, the
duty is proposed to be raised from Rs.715 to Rs.900 per tonne.
100. There are certain assessment disputes in the case of forgings and castings
as the duty rates vary depending upon the classification. As a measure of rationalisation
and to prevent such disputes, I propose to levy a uniform rate of duty of Rs.800 per
tonne on steel forgings and Rs.600 per tonne on steel castings.
101. In the case of stainless steel where the duty incidence is rather low, I
propose to raise the duty on ingots, semifinished products and hot rolled products
18
from the existing rates to Rs.1000 per tonne and on certain cold rolled products from
Rs.715 per tonne to Rs.1500 per tonne. Stainless steel castings and forgings will also
attract a duty of Rs.1500 per tonne.
102. Similar duty adjustments are proposed to be made on other iron and steel
items. In the case of dutiable downstream products, MODVAT credit on iron and
steel items would continue to be available.
103. These measures are expected to result in additional excise revenue to the
tune of Rs.150 crores and customs revenue of Rs.18 crores.
104. No Finance Minister can resist the temptation of looking to smokers of
cigarettes for augmenting excise revenue. I must confess that L like most of my
predecessors, readily submitted to this temptation. Smokers who do not pay any heed
to the statutory warning to their health should, I feel, at least contribute more to the
health of the national economy. I propose to restructure the duty rates on cigarettes.
While generally the duty rates are being raised, the extent of increase would be more
in the case of filter cigarettes of length above 70mm. However, non-filter cigarettes
of length upto 60 mm will carry a rate of excise duty of Re.1 per packet of 10. These
measures are estimated to yield excise revenue to the tune of Rs.101 crores.
105. Having revised the duty structure on cigarettes, I would not like users of
pan masala to feel aggrieved that they have been let down. I propose to double the
excise duty presently being levied on pan masala not containing tobacco for the two
existing slabs based on value from Rs.10 and Rs.20 per kg. to Rs.20 and Rs.40 per kg.
respectively. Simultaneously, I propose to increase the excise duty on pan masala
containing tobacco from 25% to 30%. The revenue implication of these measures is
Rs.8 crores.
106. As the House is aware. molasses is the principal raw material for the
manufacture of liquor. In keeping with its end use, I feel, molasses can bear a higher
incidence of duty than at present. I accordingly propose to increase the excise duty on
molasses from Rs.60 to Rs.120 per tonne. I propose to increase suitably the credit of
money that is presently available when alcohol is used in the manufacture of chemicals.
It is estimated that this measure will yield additional excise revenue to the tune of
Rs.11 crores.
107. I have a couple of proposals relating to travel tax.
108. At present, Foreign Travel Tax is being levied at the rate of Rs.50 per
ticket for travel to neighbouring countries and Rs.100 per ticket in respect of travel to
other countries. These rates have not undergone any change since 1979. I propose to
increase the aforesaid rates of tax to Rs.150 and Rs.300 respectively.
109. As the House is aware, Government has invested substantial sums of money
in developing our airports and providing infrastructural facilities therein. Keeping
19
this fact in view, the privileged few who can afford to fly within the country should
not mind if they are to pay a small extra amount as tax for augmenting revenues. I
intend to levy a new tax called Inland Air Travel Tax at 10% of the basic fare. However,
I propose to exempt passengers paying air fare in foreign currency. There will also be
a provision for exempting deserving special categories of passengers from this tax.
110. The proposals relating to travel tax will be given effect to from a date to
be notified later and are expected to yield additional revenue to the tune of Rs.85
crores.
111. Having dealt with those who fly, I now turn to those who drive. Let me
deal with my proposals in regard to the automobile sector.
112. As Honourable Members are aware, presently there is a concessional rate
of excise duty of 25% in respect of fuel efficient cars of engine capacity not exceeding
1000 cc and 30% in respect of such cars of engine capacity exceeding 1000 cc as
against the rate of 35% for other cars. I feel fuel efficient cars have established
themselves and there is no necessity to continue with the concessional rates any more.
I accordingly propose to levy a uniform rate of 35% on all motor cars. This rate will
apply to vans and jeeps also. The revenue gain from this measure will be Rs.100
crores.
113. Currently the excise duty on two wheelers-of engine capacity not exceeding
100 cc is 15% and that on others, 25%, I propose to restructure the excise duty on two
wheelers into a four tier regime. The rate of duty on two wheelers upto 50cc will
remain at the present level of 15%. The duty on two wheelers between 50 and 100 cc
is being raised from 15% to 20%. There is no change in the rate of excise duty of
25% on two wheelers between 100 and 150 cc. The rate of duty on two wheelers
above 150 cc will be 30%. This measure is expected to yield additional revenue of
about Rs.26 crores.
114. I also propose to give some concessions in customs duties to this sector
keeping in view the need to encourage domestic production and hasten the process of
indigenisation.
115. I further propose to prescribe a concessional duty of 40% on machinery
imported for the manufacture of fuel injection equipment, which is a vital component
for the automobile sector. The same rate would be applicable to components imported
for manufacture of fuel injection equipment. The concessional rate would be available
only to the units manufacturing under an approved phased manufacturing programme.
116. The concessions in customs duty to the automotive sector will have a
revenue implication of Rs.19 crores.
117. I now come to the package of measures relating to the electronics sector.
This is one of the fast growing sectors in our economy and is in a position to contribute
20
more to the exchequer. My proposals in regard to this sector are oriented to giving a
greater stimulus to the process of indigenisation.
118. The Members of the House are aware that television has offered
considerable entertainment to our people. It would be in the fitness of things that
television viewers who derive such entertainment should contribute more to the
resources of Government and thereby to the programmes of national development.
119. At present, black and white television sets of screen size exceeding 15 cm
and upto 36 cm are completely exempted from excise duty. While continuing the
exemption for such sets, I propose to increase the excise duty on the picture tube of
such sets to Rs.200 per tube. Black and white television sets of screen size exceeding
36 cm attract excise duty of Rs.300 per set. I propose to increase this rate to Rs.500
per set.
120. As regards colour television sets, the present duty is Rs.1500 per set of
assessable value upto Rs.5000 and Rs.2000 per set of assessable value more than
Rs.5000. This duty structure has led to some valuation disputes. Some high value
sets have also entered the market. A review of the duty structure on colour television
sets is therefore called for. I propose to fix a duty of Rs.2250 per set without remote
control, Rs.2500 per set with remote control and Rs.4000 per set having the facility of
‘Picture in picture’.
121. I also propose to fix a uniform rate of 20% on radios, two-in-ones, cassette
recorders and musical systems, as against the present rates of 15% or 20%.
122. I propose to increase the excise duty on computers from 10% to 15% ad
valorem. At the same time, computers are being taken out of the general scheme of
exemption for the small scale sector.
123. Presently, specified raw materials and piece parts imported for the
manufacture of specified electronic components attract customs duty at the rates of
35% and 50% respectively. While extending concessional duty to a larger number of
items, I propose to raise these rates to 40% and 60% respectively.
124. These proposals relating to electronic items are estimated to yield additional
revenue to the tune of Rs.158 crores in excise and Rs.36.5 crores in customs.
125. I have some concessions in customs duty to announce for the electronics
sector. In last year’s Budget, a uniform rate of import duty of 100% was provided to
a large number of equipments for telecommunication, satellite communication, data
communication, television transmission and studio and sound broadcasting. I propose
to extend the concession to 35 more specified equipments.
126. Optical communication cables are essential for telecommunication. In
order to encourage the manufacture of such cables in the country, I propose to reduce
21
the import duty on specified raw materials required for their manufacture from the
present rates varying from 130 to 300% to the level of 80%.
127. With a view to encouraging production of high-tech items like large scale
integrated circuits, microprocessors and other microelectronic items, 22 items of
machinery have been given a concessional import duty of 15 %. I propose to extend
the concession to five more items of machinery.
128. The concessions in customs duty to the electronics sector will have a
revenue implication of Rs.33 crores.
129. I have a package of measures in regard to the customs duty structure for
capital goods.
130. At the time of presenting the 1987 Budget, the Hon’ble Prime Minister
had emphasised the importance of the capital goods industry and had stated that it is
central to our efforts for achieving self reliance and to promote the growth of this
sector. Important steps were initiated that year. The success brought forth by these
measures encourages us to continue further along those lines. My first proposal is, to
extend the duty concession for import of machinery under the technology upgradation
scheme for the capital goods industry to four more sectors. These are cutting tools,
commercial tool rooms, textile machinery and paper machinery. In addition, for the
machine tool sector, I propose to expand the list of machinery items attracting
concessional duty.
131. I propose to rationalise the import tariff of capital goods. The rate of
import duty on general projects and machinery is being reduced from the existing
90% to 80% ad valorem. The rate of duty on components which is 15% below the
rate applicable to the machinery would get correspondingly reduced.
132. The next step in this regard would be rationalising the rate of concessional
import duty on specified machinery which presently varies between 25% to 35%.
This is being unified and fixed at 40% ad valorem. There would, however, be no
change in the case of fertilizer projects. In the case of power projects, the increase
would be by five percentage points.
133. The rationale for these changes lies in the desirability of reducing the
dispersion in tariff rates as much as possible. In pursuit of this objective, I am
introducing an intermediate level of duty of 60% ad valorem. This will apply to
certain specified items of machinery which are manufactured indigenously such as
captive power plants, certain types of generating sets and circular looms for jute
industry.
134. As a measure of facilitating the export thrust sectors to upgrade their
technology by importing modern machinery, concessional duties have been prescribed
from time to time on machinery for specified thrust sectors. I propose to extend the
22
concession to rubber and canvas footwear sector and to expand the existing list of
machinery for textile and sericulture sectors.
135. These measures relating to capital goods are estimated to result in a loss
of customs revenue of about Rs.117 crores.
136. As I have mentioned earlier in my speech, pricing and distribution of
aluminium is being decontrolled with immediate effect. In this context, I propose to
increase the excise duty on aluminium ingots and wire-rods from the existing level of
18% to 20% ad valorem plus Rs.2500 per tonne. Since MODVAT credit in regard to
primary aluminium would be available for dutiable downstream products, I propose to
increase the duty on most of such products by ten percentage points. It is also proposed
to exempt aluminium ingots from basic and auxiliary duties of customs. The basic
customs duty on aluminium scrap is being reduced from 30% to 15%. The net revenue
yield from these measures will be Rs.50 crores.
137. There are certain commodities which attract a low rate of customs duty at
present and these call for a review. I propose to ram the import duty on wood pulp,
waste paper, low ash coal, raw petroleum coke and certain chemicals by five percentage
points over the existing rates. On benzene, I propose to raise the basic custom duty
from the existing nil rate to 25% ad valorem. The revenue gain from these proposals
will be Rs.39 crores.
138. I propose to increase the basic customs duty on glazed newsprint from
Rs.550 per tonne to 30% ad valorem. This will yield additional revenue of about
Rs.12 crores.
139. Watches and components thereof presently bear a low rate of excise duty
of 2% ad valorem. This rate was fixed in order to encourage indigenous production
of watches. This measure has been successful. I think the time has come when the
watch industry can bear a higher duty. I propose to increase the rate to 5% ad valorem.
This will result in a revenue gain of Rs.5 crores.
140. I shall now deal with my package of proposals in regard to the agrobased
and related industries.
141. As Honourable Members are aware, the growth of food processing and
packaging industry is essential for increasing value addition of agricultural produce
and raising incomes of farmers. As part of Budget proposals last year, excise duty on
parts and accessories going into the installation of cold storage plants for preserving
foodstuffs was reduced from 40% to 15%. I now propose to extend the concessional
rate of 15% to parts of refrigerating appliances and machinery as well as compressors
intended to be used in refrigerated vans meant for transport of food and dairy products.
142. At present, 34 specified items of food processing and packaging machinery
enjoy a concessional import duty of 35%. I propose to extend the concessional rate
23
to a few more specified items of machinery such as transport refrigeration unit and
machinery for egg processing. The concessional rate of duty as stated earlier is now
being fixed at 40%.
143. I propose to reduce the excise duty on skimmed milk powder and condensed
milk from 15% to 10%. Simultaneously the exemption from excise duty on skimmed
milk powder in one kilogram pack is being withdrawn. The excise duty on certain
other food preparations such as preparations of fish, meat, tapioca and sago in unit
containers is being reduced from 15% to 10%. Namkeens such as bujiyas and chabena
and specified ready-to-cook mixes such as idli-mix and vada-mix are being fully
exempted from excise duty.
144. A concessional import duty of 61% has been provided for certain specified
items of machinery for marine food sector. I propose to further reduce the rate to 40%
and enlarge the list by adding three more items of machinery for fishing. In addition,
I propose to reduce the import duty on machinery for the manufacture of fish nels
from 90% to 40%.
145. One of the proposals contained in the New Policy on Seed Development
announced in September, 1988 relates to the reduction of import duty on machines
and equipments used for seed production and processing and quality control for which
technology upgradation is necessary. I propose to prescribe a concessional import
duty of 40% on 12 specified items of such machinery and equipments.
146. In order to help improve the quality of poultry feed, I propose to reduce
the import duty on two specified amino acids from the present level of 147.25%
to 70%.
147. To give relief to the jute industry, I propose to exempt from excise duty
jute yam supplied to a registered handloom co-operative society or an organisation set
up or approved by the Government. This exemption will be available for the purpose
of development of handlooms for manufacture of fabrics other than those used for jute
sacks. I also propose to extend this exemption to units set up by the Khadi and
Village Industries Commission and Boards.
148. Paper and paperboard containing not less than 75% by weight of bagasse
is totally exempted from excise duty. In order to further encourage the use of
unconventional raw materials for the manufacture of paper and thus reduce the pressure
on forest based raw materials, I propose to extend full excise duty concession to those
varieties of paper and paper board which contain not less than 75% of pulp made from
raw jute or mesta. This measure may incidentally help the jute industry.
149. For helping the farmers to get better prices for their produce, I propose to
increase the basic customs duty on cinnamon from Rs.20 per kg to 90% ad valorem
plus Rs.20 per kg and that on cloves from Rs.60 to Rs.95 per kg.
24
 150. To give a major thrust to marketing of products of the Khadi and Village
Industries sector, I propose to make an exception in regard to availability of small
scale concession where the products bear the brand name of Khadi and Village Industries
Commission and Boards. The existing concession for products of village industry
marketed by or with the assistance of the Khadi and Village Industries Commission is
being extended to furniture and ceramic products.
151. These measures relating to agrobased and related industries are estimated
to result in a revenue loss of Rs.5 crores of customs duty and Rs.8 crores of excise
duty.
152. On a review of the excise duty structure for the match industry, I feel
there is need for revising the duty rates for the different sectors of the industry.
Currently, excise duty is being levied on the mechanised, semi-mechanised,
nonmechanised and cottage sectors of the industry at Rs.5.85, Rs.4.15, Rs.3.50 and
Rs.1.60 per gross of boxes respectively. I propose to bring down the aforementioned
rates to Rs.4.50, Rs.3.00, Rs.2.50 and Rs.1.10 per gross. Simultaneously, I propose to
increase the excise duty on potassium chlorate, an essential raw material for the
manufacture of matches, from 15 % ad valorem which works out to roughly Rs.2 per
kilograrm to Rs.5 per kilogram. The duty rates will be converted into metric system
and specified as applicable to 100 boxes with effect from the 1st June, 1989. These
proposals involve a revenue sacrifice of Rs.11 crores excise duties.
153. In view of the shortage of cotton due to drought, as part of the Budget
proposals last year, a concessional duty of Rs.5.22 per Kg. was prescribed on viscose
staple fibre for blending with cotton. However, with the increased availability of
cotton this year, there is no further necessity to continue the concession. I propose to
withdraw the concessional rate and fix a uniform rate of Rs.8.35 per Kg. on viscose
staple fibre. The revenue gain from this measure will be of the order of Rs.14 crores.
154. I propose to exempt raw wool to be imported by Khadi and Village
Industries Commission and State Khadi and Village Industries Boards from the whole
of the duty.
155. The customs duty on raw silk is being reduced from 75% to 50% ad
valorem.
156. Dyestuffs are important inputs for the processing of textiles. This
commodity carries at present an excise duty of 35%. I propose to reduce the excise
duty on synthetic organic dyestuffs from 35% to 30%. This proposal which will
benefit this textile related industry involves a revenue loss of Rs.19 crores.
157. Synthetic shoddy blankets of value upto Rs.60 per square metre are being
exempted from the whole of excise duty.
25
 158. I propose to give certain concessions in customs duty to specified life
saving drugs and drug intermediates. The proposals in this regard are likely to result
in a revenue loss of about Rs.7 crores.
159. In order to give relief to cement units using vertical shaft kiln, I propose
to reduce the excise duty on cement manufactured by such units by Rs.100 per tonne
from the general effective rate. This involves a revenue loss of Rs.10 crores.
160. As a step towards energy conservation, I propose to reduce the excise
duty on high pressure sodium vapour lamps from 15% to 10%. Simultaneously, I
propose to prescribe a concessional import duty of 50% on four specified inputs
forthe manufacture of such lamps.These measures are estimated to result in revenue
loss of Rs.2.5 crores in excise revenue and Rs.5 crores in customs revenue.
161. There have been representations that the film industry has been adversely
hit by video piracy. I accordingly propose to restructure the excise duty rates on
feature films. As per the revised proposal, the first 30 prints of each feature film
would be eligible for complete exemption from excise duty as against the first 12
prints at present. The rates of duty on subsequent prints are being reduced.
162. Some of the organisations engaged in the rehabilitation of physically or
mentally handicapped persons undertake manufacturing activity for providing
employment to such persons. Presently, such organisations are eligible for excise
duty exemption only to the extent available for specified goods manufactured in the
small scale sector. I propose to fully exempt such goods produced by these
organisations.
163. In order to promote safety in chemical industry and environmental control,
I propose to extend concessional import duty of 40% on 25 specified equipments such
as monitoring instruments for toxic and hazardous chemicals or gases, special
incinerating systems etc.
164. Paraxylene is an important raw material used in the manufacture of DMT
and PTA which in turn are used by the polyester industry. Keeping in view the recent
trends in the international price of paraxylenej propose to reduce the import duty on
paraxylene from 120% to 90%.
165. There are a few rationalisation and anti-evasion measures relating to
customs and excise duties.
166. Presently, petro-chemical factories are eligible for certain concessions
including concessional excise duty on naphtha when they are declared as refineries.
The present scheme has been reviewed and I propose to make available the concessions
with certain modifications, without linking the concessions to the declaration of a
factory as a refinery. Simultaneously, I propose to raise the concessional rate of duty
26
on raw naphtha from Rs.30 to Rs.60 per kl. The orders declaring certain factories as
refineries are being rescinded.
167. Small scale units are allowed complete exemption from excise duty upto
a value of Rs.30 lakhs in case they manufacture goods falling under more than one
heading of the Central Excise Tariff. I propose to restructure the scheme so that the
exemption upto Rs.30 lakhs is available only if the goods falling under more than one
Chapter of the Central Excise Tariff are manufactured.
168. The details of the revenue implications of the measures announced are
given in the Explanatory Memorandum to the Finance Bill.
169. Provision is being made in the Finance Bill for continuance of auxiliary
duty of customs and special excise duty at the existing rates.
170. Apart from the above proposals, I have proposed certain amendments in
the Finance Bill seeking to effect changes in the excise and customs tariffs. These
amendments are merely enabling provisions and have no revenue significance. Besides,
there are proposals for amendment of some of the existing notifications. In order to
save the time of the House, I do not propose to recount them.
171. In the aggregate, the proposals in regard to changes in the customs and
excise duties outlined above are likely to yield additional revenue of Rs.863.20 crores
from excise duties and Rs.117.06 crores from customs duties. The concessions and
reliefs announced aggregate to Rs.237.12 crores on the customs side and Rs.71.02
crores on the excise side. The net additional revenue from excise duties would thus
be Rs.792.18 crores. On the customs side, there is a net revenue loss of Rs.120.06
crores. Besides, the changes in the Foreign Travel Tax and the levy of Inland Travel
Tax would yield an additional revenue of Rs.85 crores. Thus, out of the total net
additional yield of Rs.757.12 crores from indirect taxes, the Centre’s share would be
Rs.373.13 crores and that of States Rs.383.99 crores.
172. The Medicinal and Toilet Preparations Act is an enactment under Article
268 of the Constitution in terms of which duties are levied by the Union but collected
and appropriated by the States. There has been no change in the rates of duties
leviable on medicinal and toilet preparations containing alcohol, narcotics and narcotic
drugs since 1982. There have been requests from the State Governments that the rates
should be reviewed and revised suitably. While I do not propose to make any changes
in the ad valorem rates, I propose to increase the specific rates by about 50% of the
existing rates. The details of the changes made in the Schedule are given in the
Explanatory Memorandum to the Finance Bill.
173. Copies of notifications giving effect to the changes in customs and excise
duties effective from 1st March, 1989 will be laid on the Table of the House in due
course.
27
 174. The modifications proposed by me in direct and indirect taxes are expected
to yield Rs.903 crores to the Centre. Taking this into account the year end deficit for
the next year is estimated at Rs.7337 crores.
175. Sir, the proposals I have just presented mark, in their totality, a qualitatively
new stage in our continuing quest for social justice. The new employment programme,
which will expand over time, is the people’s own weapon in their struggle to usher in
a society liberated from the shackles of poverty. The budget proposals also reflect
Government’s strong commitment to self-reliance. We are determined to vigourously
implement strategies for export promotion, for modernisation of Indian industry and
for efficient import substitution. Within these basic policy parameters, every effort
will be made to contain imports to reasonable levels. The journey along the path of
development is hard and long. It involves sacrifices. The question is who will make
such sacrifices for future growth and prosperity. The answer of these budget proposals
is clear and categorical. It is the relatively affluent who will have to share a larger
burden so that the weaker and vulnerable sections of society may share in the fruits of
growth.
176. I commend the Budget to the House.
[28 February, 1989]

28
 SPEECH OF SHRI NARAYAN DATT TIWARI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1988-89
PART A

Sir,
I rise to present the Budget for the year 1988-89.
2. The Economic Survey for 1987-88 was placed before the House a few
days ago and contains a detailed review of trends in the Indian economy over the past
year. Economic performance and management during the year have been dominated
by natural calamities of drought and floods. The drought this year has been one of the
worst in this century, with 21 out of 35 meteorological sub-divisions receiving deficient
or scanty rainfall during the monsoon months. In most of the Eastern states the problem
was not too little but, rather, too much rainfall, leading to devastating floods. What is
worse, this year of drought and floods followed three successive years of poor monsoon.
3. Despite the very severe strains and distress, the economy has demonstrated
remarkable resilience. It has done so for two good reasons. First, sustained development
and diversification of our economy, over the years, has created a capacity to withstand
temporary shocks. Second, Government has responded with timely interventions across
a wide front to contain the economic and social costs of the drought.
4. The buffer stock policy pursued by the Government enabled us to build
large food stocks, which stood at 23 million tonnes on 1st July, 1987. With the help of
these stocks, a massive and sustained effort was launched to ensure adequate supply
of foodgrains throughout the country, particularly in drought affected areas. Other
important Government programmes to combat the drought included massive expansion
of relief and employment generating works, strengthening of the public distribution
system, special efforts to compensate for shortages of drinking water, fodder and
power supply, action plans to grow contingency crops in the kharif season and to
boost rabi production, measures for livestock protection and large scale imports of
essential commodities such as edible oils and pulses. These supply measures were
buttressed by careful fiscal and monetary policies to make available adequate resources
for relief expenditures, without cutting back on the public investment programme.
5. Thanks to these sustained efforts the overall indicators of economic
performance have been better than in any previous year of severe drought. Thus,
despite the decline in agricultural production, GNP growth in 1987-88 is expected to
be in the range of 1 to 2 per cent, in contrast to a decline of 4.7 per cent in 1979-80.
1
Available data show that industrial production in April-November 1987 rose by 10.2
per cent over the corresponding period of the previous year. In contrast, in the drought
year 1979-80, there was an absolute decline of 1.7 per cent in industrial production.
The overall rate of inflation in the current financial year, as measured by the Wholesale
Price Index, stood at 9.8 per cent as on February 6, 1988 as compared with inflation
in excess of 21 per cent recorded in 1979-80. Price movements in respect of essential
commodities are being monitored closely at Central and State levels and I would like
to thank State Governments for setting up control rooms at the district level also. We
have to keep continuous vigilance on the price front at all levels.
6. The strains imposed by the drought and floods have highlighted some of
the underlying strengths as well as problem areas of our economy. In the face of
successive monsoon failures, our agriculture has demonstrated its basic strength. We
are proud of our farmers. By their hard work and unflinching determination through
the years, they produced enough to enable us to build substantial food stocks. This
helped us to withstand the impact of the current drought without acute food scarcity
and widespread economic dislocation.
7. Industrial production will show an increase of more than 8 per cent for
four successive years since 1984-85. The infrastructure has performed well. Generation
of thermal power has made up the deficiency in generation of hydel power and, overall,
there was a growth of 7.6 per cent in power generation in the first nine months of the
current year. Productivity in the Railways has shown significant improvement. Coal
production has increased by 10.2 per cent in April-December,1987. The improvement
shown by the public sector in these areas is a matter of considerable satisfaction, and
bears testimony to the successful implementation of policies initiated by this
Government. Our workers have worked hard to make this possible, and the nation is
grateful to them. Government attaches the highest importance to building a strong and
vibrant public sector.
8. Exports have recorded strong growth over the last two years. After growing
by over 15 per cent in 1986-87, exports rose by nearly 25 per cent in the first nine
months of the current year as compared to the corresponding period of the previous
year. Over the same period, the growth of imports was less than 14 per cent. The trade
deficit has been declining over the past two years.
9. However, we must not be complacent. As we look ahead, we must move
decisively to overcome some of the problems that have emerged on the economic
scene. The four successive years of poor monsoons have caused considerable hardship
in our rural areas, reduced agricultural output, and affected the momentum of growth.
We, therefore, have to give a major thrust to agriculture in the remaining years of the
Seventh Plan.
10. We have done well in agriculture. But the drought and floods have
highlighted certain areas which require our urgent attention. The Prime Minister has
2
directed that an Action Plan should be formulated quickly by the Planning Commission,
which would identify the areas where further measures can lead to early gains in
production. In 1987-88, an additional allocation of Rs.236 crores has been made for
completion of irrigation projects in drought affected States. In the coming year, Plan
outlays for Centre and States in respect of agriculture and irrigation are being increased
by 40 per cent. If necessary, the Government will make re-allocations within the
overall Plan outlay for 1988-89 and provide more resources for achieving agricultural
targets.
11. We have seen rapid growth in industry, reflecting the success of
Government policies in stimulating investment and production, and promoting
technological upgradation. We must ensure that this momentum is maintained. Costs
and prices need to be reduced. Indian Industry must be made more competitive. Sickness
in industry has been a major problem. We have to take further steps to combat sickness.
We must also upgrade skills, train workers and improve management. Industrial
development must make the best use of our most abundant resource, namely, the skills
of our people. Rapid growth of industry is essential for generating employment
opportunities.
12. Small, village and khadi industries have a special place in our economic
development. These industries make use of locally available resources and are
instrumental in creating job opportunities in smaller towns and rural areas where the
bulk of our people live. Speaking in this house, thirty five years ago, Pandit Jawahar
Lal Nehru had told the nation, and I quote,
“I have no doubt that we cannot raise the people’s level of existence
without the development of major industries in this country; in fact, I will
go further and say that we cannot even remain a free country without
them........... But we must always remember that the development of heavy
industry does not by itself solve the problem of the millions in this country.
We have to develop the village and cottage industry in a big way, at the
same time making sure that in trying to develop industry, big and small,
we do not forget the human factor.”
This overall approach continues to guide us.
13. Government has been taking several measures to increase revenue, improve
tax compliance and enforce economic laws. These have yielded dividends and growth
of revenue in the past three years has been quite satisfactory. The faster growth of
expenditure has, however, exerted substantial pressures on the fiscal situation. We
face unavoidable compulsions of higher expenditure, for example, on defence,
development, social services, relief programmes and food and fertilizer subsidies. As
a nation, we must deal earnestly with the problem of mounting expenditure.
14. As anticipated, the balance of payments situation has been under strain
because of several factors. These include higher imports of edible oils and pulses,
3
increase in imports of crude oil and petroleum products, increasing protectionist
tendencies abroad, and unfavourable climate for official development assistance. The
environment for developing countries has also been badly affected by upheavals in the
international economy, volatility of exchange rates, and slow growth of world trade.
In order to reduce the impact of these unfavourable developments, we took vigorous
measures to increase exports and reduce the growth of imports. These measures would
need to be further strengthened.
15. India has followed a prudent policy in debt management and has avoided
problems of the kind faced by several other developing countries. We remain committed
to ensuring long-term viability in our balance of payments.
16. The challenges before us are many and it is only through hard work, thrift
and sacrifice that we can build a self-reliant, strong and socialist economy. As a humble
political worker, I am conscious that while we have made tremendous progress, there
is a great deal that remains to be done to improve the condition of our people,
particularly in rural areas.
17. Within the limitation imposed by our overall resource situation, I propose
to take a number of steps to benefit farmers, promote small and village industries,
provide relief to the poor, protect and create more jobs, and generate self employment
opportunities for our people. In addition to augmenting the anti-poverty programmes,
such as IRDP, NREP and RLEGP, Government has decided to initiate a number of
measures to increase the flow of agricultural credit, strengthen the institutional
framework, enhance social security to the weaker and vulnerable sections of the society,
particularly Scheduled Castes and Scheduled Tribes, and promote better housing for
the rural poor. While some of these programmes call for additional outlays, it is proposed
to reorient and redirect several of the existing programmes and institutions to serve
our social objectives better.
18. In working out the package of measures for agriculture, we have kept in
view the guidelines given by the Prime Minister when he addressed the kisans the
other day:
ÞBÉEßÉÊKÉ BÉEÉä +ÉMÉãÉä nÉä iÉÉÒxÉ ºÉÉãÉÉå àÉå ABÉE VÉÉä®nÉ® xɪÉÉ |ÉÉäiºÉÉcxÉ ÉÊnªÉÉ VÉÉA, ÉÊVɺÉàÉå UÉä]ä +ÉÉè®
ºÉÉÒàÉÉÆiÉ ÉÊBÉEºÉÉxÉÉå, £ÉÚÉÊàÉcÉÒxÉ àÉVÉnÚ®Éå +ÉÉè® OÉÉàÉÉÒhÉ nºiÉBÉEÉ®Éå {É® JÉÉºÉ vªÉÉxÉ ÉÊnªÉÉ VÉÉA* càÉÉ®ÉÒ ªÉc
£ÉÉÒ BÉEÉäÉÊ¶É¶É cÉä ÉÊBÉE AäºÉÉÒ VÉÉä £ÉÉÒ ªÉÉäVÉxÉÉ näcÉiÉ BÉEä ÉÊ´ÉBÉEÉºÉ BÉEä ÉÊãÉA ¤ÉxÉä ´Éc nä¶É BÉEä c® cãÉBÉEä
BÉEä ÉÊãÉA cÉÒ xÉcÉÒ ¤ÉÉÎãBÉE näcÉiÉ àÉå c® iɤÉBÉEä BÉEä ÉÊãÉA £ÉÉÒ ¤ÉxÉä* <ºÉºÉä {ÉÚ®ä ºÉàÉÉVÉ BÉEÉÒ iÉÉBÉEiÉ ¤ÉxÉäMÉÉÒ,
{ÉÚ®ä ºÉàÉÉVÉ BÉEÉä <ºÉBÉEÉ ãÉÉ£É ÉÊàÉãÉäMÉÉ +ÉÉè® {ÉÚ®É ºÉàÉÉVÉ +ÉÉMÉä ¤ÉfÃäMÉÉ*Þ
[In the next two-three years we must give a strong thrust to agriculture.
Special attention must be given to small and marginal farmers, landless
labourers and village artisans. It shall also be our endeavour that our
schemes for rual development benefit not only all the regions of the country
but also all the sections of the society. This will strengthen and benefit the
entire community and help us march forward.]
4
 19. The financial condition of our farming community has been affected by
the drought. A number of measures have already been taken such as reschedulement
of loans, conversion of short term loans into term loans and lowering of rate of interest
in some cases. As an important step forward, I am happy to inform the House that
today the Reserve Bank of India is issuing instructions to bring down the cost of
agricultural credit. The rate of interest on crop loans upto Rs.7,500 is being reduced
by one and half per cent to two and half per cent. The interest rate will, henceforth, be
reduced to 10 per cent for loans upto Rs.7,500 from the prevailing levels of 11.5 per
cent and 12.5 per cent. Similarly, for crop loans above Rs.7,500 and upto Rs.15,000,
interest rate will be reduced to 11.5 per cent from 12.5 per cent to 14 per cent. This
reduction in interest rates will benefit crores of agricultural borrowers from cooperative
sector, Regional Rural Banks and commercial banks, and provide much needed relief
to them.
20. In order to increase the flow of credit at reduced cost, it has also been
decided that the target for direct finance to agriculture by public sector banks should
be raised to 17 per cent of their total outstanding advances by the end of 1988-89.
Together with added efforts by regional rural banks and cooperative banks, the target
for availability of direct credit by banks to agriculture will increase by over Rs.3,000
crores in 1988-89.
21. In order to further reduce the cost of inputs, Government is asking the
fertilizer companies, in both public and private sectors, to give a discount of 7.5 per
cent over notified prices for coming Kharif and Rabi sowings. This will reduce the
price of a bag of urea by around eight rupees and eighty paise. The companies should
be able to absorb the cost of this discount through better inventory management. I am
sure our enterprising farmers will take advantage of this discount and increase
agricultural production.
22. Timely use of pesticides and weedicides has an important role in preventing
crop damage and improving productivity on our farms. In order to lower their cost, I
will be announcing later in my speech, reduction in import duties on selected pesticides/
weedicides as well as intermediates. At the same time, selected pesticide items,
considered important for agriculture, will be allowed to be imported freely by designated
state and cooperative agencies. This will ensure that the existing manufacturers do not
indulge in monopolistic practices. This measure will help our farmers.
23. In consultation with the Reserve Bank of India, NABARD, the State Bank
of India and the Commercial banks, I am happy to announce a new strategy on rural
credit designed to serve every village of the country. The commercial banks and the
Regional Rural banks together have over 40,000 branches in the rural and semi urban
areas of the country. The number of villages exceeds five lakhs and seventy six
thousand. Under the proposed dispensation, each bank branch in the country will have
a designated service area of about 15 to 25 villages, as required, in the neighbourhood
5
of the branch. The branch will be primarily responsible for meeting the appropriate
credit needs of its service area. This country-wide arrangement, supervised by the
District Lead Bank Scheme already operational, and further supplemented by the rural
cooperatives, will go a long way to serve the credit needs of the village community.
24. To help farmers affected by drought, we have given a number of reliefs
and concessions by way of rescheduling of loans, postponement of all recoveries, and
reduction in interest rates. It has been a long standing demand of farmers and the
cooperative movement that a separate National Agricultural Credit Relief Fund should
be established to provide relief on a systematic basis. I am happy to announce that it
has now been decided to set up such a Fund. The corpus of the Fund will be provided
by the Central and State Governments on an agreed basis. The criteria for releasing
money from the Fund will be worked out by the Reserve Bank of India.
25. Before I turn to other matters, I would like to refer to a subject which has
been close to our hearts. I have a feeling that the cooperative credit system, which
played such a pioneering role in the early years of our Independence, has not grown
as fast as it could have. Cooperatives are the best instruments for reaching our farmers;
they are also a symbol of self-reliance at the village level. I believe that we must now
devote special attention to revitalising the entire cooperative sector. I would invite the
Hon’ble Members to give this matter their personal attention and also request them to
send me suggestions regarding the role that the Reserve Bank of India, NABARD and
the nationalised banking sector, should play in promoting the growth of the cooperative
movement. I shall also be writing to State Governments, who have a major responsibility
in this area.
26. The programme of rural electrification has enabled countrywide utilisation
of ground water for irrigation with the help of electric pump sets. However, some of
the poorer farmers have often been unable to afford the one time cost of pump set
installation. A special programme to be called JALDHARA will be launched to assist
marginal farmers in drought prone areas. This scheme will provide them the benefits
of pump sets for irrigation on nominal rental / lease charges. It is proposed that during
1988-89 the benefits of this scheme will be provided to about fifty thousand farming
families.
27. To improve the quality of life of rural families below the poverty line,
including Harijans and Adivasis families, I propose a massive programme to be called
KUTIRJYOTI for extending single point light connections to households of their
families. The programme will meet the one time cost of internal wiring and service
connection charges. In 1988-89, five lakh households are proposed to be covered by
this programme. The cost of both the JALDHARA and KUTIRJYOTI will be met
through a combination of grants and loans to the State Electricity Boards by the Rural
Electrification Corporation.
6
 28. People living in hill areas have to bear the burden of higher transport
costs in the supply of Kerosene and LPG. Today, freight subsidy is given on Kerosene
to North Eastern States and Jammu & Kashmir. It has now been decided to extend this
concession to all hill areas. Similarly, it has been decided that LPG cylinders would be
supplied to the customers in all hill areas at the same price as for the customers in the
nearest point in the plains. This will also, to a large extent, help in conserving the
forest resources used for purposes of light and fuel.
29. In his budget speech last year, the Prime Minister emphasized the high
priority of the housing sector and had announced the decision to set up a National
Housing Bank with an initial capital of Rs.100 crores. Necessary legislation has been
passed, and the Bank will become operational shortly. In order to give a special thrust
to rural housing, the Reserve Bank of India, along with some financial institutions,
will make a special additional contribution of Rs.100 crores to the National Housing
Bank. This entire additional amount will be used for promotion of rural housing in
several ways, including setting up of specialised rural housing savings and loan
institutions,if necessary.
30. In this context, it is also proposed to extend the role of the Land
Development Banks to cover the field of housing finance for farmers. These banks
exist in most districts, have strong apex bodies and deal directly with the rural
population. They can also mobilise resources for housing finance. The State
Governments will be requested to carry out necessary legislative measures to permit
Land Development Banks to undertake housing finance.
31. A new programme of housing for small and marginal farmers with monthly
income of upto Rs.700, is being launched by Housing and Urban Development
Corporation. Under this programme, HUDCO will provide assistance, upto specified
amounts, at low rate of 7 per cent interest repayable in 22 years for building or
improving a house. Assistance will also be given for improvement of old homes, for
example, change of roof from thatch to tile.
32. A new scheme, called the “Village Abadi Environmental Improvement
Scheme” will be launched by HUDCO this year. Projects involving expenditure upto
Rs.2,000 per family in villages with population not exceeding 5,000, for improving
rural abadi infrastructure like drainage, sanitation etc., will be supported. The equity
base of HUDCO will be suitably strengthened to help finance these programmes.
33. Commercial Banks have also been providing help for rural housing, both
directly as well as through HUDCO. With their vast branch network in rural areas,
their role should be further enhanced. Hon’ble Members will be happy to know that,
it has been decided that commercial banks will increase their lending for the housing
sector to an annual level of Rs.300 crores by the end of the Seventh Plan.
34. There is great scope for using local low-cost materials in housing. Our
scientists and engineers have also developed considerable expertise in low-cost housing
7
technology. It has been decided to set up a national network of Nirman or Nirmithi
Kendras which will provide easy access to low-cost housing materials and techniques.
It is proposed to set up one Kendra in each district. In the coming year, 100 Kendras
will be set up.
35. Landless labourers, artisans and other very poor families in rural areas
face acute financial distress when their huts and belongings are destroyed by fire. I am
glad to inform the House that it is proposed to launch a new scheme to provide fire
insurance protection to them. The Government of India will bear the entire premium
cost. The scheme will be implemented by the General Insurance Coporation of India
and its four subsidiaries. The GIC will separately announce the details of the scheme.
36. I also propose to take a major new initiative for extending the system of
social security to the weaker sections of our society. The Life Insurance Corporation
of India, which has done so much to spread insurance culture throughout the length
and breadth of our country, will be setting up a separate “Social Security Fund” with
a corpus of Rs.100 crores. Certain changes are being made in the Income tax payable
by the Life Insurance Corporation of India to make this possible. The Fund will be
used for financing life insurance schemes for weaker and vulnerable sections of the
population at subsidised rates. The House will agree with me that the creation of such
a fund will provide a solid foundation for extending insurance cover to the toiling
sections of our society, for example, landless labourers, handloom workers, rickshaw-
pullers, drivers etc. who work on daily wages or whose employment is casual. In
respect of these group insurance schemes, 50 per cent of the premium will be adjusted
from the newly created Social Security Fund, the balance 50 per cent of the premium
being payable by the beneficiaries concerned.
37. Group insurance schemes will also be introduced for groups with regular
incomes like primary school teachers, cooperative milk producers, and workers in
shops and commercial establishments. Schemes will also be formulated for the benefit
of artisans, tailors, barbers, masons, carpenters and other similar groups.
38. While IRDP extends benefits to the families of the poor, these families
face hardship in the event of sudden death of the head of the family. To give greater
security to the family, a group insurance scheme of the LIC is proposed to be introduced
to cover around 3 to 4 million families under IRDP assistance every year with effect
from 1.4.1988. The insurance cover will be Rs.3,000, with double benefit in case of
accidental death.
39. I would now like to propose some measures specifically for the benefit of
Scheduled Castes and Scheduled Tribes. Many State-level Scheduled Castes and
Scheduled Tribes Finance/Development Corporations are doing a good job in looking
after the special requirements of the Scheduled Castes and Scheduled Tribes. I now
propose setting up a National Scheduled Castes and Scheduled Tribes Finance and
Development Corporation. This corporation will play a catalytic role in developing
8
schemes for employment generation and financing pilot programmes which can then
be taken up by the State level Corporations and other agencies active in this field. This
Corporation will also work with nationalised banks and NABARD in improving the
flow of financial assistance to the Scheduled Castes and Scheduled Tribes. The objective
would be to innovate, experiment and promote rather than replicate the work of the
existing agencies. I am making a provision of Rs.50 crores in the next year’s budget
for this Corporation.
40. Hon’ble Members will be happy to know that we propose to initiate a
project for one million wells under the National Rural Employment Programme and
Rural Landless Employment Guarantee Programme by raising the percentage of
allocation of funds for the exclusive benefit of Scheduled Castes and Scheduled Tribes
from 10 per cent to 20 per cent. It is fitting that in the year of Fortieth Anniversary of
Independence, we initiate this massive programme of construction of wells which will
benefit millions of small and marginal farmers belonging to Scheduled Castes and
Scheduled Tribes.
41. I would now like to announce some measures for promotion of employment
opportunities in the decentralised sector. The handloom sector provides employment
to about 10 million weavers and others. This important sector has been affected by
high prices of cotton and other yarns. I propose to increase the subsidy on Janata cloth
from Rs.2 per sq.metre to Rs.2.75 per sq. metre. The impact of this relief will be Rs.40
crores. Later, in my speech, I shall be announcing a package of measures which will
benefit the handloom sector by reducing the cost of certain types of yarns. At present,
a standard rebate of 10 per cent is being provided for Khadi. I propose to extend this
rebate to Kambals and Kambalis.
42. It has been a long standing demand of the tiny and small industries that
there should be a separate apex bank for them. Hon’ble Members will be happy to
know that it has now been decided to establish a Small Industries Development Bank
of India. The new bank will be a subsidiary of the Industrial Development Bank of
India. The equity of the new bank will be Rs.250 crores, and it will have its own
separate Board of Directors, including representatives from the small scale sector.The
new Bank will also administer both the Small Industries Development Fund established
in May, 1986 and the National Equity Fund for providing equity support to projects in
tiny and small scale sector.
43. New small scale units often experience problems and delays in securing
working capital finance. In order to overcome this difficulty, it has been decided that
requirements of working capital upto Rs.2.5 lakhs for new tiny and small scale units,
whose project cost does not exceed Rs.5 lakhs, will be provided through a single
window. Thus, both term loans and working capital will be made available by the
same bank or institution. The details of this scheme will be announced by Industrial
Development Bank of India shortly.
9
 44. A healthy capital goods sector is a pre-requisite for self-reliance. Last
year, while presenting the Budget, the Prime Minister announced a package of measures
to revitalise the machine building industries. Later in my speech, I shall be announcing
certain measures which will carry this process further for revitalising industries such
as paper, cement, and textiles. These measures will help to stimulate demand, lower
costs and improve efficiency.
45. The Capital market is an important source for mobilisation of savings for
industry and Government has taken several steps to strengthen it. Last year, the Prime
Minister announced the decision to set up a separate Board for the regulation and
development of the Stock Exchanges. Necessary legislation in this regard is under
preparation and the Board is expected to become operational soon. Measures have
also been taken to set up Mutual Funds, lay down ground rules for orderly operations
of the Stock Exchanges, improve their infrastructure, facilitate share transfers and
enforce better discipline on companies entering the market. Later in my speech, I shall
be announcing certain further measures which will help to boost investment in new
industries and generate more employment and economic activity.
46. We have one of the largest pools of scientific and technical manpower.
Yet, many of our young and new entrepreneurs find it difficult to raise equity capital
because of the risk involved. This problem can be solved by allowing Venture Capital
Companies or Funds to invest in new companies in anticipation of future capital
gains. However, such companies at present are not eligible for the concessional
treatment of capital gains available to non-corporate entities. In order to overcome
this problem, it has been decided to formulate a scheme under which approved Venture
Capital Companies/Funds will be enabled to invest in new companies and be eligible
for the concessional treatment of capital gains available to non-corporate entities.
Necessary legislative measures will be taken to bring this into effect.
47. At present, a tax concession is available for investment in the equity shares
of new industrial undertakings. Small investors generally find it difficult to take
advantage of these concessions because of absence of sufficient information about the
prospects of new companies. It has been decided that concession now available for
direct investment in equity shares of new industrial undertakings will also be available
for investment in special units of mutual funds where the resources are earmarked for
investment in new projects. This will help new companies to raise capital more easily.
48. I also propose to provide a seperate exemption upto Rs.3,000 for income
from dividends under Section 80L of the Income tax Act. This will be in addition to
the existing concessions available for certain types of incomes, including dividends
upto Rs.7,000 and a further Rs.3,000 for income from investments in Unit Trust of
India and certain other specified investments which I am including in the Finance Bill.
49. Sharp fluctuations in international exchange rates have posed problems
for exporters as well as for Indian industry. In order to provide some protection to
10
individual projects from exchange rate fluctuations, financial institutions will introduce
a new scheme whereby promoters of such projects can have their foreign currency
loans designated in rupees. The interest rate on such loans will be variable and will
include an exchange premium. The details of the scheme will be announced by the
Industrial Development Bank of India separately.
50. It has been the policy of this Government to encourage workers’
participation in management in industry. It is only through interaction and involvement
of workers in management that we can improve the overall performance, increase
productivity, and prevent sickness. Government has already announced a scheme to
facilitate such participation. I am happy to inform the House that complete exemption
from Income tax will be given in respect of all expenditure incurred by companies in
connection with introducing schemes for workers’ participation. Government has also
introduced a scheme whereby 5 per cent of the capital issues are reserved for employees.
In order to facilitate purchase of shares by workers in their own companies, banks are
being asked to provide loans liberally for this purpose. Reserve Bank of India will be
issuing necessary instructions shortly.
51. Working journalists have contributed a lot to the country by their
intellectual toil, and suggestions have been received that a Bill should be considered
by the Parliament to provide a reasonable pension scheme for them. Government will
be taking appropriate steps in this direction after consulting all concerned.
52. Government attaches considerable importance to strengthening economic
and cultural ties with Indian nationals settled abroad. A number of facilities, including
fiscal concessions, have been extended to Non-Resident Indians for facilitating
investments. In response to representations received, Government have now decided
to introduce a new scheme of Foreign Currency denominated Bonds/Deposit Certificates
for Non-Resident Indians on a non-repatriable basis. The maturity period of these
Bonds/Deposit Certificates will be 7 years and these will carry an interest rate higher
than that applicable to the repatriable foreign currency non-Resident deposits. These
Bonds/Deposits will be free from Income tax, Wealth tax and Gift tax.
53. The fiscal regime for investments and deposits by Non-Resident Indians
in our country has been made quite liberal. It is the Government’s intention to maintain
fiscal stability. No changes willl be made in the tax treatment which might adversely
affect investments already made by Non-Resident Indians.
54. The success of Non-Resident Indians in many fields of scientific, economic
and cultural endeavour has been a matter of great satisfaction to us. We cherish our
continued association with them.
55. I also propose to introduce certain measures for boosting small savings
collections. I am particularly keen to mobilise untapped rural savings. A new scheme
without tax concession, but with flexibility of encashment after two and half years of
11
deposit, is being introduced. The rate of interest will progressively increase for longer
durations. The deposit will double in value after five and half years. This instrument
will attract new investments as it can be encashed as and when funds are needed. The
instrument will be called KISAN VIKAS PATRA.
56. Last year a new savings scheme based on the net savings principle, was
announced by the Prime Minister. Under this scheme, 50 per cent of deposits upto a
maximum of Rs.20,000 are eligible for deduction under Section 80CCA of Income tax
Act. However, in the year of withdrawal, 50 per cent of the amount withdrawn is
added to the taxable income. The interest rate on deposits was 9 per cent. It has been
decided to raise the interest rate to 11 per cent. The new rate will be applicable to
existing deposits also with effect from 1st April of last year. Further, the rate of
deduction at the time of deposit will be raised from 50 per cent to 100 per cent with
corresponding increase in the amount subject to tax at the time of withdrawal. The
amount eligible for deposit is also being increased to Rs.30,000 per annum with effect
from next financial year.
57. The doubling period for Indira Vikas Patra sold from 1st March, 1988
will be reduced to five years.
58. It is also proposed to continue the sale of Rahat Patra beyond 29th February,
1988. With the continuance of Rahat Patra, sale of Capital Investment Bonds is proposed
to be discontinued from 1st April, 1988.
59. Sir, I have taken this opportunity to announce certain measures for the
welfare of the weaker and vulnerable sections of our society, for generating greater
employment opportunities, particularly in the rural areas and for strengthening our
productive base. I am sure these measures will contribute to fulfilling the aspirations
of our people.
60. Let me now turn to the Revised Estimates for 1987-88 and Budget
Estimates for 1988-89.
Revised Estimates 1987-88
61. The Revised Estimates of total expenditure in the Budget for 1987-88 are
placed at Rs.66161 crores against Rs.62942 crores in the Budget Estimates. As the
gravity of the drought became clear, the first task of the Government was to ensure
that sufficient resources were available with State Governments in order to start relief
works and take other measures for alleviating the distress caused by the drought.
Central Teams were despatched to States and decisions announced in record time in
respect of ceilings of expenditure for States affected by drought and floods. Expenditure
from the Central Budget on account of drought, floods and other natural calamities is
now estimated at nearly Rs.2,000 crores. This includes Centre’s share of margin money,
advance Plan assistance for drought, non-Plan assistance for floods and hailstorm,
supply of subsidised foodgrains in drought affected areas, subsidised supply of seeds,
12
provision of rigs for drinking water and assistance for Accelerated Rural Water Supply
Programme.
62. There have been certain other inevitable increases in expenditure. The
subsidy on indigenous fertilizers will go up by Rs.300 crores. Food subsidy will also
be Rs.200 crores higher. I am sure Hon’ble Members will agree with me that, under
the circumstances prevailing in the current year, the increases are fully justified. The
liberalisation of pensionary benefits of Government employees, particularly the Defence
Services personnel, is expected to add Rs.374 crores to the pension bill in the current
year. Financial relief granted to certain public sector enterprises are expected to cost
additional Rs.417 crores by way of subsidy, write off of loans etc. Interest charges are
likely to be Rs.800 crores higher than the original Budget provision. Taking into
account the other variations, the total non-Plan expenditure during the current year is
estimated to be Rs.1,971 crores higher than the original Budget provision of Rs.39,265
crores.
63. Central assistance for State and U.T.Plans is expected to be Rs.1,127 crores
higher mainly due to larger advance Plan assistance to States affected by drought.
Budgetary support for Central Plan is estimated to be Rs.121 crores higher - this being
the net effect of increases in sectors like agriculture, rural development, fertilizers,
agricultural financial institutions, subsidy for setting up industries in backward areas,
etc. offset by savings in certain other sectors.
64. Taking the Plan and non-Plan together, there is an increase of Rs.3,219
crores. As a result of a series of measures undertaken by Government during the year,
economy consciousness has been created and expenditure contained particularly in
low priority areas.
65. Gross Tax Revenue is estimated to yield Rs. 1,028 crores more than the
Budget Estimates mainly under Income and Corporation taxes and Customs duties.
The share of States in taxes will be higher by Rs.392 crores. Non-tax Receipts will be
higher by Rs.2,201 crores. Of this, non-tax revenue receipts are expected to fetch
Rs.765 crores more and capital receipts Rs.1,436 crores more. Rs.700 crores of the
increase in capital receipts will be from market loans.
66. Taking the variations in expenditure and receipts into account, the current
year is expected to end with an overall deficit of Rs.6080 crores. Notwithstanding the
severe strain the events of the year have cast on the Budget, this is close to the original
estimate of Rs.5,688 crores.
Budget Estimates for 1988-89
67. The Hon’ble Members will agree that Budget Estimates for the year 1988-
89 are being presented in a rather difficult environment. We have to ensure that,
despite pressures on the Budget, there is no cut-back in public investments, as that
would have an adverse effect on economic activity and employment. Accordingly, in
13
framing the Budget for next year, highest priority has been given to maintaining the
tempo of Plan investment.
68. The Central Plan for 1988-89 has been fixed at Rs.28,715 crores against
the approved outlay of Rs.24,622 crores in the crurrent year, a step up of 16.6 per
cent. Even compared to the revised Central Plan outlay of Rs.25,701 crores, the next
year’s outlay represents a step up of 11.7 per cent. Central Plan for the next year will
be financed to the extent of Rs.16,000 crores from budgetary resources and Rs.12,715
crores from Internal and Extra Budgetary Resources of public enterprises. With the
proposed outlay for 1988-89, we would have achieved in four years more than 86 per
cent of the Seventh Plan outlay in real terms.
69. In addition, Central Budget for the next year provides Rs.9,714 crores for
assitance for State and UT Plans. The total Plan expenditure in the Budget for the next
year is thus, Rs.25,714 crores compared to Rs.24,925 crores in the Revised Estimates
for the current year.
70. I am glad to inform the House that the total transfers from Centre to
States in 1987-88, including their share in taxes, were Rs.24,870 crores. In 1988-89
such transfers are estimated at Rs.26,348 crores, an increase of Rs.1478 crores.
71. Several States have represented that their liquidity position has been
affected by the drought and have requested for some relaxation in the Ways and
Means limits. The Hon’ble Members will be happy to know that Reserve Bank of
India is raising from tomorrow the Ways and Means limits by 40 per cent over the
limits prevailing prior to October, 1986. These were stepped up by 30 per cent and 20
per cent for different periods of the year in October,1986.
72. As mentioned earlier, it has been decided to increase the outlays of the
Departments of Agriculture and Cooperation and Water Resources by 40 per cent
above the current year’s outlay. I also propose to provide Rs.671 crores for fertilizer
projects in 1988-89. During the current year, four new fertilizer plants, two each in
public and private sectors, are likely to go into poduction. Fertilizer production is
expected to attain a level of 7.1 million tonnes this year, an increase of nearly 40 per
cent over the output at the commencement of the Seventh Plan.
73. The major anti-poverty programmes, namely, Integrated Rural
Development Programme (IRDP), National Rural Employment Programme (NREP)
and Rural Landless Employment Guarantee Programme (RLEGP) will continue to be
the main instruments for generating employment and increasing the earning
opportunities for those below the poverty-line. Thus far, about 254 lakh families have
been assisted with a total investment of Rs.8,413 crores under IRDP. Forty per cent of
these beneficiaries belong to Scheduled Castes and Scheduled Tribes. Under NREP
and RLEGP, 7,006 lakh man-days were generated in 1986-87 which was substantially
higher than the target of 5,115 lakh man-days. The target is likely to be exceeded this
year also.
14
 74. These programmes have proved highly successful in generating
employment in our rural areas. Suggestions have been received for expansion of these
programmes as well as for their reorganisation. The merger of some important
programmes, like the National Rural Employment Programme, Accelerated Rural Water
Supply Programme, Rural Landless Employment Guarantee Programme and Desert
Development Programme, and various other Anti Poverty Programmes has also been
suggested so that available resources can be more effectively deployed to meet the
twin objectives of employment and creation of assets to meet village needs. There is
also need to provide flexibility at the operational level. In the light of these suggestions,
it is proposed to undertake a thorough review of the employment programmes in the
coming year to examine the possibility of having a comprehensive programme.
75. Rural water supply continues to receive high priority. The technology
mission for drinking water in villages and related water management is being pursued
vigorously. In 1988-89, I propose to provide Rs.2,200 crores for the Department of
Rural Development, inclusive of Rs.430 crores for rural water supply and sanitation.
As Hon’ble Members are aware, the outlay on water supply is in addition to the
Minimum Needs Programme outlay in the State Sector.
76. Welfare programmes for the tribal people have to be based on respect and
understanding of their culture and tradition, and appreciation of their social,
psychological and economic problems. The main instrument for the development of
tribal people and tribal areas is the Tribal sub-Plan. As the Hon’ble Members know,
the Tribal sub-Plans are financed by the State Governments, Special Central Assistance,
Centrally Sponsored Programmes and financial institutions. The Special Central
Assistance for Tribal sub-Plan for 1988-89 is Rs.185 crores. For Scheduled Castes,
Special Component Plans are being formulated with the primary objective of providing
occupational mobility and economic strength. In the current year, over 20 lakh
Scheduled Caste families are likely to be benifited by these programmes. An amount
of Rs.180 crores has been provided as Special Central Additive to Special Component
Plans for 1988-89.
77. Our human resources are the most important resource of all. The quality
of manpower developed today will be decisive in determining the pace and direction
of economic and social progress in the future. In 1986, a new Education Policy was
introduced after extensive discussion in Parliament and outside. In order to give a
good start to the new Policy, last year, while presenting the Budget, the Prime Minister
raised the allocation for education sharply to Rs.800 crores from Rs.352 crores in
1986-87. The actual expenditure is likely to be of the order of Rs.700 crores. Next
year’s Plan makes an allocation of Rs.800 crores. Together with the non-Plan provision,
the total allocation for the Department of Education in 1988-89 will be Rs.1,550
crores against the Revised Estimate of Rs.1,185 crores for 1987-88.
78. Improvement in the health status of the population is an essential
component of the human resource development. To achieve this, special emphasis is
15
being laid on establishing primary health facilities, particularly in rural areas, launching
control programmes for major communicable and non-communicable diseases,
augmenting facilities for medical and para-medical education and training and providing
family welfare, maternity and child health, immunization and related services. Under
the National Leprosy Eradication Programme, multi-drug treatment has been extended
to nearly 2.2 million cases out of the estimated 4 million cases. The Universal
Immunization Programme is being extended to 120 districts, besides 182 districts
already covered. Health Contingency Plans have been prepared for drought affected
States. I propose an outlay of Rs.228 crores for medical and public health programmes
and Rs.600 crores for family welfare programmes for 1988-89.
79. Government have initiated a number of measures to ameliorate the
conditions of working women. These include programmes for raising skills and
economic development, supportive services for working women and shelter and
rehabilitation for women in adverse circumstances. For children, a nation-wide
programme of Integrated Child Development Services has been in operation. An
important objective of these ICDS Programmes is to reduce childhood mortality,
morbidity and malnutrition. I am happy to inform the Hon’ble Members that 1,738
Integrated Child Development Services Projects have been sanctioned for the most
backward rural areas, tribal areas and urban slums in the country. During the remaining
period of the Seventh Five Year Plan, we will be covering most of the tribal blocks
with more than 30 per cent Scheduled Tribe population and also the slums in big
cities. For the next year, I propose an outlay of Rs.235 crores for the Department of
Women and Child Development.
80. Energy, Transport and Communications constitute the basic infrastructure
of the economy. A total allocation of Rs.16,588 crores is being provided for these
sectors. This outlay represents an increase of about 25 per cent over the current year’s
level, and accounts for about 58 per cent of the total Plan outlay for 1988-89.
81. Electricity generation has been increasing at an annual rate of 9 to 10 per
cent during the Seventh Plan. Though hydro-generation was adversely affected by
drought this year, thermal generation registered an improvement of 16 per cent during
the first nine months of the current year compared to the corresponding period of last
year. The plant load factor of the thermal plants has improved further and is expected
to touch 55 per cent, the highest in the last 10 years. I am providing for an outlay of
Rs.3,963 crores for the Power sector, that is, an increase of over 32 per cent over the
current year’s outlay.
82. Coal is the primary and the most abundant source of conventional energy
in our country. I am stepping up the provision for this sector by 30 per cent, to a level
of Rs.1,733 crores for 1988-89. The production of coal during the current year is
expected to reach 182 million tonnes as against the last year’s level of 166 million
tonnes.
16
 83. As Hon’ble Members are aware, our Petroleum and Natural Gas sector
has taken great strides during this decade. The rebound in international oil prices has
underlined the urgency for finding and exploiting hydro-carbon resources. Significant
discoveries during the year in Krishna-Godavari Off-shore Region and the Bhuvanagiri
area of the Cauvery Basin constitute promising rewards to our heavy investments in
oil exploration. The year also saw the completion of the first section from Hazira to
Bijaipur of the HBJ Pipeline covering 642 kilometres. To maintain the tempo of
exploration and production of crude oil and natural gas, I propose an outlay of Rs.3,395
crores for the Petroleum sector.
84. In the field of communications I must share with the House a sense of
pride in the work of the Centre for Development of Telematics.By developing a state-
of-art electronic switching system, C-DoT has demonstrated what we can achieve
through proper organisation and marshalling of our scientific talents. I am allocating
Rs.1,873 crores for 1988-89 for the Department of Telecommunications - an increase
of 44 per cent over the outlay for the current year.
85. Government recognises the development of our scientific and technological
capabilities as a necessary pre-requisite for the economic development of the nation.
With this in view, I propose to increase the outlay of the Scientific Departments by
about 20 per cent over the current year’s level. We can take justifiable pride in the
many achievements of our scientists and technologists. While there have been many
notable developments during the year, I would like to make a special mention of one
of these. On August 26, 1987, the Prime Minister had informed the Hon’ble Members
that India was the first applicant to be allotted a mine site in the Central Indian Ocean
by the Preparatory Commission for the International Sea-bed Authority. This is a
significant step forward in development of our scientific potential. The mine site of
1,50,000 sq.kms. contains a rich deposit of polymetallic nodules.
86. Many other initiatives are envisaged in the different sectors of the economy.
However, I do not propose to take the valuable time of the House with a detailed
review of all the Plan programmes. The full details are available in the Budget
documents.
87. The allocation for Defence is Rs.13,000 crores against Rs.12,000 crores
in the current year. Our armed forces, in the face of unwarranted provocations, have
done a tremendous job of protecting our borders. Our jawans are the nation’s strength.
We shall continue to provide them the requisite support in their efforts. Food and
fertilizer subsidies are placed at Rs.5,300 crores against Rs.4,410 crores in the current
year. Interest charges next year are estimated at Rs.14,100 crores agianst Rs.11,450
crores in the current year. The allocation for export promotion and market development
is Rs.1,091 crores. The other increases relate to grants payable to States for revision
of pay scales of university and college teachers, grants and loans to foreign
Governments, strengthening of police forces and payment of Rs.100 crores to Oil
17
Industry Development Board. A lump sum provision of Rs.800 crores has been made for
additional D.A. instalments that may become payable to Government employees next
year. I would like to assure the Hon’ble Members that I have kept the non-Plan expenditure
to the barest minimum. Non-Plan expenditure in 1988-89 will thus be Rs.47,896 crores
against Rs.41,236 crores in the Revised Estimates for the current year.
88. Coming to receipts, Gross Tax Revenue at existing rates of taxation is
estimated at Rs.41985 crores. After payment of Rs.10682crores to States and local
bodies as their share of taxes, the net revenue to the Centre next year is estimated at
Rs.31303 crores. Receipts from market loans are placed at Rs.7,000 crores, that is, the
same level as in the current year. External assistance, net of repayments, is placed at
Rs.3,734 crores, against Rs.3,184 crores in the current year. Taking into account the
variations in other receipts and expenditure, Budget deficit for the next year at existing
rates of taxation is estimated at Rs.8120 crores.

PART B
89. I shall now turn to my revenue proposals. Every Budget has to raise some
resources for financing expenditure, and I shall not be failing in my duty to do so.
However, I do believe that it is equally, if not more, important to use fiscal policy for
achieving our wider economic and social goals while, at the same time, providing
relief where it is due. I am sure, the Hon’ble Members will find a strong link between
the proposals that I am about to make, and some of the people-oriented initiatives that
I have referred to in Part A of my speech.
90. This House is aware of the fact that in view of the exigencies of the
situation, in order to meet the formidable after-effects of the drought of 1987-88,
Government took a decision to levy a surcharge of 5% on income-tax for persons
with taxable income above Rs.50,000, a surcharge of 10% on wealth tax for the
assessment year 1988-89 and a 5% surcharge by way of auxiliary duty of customs on
imported goods excluding essential commodities like fertilizers, power equipment,
life-saving drugs and medical equipment, etc. This timely action helped the country
and the Central and State Governments to meet the requirements of a very difficult
situation created by the drought. This surcharge did not touch essential commodities.
91. In view of the continuing pernicious effects of the drought and the natural
calamities, I propose to continue with these surcharges for one more year. In addition,
it is now proposed to levy a surcharge by way of Special Excise Duty at the rate of
1/20th of the Basic Duty of Excise. The incidence of this surcharge will generally be
small; for example, it will be only one quarter of one percent i.e. 0.25%, where the
basic duty is 5% ad valorem and one percentage point where the basic duty is 20%.
92. Essential commodities and other priority items which are presently exempt
from excise duty will continue to remain exempt. I am also exempting from this
18
surcharge, certain other essential goods of common consumption, namely, sugar,
matches, cotton fabrics, vanaspati, refined vegetable oil, tea, coffee and kerosene.
Direct Taxes
93. Hon’ble Members will recall that, in August, 1986, a Discussion Paper on
Direct Tax Laws was presented in Parliament. After further discussions and
consultations among experts and the public, the Government had introduced the Direct
Tax Laws (Amendment) Bill, 1987, which was passed during the last Session. Since
then, many representations have been received from experts, concerned Associations,
Chambers of Commerce and other tax-payers regarding some provisions in the Act.
The following, inter alia, are the main points made in these representations:-
(1) The proposed system of assessment of partnership firms is too harsh
particularly on partnership firms with small income, as such firms, subject
to certain deductions, will henceforth be taxed at the maximum marginal
rate. Certain other clarifications have also been sought in regard to some
other provisions relating to taxation of firms.
(2) The levy of additional tax at a flat rate of 30 per cent would be very unfair
in cases of genuine doubt regarding taxability of certain receipts and that
the levy of additional tax should itself be appealable.
(3) The provisions relating to charitable trusts, voluntary agencies and
institutions carrying on scientific research, etc. may result in unintended
hardship, particularly as regards the treatment of contributions to the corpus
of such institutions.
(4) The new Act provides for unfettered discretion regarding re-opening of
assessments merely on a change of opinion.
94. There are many positive features in the Act, which will help the tax-
payers by simplifying the law, but there is also scope for reconsideration keeping in
view the representations against some of its provisions. In a democracy, Government
should always keep itself abreast of public opinion and be flexible enough to respond
to reasonable suggestions. Government will bring a further amendment bill in the
Budget Session which will take care of genuine grievances. After the Bill is introduced,
Government will be happy to consider any further suggestions that the Hon’ble
Members may have to offer.
95. A reasonable degree of stability in the Direct Tax regime is desirable for
inspiring confidence and encouraging savings and investment. I do not, therefore,
propose any change in the rate structure for personal and corporate taxes.
96. There is, however, a case for reducing, to some extent, the brunt of the
burden borne by the fixed income groups. I, therefore, propose to raise the rate of
standard deduction from 30 per cent to 33-1/3rd per cent of salary income and the
19
ceiling from Rs.10,000/- to Rs.12,000/-. This measure will benefit about a million
tax-payers.
97. Hon’ble Members will recall that Estate Duty was abolished from March,
1985. This was done mainly because the Estate Duty law was complicated and led to
procedural harassment to large numbers of tax-payers at a time of great distress, with
negligible gain in terms of revenue. However, there is a strong case on grounds of
social justice for taxing the transfer of wealth through inheritance especially where
the volume of wealth involved is large. This matter has been under consideration of
Government for some time. Government have decided to levy a tax on the transfer of
wealth which will be applicable to all wealth-tax assessees. The tax will be levied in
respect of assets subject to wealth tax. The method for valuation of assets would be
the same as for the wealth tax. It will also be administered by the wealth tax officer.
The rate of the wealth transfer tax would be 5 times the applicable wealth tax rates.
This new tax will avoid the rigidities and procedural delays which characterised the
operation of the old Estate Duty Act. As I have mentioned, it will be applicable only
to wealth tax assessees and will not affect ordinary tax-payers. Separate legislation
in this regard will be introduced in this Session.
98. The thrust of my other proposals in regard to Direct Taxes is to strengthen
incentives for export promotion and foreign exchange earnings, to encourage savings
and to stimulate the capital market.
99. To encourage exports, I propose to enhance the existing tax concession
under Section 80 HHC for export profits so as to exempt 100 per cent of export profits
from income-tax. It is also proposed to extend the benefit to supporting manufacturers
exporting through Trading or Export Houses. A five-year tax holiday presently available
for units in Free Trade Zones is also being extended to 100 per cent Export Oriented
Units. Replantation and rejuvenation subsidies for rubber, coffee and cardamom
plantations are also proposed to be exempted from income-tax.
100. To promote long-term financing available for construction and purchase
of houses, I propose to enhance the existing concession available under Section 80L
in respect of interest and dividend income received from companies providing such
finance. At present, such income is included under the general exemption limit of
Rs.7,000. It is proposed to make such income also eligible under the separate limit of
Rs.3,000 for UTI under Section 80L.
101. As an anti-evasion measure, I propose to provide for assessment of income
of persons engaged in certain trades, like liquor and forest contracts, at a reasonably
fixed percentage of the amount payable by them while purchasing the goods. The tax
will be collected at source.
102. I also propose to tax under the head “capital gains”, income from transfer
of a capital asset by a holding company to its wholly-owned subsidiary company or
20
vice versa, in every case where the capital asset is taken over as stock-in-trade at the
time of transfer.
103. Hon’ble Members will recall that in Part A of my speech, I have already
referred to certain changes being made in the income-tax payable by LIC as well as
certain fiscal measures to promote the equity market. There are certain other minor
proposals regarding Direct Taxes in the Finance Bill.
104. The total effect of these proposals will be a revenue loss of Rs.201 crores,
which will be off-set by my proposal to continue with the levy of surcharge on income-
tax and wealth-tax which will mean a gain of Rs.270 crores. Thus, the net increase in
revenue will be Rs.69 crores.
Indirect Taxes
105. Sir, I will now move on to the proposals relating to indirect taxes. It has
been my endeavour to see that the basic thrust provided in the field of indirect taxes
in the Budget last year is carried forward. I have proposals for providing stimuli to
cover agriculture and farming sectors, rural employment, exports, health and medical
care, housing and construction activities, technology upgradation and selected industries
such as cement, textiles, electronics, paper and plastics. There are also some important
reliefs for the common man .
Agricultural and other allied sectors
106. In Part A of my speech, I have announced several measures for the benefit
of the farmers, including reduction in interest rates and reduction in cost of inputs,
such as fertilizers. I now propose a number of fiscal reliefs for promotion of agriculture
and agro-based activities.
107. Monobloc pumpsets and submersible pumpsets are important for irrigation.
I am exempting electric motors used in these pumpsets from excise duty.
108. To bring down the cost for farmers, I propose to fully exempt from excise
duty a large number of pesticide intermediates. I am also proposing to reduce customs
duty in respect of a number of pesticides and pesticide intermediates from the existing
levels of 105 per cent and 147 per cent to 70 per cent and 60 per cent ad valorem.
These measures will reduce the cost of indigenous production and the end-prices.
109. With a view to promoting modernisation in the agricultural, horticultural,
poultry and bee-keeping sectors, I am providing for full exemption from excise duty
in respect of machinery for these sectors such as sprinkler systems, fodder mixers,
germination appliances, egg candlers, etc.
110. Cold storages are of great importance for the marketing of agricultural
produce. I propose to reduce the excise duty on parts and accessories going into the
installation of cold storage plants from 40 per cent to 15 per cent ad valorem.
21
 111. As the House is aware, the Government has taken up an ambitious
programme of increasing milk production through genetic improvement of cattle and
buffaloes. Certain critical equipments, hormones and drugs required for this programme
are accordingly being exempted from customs duty in excess of 25 per cent ad valorem.
Food Processing and Packaging
112. Growth of food processing and packaging industry can be of immense
help in increasing the value-added of agricultural produce and raising incomes of
farmers. In continuation of certain measures for growth of this industry, announced
by the Prime Minister last year, it is proposed to further reduce the customs duty in
respect of 34 specified items of food processing and packaging machinery from 55 per
cent to 35 per cent ad valorem. I also propose to reduce the excise duty on preparations
from vegetables, fruits, nuts or other parts of plants like jams, fruit juices, etc. from 10
per cent to 5 per cent ad valorem. Such preparations from vegetables and fruits like
jams, jellies, fruit juices, sauces, ketchups and pickles, if manufactured in rural areas
by registered cooperative societies, Khadi & Village Industries Commission and State
Khadi & Village Industries Boards are proposed to be exempted from excise duty
altogether.
113. I also propose to reduce the excise duty on aluminium foil from 25 per
cent to 15 per cent ad valorem. This will help in hygienic and scientific packaging of
processed food, drugs, condiments, etc.
Rural Employment
114. Off-farm self-employment provides a major route for enhancing income
and earnings in the rural areas. Individually, a micro-entrepreneur with low staying
power is vulnerable to adverse market forces. His success lies in cooperative ventures.
Hence, I am providing for a special scheme for generation of self- employment in the
rural areas. Under the proposed scheme, specified products, namely, radios, cassette
players and recorders in combination with radios, tape recorders, voltage stabilizers,
footwear of a value not exceeding Rs.75 per pair and a few other items will be fully
exempt from excise duty, if they are manufactured in rural areas by registered
cooperative societies, including self-employed women’s cooperatives or cooperative
societies under the Scheme of Development of Women and Children in Rural Areas or
the Khadi and Village Industries Commission or the State Khadi and Village Industries
Boards.
115. As Hon’ble Members are aware, there are a large number of self-employed
persons working as carpenters, fitters, electricians, plumbers, etc. To lend further
strength to their toiling hands and with the twin objectives of increasing their
productivity and earnings, I propose to reduce the excise duty in respect of some hand
tools like files, screwdrivers, pliers, etc. from 20% to 10% ad valorem.
116. To promote better accounting and to relieve the traders, city-based shop
keepers, small businessmen, wholesalers and small factory owners from the drudgery
22
of book-keeping at the end of the day, I propose to reduce excise duty from 20% to
10% on small electronic cash registers of assessable value of Rs.10,000 or below.
Consumer Articles
117. I am conscious of the fact that common consumers have been affected by
some price increase. I am anxious to give them some relief within the constraints in
which I am operating.
118. I propose to increase the upper value limit from Rs.25,000/- to Rs.30,000/-
for the purpose of extending the concessional rate of excise duty of 15 per cent ad
valorem in respect of a wide variety of commonly used toilet soaps. I am also proposing
to fully exempt from excise duty laundry and carbolic soaps manufactured in rural
areas by cooperatives and khadi and village industries sector.
119. So far, electric bulbs upto 60 watts have been exempted from excise duty.
With a view to facilitating a brighter luminance in houses, streets, work places, etc.,
I propose to reduce the excise duty in respect of electric bulbs exceeding 60 watts
from Rs. 1.50 per bulb to Re.1.00 per bulb.
120. As a measure of providing a little more happiness and education among
children, I propose to completely exempt from excise duty toys, like toy scooters, toy
pedal cars, dolls, toy musical instruments, scale models, recreational models, etc. and
inexpensive pencil sharpeners.
121. With a view to reducing domestic drudgery, I propose to fully exempt
from excise duty certain domestic electrical appliances from frying pans to saucepans.
I am also similarly exempting electric kettles, water-boilers, toasters and automatic
irons. I am also totally exempting stainless steel utensils from excise duty.
122. As a further component of anti-smuggling measures and to cultivate a
greater sense of time-consciousness and to instil a spirit of greater punctuality among
the school-going children, college students, office-goers, the public generally and, if I
may venture to say so, politicians like us also, I propose to reduce the excise duty on
wall clocks and quartz clocks and parts thereof from 15 per cent to 5 per cent ad
valorem. I shall be announcing some relief for indigenous watch industry later in my
speech.
123. In respect of glassware, I propose to reduce the excise duty in respect of
a number of items of tableware of common use like jugs, cups, plates, bowls, etc.
manufactured by automatic process from 40 per cent to 25 per cent ad valorem and
those manufactured by the semi-automatic or mouth-blown processes, to 20 per cent
ad valorem.
124. I also propose to exempt from excise duty all children’s films and all
films selected for the Indian panorama section for International Film Festivals.
23
 125. There can be no better auspicious occasion than the Government’s Annual
Budget to exempt sindoor, kajal, alta and mahavar -- the age-old symbols of glorious
and devout womanhood -- from taxation and, accordingly, I hereby do so by proposing
to fully exempt these from excise duty.
Health and Medicare
126. Our goal is to provide cheap and efficient medicare to all our people.
Towards achieving this objective, availability of essential drugs at lower prices has to
be ensured. I, therefore, intend to align the excise tariff, as far as possible, with the
new Drug (Prices Control) Order, 1987. I propose to provide total exemption from
excise duties in respect of formulations and bulk drugs which are specified in Category
I of the Drug (Prices Control) Order. Intermediates for these drugs will also be fully
exempt from excise duty. The House would recall that the drugs specified in Category
I are required for the National Health Programmes like T.B., Leprosy, Malaria, Filaria
Eradication programmes and programmes for the control of blindness and trachoma
and prevention of dehydration.
127. A concessional excise duty of 10% ad valorem is being prescribed for
single ingredient formulations based on drugs specified in Category II of the Drug
(Prices Control) Order. I also propose to continue the existing excise duty exemptions
in respect of specified cardiac drugs and anti-TB, anti-malaria, anti-leprosy and anti-
diabetic drugs. Two anti-cancer drugs and an important life-saving drug, are proposed
to be added to the list of exempted drugs. However, I propose to withdraw the existing
exemption from customs duty in respect of specified formulations for which adequate
indigenous capacity has been built up. It is hoped that these fiscal reliefs will encourage
domestic production and help better availability of these vital drugs.
128. I propose to prescribe a nominal excise levy of 5% on bulk drugs except
those covered by Category I of Drugs (Prices Control) Order . This will enable the
manufacturers to avail of MODVAT credit in respect of all dutiable inputs including
drug intermediates. I also propose to reduce the import duty on 235 specified drug
intermediates from 115% to 90% ad valorem.
129. In the related field of medical equipment, the procedure for customs duty-
free import of hospital equipments, apparatus, appliances including spare parts and
accessories by Government and Government-controlled hospitals is being simplified.
Similarly, the procedure for import of specified sophisticated medical equipment at a
concessional duty of 40% ad valorem is also being streamlined. In respect of such
imports by Non- Resident Indians, financed out of their own foreign exchange
resources, the duty will be even lower at 20%. Import of such equipment when
financed by Government to Government assistance will be exempt from customs duty.
130. I propose to extend the concessional duty to spare parts of such specified
equipments also at 40% ad valorem. The list of medical equipments attracting
concessional customs duty at 40% ad valorem is being enlarged by addition of 83
24
dental, ophthalmological, cardiological, gynaecological, general surgical and other
medical equipments. Components of these equipments will also be charged duty at
40% as against the existing levels ranging from 80% to 130% ad valorem in order to
encourage domestic manufacture of these equipments.
131. I also propose to reduce the excise duty on these indigenously manufactured
equipments from 15% to 5% ad valorem. The excise duty on X-ray films is also
proposed to be reduced from 15% to 5% ad valorem. Excise duty on aluminium
extrusions and square and round tubes used in the manufacture of artificial limbs is
being exempted altogether.
132. I hope that our dedicated doctors throughout the country will now be able
to modernise their hospitals and clinics a little faster and patients will get better care
and treatment thereby.
Housing
133. As I mentioned earlier, in order to encourage growth of housing it is
necessary to reduce the cost of house building material. Hence, I propose to provide
a general reduction in excise duty on cement from Rs. 225 to Rs. 205 per tonne. The
existing differential in excise duty rates for certain categories of cement units will
also continue. The levy ratios for certain categories of cement units are also being
reduced.
134. In order to protect the environment and help divert demand from wood to
metals, excise duty on doors, windows and their frames and thresholds for doors,
made of aluminium is proposed to be reduced from 20% to 15% ad valorem. Similarly,
excise duty on corrugated sheets of aluminium is being reduced from 25% to 15% ad
valorem. I also propose to reduce the excise duty on steel doors, windows and their
frames and thresholds for doors from 15% to 5% ad valorem.
135. It is time that we think innovatively and use unconventional materials for
housing which would be cheap and functional. The excise duty on blocks, slabs,
lintels, etc. constituting structural intermediates and components of pre-fabricated
buildings is being reduced from 12% to 5% ad valorem. Similarly, fly ash bricks will
pay a lower duty of 5% ad valorem, and lympo, a cement substitute, will bear a zero
rate of duty.
136. To reduce fire hazards, we should promote the use of fire extinguishers.
With this end in view, I propose to exempt fire-extinguishers from excise duty.
Exports
137. To thrive in the highly competitive international market, our natural
advantages and production efforts have to be supplemented by adequate fiscal and
other measures. In this context, I propose to take some further measures to promote
exports.
25
 138. Concessional rates of customs duty have been provided in the past in
respect of specified items of machinery for identified export thrust sectors. Eight
more machines for the garments and hosiery sector, twenty-three machines for the
leather industry, four more machines for the gem and jewellery industry and three
more items of textile machinery will now attract a concessional rate of 35% ad
valorem. Specified items of machinery for the tea, bicycle, silk and woollen industries
are being provided with a concessional customs duty of 35% ad valorem.
139. Ivory and Ivory powder are being totally exempted from customs duty.
This will help reduce poaching in our jungles as well as provide adequate raw
material for ivory handicraft industry, which is export-oriented.
140. The value-limit of duty-free import of commercial samples is being
enhanced from Rs.1000 to Rs.5000 in a year; and for duty-free import of prototypes
of engineering goods, from Rs.1000 to Rs.10,000.
141. Full rebate of excise duty will now be available for tea exported directly
from factories. The procedure for claiming rebate of excise duty on export of unblended
tea by merchant-exporters is being simplified. Green tea is being exempted from
excise duty altogether.
Capital Goods
142. In the modern industrial world, obsolescence takes place at a fast rate.
Unless one upgrades the technology continuously, one is apt to be left out in the race.
Following Prime Minister’s guideline given in last year’s Budget speech, I had
announced in August 1987, a technology upgradation scheme, under which fiscal
relief was provided in respect of import of specified items of capital equipments
required for manufacture of machinery covered by the scheme at 35% ad valorem. To
promote domestic production of such machinery, the customs duty on selected raw
materials needed for their production is being reduced to 55% from the existing level
ranging from around 100% to 180%. These include specified insulation materials,
copper conductors and special electrical steel sheets for power generation and electrical
equipment and clad steel plates for manufacture of selected industrial machinery
specified in the technology upgradation scheme. The customs duty on boiler and
presssure vessel quality steel plates, turbine blade flats and stainless steel plates
required for manufacture of machinery is also being reduced from 90% to 55%.
Scientific equipment and spares
143. There have been persistent demands from the scientific community for
further fiscal concessions in regard to consumables required for research and spares
of imported equipment. Keeping in view the importance of scientific research, the
existing duty concession schemes are being liberalised. The certification procedures,
which have been acting as hurdles in the clearance of these goods, are being simplified.
144. Some specified scientific instruments and apparatus would bear excise
duty of 5% ad valorem instead of the current rate of 15%.
26
Textiles
145. The textile industry has a unique place in the industrial map of India. It
provides jobs to millions of our people. It is a major export earner, and is directly
linked to agriculture. Of late, the industry has suffered from widespread sickness and
haphazard growth. Availability and prices of raw cotton and cotton yarn have been
subject to considerable instability. Handloom weavers are suffering because of yarn
prices. Powerlooms have their problems too. While production of synthetic yarn,
which is used for blended fabrics preferred for their durability by the common man,
has expanded, prices of such yarn have been very high. Smuggling has been another
problem which, despite Government’s strong action, has had some adverse effects on
the economy.
146. In order to overcome these problems, in 1985, Government had announced
a new Textile Policy. Its primary objective was to increase production of cloth of
acceptable quality at reasonable prices. In line with this policy, a number of measures
have already been taken by the Government. These have yielded results as reflected
in the increase in production and availability of cloth. I now propose to provide some
fiscal support to the endeavours of the Ministry of Textiles in reviving this industry
so that, once again, it can regain its rightful place in our economy. My proposals,
which follow are based on a comprehensive review of the duty structure relating to
the various segments of the industry with a view to lowering prices, increasing the
demand for fabrics and increasing the base of production.
147. In 1985, a scheme was evolved for making available duty-free polyester
staple fibre to the handloom sector for manufacture of designated fabrics under a
scheme approved by the Government. I now propose to reduce the excise duty on
polyester filament yarn for manufacturing handloom fabrics under a scheme for supply
management and distribution of fabrics, to be announced by the Ministry of Textiles.
Similarly, viscose filament yarn will bear a concessional rate of 50 per cent of the
existing duty, when the yarn is supplied to registered handloom cooperative societies
or any approved organisation for the development of handlooms.
148. I also propose to exempt handloom woollen fabrics processed by approved
independent processors from excise duty. Raw wool imported by certain specified
handloom agencies is being exempted from customs duty. The import duty on acetate
filament yarn is being reduced from 60 per cent to 45 per cent.
149. In order to reduce prices of cotton yarn, it is proposed to reduce the excise
duty on cotton yarn of counts not exceeding 35 by 10 per cent of the existing rates.
The excise duty on cotton yarn above 35 counts is being reduced by 3 paise per count.
This will mean a reduction of upto a maximum of 28.5 per cent, depending on the
count of yarn.
150. Considering the fact that viscose staple fibre would help substituting for
cotton, I propose to reduce the excise duty on viscose staple fibre cleared for blending
27
with cotton from the existing level of Rs. 7 per kg. to Rs. 5 per kg. Simultaneously,
I propose to increase the duty on viscose staple fibre used for other purposes to Rs. 8
per kg. to divert more VSF for cotton blending.
151. The National Textile Corporation is already manufacturing cheap fabrics
under a special scheme, for which polyester staple fibre is being supplied free of
excise duty. I propose to provide that polyester filament yarn will be available at a
concessional duty rate of Rs.10 per kg. to the National Textile Corporation for
manufacturing fabrics under a duty credit scheme. The details will be announced
separately.
152. In line with the Textile Policy, in order to facilitate absorption of increased
domestic production, I propose to reduce fiscal levies on man-made fibres and yarn.
This would also help revitalise the powerloom sector which is facing problems of
under-utilisation of capacity and consequent problems of unemployment. The duty on
polyester staple fibre is being reduced from Rs.25 to Rs.15 per kg., and on polyester
filament yarn from Rs.83.75 to Rs.53.75 per kg. At the same time, in order to ensure
greater availability and to put pressure on the domestic producers to pass on the
reduction in excise duties fully to the consumers, import duties on these items are also
being reduced by about 25 percentage points.
153. The excise duty on nylon filament yarn is being reduced from Rs.70 to
Rs.40 per kg. and that on acrylic fibre from Rs.10 to Rs. 8 per kg. Customs duty on
these items is also being suitably reduced.
154. It is also proposed to reduce the excise duty on nylon filament yarn for
industrial purposes such as for manufacture of tyres for cycles and industrial filter
fabrics, from Rs. 70 to Rs.8.13 per kg. Nylon filament yarn of specified deniers used
for fishing nets will pay an even lower concessional duty of Rs.4.55 per kg.
155. I also propose to reduce the excise duty on certain specified textile
machinery required for modernisation of the mills from 15 per cent to 5 per cent ad
valorem. The customs duty on certain specified machinery for the garment, hosiery
and woollen industries is being reduced to 35 per cent, as indicated earlier.
156. Hon’ble Members will agree that these comprehensive fiscal measures,
supported by other measures taken by the Ministry of Textiles, should give a boost to
the textile industry and help protect jobs of lakhs of workers. These should also
improve the working of the mills of the National Textile Corporation. I fully expect
and shall insist upon the entire relief being passed on in the form of lower prices.
157. At this point, I would also like to ask manufacturers in all industries,
where I have granted excise concessions, to pass on the excise relief to consumers in
the form of lower prices. Administrative Ministries concerned are being requested to
keep a close watch on the price behaviour of these commodities. I shall not hesitate
28
to withdraw the concessions, wherever there is evidence of manufacturers taking undue
advantage of these concessions.
Electronics
158. We have been using the fiscal mechanism for some time to give a boost to
the entire electronics sector. As a result of Government policy, substantial growth has
taken place in this sector, giving employment to lakhs of young men and women. At
present, concessional rates of customs duty of 60% or 70% ad valorem are available
in respect of specified items of machinery for the electronics industry. These
concessions have been reviewed. With a view to providing a stimulus and keeping in
view the latest advances in technology, I propose to extend a uniform concessional
duty of 60% ad valorem in respect of 280 items of machinery for the electronics
sector.
159. Customs duty on moulds, tools and dies required by the electronics industry
is being reduced further from 60% to 30% ad valorem. The coverage of the graded
structure of duties for raw materials, piece parts and components for the industry is
being enlarged. Polycrystalline silicon will now bear a lower duty of 35% instead of
the existing 80%.
160. Machinery and instruments required for the manufacture of Rural
Automatic Exchanges based on indigenous technology will attract a lower rate of duty
of 30%. A uniform rate of 100% is being provided in respect of a large number of
equipments for telecommunication transmission, satellite communication, switching,
data communication terminals, television transmission, studio and sound broadcasting.
Non-electronic components of these equipments will bear a lower duty of 80%. With
a view to encouraging production of high-tech items like Large-Scale Integrated circuits,
micro-processors and other micro-electronics items, import of 22 items of machinery
will be allowed at 15% ad valorem.
161. At present, computers, computer systems and peripherals attract varying
rates of duty ranging from zero to 147.5%. As a rationalisation measure, a uniform
rate of duty of 80% ad valorem plus countervailing duty is being provided in respect
of all computers, computer systems, computer peripherals and spare parts thereof.
Software will continue to attract the existing rates of customs duty at 60% ad valorem.
As an export incentive, accompanying computer software and start-up spares imported
under the policy on computer software export, software development and training will
be allowed at the rate applicable to the hardware. Computerized Numerically Controlled
systems and their parts at present attract a customs duty of 80%. This is being lowered
to 55% ad valorem. Excise duty on Computerised Numerically Controlled systems is
being reduced to 5% ad valorem.
162. Colour TV sets of screen size exceeding 36 cms and of assessable value
exceeding Rs. 5,000 per set will now attract an excise duty of Rs.2,000 instead of
Rs.1,750. However, such sets of value not exceeding Rs.5000 will continue to attract
29
a duty of Rs.1500 per set as at present. Excise duty on audio magnetic tapes is being
enhanced to Rs. 4 per square metre. Blank audio cassettes are being exempted from
duty. Excise duty on computer software is being reduced from 25% to 10% ad valorem.
163. Certain other industries also require a boost for their further development.
My proposals now cover a number of such industries.
Plastics
164. The House would recall that the customs duties on various plastic materials,
such as LDPE, HDPE, PVC and polypropylene were lowered in September, 1987,
in the wake of the steep hike in the international prices of these materials. International
prices have since gone up even higher and there is need for further reduction in
customs duties. I, therefore, propose to reduce the basic customs duty on LDPE from
Rs.3,000 to Rs.2,000 per tonne and on HDPE from 30 per cent to 20 per cent ad
valorem.
165. The auxiliary duty of customs on PVC is proposed to be converted from
ad valorem to specific, and in the case of suspension grade PVC is being reduced to
Rs.2000 per tonne and in the case of paste grade to Rs.4000 per tonne. In the case
of polypropylene, auxiliary duty is being reduced from 45 per cent to 30 per cent ad
valorem.
Automotive Sector
166. In the automotive sector, I propose to extend the concessional rate of 55
per cent customs duty in respect of parts for certain additional components to be
manufactured by auto ancillaries for supply to fuel-efficient motor vehicles. Parts of
specified as well as additional components of fuel-efficient two-wheelers and light
commercial vehicles will now attract a lower rate of customs duty of 40 per cent ad
valorem as against the current rate of 55 per cent ad valorem. Concessional rate of
customs duty of 55 per cent ad valorem in respect of components required for the
manufacture of fuel-efficient cars upto 1000 cc under phased manufacturing programme
is proposed to be made available for a further period from 1.3.1988 to 31.3.1990.
Fuel-efficient motor cars of engine capacity exceeding 1000 cc manufactured under
approved phased manufacturing programme will, however, now attract excise duty at
the rate of 30 per cent ad valorem instead of the existing 25 per cent.
167. I propose to reduce the excise duty from Rs. 1000 to Rs.500 per body in
respect of bodies of such three-wheeler auto-rickshaws, which are used by the general
public in major cities.
Vegetable oils
168. In order to cut down on imports of vegetable oils, the Government had
taken fiscal measures in the previous years so as to encourage domestic production of
edible oils. These measures have had encouraging results. As a follow-up of the
measures taken in the last two years, I propose to provide total exemption from excise
30
duty in respect of refined safflower oil. Rebate for the use of solvent-extracted cotton
seed oil in the manufacture of vanaspati is being increased from Rs.3250 to Rs.4000
per tonne. Rebate for the use of indigenous palm oil in the manufacture of vanaspati
is also being made available at the rate of Rs.3250 per tonne. Solvent-extracted
sunflower and safflower oils will, henceforth, qualify for rebate at the rate of Rs.3250
per tonne, if used in the manufacture of vanaspati. I am also proposing an increase in
the rate of rebate from Rs.320 to Rs.640 per tonne for the use of rice bran oil in the
manufacture of soaps.
Paper and Paper Board
169. I propose to reduce the excise duty on paper and paper board manufactured
by small paper mills by Rs.100 per tonne in each of the existing slabs. Paper and
paper board manufactured by mills using agricultural residues such as cereal straw,
bagasse, grasses and jute waste, etc. already attract a lower rate of excise duty of 10
per cent ad valorem plus Rs.800 per tonne. I propose to reduce this duty further by
Rs.300 per tonne. Concession of 50 per cent of the excise duty available to certain
new paper mills upto 31.3.1988 is being continued till 31.3.1990.
170. Specified items of machinery for manufacture of newsprint are being
provided with a concessional rate of customs duty of 25 per cent ad valorem.
171. I also propose to provide for import of machinery for binding and multi-
colour sheet-fed off-set printing machine by registered newspaper establishments at
concessional rates of customs duty.
Rolling Bearing Industry
172. In respect of 21 items of machinery for the rolling bearing industry, a
concessional duty of customs at 35 per cent ad valorem is being provided.
Watches
173. With a view to giving a further boost to domestic watch industry, I intend
to reduce customs duty from 55 per cent to 35 per cent ad valorem in respect of
certain horological machinery and testing instruments. The list of horological raw
materials attracting concessional customs duty of 25 per cent ad valorem is being
enlarged. In addition, my detailed proposals provide for a sound package for certain
specified parts.
Glass and glassware
174. I propose to restore the concessional rate of excise duty of 30 per cent ad
valorem in respect of glass and glassware manufactured by the semi-automatic sector.
Energy conservation
175. In our industrial processes, many of us have remained rather unresponsive
to the need for energy conservation and energy recycling. The concept of energy
conservation is still in its infancy in the country and we have to provide some incentive
31
in that direction. Accordingly, 15 specified energy-saving equipments are being
exempted from customs duty in excess of 40 per cent ad valorem.
Hotels
176. To promote tourism in the country, certain additional equipments required
by hotels are being extended a concessional rate of customs duty of 90 per cent .
Rationalisation Measures
177. My proposals on the indirect taxes include certain rationalisation measures.
(a) Industry has found the MODVAT system beneficial. The procedural
problems faced in the initial stages have, by and large, been sorted out. I
propose to rationalize rates of excise duty in respect of a few commodities,
including paints based on synthetic polymers, trailers, furniture, phthalic
anhydride and coated textiles as a part of MODVAT corrections.
(b) The scheme of excise duty concessions applicable to small scale industry
relating to air-conditioning and refrigerating appliances and parts thereof
is being slightly modified to enable full utilisation of the MODVAT credit.
(c) I propose to align the excise tariff relating to ferrous and non-ferrous
metals and articles thereof with the corresponding chapters of the
Harmonised System which would help reduce classification disputes. Tariff
rates of excise duty in respect of items relating to iron and steel and
copper are being revised. The effective rates of excise duty would by and
large be maintained. A uniform rate of excise duty of Rs.550 per tonne is
being prescribed in respect of unmachined forgings and forged products
of steel. The basic customs duty on ships, vessels and other floating
structures imported for breaking up is being reduced from Rs.1035 to
Rs.750 per Light Displacement Tonnage.
(d) Certain proposals for rationalising and rounding off of rates of excise
duty in respect of Petroleum products are being made. These proposals
have no significant revenue implications.
(e) The scheme of excise duty concession to manufacturers of tread rubber in
the small scale sector is being revised as an anti-evasion measure.
(f) As an anti-evasion measure, I am also proposing to enhance the basic
customs duty in respect of certain compound alcoholic preparations of a
kind used for the manufacture of beverages to Rs.80 per litre or 270%,
whichever is higher.
(g) There have been some reports regarding under-invoicing in respect of
imports of galvanised steel sheets, tin plates and cold rolled steel sheets.
In order to deal with this problem, the basic customs duty in respect of
32
 these goods is being converted from ad valorem-cum-specific rates into
specific rates.
(h) Specific rates of excise duty in respect of air-conditioners upto 7.5 tonnes
capacity are being revised. Specific rates are also being prescribed in
respect of air-conditioners exceeding 7.5 tonnes but not exceeding 15
tonnes.
(i) As an anti-evasion measure, excise duty on paste grade PVC is proposed
to be increased from 40% to 60% ad valorem. The duty paid on the resin
would be available as MODVAT credit. Effective rates of duty on coated
textiles are being suitably revised.
(j) In order to provide protection to the indigenous industry, I am proposing
to enhance the basic customs duty in respect of Sodium Formaldehyde
Sulphoxylate from 70% to 110% and Sodium Ferrocyanide from 70% to
100% and iron powder from 40% to 70%. The basic customs duty in
respect of palm nuts and kernels is also proposed to be raised from 60%
to 200% ad valorem.
178. Legislative changes and other changes of minor significance: Apart
from the above proposals, certain amendments have also been proposed in the Finance
Bill effecting changes in the excise and customs tariffs. These amendments are basically
enabling provisions without any major revenue significance. Besides, there are a few
minor proposals for continuing, amending or rescinding existing notifications including
one for giving retrospective effect to an amending notification. To save the precious
time of the House, I do not wish to dwell on them. I am also providing for amendment
of some of the provisions of the Customs Act, 1962, details of which are in the
Finance bill. A few amendments to the Central Sales Tax Act, 1956, are also proposed,
so as to align the definitions of certain goods of special importance with reference to
the Central Excise Tariff Act, 1985.
179. Copies of notifications giving effect to the changes in the customs and
excise duties effective from 1st March, 1988 will be laid on the Table of the House in
due course.
180. Anti-smuggling drive: Our anti-smuggling efforts yielded a seizure of
Rs.250 crores of contraband goods in 1987 which is the highest ever. I have instructed
the concerned authorities to relentlessly continue the drive against smuggling, tax
evasion and black money. I also seek the active cooperation of the State Governments,
as it is with their assistance that we can succeed in this task. I hope and trust that the
State Governments will also mount active steps against hoarding, black-marketing,
smuggling and sale of smuggled goods.
181. Revenue effect: Details of all the pluses and minuses in respect of
individual items covered in my proposals are in the Explanatory Memorandum to the
33
Finance Bill. In the aggregate, my proposals in respect of Customs and Central Excise
duties outlined above are likely to yield additional revenue of Rs.515.75 crores from
Customs duties and Rs.749.17 crores from Excise duties. The concessions and reliefs
aggregate to Rs.209.44 crores on the Customs side and Rs.509.79 crores on the Excise
side. The net additional revenue from Customs duties would, thus, be Rs.306.31 crores
and that from Excise duties Rs.239.38 crores. In Excise duties, the Centre’s share
would be Rs.117.23 crores and that of States, Rs.122.15 crores. Out of the total net
additional yield of Rs.545.69 crores, the Centre’s share would be Rs.423.54 crores
and that of the States, Rs.122.15 crores.
182. Taking into account the additional yield from the modifications proposed
in direct and indirect taxes and the revision announced a few days ago in postal tariffs,
the year end deficit for the next year is estimated at Rs.7484 crores. Government
reiterates its determination to closely monitor expenditure, maximise collection of
revenues and contain the budgetary deficit.
183. Mr. Speaker, Sir, in framing the Budget proposals, my guiding principle
has been the need to boost agriculture, help the poor and generate more employment,
investment and growth. India’s achievements since Independence are the result of the
untiring efforts of all our people. Every section of our people has contributed to build
the country’s economy. No single section or region or group can claim exclusive
credit for it. The nation’s Parliament as the supreme forum of our democracy has also
made an invaluable contribution. In all humility, may I take this opportunity to request
through you, Sir, all the Hon’ble Members of Parliament, to make this year’s debate
on the budget a participatory and constructive endeavour to evolve a nationally accepted
strategy to achieve our goals.
184. Let us be proud of what all of us together have been able to do and if
there are inadequacies or deficiencies, let us overcome them collectively. Let us all
join in the exciting task of India’s economic development and do so by making it a
common fraternal partnership of the entire Indian people. As our Prime Minister Shri
Rajiv Gandhi said a couple of months ago:
“Our socialism is our own. It is not a foreign transplant. It is not cast in
someone else’s ideological mould. It is rooted in our own history, our
culture, our realities. Gandhiji enjoined us to work for the Daridra Narayan,
to wipe every tear from every eye. This constitutes the moral imperative
of our socialism.”
185. This is also the message that this Budget seeks to convey. Sir, I now
commend this budget to the House.
[29th February, 1988]

34
 SPEECH OF SHRI RAJIV GANDHI PRIME MINISTER AND MINISTER
OF FINANCE INTRODUCING THE BUDGET FOR THE YEAR 1987-88
PART A

Sir,
I rise to present the Budget for the year 1987-88.
2. Twenty nine years ago, presenting the country’s budget, Jawaharlal Nehru
told this House:
“The times we live in and the problems that our country has to face do not
permit a static or complacent approach or any avoidance of the burdens
which inevitably accompany an attempt to advance with some speed.....
We have to strive with all our strength for our planned development by
conserving all our resources, increasing production and trying to ensure
progressively a more equitable distribution, and thus to raise the standards
of the great mass of our people.”
These are our objectives today.
3. When we came into office, we were fortunate in inheriting from Indiraji
an economy that was sound. After the devastation of 1979-80, the inflation rate was
brought down sharply. The growth rate was stepped up, and the infrastructure restored
to health. We have built on these successes and initiated a process of reform in areas
requiring urgent attention. This, I believe, we have been able to accomplish in large
measure.
4. Our principal objectives are the elimination of poverty and the building of
a strong, modern, self-reliant, independent economy. In these two years we have
sharpened the focus on poverty alleviation. Direct outlays on anti-poverty programmes
were substantially increased in the last Budget. The 20-Point Programme (1986) was
announced in August. Taking advantage of high stocks of food, rural employment
programmes were expanded. Two million tonnes of cereals were made available in
tribal areas at highly subsidised rates. We launched an important scheme to enlarge
employment opportunities for the urban poor. I have extensively toured and seen the
work being done in the most backward and remote villages of our country. Talking to
the people face to face, I know how much more needs to be done. I am also convinced
that we are making progress in our struggle against poverty.
5. Agriculture is the bedrock of our economy. Growth in this sector is also
crucial for the removal of poverty. Our farmers, farm technologists and scientists have
1
turned India from a net-importer of foodgrains living at the margin of survival to self-
sufficiency. We are proud of them. We congratulate them.
6. We have reinforced the policies that have proved so successful. We are
committed to providing remunerative prices, and increased availability of water, power,
seeds, fertilizers and credit to our farmers. Foodgrain production will exceed 150
million tonnes despite a poor monsoon. We have increased incentives to our farmers
to reduce our dependence on imports of sugar and edible oils. They have responded
magnificently.
7. I am, however, concerned about the situation of agricultural labour. They
are subject to exploitation. Government will appoint a National Commission on Rural
Labour. It will look into the working conditions of this vulnerable section of our
society and the implementation of social legislation for their protection .
8. Industry is forging ahead. Major initiatives for modernising industry and
stimulating industrial investment were taken in the Sixth Plan. Our strategy in the
Seventh Plan is to build on these initiatives to strengthen industrial performance. We
are encouraging economies of scale in production, induction of modern technology
and greater competition to increase production, reduce costs and improve quality. We
have enhanced the incentives for small scale units. There is clear evidence now that
these policies are having the expected impact on the economy.
9. Our industrial base has widened. New industries have developed . The
small scale sector has expanded rapidly. A large number of new jobs has been created.
In the three years beginning 1984-85, the growth rate in industry is expected to exceed
8 per cent per annum on average - this has not happened in the last twenty years.
10. We have given high priority to the important task of tax reform. Our tax
laws and rules had become complex. There was widespread evasion. Reform was
vital. Our reform of the fiscal system, undertaken in the past two years, has been
thoroughgoing. We have made tax rates and the tax structure reasonable. We have
simplified laws and procedures. We have enforced these laws vigorously without fear
or favour. This has helped the honest tax payer, and yielded more revenue than ever.
11. The public sector is the core of our industrial economy. I am also convinced
that our public sector enterprises can be made as efficient as any in the world. I am
glad to say that the infrastructure industries in the public sector are showing distinctly
better performance. There has been a significant improvement in productivity in coal,
power and railways. The improvement in thermal power generation is particularly
striking. The plant load factor in the current year is the highest since 1976-77. The
improvement in the functioning of infrastructure has been brought about by a change
in the management culture, and better performance on the shop floor.
12. Government will further improve the working of public sector enterprises.
We will enhance their autonomy, and make them accountable for results. Government
will bring before Parliament a White Paper on the public sector.
2
 13. As a nation, we have good reason to be satisfied with our economic
performance. During a period when growth rates in many developing countries have
declined sharply, we have been able to accelerate growth and increase per capita
incomes. We have avoided debt problems, and have kept inflation under control. Our
food stocks and foreign exchange reserves are comfortable. These are important
strengths. But we cannot afford to be complacent. The world environment, both political
and economic, continues to be unfavourable. There are also important domestic
problems that demand our attention.
14. The rapid growth in Government expenditure is exerting mounting
pressures on our fiscal balance. In the recent period, we have been compelled to
increase defence expenditure. We shall spare no effort nor shrink from any sacrifice
where our national security is concerned. At the same time, there are pressing
requirements for development. Any slackness in critical investments now will cost us
heavily in the future. It is a social imperative to spend on programmes which directly
benefit the poor and to provide food subsidy. We have had additional commitments
arising out of implementation of the Pay Commission’s Report. Higher relief and
grants had to be provided to several States severely affected by drought and flood.
15. Even so, some hard choices have to be made to keep our expenditure
within our means. Government is determined to make them. The situation requires a
thoroughgoing review of our expenditure policy. Mere scratching the surface will not
help. Ad hoc and across the board cuts of the past, while providing temporary relief,
have not yielded enduring results. There is no room for waste, ostentation or
unproductive expenditure. We have to pull together and work harder than ever before
to realise national goals.
16. We have a good record in price management. However, it will be a mistake
to take too complacent a view of the price situation. The demand and supply balance
in a developing economy is always delicate. Any external or internal disturbance can
create difficulties. It is essential, therefore, to keep a careful watch on the price situation.
17. The balance of payments has been under pressure. We had anticipated
this and initiated a range of measures to curb the growth of imports and increase
exports. These have yielded results. Exports increased by 17 per cent while imports
increased by only about 2 per cent in the first nine months of the current year. The
trade deficit is lower than last year by Rs. 1,000 crores. But there is much more to be
done. Part of the improvement is due to the fall in oil prices and we cannot count on
this. Government will remain fully vigilant on the external front.
18. The results of policies initiated in the last two years show that our direction
is correct. I propose to use this year’s Budget to provide a new thrust in selected areas
which will strengthen the economy and further our Seventh Plan objectives. First
among these is education.
3
 19. The New Education Policy has been adopted by Parliament after extensive
discussions.It has been evolved from a national consensus. It is a powerful weapon to
fight poverty. It gives to the socially and economically weaker sections the means to
realise equality of opportunity guaranteed by our Constitution. It will help us preserve
our heritage and release the creative energy of our youth. It will bind together people
speaking different languages, professing different faiths and belonging to diverse
cultural traditions that are part of the composite culture of India. It aims at excellence
in all fields - science, technology, the arts, humanities and philosophic thought.
20. To give a good start to the new Policy, I have allocated as much as Rs.800
crores for education as compared with Rs.352 crores in 1986-87. This massive increase
is a measure of our resolve to bring about an educational transformation in our country.
21. State Governments have the primary responsibility for education. These
resources will supplement the efforts of State Governments.
22. The momentum of anti-poverty programmes will be maintained. In 1985-
86, one million tonnes of foodgrains was provided to States as grant for extending the
coverage of the National Rural Employment Programme (NREP) and the Rural
Landless Employment Guarantee Programme (RLEGP), resulting in the creation of
62 million mandays of additional employment. In 1986-87, the additional allocation
was increased to two million tonnes, leading to additional employment of 128 million
mandays. I propose to continue the Programme of allocating additional foodgrains for
employment.
23. The Integrated Rural Development Programme will be strengthened further.
This year, more than 3.2 million families are likely to benefit. In the coming year, an
outlay of Rs.310 crores is being provided. Combined with matching allocations of
States and credits from the banking sector, the total flow of funds under this Programme
will be 4 to 5 times greater than this allocation. Total Plan outlay for the Department
of Rural Development will exceed Rs.2,000 crores in 1987-88. This compares with
the total Sixth Plan expenditure of about Rs. 3,600 crores.
24. Housing is high on our list of priorities. It is a basic need. It also generates
employment. We propose to launch a comprehensive programme for housing
development, particularly housing for economically weaker sections.
25. The Central Government has again earmarked Rs.125 crores in 1987-88
for the Indira Awaas Yojana. Under this scheme, one million houses will be built
during the Seventh Plan period for the Scheduled Castes and the Scheduled Tribes.
We have decided that State Governments would be free to use the amounts allocated
to them under this Programme as seed capital for launching Indira Awaas Yojana
Societies for housing loans for the Scheduled Castes and the Scheduled Tribes.
26. A new financial structure will be created to provide funds for housing. At
the apex level, a new national housing bank will be set up by the Reserve Bank of
4
India with an equity capital of Rs.100 crores. This bank will promote housing institutions
at both local and regional levels. The Reserve Bank will be announcing the details
separately.
27. The National Commission on Urbanisation, in its Interim Report, has
suggested several changes in the laws affecting housing, including the Urban Land
(Ceiling and Regulation) Act, 1976. This important social legislation aimed at using
surplus lands in urban areas for the common good. However, the results achieved
have been disappointing. Although 10 years have passed, less than one half of one per
cent of the land declared surplus has actually been used for construction. Meanwhile,
scarcity of land has pushed up rents and speculative profits in urban areas. The worst
sufferers have been the poor. This is not acceptable. I have asked the Ministry of
Urban Development to work out suitable legislative proposals taking into account the
recommendations of the Commission, and place these before the House for
consideration.
28. The Commission has also recommended certain changes in the Rent
Control Acts which would give protection to the economically weaker sections, while
also providing sufficient incentive for new constructions. These changes should, over
time, bring down rents by improving the availability of housing. The report of the
Commission will be commended to State Governments.
29. Later, in my speech, I shall be announcing certain incentives for income
tax payers in respect of housing loans taken from specified institutions.
30. In the last two years, Government has taken a number of measures for
workers’ welfare. These include legislative changes to protect workers’ dues,
introduction of a new stock option scheme for workers, increase in eligibility limit for
bonus payments, increase in the rate of DA for public sector employees, tax concession
for investment in workers’ housing, increase in the interest rate on workers’ Provident
Funds and removal of ceiling of house-rent allowance for exemption from income-
tax. As a further step, I propose to make certain legislative changes in the Income-tax
Act to protect the dues of workers by way of Provident Fund, ESI and gratuity.
31. We have achieved remarkable success in mobilising small savings. An
expert group, appointed by Government last year, has pointed out certain problems
with the present scheme of tax incentives on personal savings. An important lacuna is
that fiscal concessions are currently available for gross savings, with no penalty for
dissaving. It has, therefore, recommended shifting to a system which gives incentives
for net savings.
32. I propose to introduce a new savings scheme based on the net saving
principle. To avoid any transitional problems, this scheme will be, for the present, in
addition to the existing tax concessions available under Section 80C of the Income-
tax Act for National Savings Certificates and other instruments. Under the new scheme,
5
50 per cent of deposits upto a maximum of Rs.20,000 will be eligible for deduction.
However, in the year of withdrawal, 50 per cent of the amount withdrawn will be
added to the taxable income . Receipts under the scheme will be shareable with States.
The full details of the new savings scheme, which will be introduced in the next
financial year, are being announced separately.
33. The capital markets in India have shown tremendous growth in the last
few years. Approvals for capital issues have exceeded Rs.5,000 crores in 1986-87.
They were only about Rs.500 crores in 1980-81. For a healthy growth of capital
markets, investors’ rights must be fully protected. Trading malpractices must be
prevented. Government have decided to set up a separate Board for the regulation and
orderly functioning of Stock Exchanges and the securities industry.
34. Last year, the UTI had set up a Mutual Fund for investment in equity to
attract small investors. In order to widen their choice, the State Bank of India will set
up a similar Mutual Fund. I shall also be announcing certain measures later which
should contribute to the development of capital markets.
35. I have referred to the acceleration in industrial growth. Government’s
main thrust is to modernise India’s industrial structure. Efficiency and productivity
have to be increased. Existing technology has to be upgraded. New technology has to
be absorbed and further developed indigenously. Costs must be reduced. All these
objectives can only be realised in a medium term time frame.
36. Government have been carrying out an intensive review of individual
industries. New policy measures have been announced in respect of several important
industries, such as, textiles, jute, sugar, drugs, electronics and software. We have also
set up the Textile Modernisation Fund and the Jute Modernisation Fund. These will
facilitate modernisation of these traditional industries which provide substantial
employment. Another special development fund is being set up for jute. This will
benefit growers and workers and promote diversification and research and development.
37. Government will continue to undertake systematic reviews of the total
policy framework for selected industries, and take necessary steps to stimulate growth
and modernisation.
38. The capital goods industry is central to our efforts for achieving self
reliance. It needs immediate attention. I propose to introduce a package of measures
to further accelerate the growth of this industry. First, import duty rates for machinery,
including general project imports, are being adjusted. Second, in order to reduce
costs of domestic manufacture in certain critical sectors, such as, power, heavy
equipment and textile machinery, cost of certain special types of imported steel is
being reduced. I will have more to say on these proposals later.
39. Third, a special programme of technological upgradation for selected
capital goods industries will be launched by financial institutions for the three year
6
period upto the end of this Plan. This will cover in the first instance electrical machinery,
including power equipment and electric motors, foundries and machine tools. The
objective of this programme will be to induct the latest technology in these sectors,
improve indigenous R & D facilities for constant upgradation, and reduce costs. The
details will be announced separately by the Industrial Development Bank of India.
40. Industries linked to agriculture have a special role in our development.
They provide markets for agricultural produce and generate higher incomes for our
farmers. I have already referred to the measures taken for modernisation of two of the
most important agro-based industries, namely, jute and textiles. Last year’s budget
had provided important tax incentives for use of certain indigenous oils in vanaspati.
I shall be announcing certain proposals to encourage the food processing industries.
This will benefit the farmer and the consumers. There are other proposals to benefit
cotton and wool.
41. In the past year, Government have taken a number of measures to support
export industries. New schemes of cash compensatory support and customs duty
drawback have been introduced. Import duties on capital equipment for selected export
industries have been reduced. Interest rates have been lowered. Specified raw materials
are being provided at international prices. Fiscal incentives have also been extended.
Exports are now doing better. In this Budget, I shall be proposing some further measures
for increasing export production.
42. Mr. Speaker, Sir, these and other budget proposals will strengthen the
productive forces in our society. The fundamental assumption of the Seventh Plan, as
indeed of all our Five Year Plans, is that growth and development are the real antidotes
to poverty. Direct measures for alleviation of poverty are indispensable in our society.
However, such measures can be sustained only by rapid development. This was the
message that Jawaharlal Nehru gave to the country while introducing the Second
Five Year Plan in this House :
“We have, therefore, to lay great stress on equality, on the removal of
disparities, and it has to be remembered always that socialism is not the
spreading out of poverty. The essential thing is that there must be wealth
and production....”
43. We can grow faster only if we use modern technology. This is the only
way to deal effectively with the problems of unemployment and poverty. Those wise
men who decry the use of modern technology in the name of social justice would do
well to listen to Panditji, who in the course of the same speech, said,
“Do not imagine that minus technological progress we are going to deal
with the problem of unemployment.... If India is to advance, India must
advance in science and technology, and India must use the latest techniques,
7
 always keeping in view, no doubt, that in doing so, the intervening period,
which always occurs, must not cause unhappiness or misery. “
44. This then is our basic strategy - a framework of sustained growth on the
basis of rapid modernisation of India’s agriculture and industry. I am committed to
planning for socialism in India, socialism which fits in with our genius but nevertheless
socialism in its basic meaning of removing disparities and providing equality of
opportunity. This is the yardstick by which I want to judge all policies and programmes.
45. Let me now turn to the Revised Estimates for 1986-87 and Budget
Estimates for 1987-88.
REVISED ESTIMATES 1986-87
46. Budget Estimates 1986-87 provided for a total expenditure of Rs.52,883
crores. The expenditure in the current year is likely to exceed the original estimate by
Rs.7,445 crores owing to a number of post-budget developments.
47. I do not propose to take the time of the House by going into details as
they have been explained in the Budget documents. I shall only refer to certain major
items.
48. Non Plan expenditure is expected to be higher by Rs.5,508 crores including
expenditure arising from the recommendations of the Fourth Pay Commission. To
reduce the cost of carrying the buffer stock, the Food Corporation of India is being
provided loans of Rs.1,200 crores on soft terms. This will replace equivalent bank
financing. For reasons well known to the House, we have increased defence expenditure
by Rs.1,466 crores. Interest payments will be higher by Rs.800 crores.
49. Plan expenditure is likely to be Rs.1,937 crores higher than the original
estimates. Budgetary support for the Central Plan is expected to increase from
Rs.13,617 crores to Rs.14,792 crores. The increase of Rs.1,175 crores is mainly in
Telecommunications, Railways, Petroleum, Mines, Textiles and Atomic Energy sectors.
Central assistance for State and Union Territory Plans will be Rs.762 crores more
mainly because of additional Rs.510 crores of advance Plan assistance to States affected
by natural calamities. Taking Plan and Non-Plan together, natural calamities assistance
to States will be Rs.640 crores higher than the Budget Estimate of Rs.150 crores.
50. Coming to receipts, net tax revenue is likely to increase by Rs.1,564 crores
compared with the Budget Estimate of Rs.22,643 crores.This is a large increase, made
possible by vigorous implementation of our tax laws. Non tax revenue and capital
receipts including the contributions from the oil sector are estimated at Rs.27,836
crores against the Budget Estimate of Rs.26,537 crores. The total receipts are placed
at Rs.52,043 crores and the total expenditure at Rs.60,328 crores. Inclusive of Rs.1,200
crores on account of replacement of bank credit for buffer stock by Government loans,
the current year is expected to end with a Budgetary Deficit of Rs.8,285 crores.
8
 51. The deficit is high and I do not like it. I have decided that the deficit in the
Budget Estimates for 1987-88 shall not be exceeded. Some supplementary demands
are unavoidable; I am instructing the Ministries and other Central Government
organisations to ensure that additional demands are offset by equivalent savings or
through measures to raise more resources. We will review the financial performance
of public sector units to ensure that targets for internal resource generation are met. I
am constituting a Cabinet Committee on Expenditure to monitor the implementation
of these measures.
52. The overall economic situation is good. Our foodstocks and foreign
exchange reserves are quite satisfactory. We have been able to keep the overall price
situation under control through judicious demand and supply management. Along
with expenditure control, we will continue to take anticipatory action to reduce excess
liquidity and increase supply of sensitive commodities, particularly foodgrains, sugar
and edible oils.
53. Following the report of the Committee on the working of the monetary
system, in consultation with the Reserve Bank of India, it has been decided that
henceforth the Budget documents should show the budgetary deficit as well as the net
change in the Reserve Bank of India credit to Central Government. The latter presents
a more accurate measure of the monetary impact of the Government’s fiscal operations.
According to the present information, it is estimated that the change in the net Reserve
Bank of India credit to Central Government in 1986-87 will be Rs.7,250 crores, which
is lower than the budgetary deficit.
BUDGET ESTIMATES 1987-88
54. For 1987-88, in the present situation, I have given the highest priority to
maintaining the tempo of the Plan. I have provided an outlay of Rs. 24,622 crores for
the Central Plan of 1987-88, of which Rs.14,923 crores will be provided as budgetary
support. With this order of outlay, in the first three years of the Plan, we would have
fulfilled about 63 per cent of the Seventh Plan outlay. This is a record.
55. However, we now have to make greater efforts to achieve more for every
rupee of investment that we make. Achievement of physical targets is far more important
than just spending the money. Government must be more cost effective. The cost of
delivery of our programmes must be reduced.
56. The Government has, therefore, given a high priority to implementation
of projects in time, avoidance of time and cost over-runs in projects, and the use of
innovative methods and new technologies. A monitoring system has been set up for
projects under implementation.
57. Revised accounting classification to bring about one to one correspondence
between heads of accounts and heads of development used for Plan purposes is being
introduced from 1.4.1987 in consultation with the Comptroller and Auditor General of
9
India. This will strengthen the planning process and help better monitoring. Equally
important is obtaining timely feed-back from grass root levels regarding implementation
of programmes and flow of benefits therefrom.
58. In the Central Plan, a high priority has been given to programmes which
have an impact on alleviation of poverty in the rural areas. As I mentioned earlier,
particular emphasis has been given to education , the NREP, the IRDP, the RLEGP,
rural water supply, and the use of food stocks for creation of additional employment
opportunities in the rural areas.
59. Agricultural development has a major impact in alleviating poverty. In the
Central Plan, the accent in the agricultural sector continues to be on increasing
productivity by increasing the area under high yielding and improved varieties,
accelerated transfer of new technology, increasing crop intensity, diversifying the
cropping pattern and control of pests and diseases. Some of the important programmes
under implementation are : Special Rice Production Programme, National Oil-seeds
Project, National Watershed Development Programme and National Pulses
Development Project. These projects are designed to solve specific agricultural
problems, and are already making an impact in our rural areas.
60. Irrigation and fertilizers are two major components of programmes for
increasing agricultural productivity. In irrigation, a high priority is being given to the
completion of on-going projects and for bridging the gap between irrigation potential
and its utilisation. Fertilizer production in the current year will increase to nearly 7
million tonnes from about 5.7 million tonnes last year. The fertilizer plant at Paradeep
has commenced production during the year. In the next year, the fertilizer plants at
Vijaipur and Aonla - each with a capacity of 7.2 lakh tonnes of urea are expected to
be commissioned.
61. In terms of financial outlays, infrastructure sectors, namely, energy,
transport and communications will account for more than 54 per cent of the total
Central Plan . In 1987-88, taking the Centre and States together, we will be
commissioning 4880 MW of additional power capacity. In coal, the output per man-
shift has improved by 11 per cent. The target for coal production in 1987-88 is 183.5
million tonnes as against 165 million tonnes in 1985-86.
62. In the Sixth Plan, we were able to increase our crude oil production nearly
three-fold. In the current Plan, production is likely to show a slower increase and it is
necessary to accelerate investment in exploration and development of new oil fields.
The total outlay for the petroleum sector as a whole is Rs.3,265 crores next year.
63. In order to save the time of the House, I have mentioned only a few of the
highlights of the Central Plan for 1987-88. In several other areas, such as, women and
child development, health and family welfare, youth affairs and sports, art and culture,
science and technology, environment, social forestry and information and broadcasting,
10
this Government has taken several new initiatives to make the Plan more meaningful
to our people. These programmes are being strengthened. Necessary provisions have
also been made for industrial projects, including those in heavy industry, steel and
mines.
64. I am also happy to inform the House that the total Plan outlay of States
and Union Territories for 1987-88 has been fixed at Rs.19,537 crores representing an
increase of 17 per cent over the current year. We have taken care of the requirements
of Arunachal Pradesh and Mizoram on being elevated to Statehood. A provision of
Rs.8,754 crores has been made next year for Central assistance for State and Union
Territory Plans as against Rs.8,140 crores in the current year’s Revised Estimates.
65. The Budget Estimate for defence is Rs.12,512 crores in 1987-88. This has
naturally cast a heavy burden on our budgetary resources, but the House will agree
with me that no compromise is possible where country’s defence is concerned. The
strength and morale of our Armed Forces are high. On behalf of this House, I assure
our Jawans of the unstinted support of the entire nation.
66. Interest payments next year are estimated at Rs.10,650 crores against
Rs.9,550 crores in the current year. Food and fertilizer subsidies including arrears, are
placed at Rs.3,910 crores as against Rs.3,893 crores in the current year. Next year’s
Budget includes a lump provision of Rs.500 crores to cover likely increases in additional
dearness allowance to Government employees and also the increases in pensionary
charges arising out of the recommendations of the Fourth Pay Commission. This
Government - ever sensitive to the difficulties of pensioners- has decided to increase
the minimum pension and minimum family pension to Rs.375 per month. This will
benefit nearly six lakh pensioners.
67. The total Non Plan expenditure in 1987-88 is estimated at Rs.39,266 crores.
Tax revenue next year net of States’ share is estimated at Rs.25,689 crores against
Rs.24,207 crores in the current year. Non tax revenue and capital receipts are placed
at Rs.31,243 crores against Rs.27,836 crores in the current year. The total receipts at
existing rates of taxation thus amount to Rs.56,932 crores against the total expenditure
of Rs.62,942 crores, leaving a gap of Rs.6,010 crores.
68. I shall now turn to my tax proposals.

PART B
69. In the 1985-86 Budget, we initiated a process of major tax reform. The
broad direction and strategy for this reform was set out in the Long Term Fiscal Policy
(LTFP). We will be introducing a detailed Amendment Bill on Direct Taxes separately
in the Budget Session. This Bill will implement wide ranging changes aimed at
simplification and rationalisation.
11
 70. The basic thrust of my few Direct Tax proposals is to provide incentives
for savings to promote investment and to support housing. I propose to strengthen
some welfare measures. I have also included some measures to enhance revenue.
71. I do not propose any changes in the rate structure for Personal and
Corporate Taxes. This is in line with the Long Term Fiscal Policy.
72. In order to conserve foreign exchange and to raise revenue, I propose to
levy a modest tax of 15% on foreign exchange released in India for foreign travel.
Foreign exchange released for medical treatment and education abroad will be excluded.
This tax will be applicable for travel from a date to be notified. The revenue yield
from this measure is expected to be Rs. 60 crores.
73. Those who can afford to patronize high class hotels should also be afforded
the further pleasure of contributing to the national exchequer. A separate legislation
will be brought forward for levy of a tax on expenditure in expensive hotels. This tax,
to be levied at 10% of expenditure, will not apply to payments made in foreign
exchange. It will become effective after passage of the necessary legislation.
74. I have already mentioned the decision to introduce a new National Savings
Scheme based on net savings. Necessary legislative changes are being included in the
Finance Bill.
75. I propose to provide a fiscal incentive for channelising savings into the
housing sector. Repayment of loans and payments made to the extent of Rs.10,000 in
a year towards the cost of any new residential property will qualify for deduction on
the same lines as life insurance premia or contribution to provident fund under Section
80C of the Income-tax Act. This exemption will be within the existing limit of
Rs.40,000.
76. Capital gains arising from the sale of a residential house are exempted in
case such gains are utilised for acquiring another house. This was hitherto applicable
only to individuals. It is now being extended to Hindu Undivided Families.
77. I understand that for the purpose of taxation of income from houses, our
tax laws make a distinction between a real owner who is not a legal owner and a legal
owner who is not a real owner. Following the well-established revenue tradition,
when it comes to taxing, we tax both the real owner who is not a legal owner and the
legal owner who is not a real owner. Concessions available to a house owner are,
however, given only to a real owner who is also a legal owner. I propose to simplify
the law by clarifying that the real owner, even if he is not the legal owner, will pay
the tax and avail of the concessions available to the legal owner. I hope this proposal
is abundantly clear to the Hon’ble Members.
78. In cases where the compensation for acquisition of a property is enhanced,
or where a new residential house is not acquired within the specified time after selling
12
the old house, the completed tax cases for the past years have to be modified to tax the
capital gains accrued earlier. Certain procedural changes are being made in the law to
remove this complication.
79. Several important changes have been introduced in the corporate tax
structure in the last two years. With effect from April, 1987, a liberalised set of
depreciation rules is being introduced. Depreciation will be allowed in respect of
blocks of assets instead of the present system linked to individual assets. There will
be only three rates of depreciation for plant and machinery, namely, 100%, 50% and
33-1/3%. Apart from simplifying assessment, this will enable industry to replace and
modernise capital equipment faster.
80. It is only fair and proper that the prosperous should pay at least some tax.
The phenomenon of so-called “zero-tax” highly profitable companies deserves attention.
In 1983, a new Section 80VVA was inserted in the Act so that all profitable companies
pay some tax. This does not seem to have helped and is being withdrawn. I now
propose to introduce a provision whereby every company will have to pay a “minimum
corporate tax” on the profits declared by it in its own accounts. Under this new
provision, a company will pay tax on at least 30% of its book profit. In other words,
a domestic widely held company will pay tax of at least 15% of its book profit. This
measure will yield a revenue gain of approximately Rs.75 crores.
81. The capital markets have shown remarkable buoyancy. I propose to make
some changes in the Tax Laws which will support healthy development of the capital
markets. The existing provision of allowing deduction in respect of investment in
equity shares of certain categories of new companies was to be withdrawn with effect
from 1st April, 1987. In view of the need to continue support for issues of new
companies, I propose to extend this concession for 3 more years. I also propose to
reduce the holding period of these shares from 5 years to 3 years.
82. At present shares have to be held for a period of 36 months before capital
gains on their transfer qualify for the concessional treatment allowed for long term
capital gains. It is proposed to reduce the holding period to 12 months. This will
provide greater flexibility to investors and also improve the mobility of capital invested
in shares.
83. Concentration of industries in many of our urban areas poses serious
problems of congestion, pollution and hazards. In order to encourage industries to
shift out of such areas, I propose to exempt capital gains made on the sale of land and
buildings in such areas provided these are reinvested in approved relocation schemes.
84. The provisions regarding additional income-tax on undistributed profits
of closely held companies have lost their relevance after the reduction in tax rates
effected in 1985-86 Budget. These are being deleted. Because of some court decisions,
the capital gains on transfer of goodwill of a concern or transfer of assets from a firm
to a partner and vice-versa escape the tax net. Such gains will be explicitly taxable.
13
 85. A tax holiday to newly established undertakings in Free Trade Zones has
been provided. It is being clarified that this will also extend to units which develop
software as also those which assemble or process components for exports.
86. A tax concession is available to the Indian companies earning income
from a foreign Government or a foreign enterprise for imparting technical knowhow.
This tax concession will now be available only if the foreign exchange earned is
repatriated to India. It is also being clarified that an Indian resident cannot be treated
as a foreign enterprise for this purpose.
87. It is proposed to exclude computers and machines for transmission and
reception of messages from the list given in the Eleventh Schedule of the Income-tax
Act as these industries are no longer non-priority.
88. At present Indian citizens earning remuneration in foreign currency for
services rendered abroad are allowed 50% exemption under Section 80 RRA of the
Income-tax Act subject to certain conditions. This is being further liberalised. The
exemption will now be allowed to the extent of 50% of the remuneration, or 75% of
the remuneration repatriated in convertible foreign exchange, whichever is higher.
89. In order to improve coverage and prevent tax evasion, it is proposed that
tax at specified rates should be deducted at source in respect of all payments beyond
certain prescribed amounts of fees for professional and technical services, royalty,
rent, commission or brokerage and payments for goods supplied to Government, etc.
This will apply to payments made by all persons, excepting individuals and Hindu
Undivided Families.
90. Let me now come to measures for the welfare of workers, members of
armed forces and the handicapped. There are a number of cases where the employers
do not credit their own contributions nor those of the employees to the Provident
Fund and the State Insurance Fund. It is also unfortunate that a separate fund is not
being kept by some employers in respect of gratuity of workers. To prevent this anti-
labour practice, we propose to penalise such delinquent employers by providing that
the contributions of the employees to these funds will be taxed as the income of the
employer and allowed as a deduction only when they are made over to the separate
accounts relating to these funds within the time allowed under the statute.
91. Any compensation received by a workman at the time of his retrenchment
is exempt from tax. Similar exemption is being extended to payments made under
voluntary retirement schemes for public sector employees.
92. Regimental Funds or Non-public Funds are utilised for purposes such as
providing assistance to widows of armed personnel killed in action, as also to disabled
soldiers. The contributions will enjoy similar tax concessions as other funds of national
importance like the National Defence Fund.
14
 93. I am increasing the special deduction allowed to the physically
handicapped persons and the totally blind from Rs.10,000 to Rs.15,000.
94. There are other procedural proposals in the area of Direct Taxes including
those to ensure better functioning of the Settlement Commission which are in the Bill.
95. For the Members of Parliament, I propose to introduce a general
exemption in respect of Constituency Allowance without reference to any monetary
ceiling.
96. The above proposals will give a net revenue gain of Rs.145 crores.
97. Let me now turn to Indirect Taxes. The tariff regime for capital goods
will be restructured and rationalised. I propose to extend MODVAT to most of the
remaining areas. Excise and Customs duties for certain industries are being adjusted
to stimulate growth. There is a package of reliefs for the common man.
98. As I mentioned earlier, the capital goods industry needs special support.
99. At present, there are two tariff rates for import of machinery: 101% for
import of general machinery and a concessional rate of 55% when machinery is
imported for a new project. The low duty rates for project imports have provided a
strong encouragement for unnecessary imports. The differential between the general
rate and the project rate also discriminates against modernisation of existing units,
and favours sickness. These anomalies must be corrected.
100. I propose to equalise the two rates at 85%. The rate of duty applicable for
components will be 15% below the applicable tariff rate.
101. At present, fertilizers, power and electronics are allowed concessional
import duty on their capital goods imports. These rates are being adjusted upwards.
The duty on import of equipment for the electronics industry is being raised from 25%
to 30% and for fertilizer plants, it is being increased from zero percent to 15%. In the
case of power, plants of above 50 MW capacity will continue to be imported at 25%.
Plants of 50 MW and below will pay a higher duty of 35%.
102. Further concessions are needed to encourage upgradation of technology
in specified capital goods sectors.
(i) At present, domestic capital goods manufacturers have to pay very high
import duties on import of special steels. The duty rate is being reduced
to 85% on steels such as boilers-pressure-vessels-quality plates, sheets or
coils, turbine blade flats and stainless steel plates.
(ii) The textile machinery industry will be allowed supply of imported stainless
steel at concessional duty of 65% instead of the prescribed rate of 245%
at present.
15
 (iii) In order to encourage modernisation of foundries, import duty on specified
capital goods is being reduced from 101% to 55%.
(iv) Caustic soda plants presently based on mercury-cell technology should be
encouraged to convert into membrane-cell technology. The new technology
saves energy and reduces pollution. Specified equipment required for
this conversion will be allowed imports at concessional duty of 35% instead
of the present 101%.
103. The MODVAT introduced in the 1986-87 Budget was a major innovation.
We covered 38 chapters of the Excise Tariff last year. I now propose to extend
MODVAT to all the remaining chapters except those relating to textiles, tobacco and
the petroleum sectors. MODVAT will now be extended to cover food products, mineral
products, leather and travel goods, footwear, paper and paper-board, wood and cork
products, asbestos cement products and precious metals.
104. Last year, in order to ensure revenue neutrality, the introduction of
MODVAT was accompanied by an increase in the duty on the final product to balance
the set-off being given of the duty paid on inputs. This year, keeping in view the
nature of products, the duty on the final product is not being increased except in a few
items. This will reduce the effective duty on a large number of items.
105. In the case of food products, for example, the total number of items
coverd by MODVAT will be over 100. The duty increase for revenue neutrality is
being done only in case of cheese, malt preparations and aerated soft drink. The
effective rate of taxation on other food products, such as biscuits, skimmed milk
powder, butter, jams and jellies, and confectionery will be significantly reduced.
Farmers and horticulturists are benefited by the expansion of the market of value-
added food products.
106. Some increase in the final duty is necessary in five of the items which
were covered last year where we have found that set-off given last year was very
much larger than initially estimated. These are zinc-oxide, adhesives based on synthetic
resin, organic surface-active agents, electric motors and primary batteries.
107. A number of important procedural changes are also being introduced to
simplify the operation of MODVAT. Some of the concessions are:
(1) Refund in cash of input duty credit if the final product is exported by the
manufacturer in certain circumstances.
(2) Availability of credit of duties in respect of inputs lying in stock.
(3) Adjustment of input duty credit if additional duty is demanded from input
manufacturers in case of change in classification of inputs.
(4) Receipt of inputs directly by the job-workers will be permitted for all
items under the MODVAT scheme.
16
 108. With these measures, we will have successfully eliminated the cascading
effect of excise duty and given a measure of excise relief.
109. Our comprehensive policy package has made electronics one of the fastest-
growing industries. It has generated substantial employment. I propose to make
certain changes which will strengthen the basic design of the existing policy.
110. For computers, the following reliefs and rationalisations are being carried
out:-
(i) Import duty on electronic sub-assemblies is being reduced from 308% to
150%.
(ii) The list of peripherals is being enlarged and a uniform rate of import duty
of 60% is being specified.
(iii) Import duty on specified data-communication equipment is being reduced
from 140% to 100%. Duty on mechanical parts of data-communication
equipment is being reduced from 140% to 55%.
(iv) The present notification regarding exemption of import duty on computer
peripherals for Research Institutes is being extended by 3 years.
(v) Duty on computer systems imported under OGL is being reduced from
150% to 140% (basic and auxiliary).
(vi) Import duty on specified electronic parts of computers is being increased
from 25% to 75% in order to give appropriate protection for indigenous
production. The import duty on mechanical parts of computer peripherals
is also being increased from 5% to 75%; and this is being extended to
mechanical parts of CNC system.
111. The Indian computer industry achieved a turnover of Rs.225 crores last
year. It has passed its infancy and is healthy and vigorous. Now that the industry has
arrived, can the tax- collector be far behind? It is proposed to levy an excise duty of
10% on computers and peripherals. With MODVAT, the effective incidence of duty
will be much lower.
112. The research and development base of the electronics industry is crucial
for its long-term success. I, therefore, propose to reduce the duty on specified
equipments required for R&D from 140% to 55%.
113. We must also encourage domestic production of capital goods required
for the electronics industry. At present, mechanical components required for
manufacture of such capital goods attract a duty of 140%. I propose to reduce this
duty to 45% in the case of components required for nearly 300 specified machines.
17
 114. In the field of general electronics, a concessional duty structure of 30%,
45% and 75% is allowed for imports of raw materials, piece-parts and components,
respectively. We are expanding the coverage of this concessional duty structure by
adding some more items.
115. I propose to abolish the excise duty on the production of poly-silicon in
all forms as a measure of support for the domestic industry. The customs duty for the
import of silicon, solar cells and photo-voltaic systems is being fixed at 30%, 45%
and 75%, respectively. I propose to increase the duty on the import of poly-silicon to
75% for electronics industry in the interest of domestic production.
116. Production of television sets has increased rapidly in line with targets. A
thriving and competitive industry has been set up. I propose to make two changes:
(i) As an anti-avoidance measure, it is proposed to impose an excise duty or
countervailing duty of Rs.150 on black and white tubes meant for sets of
size above 36 cms. and to impose an excise duty or countervailing duty of
Rs.600 on all colour television tubes. Under MODVAT, this input duty
would be fully rebated to duty-paying manufacturers with no additional
duty burden on the consumer. It will, however, help to check unlicensed
production.
(ii) The excise duty on colour television sets exceeding 36 cms. size is
presently Rs.1,500 irrespective of the value of the set. I propose to increase
the duty on costlier sets to Rs.1,750 per set. This will apply to sets
cleared at assessable value higher than Rs.5,000 which corresponds to a
retail price of about Rs.7,500. The excise duty for sets cleared at assessable
value of Rs.5,000 or below will remain at Rs.1,500. The costlier sets can
bear the extra duty.
117. These proposals relating to the electronics industry will involve a net
loss of revenue of Rs.19.30 crores. There will be a revenue gain of Rs.40 crores in
excise duty and a loss of Rs.59.30 crores in customs duty.
118. Important developments have taken place in the automobile industry in
the past few years. New technology has been introduced, production has increased
and indigenisation is taking place. Government have been reviewing these and other
developments and will be announcing a comprehensive policy. For the present, I
have the following tax proposals for automobiles:
(i) At present, a concessional rate of customs duty of 50% is allowed for
imported sub-components required for the manufacture of components
for fuel-efficient trucks, cars, and two-wheelers. I propose to enlarge the
list of components eligible for concessional import of sub-components.
This will encourage indigenisation.
18
 (ii) Excise duty on fuel-efficient motor vehicles with engine capacity not
exceeding 1000 c.c. is proposed to be increased from 20% to 25%. This
sector can bear the additional duty and it will still benefit from a lower
rate than the rest of the industry.
(iii) For handicapped individuals, I propose to provide for total exemption
from customs duty in respect of automatic transmission and other special
equipment to be fitted into fuel-efficient cars of engine capacity not
exceeding 1000 c.c.
(iv) The rate of duty on import of spares for meeting the after-sales or warranty
of fuel-efficient motor vehicles is being increased from 50% to 75%.
(v) Excise duty on tractors will now be fixed on engine capacity instead of
Power-Take-off-Horse-Power . This is an anti-avoidance measure with
no revenue implication.
119. Plastics are widely used by the common man. They also have a tremendous
potential for use in farms and factories. Our plastic prices are high. Government
propose to initiate measures to reduce costs in this important area.
120. I propose to reduce the basic customs duty on PVC resin (general-purpose
suspension-grade) from Rs.10,500 per metric tonne to Rs.7,500 per metric tonne.
These resins are used in the manufacture of cheap footwear, pipes for agricultural
application and as insulation for wires and cables.
121. I also propose to reduce the basic customs duty on Low- Density -
Polyethylene (LDPE) from 100% to 75%. LDPE is used as a base for production of
a wide range of packaging materials. LDPE film has a big potential use in the lining
of canals and farms and field-channels.
122. The excise duty on products of regenerated cellulose, which includes the
cheap packaging material-cellophane, is being reduced from 40% to 20%. Excise
duty is being similarly reduced on cellulose acetate moulding granules which is used
for spectacle-frames, umbrella handles, tooth-brushes and on sodium carboxy-methyl
cellulose which is used in oil-drilling, textiles processing and detergents.
123. Excise duty on certain varieties of industrial plastics i.e., acrylic and vinyl
resin emulsions is being reduced from 40% to 20%.
124. Over the past year, we have taken a number of steps to strengthen our
export performance through fiscal and other means. I propose to give the following
additional incentives.
(a) For the gem and jewellery industry, customs duty on 46 additional items
of tools, machinery, etc. is being reduced to 35%.
19
 (b) For the marine products industry , 3 additional items will be allowed
concessional import duty of 40% (basic and auxiliary).
(c) For the leather industry -
(i) 31 additional items of machinery required for leather industry will
be allowed concessional duty of 35%.
(ii) polyurethane film/foil used for improving finished leather will have
lower countervailing duty of 40%.
(iii) polyurethane leather required for the manufacture of football for
exports will be exempted from duty.
(d) The import duty on tyre moulds required for export production is being
reduced to 25%.
(e) Export duty on mica products is being abolished except for mica waste
and scrap.
(f) Import duty on flax and ramie fibres is being reduced from 80% to 40%.
125. I also propose to make some adjustments which will further benefit the
common man:-
(1) In August 1985, Government introduced a scheme of fiscal relief for the
manufacture of inexpensive blended fabrics -Sulabh fabrics. Under this
scheme, NTC mills are supplied raw material free of excise duty for the
manufacture of suitings of value upto Rs.45 per metre and shirting of
value upto Rs.20 per metre. This scheme has made a good start. It is now
proposed to have a similar scheme for manufacture of Sulabh sarees.
This will make available good-quality sarees at reasonable prices.
(2) At present, footwear of Rs. 45 per pair is exempt from excise duty. I
propose to raise the limit to Rs.60 per pair of assessable value which
corresponds to footwear retailing at about Rs.100 per pair. To off-set the
revenue loss, excise on footwear exceeding this assessable value is being
increased to 15% for leather footwear and 20% on footwear of synthetic
resins.
(3) Janata soaps of value not exceeding Rs.10,000 per metric tonne bear a
lower rate of excise duty of 5%. I propose to raise the value limit to
Rs.12,000 per metric tonne. This should reduce the cost of cheaper toilet
and laundry soaps. Soaps of value between Rs.12,000 per metric tonne
and Rs.25,000 per metric tonne will continue to pay duty at 15% but
expensive soaps, whose value exceeds Rs.25,000 per metric tonne, will
be charged 25%.
20
 (4) Complete exemption from excise duty is available in respect of shoddy
wollen fabrics of assessable value not exceeding Rs.40 per sq. mtr. I
propose to raise this limit to Rs.60 per sq. mtr. Shoddy blankets are
already fully exempt from excise duty.
(5) Excise duty on fluorescent tubes is being reduced to the specific rate of
Rs. 2 per tube. The other fittings and parts of such tubes will also pay
reduced excise duty at the rate of 10%.
(6) I also propose to exempt, from excise duty, bio-gas appliances such as
stoves, hot plates and lights. This would encourage greater use of bio-
gas.
(7) Specified life-saving equipment is presently fully exempt from customs
duty but import of spares needed for such equipment attracts duty. This
is an unnecessary burden on our hospitals and clinics. I propose full
exemption also for spares and accessories of such life-saving equipments.
(8) Items like note-books, letter-pads, blotting pads, registers, account books,
file covers are being exempted from excise duty altogether.
126. I have two proposals for cotton textiles:-
(i) I propose to liberalise the Small-Scale Scheme for hand-processed fabrics
by increasing the full exemption limit from 36 lakh sq. mtrs. to 50 lakh
sq. mtrs. in case of hand-processed cotton fabrics.
(ii) The excise duty structure on cotton fabrics in the power- processing sector
is being rationalised. Specific rates of excise duty are being provided in
respect of fabrics of value upto Rs.25 per sq. mtr. This will involve a
revenue loss of Rs. 15 crores.
127. I propose to remove excise duty on wool tops altogether. However, I
propose to increase the customs duty on raw wool, woollen rags and wool waste from
20% to 30% and reduce the customs duty on synthetic rags from 80% to 30%. Excise
duty on polyester-wool-blended yarn is also proposed to be reduced from Rs.30 per
kg. to Rs. 15 per kg. This will benefit cheaper varieties of woollen textiles.
128. The present rates of duty on viscose staple fibre and viscose filament yarn
have not been revised for a number of years. As a revenue measure, I propose to
increase the excise duty on viscose staple fibre from Rs. 5 per kg. to Rs. 7 per kg.
Similarly, excise duty on viscose filament yarn is also being increased by about 12.5%
of the existing rates. These measures together will give us an additional revenue of
Rs. 29 crores.
129. As the House is aware, there is a scheme which has replaced sales-tax on
sugar, tobacco and textiles by an Additional Excise Duty (AED). The proceeds of
21
AED go entirely to the State Governments. The AED is required to be raised to reach
the agreed level of tax incidence. The rate of duty on costlier fabrics of assessable
value exceeding Rs.100 per sq. mtr. is being increased to 20%. The total revenue gain
of AED will be Rs. 40 crores and will be passed on wholly to State Governments.
130. I now propose to deal with some other industries which require relief:Ð
(1) As a result of recent policies, cement production has grown rapidly
benefiting the consumer and converting a sellers market into a buyers
market. The newer units in the industry need some support in view of
their high capital costs. I, therefore, propose a rebate of excise duty at the
rate of Rs.50 per metric tonne in respect of portland cement manufactured
by units commencing production of such cement on or after 1.4.1986.
This rebate will be available for a period of three years from 1.3.1987.
The levy quota in respect of such units is also being reduced from the
existing 30% to 15%. The excise concession will be available only to
those units whose aggregate production is not less than 30% of the licensed
capacity.
(2) I propose to allow imports of specified machinery for improvement in
productivity and quality of solvent-extracted oils and oilmeals at concessional
duty rate of 55%. Last year, we introduced a system of rebate in excise
duties for vanaspati and soap linked to larger use of minor oils. This has
had the desired effect and production of rice-bran oil as well as its use in
vanaspati and soap have increased considerably. The rebate scheme is being
continued this year. There are some procedural changes and the ad valorem
duty on vanaspati is being changed to a specific duty.
(3) Better food-packaging and food-processing can contribute greatly to raise
the income of our farmers. I have already made some proposals in plastics
which will help. I further propose to reduce the import duty on specified
items of machinery and aseptic packaging from 101% to 50%.
(4) I propose to exempt 36 more drug intermediates used either exclusively
or predominantly in the manufacture of drugs from additional duty of
customs. In addtion, I propose to lower the customs duty to 70% on two
specified drug intermediates required for the manufacture of pyrazinamide,
an anti-TB drug.
(5) Customs duty on specified raw materials for refractories is being reduced.
(6) It is proposed to reduce excise duty on unwrought aluminium of CG-
grade from 13% to 11%.
(7) I propose to reduce excise duty on feature films, including dubbed feature
films by about 10% of the existing duty leviable.
22
 (8) Denatured-ethyl-alcohol of specified strength, when imported for use
exclusively for industrial purposes, is being exempted from customs duty
in excess of 60% ad valorem.
(9) It is proposed to merge the two existing SSI schemes for the refrigeration
and air-conditioning appliances and machinery industry into one and to
liberalise it. Full exemption from excise duty will now be available for
clearance upto Rs. 5 lakhs. Thereafter, 50% of the excise duty leviable
will be applicable for clearance between Rs. 5 lakhs and Rs. 15 lakhs.
Subsequently, the unit will pay the normal duty but eligibility limit for
retaining exemption and concessions for the unit will be Rs. 40 lakhs.
(10) I propose to extend the concessional rate of customs duty of 20% in
respect of HBI (Hot Briquetted Iron)/ sponge iron and melting scrap of
steel available to electric arc furnace units to induction furnace units also.
(11) Customs duty on fluorspar (natural calcium fluoride) used for manufacture
of aluminium fluoride is being reduced from 110% to 75%.
(12) I also propose to reduce customs duty to 25% for plant and equipment
needed for manufacture of family-planning apparatus and appliances and
also of equipment using non-conventional energy sources. The same low-
duty rate is being applied for certain specified sophisticated fire-fighting
equipment for fire-fighting services administered by Central/State/U.T.
Governments and local bodies.
131. In looking for more revenue, I have to fall back on the ever dependable
and reliable friend of Finance Ministers and the certified enemy of Health Ministers.
Lately, I am told, the friendly relationship has been marred by disputes and litigation.
I now propose to restore amity between the two by moving over to a new and more
rational system of levying excise duties.
132. The existing scheme of excise duty on cigarettes is based on the printed
retail price. I propose to move over to an entirely new scheme of specific excise duty
based on the length of the cigarette. This is the system prevalent in many countries.
It ensures unambiguous determination of the excise duty, avoiding all problems of
determining either assessable value or sale value.
133. It is proposed that for non-filter cigarettes of size upto 70mm, the excise
duty would be Rs.150 per 1000 cigarettes. In case of filter cigarettes, the excise duty
will be in four slabs namely, upto 70 mm, over 70 upto 75 mm, over 75 upto 85mm,
over 85 upto 100mm. The rates of duty per 1000 filter cigarettes in these slabs will
be Rs.200, Rs.300, Rs.400 and Rs.600, respectively. The tariff rate for cigarettes is
Rs.700 and, therefore, non-filter cigarettes beyond 70 mm length and filter cigarettes
beyond 100 mm length will pay the tariff rate.
23
 134. This scheme will be a major simplification and rationalisation measure.
Incidentally, it will also yield additional revenue to Government of Rs.200 crores!
135. I will now mention some other measures largely of rationalisation:Ð
(1) Denudation of our forests is causing serious damage to our environment.
The tax structure must also make a contribution towards preservation of
our forest wealth. With this objective in view, we have rationalised the
duty structure on wood products. I propose to levy a uniform rate of
excise duty of 20% on wood products based on waste wood such as
particle-board, insulation and hard- boards and fibre-boards. A higher
rate of 30% will be levied on all plywoods made from prime timber. I
invite suggestions from Members and other conservationists and I am
prepared to take further measures which would implement this policy
objective.
(2) Excise duty on snuff and chewing tobacco or products containing chewing
tobacco is being imposed at the rate of 25% .
(3) A large number of exemption notifications in customs have the effect of
lowering the rate of duty below 25% for many items. In order to prevent
invoicing malpractices, rates of duty should not be below 25% except in
very special circumstances. Accordingly, duty rates are being raised to
25% for 7 items. In a few other cases, the duty rates have been reviewed
and increased.
(4) The concessional rate of 25% (basic) in respect of soda ash will continue
until 31st March, 1988.
(5) The 70% concessional duty on 13 specified parts of mechanical and quartz
analogue wrist watches will continue for another year with certain
modifications. The rate of duty is being enhanced to 100% for three
specified parts. The concessional rate in respect of certain other parts of
wrist watches is being withdrawn altogether.
(6) The excise duty on aerated soft drink is being increased by 20 paise per
bottle and in the case of soda, by 15 paise per bottle. Soda and soft drinks
in packagings other than bottles will have a duty of 60% and 75%,
respectively. MODVAT benefits will now be available to these items.
Hence, the effective incidence will be considerably lower.
(7) Processed foods of various types are charged 15% excise duty. The list of
such processed and relatively expensive packaged foods is being extended
to noodles, spaghetti, macaroni, vermicelli, flakes of cereals, ready-to-
cook food- mixes, etc. put up for sale in unit containers.
24
 (8) Basic customs duty on unwrought aluminium is proposed to be raised
from 20% ad valorem to 35% plus the normal additional duty. This is
necessitated by the upward revision of domestic aluminium prices to equate
the landed cost of imported metal with the statutory price per tonne.
(9) I propose to raise the excise duty on steel ingots made by mini-steel plants
from Rs.315 per tonne to Rs.365 per tonne so as to equate the duty with
steel ingots produced by the integrated steel plants. Even at the revised
rate, the ad valorem incidence of excise duty will be lower than on the
steel produced by integrated plants because of substantial MODVAT credit
and higher prices.
136. I am also taking this opportunity to bring the surplus of the Oil Pool
Account into the tax-net. This will have no effect on consumer prices. This surplus
presently accrues to Government as non-tax receipts. I now propose to raise the
customs duty on imported crude petroleum by Rs.500 per tonne. I also propose to
increase the ceiling limits upto which excise duty by way of cess for the development
of oil industry may be levied on crude oil and natural gas produced in India. The
limits are proposed to be raised from Rs.300 per tonne to Rs.1000 per tonne on crude
oil and from Rs.50 to Rs.300 per thousand cubic metres on natural gas. The effective
rate of cess on crude oil is proposed to be raised from 1st March, 1987 from Rs.300
to Rs.600 per tonne. The proposals are expected to yield Rs.800 crores by way of
customs duty and Rs.900 crores by way of cess with an equivalent reduction in non-
tax receipts. These increases will be absorbed fully by the Pool Account and will not
affect prices paid by the consumer in any way.
137. Apart from the above proposals, I have proposed certain amendments in
the Finance Bill seeking to effect changes in the excise and customs tariffs. These
amendments are merely enabling provisions and have no revenue significance. Besides,
there are several proposals for amendments in existing notifications, excise rules which
have merely procedural significance. In order to save the time of the House, I do not
propose to recount them. Provision in the Finance Bill is also being made for
continuation of the levy of auxiliary duty of customs and Special Excise duty.
138. Copies of notifications giving effect to the changes in customs and excise
duties effective from 1st March, 1987, will be laid on the table of the House in due
course.
139. My proposals in respect of Customs and Central Excise duties outlined
above are likely to yield additional revenue of Rs.531.73 crores from Customs duties
and Rs.431.80 crores from Excise duties. The concessions and reliefs aggregate
Rs.464.81 crores on the Customs side and Rs.130.00 crores on the Excise side. The
net additional revenue from Customs duties thus would be Rs.66.92 crores and that
from Excise duties, Rs.301.80 crores. In Excise duties, the Centre’s share would be
Rs.109.48 crores and that of States, Rs.192.32 crores. Out of the total net additional
25
yield of Rs.368.72 crores, Centre’s share would be Rs.176.40 crores and that of the
States, Rs.192.32 crores.
140. I had earlier mentioned that the Budget deficit at the existing rates of
taxes would be Rs.6,010 crores. The proposed tax measures, taken together with
reliefs, are estimated to yield net additional revenue of Rs.322 crores to the Centre.
This will leave an uncovered deficit of Rs.5,688 crores. This is significantly lower
than the deficit for the current year. As mentioned earlier, I have decided that this
shall not be exceeded. I have set in motion measures to implement this decision.
141. Mr. Speaker, Sir, I am conscious of the enormous challenges that confront
our economy. Some are inherent in the process of planned development in a democracy.
But some are in the nature of a price that we have to pay for pursuing an independent
foreign policy. The people of India have asserted their independence and willingly
accepted these burdens. Their heroic exertions, their sacrifices, and their unshakable
confidence in their capacity to build the India of their dreams are a source of strength,
inspiration and direction to me. Let us move forward with determination.
142. I commend the Budget to the House.
[28th February, 1987]

26
 SPEECH OF SHRI VISHWANATH PRATAP SINGH MINISTER OF
FINANCE INTRODUCING THE BUDGET FOR THE YEAR 1986-87

Sir,
I rise to present the Budget for the year 1986-87.
2. The Budget is a powerful tool for achieving our socio-economic goals as
laid out in the Plan. Our Prime Minister, Shri Rajiv Gandhi, reminded us not so long
ago:
“Development must be accompanied by equity and social justice - by
removal of social barriers that oppress the weak. This is the essence of
our concept of socialism.
These objectives have guided the formulation of this Budget.
3. The economic developments in the current year have been described in
detail in the Economic Survey, which was placed in the House earlier this week.
Therefore, I will confine my remarks to a few key features of our economic performance.
4. Growth in GNP in 1985-86 is expected to be between 4.5 and 5 per cent,
which is close to the target envisaged in the Seventh Five Year Plan. This is a distinct
improvement over the 3.5 per cent growth estimated for 1984-85. In contrast to the
disappointing agricultural performance in 1984-85, when net output is estimated to
have declined by 1 per cent, growth this year is anticipated to be about 3 per cent.
Food grains production had fallen to 146 million tonnes in 1984-85. Despite drought
in several parts of the country, we expect food output to be about 150 million tonnes
in the current year.
5. After a slow start, industrial production has picked up and the rate of
growth in October and November, 1985 exceeded 8 per cent. For the financial year as
a whole it is expected that the growth rate will be close to 7 per cent. The acceleration
in growth of industrial output largely reflects higher production in the manufacturing
sector, which had shown low rates of growth in the previous three years. It is heartening
that the production response to changes in industrial policy has been positive.
6. An important priority of the Government is to improve the functioning of
the infrastructure sectors. I am glad to inform the House that in the first ten months,
thermal power generation registered an increase of more than 15 per cent over the
corresponding period of 1984. Railway freight has also recorded a commendable
increase of 9 per cent in the first eight months of this financial year. This is double the
1
annual average rate of increase during the Sixth Plan. Despatches of coal increased by
10 per cent in the first eight months.
7. The increase in the Wholesale Price Index in the current year upto 8th
February, 1986, was 3.4 per cent as against 5.4 per cent last year. Among items of
particular interest to the consumer, the largest increase in wholesale prices has taken
place in wheat, pulses, fruits and vegetables, eggs, fish, meat, sugar and gur. On the
other hand, prices of rice, condiments and spices, tea, coffee and edible oils have
remained stable or have actually declined.
8. The House will recall that the last Budget ushered in major reforms in our
system of direct taxes. At that time, many a prophets of doom had prophesied that
revenues will fall and buoyancy of the tax system, such as it was, will be further
eroded. Exactly the opposite has happened. Collections from major taxes have increased
by 22 per cent over the previous year, which is the highest increase in a decade.
Collections have also exceeded Budget Estimates by a large margin. What is even
more pertinent is the 36 per cent increase (over Budget Estimates) in personal income
taxes. In the current year, we have succeeded in reversing the declining trend in the
ratio of direct taxes to GNP.
9. This is a testimony to the soundness of our strategy of increasing revenue
yields through a combination of reasonable rates, simpler procedures and strong
enforcement of tax laws. We have raised more from the rich by way of income-tax,
and not less. The proof of fiscal policy is, not in empty theorising, but in the revenue
that it generates.
10. The Government has launched an intensive drive against smugglers, black
marketeers and tax evaders. There cannot, and will not, be a compromise on this
score. Those who abuse the nation’s trust must be dealt with firmly and with full force
of the law. Considerable success has already been achieved in curbing the growth of
black money, and Government will spare no effort to root out this evil.
11. However, I do not propose to dwell only on the strong points of our
economic performance. I would like to take this opportunity to highlight some of the
policy issues and to seek the advice and support of this august House in coming to
grips with them. Let me, therefore, share with you a short list of key problem areas on
which we, in the Government and the Parliament, must take urgent action, both through
this budget and by other means.
12. The budget is now under severe pressure to meet the growing burden of
expenditure on account of interest payments, defence, subsidies and assistance to
States. An important issue before us is to find sufficient resources for financing the
public sector Plan. This is not a partisan issue or the problem of a particular Government
in power and I believe that a frank debate is essential for the long term economic
health of our nation. In a nutshell, the core of the problem is simply that internal
2
generation in public sector enterprises is not measuring up to the task of financing a
Plan of the size that is essential for our development.
13. The severity of the problem can be illustrated by the experience of the
current year. The Seventh Plan visualises that 53 per cent of the Central Plan will be
financed through resources of public enterprises, and 47 per cent will be financed
through the budget. In the first year of the Plan, in view of the paucity of internal
resources, the budget had to finance 66 per cent of the Central Plan, and not 47 per
cent. We have been successful in increasing tax revenues sharply, and beyond Plan
targets. But higher revenues have been more than offset by increase in food and fertiliser
subsidies and assistance to States. The higher budgetary support to the Plan, therefore,
had to come from additional domestic borrowings and higher level of deficit financing.
14. Collectively, we must address ourselves to the basic issue of raising
resources for the Plan without fuelling the fires of inflation. The Plan is not something
abstract. It is more schools, more roads, more irrigation, more jobs, in a word, more
development. It embodies the hopes and aspirations of our people for a better future.
We cannot slacken our efforts to implement it fully.
15. Public sector has a key role in bringing about the transformation of our
economic structure. We must work hard to strengthen it. A number of public sector units
in this country are functioning very efficiently and producing surpluses for reinvestment.
These units provide irrefutable evidence that the public sector can perform as well as the
best, given the right set of circumstances. Unfortunately, there are also a number of
public enterprises whose losses have become a drain on the resources of this nation,
which could have otherwise been used for the greater benefit of the common man.
16. The Government for its part will be taking steps to improve the working
environment of the public sector enterprises, and improve their profitability. But beyond
that, we must involve workers and the management in the task of revitalising the
public sector. This, if any thing, is the need of the hour.
17. We also have to find a way of reducing the non-Plan expenditure, however
painful it may be. Subsidies serve an important social purpose, and constitute a
legitimate charge on society’s resources. However, the question that we must ask
ourselves is: how fast and how far they can be allowed to grow without cutting into
resources for investment in our future. Food and fertilizer subsidies have now reached
Rs.3,700 crores and have increased by over 40 per cent per annum in the last three
years. Even with buoyant tax revenues, this order of increase is simply not sustainable.
At present rates of growth, these subsidies would have reached Rs.14,000 crores by
the end of the Seventh Plan. At this rate, total subsidies would exceed Rs.41,000
crores for the Plan period. This is equal to the entire Central Plan for the first two
years. To put it in another way, this amount would be sufficient to provide one deep
tube-well and one primary school building in each village of the country. The issue is
what balance to strike.
3
 18. The Government is initiating a process of thorough review of our
expenditure policies and procedures. We have to cut every rupee of wasteful
expenditure, get more out of every rupee of essential expenditure, and improve
efficiency all round. A full debate on what we can and must do to reduce expenditure
is necessary and I would like to invite the suggestions of the Hon’ble Members on
these issues.
19. There has been a healthy debate in the country regarding the impact of
administered prices on the inflationary situation. When all other prices are changing,
some changes in administered prices are necessary and inevitable. But the Government
accepts the view that as far as possible there is need to stabilise the prices of critical
commodities. In order to clarify the issues involved, and to initiate an open debate on
the appropriate approach, the Government will present a policy paper on administered
prices to Parliament.
20. The balance of payments is another area of concern. As I had pointed out
in my Budget speech last year, some of the factors that have worked in our favour in
the 6th Plan will not operate with the same vigour in the 7th Plan. As anticipated,
growth of oil production, which had shown an increase of 18 million tonnes in the 6th
Plan, has slowed down. The world environment for trade and concessional assistance
continues to remain unfavourable. Against this background, it is essential to strengthen,
further the measures to conserve scarce foreign exchange. In particular, we must pursue
a concerted programme for energy conservation, and develop indigenous sources of
energy. In the current year alone we are likely to pay nearly Rs.1,100 crores more for
oil imports. The net foreign exchange outlay on this account may exceed Rs.4,600
crores as against about Rs.3,500 crores in the previous year. Can we afford this?
21. In order to overcome domestic shortages, we also had to import large
quantities of sugar and edible oils. Policy initiatives have already been taken to
encourage higher domestic production of sugar and edible oils. These have begun to
yield results. The potential for further expansion of output of oilseeds, particularly
minor oilseeds, is immense. Later in my speech, I propose to announce a package of
incentives, which will provide support to domestic cultivators of oilseeds. Our farmers
have responded magnificently to the task of increasing yields and absorbing new
technology. As a result of their effort, we are now self-sufficient in food grains. As
Indiraji so rightly observed:
“In a country where half the national income comes from farming,
agricultural self-reliance is the basis of all self-reliance’’.
22. Export growth is essential to pay for our vital imports without getting into
4 debt trap. The international environment for our exports, however, continues to be
unfavourable with the intensification of protectionist tendencies and a low rate of
growth of the world economy. This makes it all the more necessary that greater impetus
4
is given to industries which have made important contribution to our export effort.
Several step’s were taken in the last budget for export promotion. I shall be carrying
this process further in the current year’s budget. Separately, the Reserve Bank of India
is announcing further liberalisation of pre-shipment credit facilities for exports.
23. The Government will keep external borrowings at prudent levels consistent
with our debt-servicing capacity. Our record in this respect has been enviable. And we
intend to keep it that way.
24. Over the past year, the Government has taken wide ranging steps to
modernise the economy, accelerate industrial growth, encourage more economic scales
of production, upgrade technology and promote rehabilitation of enterprises facing
temporary difficulties. Although the full effect of these recent initiatives will take
time, as I said earlier, these have already had a favourable impact on manufacturing
output. However, overall industrial growth still remains below our full potential. Aside
from further measures to promote overall growth in industrial output and employment,
we have to devote special attention to the domestic capital goods industry. This industry,
has been painstakingly built over decades and makes a valuable contribution to our
self-reliance. It deserves our full support. I shall be making certain proposals in order
to provide further encouragement to the growth of the capital goods industry.
25. Small scale industry has played a vital role in increasing our exports,
generating employment opportunities, and reducing the concentration of economic
power. It has been truly said that “great engines turn on small pivots.” In order to
provide a focal point for coordinating financial assistance to this sector at the apex
level, it is proposed to set up a separate special fund, called the Small Industries
Development Fund in the IDBI. This Fund will also be charged with the responsibility
of providing refinancing assistance for development, expansion and modernisation of
small scale industry. I also propose to announce a new scheme for excise exemption
for small scale industries which should considerably facilitate their growth.
26. Agriculture is at the centre of our development strategy. The quality of
agricultural performance is the single most important factor in reducing the incidence
of poverty in rural areas. Through sustained and prolonged efforts we have become a
surplus producer of wheat. But, as our heavy imports of sugar and edible oils testify,
production of some important crops remains inadequate.
27. Correcting this imbalance in cropping pattern will ease the pressure on
our balance of payments and lead to better use of our agricultural resources. To ensure
that our approach is not ad hoc, we must work towards evolving a longer term policy,
which takes full account of regional differences in yields of different crops. In particular,
the reduction in uncertainty and instability in agricultural prices will provide more
assured incomes for farmers, and thus encourage production response in desired
directions. With a view to providing protection to farmers, last year, a comprehensive
crop insurance scheme was introduced. This year, such a scheme will also be extended
5
to fruit cultivation. As a further step to reduce uncertainty, I am glad to inform the
House that my colleague, the Hon’ble Minister for Agriculture, has already initiated
work on the formulation of a longer term price policy for important crops in consultation
with agricultural experts and scientists.
28. Broad-based agricultural development provides the most effective way of
tackling our central problem of poverty. But we must also recognise that the fruits of
development do not always reach the poorest sections of our society, especially in
regions where agricultural development is lagging. For them the best hope for higher
incomes and better living conditions lies with the major anti-poverty programmes of
Integrated Rural Development Programme, National Rural Employment Programme
and Rural Landless Employment Guarantee Programmes. These programmes are at
the forefront of our assault on poverty and for many millions they represent the
difference between the despair of destitution and the hope of gainful employment. In
the next year’s Budget, I shall be proposing an increase of nearly 65 per cent in the
allocation for these programmes. The programme for housing for Scheduled Castes
and Scheduled Tribes, announced by me last year is also being strengthened.
29. Many of the programmes for the welfare of the poor and the needy are the
gifts of our late Prime Minister Smt. Indira Gandhi to the nation. It will be a fitting
tribute to her memory to name the new Housing Scheme for Scheduled Castes and
Scheduled Tribes as INDIRA AWAAS YOJANA”.
30. It is only proper that the banking system, which is the repository of peoples’
savings, should use these savings to further our national objectives, particularly in
respect of poverty alleviation and rural development. I am glad to inform the House
that in the year 1985, the advances of public sector banks to the priority sector reached
43.4 per cent as against the target of 40 per cent. Under the Integrated Rural
Development Programme, banks have advanced loans of Rs.3,100 crores to 16.5 million
persons below the poverty line during the Sixth Plan. In the Seventh Plan, the target
Of the number of beneficiaries is 20 million. Of them, six million will belong to
Scheduled Castes and Scheduled Tribes.
31. It is also necessary to use our social banking and insurance infrastructure
for tackling the problem of urban poverty. Rickshaw-pullers, cobblers, washermen,
porters, barbers, hawkers, sweepers and cart-pullers are among the particularly
disadvantaged. The Government proposes to introduce a new scheme which will provide
loans through the banking system with a subsidy component, so that the repayment
burden on beneficiaries is effectively reduced. The scheme will provide for purchase
of equipment and loans for working capital for the self-employed. such as, rickshaw-
pullers, cobblers, washermen, barbers, hawkers and cart-pullers. Details of this scheme
are being worked out in consultation with the Reserve Bank of India, and will be
announced separately.
6
 32. I also propose to introduce a new Scheme for accident insurance for the
benefit of Municipal sweepers and Railway porters. This scheme, the details of which
will be announced separately by the Life Insurance Corporation, will provide Group
Insurance through the workers’ unions. The Scheme will provide life insurance cover
of Rs.5,000 with a double accident benefit to the members of a union, provided 75 per
cent of the members agree to join the Scheme.
33. In the last Budget, I had introduced a Personal Accident Insurance Social
Security Scheme for the poor families in 100 districts of the country. As the Scheme
has been widely welcomed, I propose to extend it now to 200 districts. The Scheme
will cover the risk of death by accident in respect of earning members of poor families
in rural and urban areas comprising landless labourers, small and marginal farmers,
traditional craftsmen, small traders and others. The entire cost of this scheme is borne
by the Central Government.
34. The true asset of our country is its labour. It was in recognition of this that
last year, I had announced a series of measures for the benefit of industrial and other
workers. These included measures to give workers’ dues the same priority as secured
creditors in the event of closure of companies, the increase in the limit on the salary
or wage on which bonus is payable to employees from Rs.750 per month to Rs.1,600
per month, the introduction of a stock option scheme and increase in the monetary
ceiling on the exempt amount of retrenchment compensation from Rs.20,000 to
Rs.50,000. These proposals were implemented during the year. In addition, the eligibility
limit for bonus payments which was Rs.1,600 earlier was raised to Rs.2,500. We have
also increased the industrial D.A. for public sector employees from Rs.1.30 to Rs.1.65
per point increase in the Consumer Price Index.
35. It is necessary to improve the return that workers and employees earn on
their hard earned savings. I, therefore, propose to increase the interest rate on
contributions to the Provident Fund. The rate of interest on General Provident Fund
for Government employees is being raised from 10.5 per cent to 12 per cent. To
benefit other workers covered by the Employees Provident Fund, Coal Mines Provident
Fund Act and the like, interest on Provident Fund accretions invested in Special Deposits
with Government is being raised from 11 per cent to 12 per cent. The pattern of
investment is also being changed to permit the funds to invest upto 85 per cent of the
accretions in Special Deposits with Government as against the existing limit of 30 per
cent. I also propose to increase the interest rate from 10 per cent to 12 per cent on
Public Provident Fund which is intended for the self-employed persons and those not
covered by other provident fund schemes.
36. The expansion of housing is essential for the welfare of workers and their
families. I, therefore, propose to considerably liberalise the depreciation provisions in
respect of outlays on workers’ housing. Government will encourage all industrial units,
large and small, to pay special attention to this area. The Housing and Urban
7
Development Corporation has been playing an important role in building houses for
economically weaker sections, and providing housing loans at low rates of interest.
The Government will expand assistance to the weaker sections for housing.
37. In view of the role of construction activity in creating employment
opportunities, while meeting an important and universal social need, Government will
consider suggestions for giving a boost to this activity. We have to ensure that housing
scarcity is reduced by increasing the supply and availability of houses. Tax concessions,
which merely increase the demand for houses without increasing their supply, are
unlikely to be helpful. ‘Mere are several financial and non-financial factors inhibiting
construction activity, and it is necessary to have a thorough debate on these. The
Government would welcome suggestions from the Hon’ble Members and the public
on this question.
38. Among developing countries, India has the distinction of having one of
die highest rates of savings. This is a tribute to the habits of hard work and thrift of
our people. An important objective of Government policy in the last few years has
been to provide opportunities for investment of these savings in productive channels,
particularly financial assets. These policies have proved remarkably successful, and
today nearly 65 per cent of household savings are being invested in financial assets as
against only 46 per cent in 1979-80. The household sector accounts for over 80 per
cent of our national savings, and the substantial increase in the holding of financial
assets augurs well for the future development of our financial and capital markets.
39. There is considerable interest among small investors in investing in shares
quoted in the Stock Exchanges with a view to getting the benefit of capital appreciation.
Most, however, lack the necessary expertise and are also subject to exploitation by
unscrupulous elements. In order to provide a channel for such investors, it is proposed
to set up a new Mutual Fund in the public sector as a subsidiary of the Unit Trust of
India. Investment in units of the proposed Mutual Fund would qualify for exemption
of capital gains under Section 54-E of the Income Tax Act, subject to certain conditions.
This will be in addition to the already existing facility of investment in the Units of
the Unit Trust of India.
40. An important innovation to tap people’s savings, particularly rural savings,
for public sector projects was announced by me last year. Public sector companies in
Telecommunications and Power sectors have been permitted to raise funds from the
public through a new series of bonds. These bonds provide an attractive rate of interest,
and are quoted in the Stock Exchange. As a further innovation, in the next year, the
Government will introduce another series of Public Sector Bonds with a tax free
return. In addition, other benefits, such as Wealth Tax exemption will also be available.
I am sure that people will respond enthusiastically to this opportunity for contributing
to the country’s development.
8
 41. At this point I would like to refer to a somewhat technical matter, which
nevertheless has an important bearing on the impact of fiscal management on the rest
of the economy. This relates to the measurement of budgetary deficit. The Chakravarty
Committee, which was set up by the Reserve Bank of India to review the working of
the monetary system, has observed that the budgetary deficit, as conventionally defined
in the Budget documents, does not accurately measure the monetary impact of the
Government’s fiscal operations. The Committee has, therefore, recommended that the
budgetary deficit should include changes in the entire RBI credit to the Government,
including changes in RBI’s holding of long dated securities. The Government proposes
to accept, in principle, this recommendation of the Committee. The modalities for
effecting the change in the definition of budgetary deficit will he worked out in
consultation with the Reserve Bank.
42. The Government also proposes to accept the Committee’s recommendation
for setting overall monetary targets, which can be monitored, and which will help
bring about better coordination between fiscal and monetary policies, and make their
overall management more scientific. There are certain technical difficulties in devising
operational rules because of short-run volatility of monetary variables. An exercise to
develop operationally meaningful targets will be undertaken by Government on an
experimental basis in the next year.
43. I shall now turn to the Revised Estimates for 1985-86 and the Budget
Estimates for 1986-87.
44. There were several important developments in regard to Budget Estimates
for Revenue and Expenditure presented by me last year. As I mentioned a little while
ago, tax revenues have exceeded Budget Estimates by a large margin. The Revised
Estimates show an increase of Rs.2476 crores, which is 21 per cent higher than last
years’ tax realisation, and 10 per cent higher than the Budget Estimates for 1985-86.
Direct Taxes will be 15 per cent higher than the Budget Estimates and Income-tax
Collections are expected to be as much as 36 per cent higher. This order of increase
in Direct Tax collections is unprecedented. The Centre’s share of taxes will increase
by 19 per cent over 1984-85 and that of States by 30 per cent. Another heartening
feature of fiscal developments is the sharp increase in Small Savings collections.
These will be 23 per cent higher than the Budget Estimates and 32 per cent more than
the previous year.
45. As regards other receipts, non-tax revenue will be 2 per cent higher and
capital receipts including market borrowings, external assistance and small savings
will show an overall increase of 8 per cent.
46. Taking advantage of buoyancy in tax revenues and satisfactory behaviour
of other economic indicators, including the high level of food stocks, the Government
decided to step up the Central Plan by Rs.1594 crores. The Revised Estimate for the
Central Plan is Rs.20,094 crores as against Budget Estimates of Rs.18,500 crores.
9
Budgetary support for the Central Plan has been stepped up by Rs.1484 crores or by
13 per cent. In the additional allocations, particular care has been taken to provide
adequately for the infrastructure sectors like railways, steel and aluminium on the one
hand and anti-poverty programmes on the other.
47. Several States continued to face problems of resources in the first half of
the current year. A number of steps were taken to help them in overcoming these
problems. I shall refer to them a little later.
48. Coming to non-Plan expenditure, additional provisions amounting to
Rs.440 crores were made for interim relief, liberalised ad hoc bonus, pensionary
benefits, and additional dearness allowance sanctioned to Government employees in
the current year.
49. Defence expenditure is placed at Rs.7862 crores as against Budget Estimate
of Rs.7686 crores. Interest payments are estimated at Rs.7400 crores, which is about
5 per cent higher than the Budged Estimate of Rs.7075 crores.
50. There was, however, substantial increase during the year on account of
food and fertiliser subsidies. The Revised Estimates for these subsidies are Rs.1650
crores and Rs.2050 crores, representing an increase of 50 per cent and 14 per cent
respectively, over the Budget Estimates. Altogether, subsidies will be 24 per cent
higher than the Budget Estimates.
51. The Revised Estimates for total receipts are Rs.46,01 crores as against the
Revised Estimates of expenditure of Rs.50,507 crores, leaving a deficit of Rs.4,490
crores. The Budget deficit is thus expected to be higher than the Budget Estimates.
However, despite this, the rate of growth of money supply in the economy has been
lower than in the previous year. The deficit has been absorbed by the economy without
unduly aggravating the overall liquidity position.
52. In framing next year’s Budget Estimates, my first priority has been to
provide adequately for the Plan. As the House is aware, the Seventh Plan envisages a
total public sector outlay of Rs.1,80,000 crores of which Rs.95,534 crores has been
earmarked for the Central Plan at 1984-85 prices. To finance this order of Central
Plan, as pointed out in the document on Long Term Fiscal Policy, an outlay of about
Rs.18,000 crores at 1984-85 prices was required for 1986-87. At present prices, this is
roughly equivalent to Rs.20,000 crores.
53. The annual Plan discussions conducted by the Planning Commission with
the Ministries, however, revealed that a much higher order of Plan outlay is required
for 1986-87, in order to maintain the momentum of investment in the core public
sector, and accelerate the implementation of and-poverty programmes. It has, therefore,
been decided to allocate Rs.22,300 crores for next year’s Plan. This constitutes a
massive increase of Rs.3,800 crores or 20.5 per cent over the Budget Estimates for
1985-86. Although this is by no means sufficient to fulfil all our needs, I believe that
10
this order of increase will enable us to meet our urgent requirements. Taking the first
two years together, we would have provided over 40 per cent of the Seventh Plan
outlay in real terms at 1984-85 prices. This is substantially better than in the first two
years of the Sixth Plan.
54. I am also happy to inform the House that the total Plan outlay of States,
for 1986-87 has been fixed at Rs.15,880 crores, representing an increase of 21 per
cent over the current year. For the Union Territories, the Plan outlay has been fixed at
Rs.872 crores compared with current year’s level of Rs.640 crores. It is also a matter
of satisfaction to me that the Centre provided substantial additional resources to States
in the current year which has strengthened the financial position of States.
55. Compared with 1984-85, as I mentioned earlier, the States’ share of Central
taxes has gone up by 30 per cent. This reflects the sharp increase that has taken place
in revenue collections as also the increase in the share of States as a result of the
recommendations of the Finance Commission. I am glad that Centre’s efforts to improve
tax collections have also been of substantial benefit to States. There has been a steep
increase in other forms of transfer of resources as well. The States’ share in small
savings has registered an increase of 50 per cent and the Centre’s Plan assistance to
States has increased by 38 per cent. In addition, the Centre has provided Rs.722 crores
as assistance to States for drought and flood relief. A medium-term loan of Rs.1628
crores was also provided to the States in order to clear their overdrafts with the Reserve
Bank of India. I had made it clear that the Overdraft Regulation Scheme would have
to be strictly adhered to in all circumstances and I am glad that the States have
conformed to it. A problem that has bedevilled the fiscal picture for more than a
decade has thus been solved. I should make it clear that this problem will not be
allowed to recur.
56. Taken together, there has been a massive increase of as much as Rs.7542
crores or 51 per cent in Centre’s transfers to States and Union Territories inclusive of
assistance for Central and Centrally sponsored schemes in the current year as compared
with 1984-85. In 1986-87 the budget estimates for total transfers to States on various
counts is estimated at Rs.20708 crores which is 15.4 per cent more than the budget
estimates for 1985-86.
57. Let me now deal with some of the important sectors in which the Annual
Plan for 1986-87 will provide a major thrust. First and foremost, we propose to provide
a quantum jump in the allocations for poverty alleviation programmes. The outlay for
Department of Rural Development for 1986-87 has been fixed at Rs.1851 crores
compared to an approved outlay of Rs.1239 crores for 1985-86 - an increase of nearly
50 per cent. Hon’ble Members will recall that during the current year, Government
had announced schemes for construction of low cost rural houses for Scheduled Castes/
Scheduled Tribes and bonded labour, distribution of food grains at a concessional
price to the people in the Integrated Tribal Development Projects, extended coverage
11
under nutrition programme for young children, pregnant women and nursing mothers
and expansion of the coverage of the Rural Landless Employment Guarantee
Programme and the National Rural Employment Programme by allocation of additional
food grains. It is proposed to continue with these programmes during the next year
also. An offtake of about 2 million tonnes of food grains is expected under these
programmes in 1986-87. These programmes are designed to fulfil a commitment made
by our Prime Minister Shri Rajiv Gandhi.
58. Consistent with this Government’s commitment towards the alleviation of
rural poverty, greater emphasis has been laid on programmes which are of direct
benefit to the weaker sections of the society, especially the Scheduled Castes and
Schedules Tribes. The allocations and targets for some of the anti-poverty programmes
in 1986-87 are:-
(1) National Rural Employment Programme will generate employment of over
300 million man-days in 1986-87 as compared to 253 million man-days in
the current year. The Centre’s outlay for this programme has been stepped
up from Rs.230 crores in 1985-86 to Rs.443 crores next year - an increase
of 93 per cent.
(2) The Rural Landless Employment Guarantee Programme will generate
employment of 264 million man-days next year as compared to 209 million
man-days in the current year. The Central outlay for this Programme for
1986-87 is Rs.633 crores which is 58 per cent higher than the current
year’s budget estimate of Rs.400 crores.
(3) The Centre’s allocation for Integrated Rural Development and related
beneficiary oriented programmes is Rs.428 crores in 1986-87 as against
Rs.283 crores in the budget estimates in the current year - an increase of
51 per cent. In the first nine months of the current year 15.3 lakh families
were assisted under the Integrated Rural Development Programme of which
6.3 lakh families belonged to Scheduled Castes/Scheduled Tribes. In the
Seventh Plan, the Integrated Rural Development Programme is expected
to assist nearly 20 million families.
(4) The outlay for housing schemes for Scheduled Castes/Scheduled Tribes
and bonded labour is being enhanced from Rs.100 crores to Rs.125 crores.
In 1985-86 projects worth Rs.146 crores involving construction of 1.5
lakh houses have been approved. This important programme will receive
a further boost.
59. The rural water supply continues to be part of the Minimum Needs
Programme as well as Revised 20-Point Programme. At the beginning of the Sixth
Plan there were 2.31 lakh problem villages out of which 1.92 lakh were provided with
at least one safe source of potable water during the Sixth Plan period. In the Seventh
12
Plan, priority will be given to provide drinking water to the remaining 39,000 problem
villages. It is expected that these villages will be covered by 1987-88. A provision of
Rs.317 crores has been made for this purpose in 1986-87.
60. Agriculture and allied sectors enjoy a natural priority in all our development
efforts. The total Central outlay for the concerned Departments has been stepped up
from Rs.2207 crores in the current year to Rs.2838 crores in 1986-87 -an increase of
29 per cent. This includes the outlay on the programmes of rural development, details
of which I have just mentioned. As the Hon’ble Members know, the, Central outlay of
Rs.2838 crores will be in addition to the allocations made by the States for these
sectors in their own Plans.
61. The Fertilizer Plants at Hazira and Thal Vaishet have commenced
production in the current year and will augment the production of nitrogenous fertilizers
considerably. Production of fertilizers in 1986-87 is expected to go up to 6.9 million
tonnes, which is an increase of 21 per cent over die current year. The provisions for
Aonla Project of IIFC0 and Vijaipur Project of National Fertilizers Limited - the other
major Gas based fertiliser projects - next year are Rs.205 crores and Rs.180 crores
respectively.
62. A major thrust in the Seventh Plan is development of Human Resources.
This includes education, sports, youth affairs, health, family welfare, women’s welfare,
environment, art culture and broadcasting. I propose to enhance the outlays for
programmes in this sector from the current year’s level of Rs.1,236 crores to Rs.1,733
crores for 1986-87 -an increase of over 40 per cent.
63. Education, the Hon’ble Members will agree, is the main instrument of
change. Accordingly, I propose to increase the outlay on Education from Rs.221 crores
in the current year to Rs.352 crores for 1986-87. This implies an increase of over 59
per cent.
64. In the field of Education mention may be made of two schemes. It has
been decided to set up Model Schools in every district of the country to provide
education of high quality and excellence. I propose to provide Rs.25 crores in 1986-
87 for this scheme. For providing equal opportunities to the students in the remote and
backward areas in the field of higher education, a National Open University has been
set up for which I have provided Rs.7.5 crores for 1986-87.
65. Radio and television are powerful vehicles for spread of information and
education. Successful implementation of new concepts and special schemes like
dissemination of knowledge in remote areas through Open University are also dependent
on the spread of broadcasting. With a view to enlarging the broadcasting infrastructure,
I propose to step up the outlay for the Ministry of Information & Broadcasting in the
current year from Rs.110 crores to Rs.242 crores - an increase of 120 per cent.
13
 66. The New Education Policy’ will be presented by the Minister of Human
Resource Development during this Session of Parliament. I believe, the Policy will
give the highest priority to universalisation of primary education and to spread of
adult literacy in 15-35 age-group within the shortest possible time. Stress is also being
laid in the new policy on consolidation of secondary education and on launching a
large programme of employment-oriented vocational education. Besides, scientific
research and training of technical manpower will receive high priority. The Government
is committed to implement the education policy as approved by Parliament.
67. We have adopted the goal of ‘Wealth for All” by the year 2000 A.D. This
is sought to be achieved mainly by expansion of primary health care programmes,
which as Hon’ble Members know, form part of the State Plans. I propose to provide
Rs.200 crores for programmes of the Department of Health during next year, of which
Rs.123 crores will be on programmes for control of communicable diseases. For Family
Welfare programmes I propose to provide Rs.530 crores for 1986-87.
68. Art forms and cultural heritage foster national integration as well as national
development. I, therefore, propose to increase the outlay of the Department of Arts
and Culture from Rs.19 crores for this year to Rs.59 crores for 1986-87 - an increase
of more than 200 per cent. A new scheme is being launched for setting up zonal
cultural centres to highlight the cultural kinships that exist among the States and
people, as part of the composite Indian culture.
69. The Government is deeply concerned about the problems of pollution. A
major scheme - the Ganga Action Plan - has been launched during the current year for
prevention of pollution of river Ganga. This is an inter-disciplinary programme being
implemented by the Central Ganga Authority. The proposed outlay for this scheme for
1986-87 is Rs.52 crores as compared to the current years level of Rs.10 crores. -The
higher provision will cover a large number of action plan schemes covering sewage
treatment to be implemented during 1986-87.
70. The Government has set up the National Wastelands Development Board
with the objective of bringing wastelands under fuel wood and fodder cultivation. I
propose an outlay of Rs.15 crores for this programme for 198687. This will be in
addition to the provision of Rs.20 crores made for social forestry including rural fuel
wood plantation.
71. A necessary feature of development process is the creation of needed
infrastructure facilities in sectors like Coal, Power, Railways, Petroleum and Surface
Transport which constitute the core of the public sector. In the Seventh Plan, the
outlay on infrastructure accounts for Rs.45,649 crores out of the total Central sector
outlay of Rs.95,534 crores, i.e. nearly 48 per cent. I am proposing an outlay of Rs.10,805
crores for 1986-87 as against Rs.8,751 crores in the current year - an increase of 23
per cent - for Departments of Coal, Power, Petroleum & Natural Gas, Railways and
14
Surface Transport taken together. This accounts for 48 per cent of the total Central
sector Plan outlay for 1986-87.
72. The outlay of the Department of Power is being stepped up from Rs.2,090
crores in the current year to Rs.2,575 crores in 1986-87. During the current year, the
capacity for power generation in the country is expected to be augmented by more
than 4,000 MW against the Seventh Plan target of 22,245 MW. Of the additional
capacity likely to be created in the current year, 865 MW will be from the Central
Sector projects. In 1986-87, the installed capacity is expected to further increase by
about 4,000 MW. Thus, the first two years would account for 36 per cent of the Plan
target.
73. The performance of power stations owned by National Thermal Power
Corporation, a Central public sector undertaking, is a matter of satisfaction. In the
first ten months of the current year, these power stations attained a Plant Load Factor
of 67.9 per cent against the national average of 5 1.3 per cent.
74. A notable achievement in the current year is the attainment of criticality
by Stage H of Kalpakkarn Atomic Power Station of 235 MW on August 12, 1985. The
commissioning of this plant marks the complete indigenisation of the technology for
Natural Uranium Heavy Water Reactor. The year also witnessed the commissioning of
one of the largest research reactors in the world - the 100 MW Dhruva - at the Bliablia
Atomic Research Centre. It is also a matter of great pride for us that with the Fast
Breeder Test Reactor at Kalpakkam attaining criticality, we have joined the select
group of countries which have made a major breakthrough in the Fast Breeder
Technology.
75. An important project approved during the year in the power sector is the
Mejia Thermal Power Station of DVC. The project - located in Bankura District of
West Bengal - envisages creation of 630 MW capacity at an estimated cost of Rs.566
crores. It is proposed to set up three power plants, one each at Kawas (Gujarat), Anta
(Rajasthan) and Auraiya (Uttar Pradesh) based on Natural Gas, which together would
create additional capacity of 1,500 MW. An outlay of Rs.100 crores is proposed for
these three projects during 1986-87.
76. Government have decided to set up a Power Finance Corporation. The
Corporation will augment resources for financing of the power projects, including
renovation and modernisation schemes. A provision of Rs.100 crores has been made
for renovation and modernisation in the Annual Plan for 1986-87, out of which Rs.70
crores will be provided for the proposed Corporation.
77. An allocation of Rs.3,300 crores has been made for the Ministry of
Petroleum & Natural Gas for 1986-87. The production target for crude oil for the next
year has been set at 30.21 million tonnes. A sizeable increase in despatches of natural
gas is also anticipated. In 1986-87, the despatches are expected to be Rs.4,677 million
cubic metres which will be 28 per cent more than in the current year.
15
 78. In the Indian context, Coal continues to be the most important primary
source of energy. Keeping in view the increasing demand for Coal and the long lead
time associated with development of coal mines, I am increasing the outlay for the
Department of Coal from Rs.1,102 crores in the current year to Rs.1,350 crores in
1986-87 - an increase of nearly 22.5 per cent. The target for production of Coal for
1986-87 has been fixed at 166.80 million tonnes which is 12.30 million tonnes higher
than the anticipated production during the current year.
79. Despite impressive growth in the Transport sector, the capacity of the
entire transportation system continues to fall short of demand. There is also an
immediate need for replacement of the overaged and obsolete assets. Keeping this in
view, a total provision of Rs.3,875 crores has been made for the Ministry of Transport
for 1986-87, inclusive of Rs.2,650 crores for the Railways, separately provided in the
Railway Budget Railways’ freight traffic target for the next year has been fixed at 294
million tonnes - an increase of 17 million tonnes over the target for the current year.
The year also witnessed a remarkable improvement in the utilisation of assets and
financial performance by Railways.
80. For 1986-87, I am proposing an outlay of Rs.1,350 crores for the
Department of Steel which includes Rs.700 crores for the Visakhapatnam Steel Plant.
Hon’ble Members will be glad to know that SAIL which had incurred a loss of
Rs.214.61 crores in 1983-84 has turned the corner. In 1984-85 the Company earned a
nominal profit of Rs.4.24 crores. In the current year, the profits are expected to be
over Rs.100 crores.
81. The outlay for Department of Atomic Energy has been raised from Rs.495
crores to Rs.550 crores and for Department of Space from Rs.165 crores to Rs.217
crores.
82. The proposed outlay for the Department of Telecommunications for 1986-
87 is Rs.915 crores. With a view to improving the operational efficiency of the
Telecommunication network, the Government have decided to set up a public sector
corporation to manage and operate the telephone services of the metropolitan cities of
Bombay and Delhi. This Corporation will also raise funds through the issue of bonds.
83. A scheme for providing self-employment to educated unemployed was
announced by the late Prime Minister, Shrimati Indira Gandhi, on August 15, 1983.
For 1986-87 a provision of Rs.103 crores has been made for this scheme compared to
Rs.65 crores in the current year - a step up of 58 per cent. For the Khadi and Village
Industries Commission, I am providing Rs.100 crores for 1986-87. In the Seventh
Plan, employment coverage in the Khadi and Village Industries sector is expected to
increase from 37 lakh persons to 50 lakh persons.
84. Tourism promotes understanding and national integration. Tourism is also
an important source of earning foreign exchange for the country. The Seventh Plan
16
outlay on tourism at Rs.139 crores is 93 per cent higher than the outlay for the Sixth
Plan. For 1986-87 an outlay of Rs.26 crores is proposed. With a view to encouraging
tourism, further steps are being taken for improving the tourist infrastructure.
85. The Hon’ble Members will be glad to know that with the priorities assigned
in the annual Plan 1986-87, implementation of the 20-Point Programme will gain
further momentum. Compared to Rs.4,900 crores in the current year, the outlay for
this programme in the Central Plan for 1986-87 will be Rs.5,998 crores - an increase
of more than thousand crores.
86. Coming to non-Plan expenditure, I have provided Rs.8728 crores for
Defence compared to Rs.7,862 crores in the current year. The House will agree with
me that in view of the pressure on our borders, there cannot be any compromise with
our security.
87. Reflecting the increase in market borrowings and small savings
mobilisation for development, interest payments will also increase to Rs.8,750 crores
against Rs.7,400 crores in the current year. I am also making a provision of Rs.1,750
crores for food subsidy and Rs.1,950 crores for fertilizer subsidy and the total of the
two is the same as in the Revised Estimates for the current year. Other non-Plan
expenditure has been kept to the minimum. This includes a lump sum provision of
Rs.300 crores for additional dearness allowance to Government employees.
88. On the receipts side, I have assumed a 17 per cent growth in tax revenues
over current year’s Budget Estimates. In the estimates for non-tax receipts, I have
taken note of the repayment next year of the instalments of Compulsory Deposit
deferred during the current year as well as those falling due next year.
89. Under capital receipts, only a modest increase of 4 per cent has been
assumed under market borrowings over the current year. Small savings collections,
however, are expected to yield 10 percent more than current year’s Revised Estimates
and 36 per cent higher than the current year’s Budget Estimates.
90. The total receipts next year are estimated at Rs.48,767 crores and the total
expenditure at Rs.52,862 crores leaving a gap of Rs.4,095 crores at the existing levels
of taxation.
91. I shall now turn to my taxation proposals.

PART B
92. In the last year’s Budget I had announced the Government’s intention to
formulate a Long Term Fiscal Policy co-terminus with the Plan. I am glad that the
Government has been able to keep this commitment. The statement of the Government’s
long term fiscal intentions has, I am aware, greatly reduced the speculation and drama
17
that has traditionally surrounded Budgets. I hope Hon’ble Members will agree that the
loss in dramatic content has been more than compensated by the gain in imparting a
stable frame-work, and much greater opportunity for open debate, in relation to
Government’s fiscal policies.
93. A primary thrust of this Budget is to implement the various elements of
the Long Term Fiscal Policy. In particular, I shall be proposing a major overhaul of
our system of excise taxation, which will reduce the cascading effect of multi-point
excise levies and help in reducing costs and prices to consumers. The Budget will
strengthen the development of handlooms, improve the supply of cheaper cloth, and
lower duties on drugs and medicines and certain other articles of interest to consumers.
94. I also propose to liberalise the excise exemptions scheme for small scale
industry, which will encourage growth of this sector and create more employment
opportunities. In order to promote self-reliance and encourage domestic production, I
propose to provide substantial help to domestic production of edible oils and to the
indigenous capital goods industry. Naturally, I shall also be making certain proposals
for raising revenue, the burden of which will fall on the affluent sections of society.
95. I would be brief in setting out my proposals for direct taxes as these have
been discussed in the Long Term Fiscal Policy. We are introducing legislation to give
effect to the following proposals:-
(1) A Funding Scheme is being introduced which will replace the scheme for
Investment Allowance. Assessees will be allowed deduction to the extent
of 20 per cent of the profsf these are deposited with the Industrial
Development Bank of India or utilised for purchase of plant and machinery.
Surcharge on companies which was largely being deposited with Industrial
Development Bank of India, is being abolished from assessment year 1987-
88, along with the introduction of the New Funding Scheme.
(2) Investment Allowance will not be available in respect of plant and
machinery installed after 31.3.1987. The benefit of both investment
allowance and the funding scheme will not be available in the same
assessment year.
(3) I had earlier proposed in the Long Term Fiscal Policy that, as part of the
reform package, surtax on corporate incomes will not be charged from
assessment year 1987-88. In the interest of revenue, I am postponing giving
effect to this measure by one more year.
(4) In regard to Capital Gains taxation, the date of determining the cost of
assets is being advanced from 1.1.64 to 1.4.74, and a uniform rate of
deduction at the rate of 50 per cent is being prescribed for long term
capital gains from buildings and lands and 60 per cent from other assets.
Bonds issued by Industrial Development Bank of India and Bonds issued
18
 by other notified public sector agencies are also being added to the list of
investments qualifying for exemptions from Capital gains. The limit for
initial deduction is being increased from Rs.5,000/- to Rs.10,000/-. The
present period of one year for purchase of a residential house in a case
where the capital gains arise on sale of an old house is being increased to
2 years.
96. As promised in the Long Term Fiscal Policy Statement, I propose to
introduce a system of allowing depreciation in respect of blocks of assets instead of
the present system of depreciation on individual assets. Simultaneously, I propose to
rationalise the rate structure by reducing the number of rates as also by providing for
depreciation at higher rates so as to ensure that more than 80 per cent of the cost of the
plant and machinery is written off in a period of 4 years or less. This will render
replacement easier and help modernisation. Apart from those items which are eligible
for 100 per cent depreciation in the initial year itself, there are at present different
rates for plant and machinery. I propose to have only two rates of depreciation at 33
1/3 per cent and 50 per cent. Plant and machinery used as anti-pollution devices and
those using indigenous know-how, are proposed to be placed in a block carrying the
higher rate of depreciation of 50 per cent. Buildings meant for low-paid employees of
industrial undertakings will be entitled to depreciation at 20 per cent as against the
general rate of 5 per cent for residential buildings and 10 per cent for non-residential
buildings.
97. It has been brought home to me that of late I am not very popular with
housewives. Their support and sympathy, I cannot afford to lose. Therefore, I propose
to raise the standard deduction from 25 per cent to 30 per cent of salary income. The
ceiling will be increased from Rs.6,000 to Rs.10,000. The measure will benefit 3.5
lakh tax payers in the fixed income group. I am giving this benefit on the condition
that it will be duly passed on to the housewives.
98. While the medical needs of some groups of salary earners are taken care
of by the employers, there is no such provision in the case of other salary earners and
of self-employed persons. In order to provide some relief in respect of medical expenses
by such persons, I propose to allow a deduction out of the total income of such
persons, subject to limits, of the amount spent by them on medical treatment or paid
as premium on medical insurance policies taken by them with the General Insurance
Corporation of India.
99. In line with the Long Term Fiscal Policy another major step being taken
is to empower the Government with a pre-emptive right to purchase properties which
are offered for sale in the market at the price agreed to by the transferer. To begin
with, this provision will apply to properties valued at over Rs.10 lakhs located in
metropolitan cities. An honest seller, wherever he may be, will not be hurt by this
measure. For the rest, it is between them and the Income-Tax Department - and God!
19
 100. One of the vexatious problems in Wealth Tax has been the determination
of the market value of assets. In order to eliminate the endless controversy and litigation
arising out of this, we have decided to frame simpler rules for the valuation of assets
such as shares, residential properties, commercial properties, jewellery, etc. and these
will be notified by the end of March, 1986.
101. In the Long Term Fiscal Policy I had announced the intention of the
Government to retain Gift Tax, and review its provisions with a view to rationalising
them. The following amendments are being made in the Gift Tax Act:
(a) The basic exemption limit will be raised from Rs.5,000/- to Rs.20,000/-.
(b) Gift tax will be levied at a flat rate of 30 per cent of the value of the
taxable gifts.
(c) The provision relating to aggregation of gifts.
(d) Certain exemptions like those relating to National Defence Gold Bonds,
1980, gifts to the spouse, gifts of policies of insurance, gifts in the course
of carrying on a business, etc. and gifts to any other person upto a maximum
of Rs.500/- are being withdrawn.
102. There is at present tax deduction at source from out of winnings derived
from races and lotteries. I propose to tax these windfall profits at a flat rate of 40 per
cent of the gross receipts. The exemption from income of a casual and non-recurring
nature will simultaneously be raised from Rs.1,000 to Rs.5,000. Income from any
winnings from crossword puzzles, card games, other games of any sort or from gambling
or betting of any form or nature whatsoever, races including horse races (other than
income earned by owners of race horses by way of stake money) and winnings from
lotteries will not be aggregated with other incomes. That is to say, losses, if any, from
other business will not be allowed to be set off against winnings from races or lotteries.
It has been said that “whoever plays deep must necessarily lose his money or his
character”. In depriving the lucky winner of his money, I hope I would have contributed
to the building of his character.
103. The above measure along with the withdrawal of certain other tax
concessions in respect of inter-corporate dividends, will net additional revenue of
Rs.54 crores.
104. It is proposed that part of the benefit of tax deduction on export profits
should be allowed to be transferred to the supporting manufacturers. This will help
increase our exports.
105. The Long Term Fiscal Policy recognises the need to widen the tax base
and to bring all persons who have income above taxable limit, into the tax net. For this
purpose, it is necessary to carry out surveys. An amendment is being made to authorise
the Income-tax authorities to collect certain information. We are also taking separate
20
steps to strengthen survey, investigation and prosecution machinery of the Income-tax
Department
106. In the Long Term Fiscal Policy, I had indicated the outline of a National
Deposit Scheme (New Series) for public discussion. I am grateful for the comments
and suggestions received from the general public, experts and also many Hon’ble
Members of Parliament. Suggestions have been received for liberalising its provisions
as well as for making these more restrictive. In view of the importance of this measure.
I have decided to refer this proposal to the Committee on Expenditure Tax for more
intensive examination. I am asking them to submit their report on this aspect by May,
1986.
107. The Long Term Fiscal Policy has also proposed the creation of a Venture
Fund to promote indigenous technology, to be administered by the Industrial
Development Bank of India. It was proposed that as a source of funding this scheme,
a small 5 per cent Research and Development levy will be imposed on all payments
made for purchase of technology from abroad, including royalty payments, lump sum
payments and payments for designs and drawings. A separate Bill to give effect to this
levy will be introduced in Parliament.
108. We also propose to carry out the following amendments:-
(a) Investment allowance and depreciation is claimed on the basis of actual
cost. In the past few years a number of companies have been using an
accounting practice of capitalising the entire amount of interest on the
monies borrowed for acquiring of plant and machinery. This artificially
inflates the cost of the assets and the net worth of the company. We are
clarifying that the capitalisation of interest paid or payable will not be
allowed after the asset is first put to use.
(b) The ceiling of investment in plant and machinery for the small scale sector
is being raised from Rs.20 lakhs to Rs.35 lakhs, as mentioned last year
and would be applicable to all cases where the previous year ends after
17th March, 1985. This enhancement will be relevant also for the grant of
investment allowance and for reduction in respect of profits and gains
from newly established small scale industrial undertakings in rural areas.
(c) There is, at present, a great disparity between persons in receipt of house
rent allowance and those provided with rent free accommodation, the
former being worse off in the matter of payment of taxes. Amendments
are being introduced to do away with this discrimination.
(d) At present notional income from self-occupied house is being taken into
account for taxes. It is proposed to exempt such notional income.
21
 (e) I propose to rationalise the tax deductible from the gross amount of incomes
earned by way of royalties and fees for technical services by foreign
collaborators at a uniform rate of 30 per cent.
109. We had initiated a simplification exercise in the last Budget which has
been continued this year. It is proposed to bring out a comprehensive new Direct
Taxes Code by June, 1986.
110. The total effect of these proposals will be a revenue loss of Rs.33 crores
and a revenue gain of Rs.54 crores. The net increase in revenue will, therefore, be
Rs.21 crores.
111. I now come to my proposals relating to Indirect Taxes.
112. An important item in our agenda for 1986-87 is to initiate reform in the
system of indirect taxes. The first step was taken in the Winter Session of the Parliament
when new Tariff Bills for Customs and Excise were introduced based on the harmonized
system of classification. The new structure is scientific and international. In the second
stage, the tariff structure with such amendments of duties, as will be carried out in this
Budget, will replace the old ad hoc structure.
113. In excise taxation a vexatious question which has been often encountered
is the taxation of inputs and the cascading effect of this on the value of the final
product. The Long Term Fiscal Policy had stated that the best solution would be to
extend the present system of proforma credit to all exciseable commodities with the
exception of a few sectors with special problems like petroleum, tobacco and textiles.
This scheme, which has been referred as Modified Value Added Tax (MODVAT)
scheme - I shall stress MODVAT, not MADVAT - allows the manufacturer to obtain
instant and complete reimbursement of the excise duty paid on the components and
raw materials.
114. ‘Me MODVAT scheme provides a transparency which discloses the full
taxation on the product and its introduction is an important measure of cost reduction.
Amount of excise duty payable depends upon the value of the final product and the
rate of duty. Introduction of MODVAT will decrease the cost of the final product
considerably through the availability of instant credit of the duties paid on the inputs
and consequential reduction of interest costs.
115. It would be noticed that the MODVAT scheme avoids the payment of
duties on earlier duties paid. The payment of duty drawback will be swifter as the
element of excise duty will be transparent It will, therefore, benefit both the consumers
and exporters.
116. However, in view of the novelty of the scheme, we have to hasten slowly
and implement the MODVAT scheme in stages. As a first measure, I propose to
introduce MODVAT scheme for all goods covered by 37 specified chapters of the
22
Central Excise Tariff Act, 1985. The Scheme as a result would cover products of
chemical and allied industries, paints and packaging materials, plastics, glass and
glassware, rubber products, base metals and articles of base metals, machinery and
mechanical appliances including electrical equipments, motor vehicles and certain
miscellaneous manufactured products. This would imply that as long as the input and
the final product are covered by the specified 37 chapters and the final product bears
some duty of excise, credit of duty on the inputs covered by these chapters will be
available.
117. The proforma credit given will cover both excise duty and additional duty
of customs also known as countervailing duty. Set off will also be available for
packaging materials, consumables, paints though these are not strictly raw materials.
Items outside these chapters availing proforma credit and benefits of set off under any
erstwhile schemes would be allowed to continue to get the relief to the extent the
revised tariff headings permit. However, the MODVAT scheme and the erstwhile
schemes to the extent they are continued, will be mutually exclusive.
118. The MODVAT scheme will be in force from 1st March, 1986.
Manufacturers who fulfil the requirement will be able to avail of proforma credit in
respect of the permissible goods which have suffered duty of excise from 1st February,
1986 and are either in the stocks or are received by the manufacturer on or after 1st
March, 1986.
119. As stated earlier, the introduction of MODVAT scheme will result in
considerable reduction in the cost of final product and, therefore, to retain the collection
of excise duties at the earlier level, the rates of duties on the final product have been
suitably adjusted. After accounting for the set off, the duty rates have been rounded to
the nearest step in the new duty structure. While all care has been taken to work out
the incidence of set off benefits, the scheme being a new one, Central Board of Excise
and Customs would take corrective steps wherever anomalies are noted.
120. In respect of Small Scale Industry, the objective of reform is to ensure
that the scheme of concessions is a ladder and not a lid. That is to say, such concessions
should facilitate and encourage healthy growth of the small scale units and prevent
unnecessary fragmentation and bifurcation of units. With this end in view, I propose
to introduce a New Scheme of Excise Concessions for small scale units. The proposed
scheme will considerably enhance the scope of concessions available to the small
scale sector. Under the New Scheme, the full exemption will continue to be available
upto clearances of Rs.7.5 lakhs in a year which account for nearly 85 per cent of the
small scale units in the country.
121. Under the chief existing scheme, excise duty is chargeable in slabs of 25
per cent, 50 per cent or 75 per cent of the duty rate upto a turnover limit of Rs.40
lakhs. After that, full duty is chargeable until turnover reaches Rs.75 lakhs. If a unit
crosses this level it loses the entire exemption. It has been noticed that the present slab
23
rate system has provided strong temptation for small scale units to stay below a
particular limit or to under-state their, actual production. Under the New Scheme, in
respect of clearances in excess of Rs.7.5 lakhs, the excise concession will be available
at a flat rate of 10 percentage points below normal duty, subject to a minimum excise
duty of 5 per cent. This concession will apply upto a turnover limit of Rs.75 lakhs.
Thereafter the unit will pay normal duty but continue to enjoy the concessional rate
on the first 75 lakhs of turnover. However, this concession will be lost when the Unit
has crossed a turnover of Rs.1.5 crores.
122. As a transitional measure and to overcome possible handicap in certain
marginal cases, I am proposing that units in the turnover range of Rs.7.5 lakhs to
Rs.15 lakhs may be allowed to pay concessional excise duty either at a rate of 10
percentage points below the excise duty rate or 25 per cent of the excise duty but not
less than 2.5 per cent. The relief corresponding to this turnover range will also continue
to be available to units with higher turnover for the prescribed period of one year.
123. An important feature of the new scheme is its universal applicability to all
types of exciseable goods with a few exceptions like cosmetics, TV sets, refrigerating
and air-conditioning appliances, etc.
124. A new and major concession which is being allowed to the small scale
sector relates to grant of proforma credit under the MODVAT scheme. We are providing
that proforma credit would be equal to the notional normal duty even when the small
scale unit would have paid only concessional duty.
125. The introduction of this new SSI scheme from 1st March, 1986 will mean
a revenue loss of Rs.75 crores.
126. In the last year’s Budget Special Excise Duty had been removed from as
many as 100 items from the Excise Tariff. I now propose to remove the Special Excise
Duty on the remaining 32 items of the old Tariff.
127. My next set of proposals relate to incentives for greater production of
edible oils. It is well known that the potential of production of oils from rice bran, oil
cakes, cotton seeds, tree oil seeds is not fully exploited. A big thrust to maximise
extraction of such oils, especially edible oils from these sources is proposed to be
accomplished by the following measures:-
(1) If minor oils like rice bran oil, mahuwa oil, water melon seed oil, sal seed
oil and mango kernel oil are used by the Vanaspati units in excess of 3 per
cent in the total oil mix, an excise duty relief of Rs.100 per metric tonne
on Vanaspati will be given for each additional percentage point of use of
such minor oils.
(2) In case cotton seed oil is used in excess of 15 per cent in the total oil mix
for Vanaspati production, a relief of excise duty to the extent of Rs.30/-
24
 per metric tonne of Vanaspati for each additional percentage point of use
will be given. The maximum relief for the use of minor oils and cotton
seed oil together will not exceed Rs.1000 per metric tonne.
(3) The extent of relief in case of use in soap is being increased to Rs.25/- per
metric tonne for each additional percentage point of minor oils in excess
of 3 per cent of such oils in the total oil mix. The relief now will be
available for 10 additional minor oils apart from the 4 minor oils which
enjoy the concession today at a lower rate.
(4) The excise duty on solvents is being brought to Nil from the existing
Rs.1050/- per kilo litre.
(5) Hardened inedible technical oils, fatty acids, soap-stocks and acid oils are
being exempted from excise duty. This measure is expected to reduce
imports and encourage the greater use of minor technical oils.
(6) Plant and machinery as may be identified by the Department of Civil
Supplies for improving the quality and increasing the production of solvent
extracted oils or oilmeals will be exempted from customs duty or excise
duty, as the case may be.
(7) It is proposed to provide a cash compensatory support of 10 per cent of
the f.o.b. value of oil meal exports.
128. The poorer sections of our society consume unrefined vegetable oils made
from crushing of domestic oilseeds and it is proper that such oils continue excise duty
free. We do not allow the use of crushed groundnut oil or mustard oil in vanaspati so
that it remains available for direct consumption by the weaker consumers. There is,
however, a production of less than 5 lakh tonnes of refined edible oils which is
consumed by the affluent classes. In general, the prices of these refined oils are even
higher than those of vanaspati and the commercial margins are high. I propose to levy
an excise duty of Rs.1500 per tonne on costly refined edible oils in line with the
excise duty on vanaspati. However, to encourage the production of new refined minor
oils, we propose to exempt from this levy refined oils from soyabean, rice bran, cotton
seed and sunflower.
129. The total revenue gain on account of the excise duty on a few refined
vegetable oils will be Rs.80 crores in a year; while the total revenue loss as a result of
the above described measures would be Rs.82.20 crores. These proposals would,
therefore, be revenue negative to the extent of Rs.2.20 crores.
130. I have to announce the following measures which will help exports and
export production:-
(1) Export duty on unmanufactured tobacco has lost its rationale. In order to
provide a competitive edge to the unmanufactured tobacco in the
25
 international market and to ensure that the tobacco farmers are able to get
a fair price, I propose to provide total exemption from export duty on this
item.
(2) Garment industry is poised for rapid development and exports and we
have recently conceded to them drawback rate of 7.5 per cent. In view of
the potential of this industry for exports and employment, it I proposed to
further improve the general drawback rate to 10 per cent.
(3) It has been a long standing demand of the footwear industry that the
scheme of excise concession to small scale units of footwear production
presently granted to units with 2 HP and 49 workers should be reviewed.’
units in case of footwear are the backbone of the production structure. It
is now proposed to extend the scheme of exemption to small scale industries
to the footwear sector also. In view of the shortage in the availability of
wattle bark to our industry, the import duty has been reduced from 70 per
cent to 40 per valorem. The import duty on leather-shaving blades is
being reduced from an average rate of 72.5 per, 40 per cent.
(4) Improvement in marine products export earnings will come about by
modernisation of the plants to improve quality of product and also by
moving over to added value product. It is, therefore, proposed to reduce
duty on specified machines used in processing and packaging of marine
products from existing rate of cent to 40 per cent (Basic and Auxiliary).
(5) We have a potential for development of exports of cigar, cheroots and
cigarilloes. This would require development of production of branded
products which will sell both in the domestic and in the export n is proposed
to do away with the excise duty presently levied on branded cigars, cheroots
and cigarillos. Excise duty on branded Hukka tobacco is also being
abolished. I may confess that total excise collections on these items were
insignificant. Those who cannot afford to smoke cigarettes can now turn
to cigars and cheroots.
(6) Gem and Jewellery - A reduction of import duty in respect of 74 items of
machines, equipment and too being made from the existing level of 40
per cent to 228 per cent ad valorem to 25 per cent. Arrangements are also
being made to allow export of gem and jewellery through air mail and
parcel post from Bombay and Jaipur.
131. The concessions given in the interest of exports will cost the exchequer
Rs.12.94 crores on the custom and Rs.9 lakhs on the excise side.
132. In the textile sector, considerable relief has already been provided in August,
1985 as part of the implementation of the first stage of Textile Policy. From a review
made by the Department of Textiles, it is observed that the market prices of fibre,
26
blended yarn and fabrics showed a declining trend upto November, 1985, though
increase was noticed in December, 1985 and January, 1986. On the production side,
there has been an increase: production of blended yarn from 129.72 million kilogrammes
during July-December, 1994 to 146.72 million kilogrammes during July-December,
1985. It may, however, take some time to realise the full benefits of the duty reliefs.
Under the ‘Sulabh’ cloth scheme, National Textiles Corporation has been provided
with duty free polyester and production of such cheap blended fabrics would go up to
50 million metres in 1986-87.
133. The Textile Policy also aims at encouraging production of blended fabrics
on handlooms. Government considering a scheme whereby specified handloom
organisations can be provided blended yarn made from duty polyester fibre. For the
present, I propose to fully exempt blended polyester cotton and polyester viscose yarn
w certain polyester content supplied to specified handloom organisations. Duty is also
being fully waived on processing of specified blended fabrics by specified handloom
development organisations.
134. Handloom cess, which is now being collected at the rate of 1.9 paise per
square metre is utilised for development of handlooms. I propose to raise the cess to
2.5 paise per square metre. The revenue gain of Rs.3., from this measure will be
utilised for setting up an Enforcement Machinery to ensure that the items reserved for
handloom sector are not encroached upon by other sectors of the textile industry.
135. I propose to extend exemption from excise duty to cover all shoddy woollen
products. These will include blankets, melton cloth, shoddy shawls and other fabrics.
136. As a measure of relief to the woollen industry, I propose to reduce the
import duty on raw wool from 4C cent to 20 per cent ad valorem. To make up this loss
and also to avoid assessment disputes, I propose to increase import duty on wool
waste and woollen rags from 10 per cent to 20 per cent.
137. As Hon’ble Members are aware, a reduced rate of customs duty of 25 per
cent ad valorem was provided respect of a few sophisticated textile machines in the
year 1983. I propose to continue those reliefs for one more Moreover, in order to
encourage domestic production of certain sophisticated textile machines, I propose to
provide reduced rate of customs duty of 25 per cent ad valorem in respect of components
of such machines. This will involve a loss of Rs.2.74 crores in a year.
138. To protect jute bag industry, I propose to levy duty on synthetic tapes at
the rate of Rs.10 per kilogramme where input duty relief will be available; on other
tapes the duty will be Rs.4 per kilogramme. This will also result revenue gain of Rs.15
crores in a full year.
139. Our review of the earlier reliefs given during 1985 have shown that while
reliefs were passed on by the fibre manufacturers, the blended yarn producers did not
27
do so after an initial period of decline in prices. The prices of blended yarn produced
by many of the important companies has gone up to or near the level prior to the grant
of excise relief. I think it is necessary to establish the principle that if the spirit of
reliefs given in the interest of consumers is not respected, the Government will withdraw
the reliefs. I am reducing the reliefs given to the yarn producers roughly by about 50
per cent. On their future conduct will depend our further response.
140. The Government is also committed to increasing the share of additional
duty (in lieu of sales tax). I propose to raise the additional duty of excise on cotton and
man-made fabrics of value, exceeding Rs.50 per square metre by Rs.2.50 per square
metre. This will yield a revenue of Rs.18 crores for the States.
141. The above proposals will lead to a gain of Rs.55.83 crores in excise duty
and a loss of Rs.2.74 crores in the customs duties.
142. We have received a number of representations from associations of
industries and from the concerned Ministries pointing out the need of certain
rationalisation which are unimportant from the revenue angle but would remove
difficulties for the industry or will bring down the leakage of revenue.
143. Paper industry has been representing that the scheme of relief to the paper
units using at least 50 per cent unconventional raw materials does not encourage the
mills to increase production. In the new scheme which I am proposing all paper mills
whose clearances did not exceed 24,000 tonnes in the previous financial year and
which do not have a bamboo or wood pulp plant will pay duty at the rate of Rs.300,
Rs.650, Rs.1200 and Rs.1500 per metric tonne for the successive slabs respectively.
For paper mills with clearances exceeding 24,000 metric tonnes or larger paper mills
having bamboo or wood pulp plant, the rate of duty will be 10 per cent ad valorem,
plus Rs.850/- per metric tonne. Finer varieties of paper are being excluded from these
reduced rates. These schemes will be in force from Ist April, 1986 and will cost the
exchequer Rs.6 crores in a year.
144. It is proposed to have a single uniform rate of excise duty of 30 per cent
ad valorem in respect of 3 major thermo plastics, namely, Low Density Poly-ethylene,
High Density Poly-ethylene and Poly-propylene. The loss in excise duty would be
Rs.7.24 crores. We are, however, revising the customs duty suitably to make the step
revenue neutral. There will be a revenue gain of Rs.7.52 crores in customs duties.
Engineering plastics are raw materials which will have an increasing use in India. It is
proposed to have a concessional rate of 60 per cent ad valorem of customs duty (Basic
plus Auxiliary) in respect of 4 such specified engineering plastics. The additional duty
of customs as appropriate will, however, continue to be levied. It is also proposed to
provide for uniform rate of excise duty of 35 per cent ad valorem in respect of plates,
sheets, films and foils of plastic materials and these items are being brought under the
general scheme of small scale exemptions.
28
 145. In consonance with the Drug Policy, I propose to exempt 23 specified
Drug intermediates from the levy of additional duty of customs, thereby reducing the
total customs duty on these to 110 per cent ad valorem. Revenue sacrifice will be Rs.1
crore.
146. I also propose to exempt additional 41 life saving formulations from excise
duty. This will cost the exchequer Rs.15 crores.
147. The total customs duty on additional five medical equipments of
consumable nature is being abolished. In the last Budget exemptions from customs
duty in excess of 45 per cent was provided in respect of 10 specified items of
sophisticated medical equipments. I propose to enlarge this list substantially by adding
101 items of medical equipments and exempt them from duty in excess of 40 per cent
ad valorem.
148. In order to encourage domestic production of medical equipments, I also
propose to allow a concessional rate of customs duty of 40 per cent ad valorem in
respect of components for manufacture of 15 identified medical equipments.
149. In the 1985 Budget, we had given a total exemption from customs duty in
respect of consumable goods imported for scientific research by public funded research
institutions upto the value of Rs.50,000/-. As a measure to encourage indigenous
research and development effort, I propose to remove the ceiling. The revenue sacrifice
would be Rs.5 crores.
150. These measures will involve a loss of Rs.28.24 crores in excise duties and
Rs.0.48 crore in customs duties.
151. Some of the Other Rationalisations proposed are the following:-
(a) I wish to give relief to some items of daily use of the common man. We
are abolishing excise duty on stoves using kerosene and wood. The value
limit of complete excise exemption in case of footwear is being raised
from Rs.30 per pair to Rs.45 per pair. Excise duty is also being abolished
on brushes, combs, umbrellas, chalks and similar other materials.
(b) The Long Term Fiscal Policy recognises that cesses levied as excise duties
contribute to the multiplicity of taxes. As an endeavour to reduce the
number of these cesses, it has been decided to dispense with the cess on
cotton, copra and vegetable oils. The Ministry of Agriculture will take
appropriate action in the matter. The loss to the exchequer on this account
will be Rs.5.90 crores.
(c) Ship breaking industry is an important source of scrap for our steel industry.
It is proposed to fix an effective rate of customs duty on ships imported for
breaking up at Rs.1,400/- per LDT and to exempt them from the auxiliary
29
 and additional duties of customs. ‘Me effective rate of excise duty of Rs.365
per metric tonne would be available for materials obtained by breaking up
of ships which have suffered the customs duty of Rs.1,400/- per LDT.
(d) In recognition of the vital role of newspapers, I am reducing import duty
on 4 items of printing equipment. It is my hope that they will not accuse
me of influencing the Press.
152. Some of the other amendments which are being made are the following:-
(i) The effective rate of basic customs duty on caustic soda is being fixed at
Rs.3,500/- per metric tonne, and we are exempting it from auxiliary and
additional duties of customs.
(ii) Import duty in respect of Synthetic Organic Dye stuffs and certain other
Dyes is being increased as a measure of protection, from 100 per cent to
150 per cent ad valorem.
(iii) The effective rate of basic customs duty on PVC resin in being fixed at
Rs.10,500/- per metric tonne.
(iv) We wish to encourage the production of iodised salt in the interest of
implementation of the National Goitre Control Programme and, therefore,
iodine imported for the production of iodised salt would receive the
concessional rate of import duty of 25 per cent ad valorem.
(v) Specific rates of excise duty are being introduced for manual typewriters
and leather cloth.
(vi) The excise duty on marine plywood and aircraft plywood as an anti-
avoidance measure is being increased from 10 per cent to 20 per cent ad
valorem. Effective rates of excise duty for match boxes containing 300
sticks per box are being provided.
(vii) Exemption from excise duty is also being provided in respect of ores, slag
and ash, wood pulp, inorganic chemicals used in manufacture of fertilizers,
clinkers used in the manufacture of cement.
153. These measures will involve a revenue gain of Rs.26.97 crores on the
customs side and a loss of Rs.3.44 crores on the excise side.
154. I will now come to important measures of resource mobilisation. My first
proposal is to rationalise the structure of auxiliary duties of customs. At present, there
are 11 slabs of auxiliary customs duties. While the specific duty on crude petroleum
will remain as at present, it is proposed to reduce the existing 11 slabs into three slabs,
namely, Nil, 25 per cent and 40 per cent. This will give us a revenue gain of Rs.190
crores. However, removal of auxiliary duty from certain GATT bound items would
mean a loss of Rs.9 crores.
30
 155. Earlier in my speech, I had referred to the importance of providing adequate
support to our capital goods industry which is pivotal for self reliance. With this end
in view, it is proposed to increase the general machinery rate of basic customs duty by
10 per cent. A similar increase is also being made in the general project rate from 45
per cent to 55 per dent ad valorem.
156. As a complement to this, it is proposed to reduce the import duty on
components of capital goods by 5 per cent. This will ensure that the import duty on
components will now stand at 15 per cent below the import duty on the complete
machines. This differential, as recommended in the Long Term Fiscal Policy, would
go towards greater production of capital machines including computerised numerically
controlled machine tools in India instead of their total imports. While the reduction in
rate on components will lead to a revenue loss of Rs.50 crores, the increase in machinery
rate will give Rs.124 crores and the revision of general project rate Rs.120 crores.
157. In respect of 32 machine tools where domestic production has been
established, the customs duty is being raised to 110 per cent. Again, 91 machine tools
and instruments have been identified where there is negligible domestic production
and it is proposed to reduce import duty on these machines to 35 per cent ad valorern
(basic plus auxiliary). There will be a revenue sacrifice of Rs.9 crores in customs
duties.
158. At present there is a concessional rate of duty on the fuel efficient cars
which comes to about 15 per cent ad valorem or less. As I have mentioned earlier, full
MODYAT will be extended to the automobile industry and the new MODVAT rates
for fuel efficient cars would be 20 per cent ad valorem. I feel that such cars and their
purchasers can bear an increase in the rate of duty by 5 per cent.
159. The current rate of duty for non-fuel efficient cars is around 25 per cent.
The MODVAT rate of such cars would be 30 per cent. It is proposed to increase the
excise duty on non-fuel efficient cars also by 5 per cent so that the final duty would
be 35 per cent. A concession of excise duty was given for non-fuel efficient cars used
as taxis. It is proposed to fix this rate at 30 per cent.
160. Under the new Excise Tariff, both the chassis of the vehicles and the body
building of the motor vehicles are chargeable to excise duty. Fun MODVAT is available
for the chassis to the body builders in the final vehicle. Body building imparts an
added value to the chassis and it is proposed to levy excise duty of 20 per cent on the
final vehicle also.
161. The net gain of the revenue of the above proposals would be Rs.40 crores.
162. The duty incidence on T.V. set has been rather low. Substantial concessions
in customs and excise duties have been given in the past in respect of raw materials
and components for the electronics industry in general. Duty is proposed to be enhanced
31
from Rs.900 to Rs.1,500 per set in respect of colour TV sets of screen size exceeding
36 cms. Ibis proposal will lead to a revenue gain of Rs.48 crores in a year.
163. I also propose to provide for levy of additional duty of customs on TV
sets imported as baggage. This increase would restrict the import of TV sets in baggage
to some extent. The gain in revenue in the customs dudes will be Rs.30 crores in a
year.
164. I propose to increase the duty on air-conditioners and replace the existing
duty by a specific duty to stop evasion. It is proposed to levy a specific rate of duty of
Rs.8000 per air-conditioner upto 1.5 tonne capacity. ‘me rate would be Rs.10,000 per
air-conditioner above 1.5 tonnes and upto 3 tonnes capacity and Rs.15,000 per air-
conditioner thereafter upto a capacity of 7.5 tonnes. A uniform duty of 60% ad valorern
will now be levied on all parts and accessories of refrigerating and airconditioning
machinery. The duty on compressors for airconditioners would be specific at Rs.4000
per compressor. As we are extending full MODVAT relief to the industry, I propose to
dispense with all end-use exemptions except for Government hospitals. The special
scheme of relief to small scale units in this sector will continue. This measure will
yield revenue of Rs.25 crores.
165. Copies of notifications giving effect to the changes in customs and excise
duties effective from the Ist March, 1986, will be laid on the Table of the House in
due course.
166. Apart from the above proposals, I have proposed some amendments in the
Finance Bill seeking to effect some changes in the new Customs and Excise Tariffs.
These changes are based on the feedback we have had from the trade and industry as
well as the field formations since the enactment of these two tariffs and generally seek
to preserve the position that existed under the old tariffs.
167. My proposals in respect of Customs and Excise duties outlined above are
likely to yield additional revenue of Rs.499.92 crores from customs duties and Rs.253.78
crores from excise duties. The concessions and reliefs aggregate Rs.93.11 crores on
the customs side and Rs.193.37 crores on the excise duty. The net additional revenue
from customs duties thus would be Rs.406.81 crores and that from excise duties
Rs.60.41 crores. In the excise dudes, the Centre’s share would be Rs.24.19 crores and
that of States Rs.36.22 crores. In the total net additional yield of Rs.467.22 crores
Centre’s share would be Rs.431.00 crores and that of the States Rs.36.22 crores.
168. I had earlier mentioned that the Budget deficit at the existing rates of
taxes would be Rs.4095 crores. The proposed tax measures, taken together with reliefs,
are estimated to yield net additional revenue of Rs.445 crores to the Centre. This will
leave an uncovered deficit of Rs.3650 crores. In relation to the size of our economy
and the stock of money, the deficit is reasonable and non-inflationary. It is also
significantly lower than last year.
32
 169. With this, Mr. Speaker I have come to the end of my task. My principal
priorities in this Budget were to strengthen the public sector, to provide a further
thrust to the anti-poverty programmes, to promote self-reliance, and to provide relief
to the common man. I have provided an increase in the Plan by 20.5 per cent despite
resource constraints. We will be financing over 40 per cent of the Seventh Plan in the
first two years in real terms, which is an achievement in itself. I have increased outlays
for major anti-poverty programmes by nearly 65 per cent in keeping with our socialist
goals. New schemes are being introduced for the benefit of rickshaw pullers, cobblers,
sweepers, porters and others among the urban disadvantaged groups. Interest rates on
Provident Fund contributions is being increased for the benefit of workers and the
self-employed. I have provided tax relief to the fixed income groups. And I have given
incentives for import substitution and export promotion, besides introducing several
measures for rationalisation.
170. This Budget is just one step forward. Finally, in the immortal words of
Mahatma Gandhi:
“In times to come the people will not judge us by the creed we profess, or
the label we wear, or the slogans we shout but by our work, industry,
sacrifice ........”
I commend this Budget to the House.
[28th February, 1986]

33
 SPEECH OF SHRI VISHWANATH PRATAP SINGH MINISTER OF
FINANCE INTRODUCING THE BUDGET FOR THE YEAR 1985-86

Sir,
I deem it a great privilege to present the first Budget of the new Government.
2. I am conscious of the fact that the tremendous responsibility that has
devolved on us at this critical juncture arises not only from the office that we hold but
more so from the immense trust that the people have reposed in us. We pledge all our
endeavour to justify this trust of the common man.
3. I am reminded of the words of our beloved departed leader, the late Prime
Minister Smt. Indira Gandhi:
“No section of our vast and diverse population should feel forgotten. Their
neglect is our collective loss.”
We can no longer hear her voice, but her words will live with us. In the task of
nation-building, she spared herself no pain - not even the pain of death. She has left
us a legacy signed in her own blood; a legacy to preserve this country and keep it
moving ahead. To this cause of hers we rededicate ourselves.
4. The Economic Survey, which has been presented to the House, deals with
economic developments in the current year in detail. I shall, therefore, touch upon
only a few salient features of the current economic situation.
5. The overall growth in national income in 1984-85 is anticipated to be of
the order of 4 per cent on top of 7.4 per cent recorded in the previous year. Food
production in 1983-84 turned out to be even better than what was anticipated at this
time last year. Output of foodgrains reached 151.5 million tonnes from the level of
about 130 million tones in 1982-83. Agricultural growth in 1983-84 was 13.6 per cent.
In 1984-85, food production is likely to be around the record level achieved in the
previous year. Industrial production also recovered during the year and, according to
present indications, it may show a growth rate of about 7 per cent in 1984-85. For the
Sixth Plan as a whole, however, the growth rate in industry is likely to average about
6 per cent, which is below the Plan target.
6. The major infrastructure sectors performed reasonably well in 1984-85.
Power generation during the period April-December 1984 was 13.5 per cent higher
than in the same period of the previous year, as compared with an increase of 7.6 per
cent in 1983-84. Coal production increased by 6.9 per cent during April-December
1
1984 compared with 5.8 per cent in 1983-84. Freight movement by rail, which had
stagnated in 1983-84, picked up in the current year with a modest growth of 3.2 per
cent in the first nine months.
7. Our balance of payments situation during the year was comfortable with
a net accretion in reserves of about Rs.547 crores upto end - January 1985. Although
a part of the increase in rupee terms is because of the strengthening of the U.S. dollar,
it is heartening that the improvement in the balance of payments situation witnessed
in 1983-84 was sustained during the current year. Trade data, available upto November,
1984, show an increase in exports by 23 per cent and that in imports by 14 per cent
over the corresponding period of the previous year. Trade deficit, on provisional basis,
is estimated at Rs.3016 crores in the current year upto November as compared with
Rs.3080 crores in the previous year. It will be recalled that the Government had
voluntarily terminated the International Monetary Fund arrangement with effect from
1st May, 1984 after drawing only Special Drawing Rights 3.9 billion out of Special
Drawing Rights 5 billion available under the loan arrangement. That we have been
able to do so is a testimony to our sound financial management during a period when
the external environment has been highly unfavourable.
8. The rate of inflation which was causing concern towards the end of the
last year, could be effectively contained by the implementation of various anti-
inflationary measures, including curbs on expenditure, coupled with an imaginative
supply management and timely imports. We also, of course, had the benefit of two
successive good crops. Thus, the annual rate of inflation in wholesale prices on 23rd
February, 1985 was 5.2 per cent as compared with 10.0 per cent at the same time last
year. The consumer price index has also shown an increase of only 4.4 per cent in
January 1985 over the level 12 months ago as compared with an increase of 13.7 per
cent in the corresponding period of the previous year.
9. On the whole, therefore, the economy is functioning well. That the country
has been able to make all this progress within a democratic framework is no mean
achievement. In a country where a large proportion of the population is below the
poverty line, to have raised the necessary resources for its development without material
external help and yet preserve the ballot-box is a tribute to the sagacity of the political
leadership of the country.
10. However, we should not be lulled into a false sense of complacency as the
task ahead is arduous. I would now like to share with the Hon’ble Members my
perception of the challenges that we face and the Government’s response to meeting
them.
11. As we enter the Seventh Plan, the resource constraint has become acute,
both at the Centre, and the States. The basic problem is that our non-Plan expenditure
has been increasing at a rate substantially faster than the growth of current revenues.
As a result, budgetary resources for the Plan have been severely eroded. Defence,
2
interest payments, and food and fertiliser subsidies now account for nearly 70 per cent
of the non-Plan revenue expenditure of the Centre. A sizeable part of the remaining 30
per cent of such expenditure is accounted for by essential maintenance, social and
community services, and grants to States. Further, the increase in non-Plan expenditures
of the States has meant larger transfers to States on this account.
12. In the past few years, we have been able to finance large increases in the
Annual Plan largely through borrowings, both external and internal. However, this
cannot go on indefinitely. The process of pruning budgetary expenditure at the Centre
and at the States, however painful, must begin so that the necessary adjustment can
take place over a period of time.
13. The public sector is vital for faster industrialisation, balanced regional
development, and prevention of concentration of wealth and economic power. Over
the years, the public sector has grown rapidly, and an important priority now is to
ensure that there is sufficient internal generation of resources for its future growth.
Given our resource constraint, increasing levels of investments in the public sector are
feasible only through better utilisation of existing capacity and higher return on past
investments. The Seventh Plan will give particular attention to this aspect.
14. The recent improvement in the balance of payments is gratifying. However,
this is an area where there can be no room for complacency. Some of the factors that
have worked in our favour in the Sixth Plan will not operate with the same vigour in
the Seventh Plan. Oil production, which had increased by about 18 million tonnes
during the last five years, may not increase at the same rate in the future. Repayments
of the International Monetary Fund loan and external commercial borrowings would
also increase sharply.
15. Recent developments in the world economy have dot only reduced the
availability of external resources for development, but have also made their terms
distinctly harder. The alternative source of external commercial borrowing is expensive.
The room for manoeuvre in terms of increasing the surplus on account of invisibles is
also limited. There can be little doubt that if we have to reconcile a manageable
balance of payments situation with a tolerable debt profile, export earnings would
have to finance a larger and larger proportion of our impots so that the deficit in our
balance of payments is reduced. In the context of the need to conserve scarce foreign
exchange, it would be desirable to increase the domestic production of importables
wherever we have under-utilized capacities. It is necessary also to stress efficient
import substitution, in an economic sense rather than the physical sense, so that
considerations relating to cost and efficiency are incorporated in the frame-work of
policies.
16. Agricultural and rural development is at the centre of our planning. Control
of inflation, reduction in poverty levels, promotion of employment, and improvement
in our balance of payments are goals which are linked with our success in agriculture.
3
Our past record has been good, which underscores the soundness of our agricultural
strategy involving structural changes in rural economic relations, greater application
of new technology and fertilisers, and increase in the irrigated area. But, much more
remains to be done on each count. We have to tackle the problem of increasing yields
in different regions, particularly in respect of paddy. We also have to pay special
attention to increasing domestic output of oilseeds through more intensive cultivation
of existing varieties and development of new ones. Import of edible oils is a major
drain on our foreign exchange resources, and higher domestic production will benefit
the economy in several ways.
17. It is the policy of the Government to provide remunerative prices to our
farmers. The price support operations are already functioning well in respect of certain
major agricultural commodities, like wheat and rice. The Government will, over a
period of time, extend effective price support operations to other important crops also,
particularly oilseeds and pulses.
18. A crop failure, in the event of a drought or flood, can have disastrous
effect on the livelihood of our farmers and their families. The Government has,
therefore, decided to introduce a comprehensive scheme of crop insurance. Hence-
forth, there will be a built-in insurance cover for all crop loans. The insurance cover
will be provided up to 150 per cent of the crop loan. To begin with, the scheme will
be extended to wheat, paddy, oilseeds and pulses. The insurance charges will be low.
The marginal and, small farmers will be subsidised to the extent of two-thirds of the
insurance charges by Central and State Governments on a matching basis. Details of
the scheme, which are being worked out, will be announced separately.
19. The integrated Rural Development Programme, the National Rural
Employment Programme, the Rural Landless Employment Guarantee Programme, and
the Programme for providing self-employment opportunities to the educated
unemployed, have helped to reduce the incidence of poverty and have contributed to
increasing the employment opportunities. Government is committed to further
strengthen and improve the performance of these special programmes. The generation
of adequate employment opportunities is at the heart of our development efforts.
Measures being taken now to stimulate the economy will have an important beneficial
impact on the employment situation.
20. Government proposes to introduce a Social Security Scheme to cover the
risk of death by accident in respect of earning members of poor families comprising
landless labourers, small and marginal farmers, traditional craftsmen and others not
covered by any insurance scheme or workmen’s compensation arrangements. Under
this scheme, a sum of Rs.3000/- will be paid to the dependent of the deceased, who
dies as a result of an accident. The scheme will, to begin with, be introduced in 100
districts in the country, selected in consultation with the States. I hope all sections of
the House will welcome this measure which will cover the needs of the poorest families
in their moment of utter deprivation.
4
 21. I am glad to inform the House that the target of priority sector advances,
including advances for agriculture and small scale industry, which was fixed at 40 per
cent by end of 1984-85, has already been exceeded by public sector banks. This is a
major achievement in view of the fact that advances to priority sectors were less than
15 per cent in 1969, when the banks were nationalised. A problem that we now face
is the slow pace of recovery of past loans. Hon’ble Members will appreciate that it is
not possible for the credit system to fulfil the task assigned to it unless performance
in repayment of past loans improves.
22. An important task for the future is to accelerate industrial growth. At the
same time, we must ensure that the pattern of industrial growth conforms to our socio-
economic priorities. Our domestic market is large, the structure of industry is already
diversified, and the base of entrepreneurship has grown. These are important strengths.
We must now aim at reducing costs and prices and improve the competitiveness of our
industry. This process calls for structural changes in the economy and will entail some
costs which we should be prepared to pay. Unproductive investments of the past
should not stifle the productive forces of the future. Indian industry must also become
more self-reliant in financing investment. Regulations must facilitate growth and
respond to the changing external and technological environment. In particular, it is
necessary to bring about closer coordination among fiscal, industrial and trade policies.
23. A multipronged programme of action is necessary to meet the challenges
of the future. As our Prime Minister, Shri Rajiv Gandhi observed recently, in the
Parliament:
“The challenges before our country are many. We have to modernise India.
We have to change the thinking of the people of India to look ahead into
the future and not to keep on dwelling on the past. We have to make India
self-reliant in every important sphere. We have to create a dynamic country
that is equal to any other country in the world.”
In this task, our greatest asset is the human resource, and crucial to the success
of all our policies is the development of an effective programme for best utilisation of
this resource through renewed emphasis on education, environment, and the application
of science and technology.
24. I now propose to announce a few decisions which are designed to reduce
regidities and improve the environment for industrial growth. It is proposed to notify
a list of industries for delicensing so that procedural delays are cut to a minimum in
areas where we want additional capacity. In order to reflect the considerable increase
in the cost and the economic size of projects that has taken place since the asset Emit
for MRTP companies was fixed in 1969, this limit is being revised to Rs.100 crores.
The small scale sector has played a vital role in our economy and the Government
proposes to take further steps to promote its growth. The ceiling of investment in plant
and machinery, which was fixed in 1980, is being raised from Rs.20 lakhs to Rs.35
5
lakhs. The Ceiling in respect of ancillaries is being raised from the present level of
Rs.25 lakhs to Rs.45 lakhs. Later in my speech, I shall be announcing certain fiscal
measures to facilitate development of this sector.
25. On the financial side, I propose to facilitate the mobilisation of resources
from the market by the corporate sector and to reduce its dependence on public financial
institutions. With a view to improving the marketability of convertible debentures of
non-MRTP and non-FERA companies, the maximum interest payable by them on
such issues is being raised from 13.5 per cent to 15 per cent. The Securities Contracts
(Regulation) Act, 1956, is being amended to ensure free transfer of securities of listed
public limited companies. This measure will particularly benefit small investors spread
all over the country. In order to offer wide choice to investors, certain changes are
being made in respect of listing requirements of closely-held companies. Such
companies will be permitted to enlist by offering 40 per cent of their equity capital in
two stages over a period of 3 years and capitalise a larger portion of their free reserves
before going to the public. In order to diversify the market, a new instrument, namely,
Convertible Cumulative Preference Share is being introduced. Several measures to
reduce the prevailing high cost of public issues are being announced separately.
26. The corporate sector should also be permitted to play a legitimate role
within defined norms in the functioning of our democracy. It is proposed to introduce
the necessary legislation during this session to allow companies to make contribution
to political parties from out of their profits.
27. The Government proposes to introduce a special legislation for sick units.
It is proposed to set up a Board for Financial and Industrial Reconstruction, which
will provide a speedy mechanism for amalgamation, mergers and devise such other
solutions as may be necessary to deal with the problem of sick units in the large and
medium sector. The onus for reporting sickness will be laid on the management of the
units themselves, who will be required to seek a fresh mandate from their shareholders
after 50 per cent of the net worth of the company has been eroded. When the company
loses its entire net worth, the existing management and the owners will not have any
further role to play in running the affairs of the unit. It is also proposed that those who
are deemed to be responsible for mismanaging the unit will not have access to assistance
from financial institutions even in new ventures. Bad managers, like bad currency,
have to be kept out of circulation.
28. Workers are the worst victims of Industrial sickness. Under the present
law, however, when companies are wound up, workers’ dues rank low in priority
compared to secured creditors. To my mind, labour is as much a factor of production
as any other and it is unjust that the workers’ dues should have a lower priority. In
order to rectify this situation, we have taken a decision to introduce the necessary
legislation so that legitimate dues of workers rank pari passu with secured creditors
such as banks in the event of closure of the Company. Such dues will rank above even
6
the dues to Government. The Government is also considering the introduction of a
scheme of stock options to the employees and workers of companies to encourage
their participation in management.
29. At present, under the Payment of Bonus Act, 1965 where the salary or
wage of an employee exceeds Rs.750/- per month, the bonus payable to such employee
is calculated as if his salary or wage was Rs.750/- per month. It is now proposed to
raise this limit to Rs.1,600/- per month. The eligibility criteria would remain the same.
30. In addition to the changes being made in the overall policy framework,
the Government is also undertaking a review of certain specific industries with a view
to correcting structural imbalances. Textile industry has a vital place in our economy
in terms of its contribution to output, exports and employment. This industry is,
however, passing through a very difficult period and the need for structural change is
pressing. I shall be proposing certain changes in the fiscal structure of cotton textile
industry. The preparation of a new textile policy is well under way.
31. The electronics industry is truly the industry of our times. In order to
accelerate the growth of this industry, in November, 1984, the Government announced
a new package of measures for computers. Rates of duty on imports of components
and raw materials were reduced drastically and, in order to protect the interests of
end-users, import policy for computers was also liberalised. It has now been decided
to extend this approach to other items of manufacture in electronics. Details of the
new policy will be announced separately by the Department of Electronics.
32. I shall now turn to the Revised Estimates for 1984-85 and the Budget
Estimates for 1985-86.
Revised Estimates for 1984-85
33. There were several unanticipated developments on the budgetary front
during the yew. On the Plan side, higher budgetary provisions had to be provided for
the Central and State Plans. On the non-Plan side, there was substantial increase in
expenditure on defence, food and fertiliser subsidies, and payment of dearness allowance
to Government employees. Larger assistance was given to States affected by floods
and cyclones, and medium term loan has been provided to certain States facing acute
financial problems. On the receipts side, there was some increase in tax revenues and
a significant step-up in small savings collections.
34. The budgetary support for the Central Plan is now estimated to be higher
at Rs.11,751 crores as against the original outlay of Rs.11,420 crores. The revised
Central Plan outlay is estimated to be Rs.17,495 crores as against the Budget Estimate
of Rs.17,351 crores. Within this overall amount, there were certain changes in the
sectoral outlays. The provision for self-employment scheme for educated unemployed
youth was increased by Rs.124 crores and the National Bank for Agriculture and
Rural Development was provided an additional amount of Rs.152 crores against
7
disbursements under external aid programmes. Additional provisions were also made
for Visakhapatnam Steel Plant, mines, non-conventional energy sources, atomic energy,
electronics, food storage godowns, and certain other sectors. The Revised Estimates
of the Central Plan outlay in some areas, notably, petroleum, coal, and fertilisers were,
however, lower. The provision made in the Budget for Central assistance for State
Plans has also been stepped up by Rs.153 crores.
35. On the non-Plan side, during the year, nine instalments of additional
dearness allowance including relief to pensioners, were sanctioned to Central
Government employees. These are estimated to cost about Rs.715 crores in the current
year against the lump sum provision of Rs.300 crores made in the Budget. Ad hoc
bonus sanctioned to Government employees in the current year would cost Rs.61
crores.
36. Food subsidy in the current year will increase from Rs.850 crores to
Rs.1100 crores. This is mainly due to increase in procurement price of paddy, lower
realisation from sale of wheat and sharp increase in stocks of foodgrains. The subsidy
on domestic fertilisers will go up from Rs.930 crores to Rs.1200 crores. The subsidy
on imported fertilisers will increase from Rs.150 crores to Rs.632 crores owing to
increase in the cost and volume of imports.
37. Assistance to States affected by floods and cyclones was stepped up by
Rs.130 crores. Consequent on larger small savings collections, the share payable to
States was also increased by Rs.440 crores. The provision for loans to States for
purchase of agricultural inputs was stepped up by Rs.60 crores. In addition, special
medium-term loan of Rs.440 crores has also been provided to States which faced
serious financial difficulties during the year.
38. Defence expenditure in the current year is estimated at Rs.7175 crores
against the Budget Estimates of Rs.6800 crores. Interest payments are expected to be
Rs.390 crores higher than the original estimate of Rs.5,600 crores.
39. Certain public sector enterprises have suffered large cash losses and
additional budgetary support had to be provided to them. Taking into account these
and other variations, including notional provisions for conversion of equity in certain
public undertakings into loans, assistance towards their interest dues to Government
and additional subscription to International Monetary Fund, the total non-Plan
expenditure is estimated at Rs.29,740 crores against the Budget Estimates of Rs.26,066
crores.
40. Under non-tax revenue, the dividend from Railways is likely to be less by
Rs.211 crores. The profit from sale of edible oil will also be less due to high international
prices. Mainly due to additional budgetary support provided to certain public
undertakings and improvements in the finances of some others, interest receipts from
public sector undertakings and others are, however, estimated to be Rs.439 crores
higher than the Budget Estimates.
8
 41. Under capital receipts, I am glad to report that small savings collections
during the year are now expected to reach Rs.3,300 crores against the Budget Estimate
of Rs.2,400 crores. Receipts from special deposits of non-government provident funds
are estimated to be higher by Rs.75 crores and deposits by public sector undertakings
of their surplus funds by Rs.200 crores. Corresponding to the increase in expenditure,
receipts from special securities to International Monetary Fund will also go up by
Rs.149 crores. Taking into account the additional recoveries from State Governments
and other variations, capital receipts in the current year are estimated at Rs.17,778
crores compared with the Budget Estimate of Rs.16,757 crores.
42. Total receipts are thus estimated to go up from Rs.40,763 crores to
Rs.42,710 crores. Total expenditure is. estimated to go up from Rs.42,536 crores to
Rs.46,695 crores. This will leave a budgetary deficit of Rs.3,985 crores as compared
with Rs.1,773 crores in the Budget Estimates.
43. The deficit is higher than what I would have ideally liked. I am glad that
this deficit has been absorbed by the economy without any adverse effects on prices,
thanks to the favourable agricultural situation. Howerver, as a necessary caution, in
the coming year we would need to curtail the size of the deficit, though it has been
said that “anyone who lives within his means suffers from lack of imagination”. Not
that I lack imagination, but I do not propose to run riot.
Budget Estimates for 1985-86
44. The current year marks the end of the Sixth Plan. It is estimated that
public sector Plan expenditure during the Sixth Plan period will be of the order of
Rs.1,10,000 crores as against the originally envisaged outlay of Rs.97,500 crores. In
view of the price rise during the period, outlays in real terms will, however, be lower
than in the original Plan. Nevertheless, it is gratifying that the target of 5.2 per cent for
the annual growth rate of the economy would have been met. Foodgrains output will
be close to the Plan target, and crude oil production will significantly exceed it. In
power, additional installed capacity has been below Plan target; nevertheless, we would
have added nearly 50 per cent to the existing installed capacity at the beginning of the
Plan. In irrigation, additions to potential would be around 11.5 million hectares as
against the Plan target of 13.7 million hectares.
45. As we enter the Seventh Plan, the main task is to consolidate the gains of
the past and give a new thrust to the movement for increasing productivity, while at
the same time ensuring financial and monetary stability. After taking into account
higher devolution and grants to States arising out of the implementation of the
recommendations of the Finance Commission, and essential non-Plan expenditure on
account of defence and subsidies, the budgetary resources available for the Plan in
1985-86 are far short of our overall requirements.
46. In allocating these resources. I was particularly guided by the need to
provide greater Central assistance for State Plans as otherwise many States would not
9
be in a position even to protect their on-going projects in crucial sectors. When the
States’ Plans for 1984-85 were approved, it was expected that the States’ own budgetary
resources as also contributions from their public sector undertakings would be Rs.5,740
crores. The latest assessment indicates deterioration of the order of Rs.2,300 crores in
the transactions of the current year.
47. Central assistance to State Plans in 1985-86 is being increased to about
Rs.6,000 crores as comapred with Rs.4,313 crores in 1984-85, which is an increase of
39 per cent as compared with an increase of 13 per cent provided last year. The States
have also been authorised to go in for higher market borrowings to the tune of Rs.1,600
crores, which is an increase of 20 per cent over 1984-85. This order of increase in
Central assistance and market borrowings, on top of other transfers, has made a heavy
draft on Centre’s own resources for the Plan.
48. In view of the elections in several States, the annual Plans of the States
have not yet been finalised. It is expected that the process of finalising the State Plans
will be completed in the next few weeks. In view of the sharp increase in central
transfers on account of Plan as well as Finance Commission’s recommendations,
Centre’s resources are already over-stretched, and it will not be possible for the Centre
to bear the additional burden of overdrafts by the States. For, ultimately, it is the
common man who pays. Despite a large step-up in Central assistance, market
borrowings and negotiated loans, a reasonable Plan outlay for the States would be
possible only if they make an earnest effort at mobilising a higher level of resources
and improving the working of States enterprises.
49. Plan outlays of Union territories have been fixed at Rs.640 crores as against
Rs.558 crores in 1984-85. Central Budget provides Rs.578 crores and the balance of
Rs.62 crores will be met through additional resource mobilisation measures of the
Union territories during the course of the year.
50. The Central Plan for 1985-86 has been fixed at Rs.18,500 crores as
compared with Rs.17,351 crores in 198485. In view of the resource constraint, while
determining sectoral priorities, I have considered it prudent to complete projects already
under implementation rather than taking on new starts. It is also my endeavour to
provide more for projects which are in an advanced stage of execution and which can
be commissioned more speedily so that the benefits can start flowing to the economy
as early as possible. Earlier in my speech, I referred to the excellent performance of
the agricultural sector. In order to augment the efforts of State Governments in
accelerating investment in agriculture, in the Central Plan an outlay of Rs.790 crores
has been provided for the Department of Agriculture and Cooperation and Department
of Agricultural Research and Education. A provision of Rs. 165 crores has been made
for the new fertiliser factories at Guna and Aonla which are to be set up based on
Bombay Righ gas to be transported through the Hazira-Bijaipur-Jagdishpur pipeline.
10
 51. A total provision of Rs.932 crores has been made for Rural Development
in the Central Plan. Pending finalisation of the State Plans, the provisions for Integrated
Rural Development Programme and National Rural Employment Programme have
been kept at more or less the same level as in the current year and will be enhanced
later, if required. Honourable members should be glad to know that projects worth
more than Rs.800 crores have been sanctioned for implementation under the Rural
Landless Employment Guarantee Programme. This programme will have an outlay of
Rs.400 crores in 1985-86.
52. Honourable Members are well aware of the Government’s emphasis on
the restructuring of the educational system. We are in the process of evolving a new
National Policy on Education. The Government is committed to making the education
of girls free all over the country upto the Higher Secondary level. A total provision of
Rs.221 crores has been made for Education in the Central Sector including provisions
for these new initiatives.
53. Consistent with our goal to achieve a net reproduction rate of unity by the
year 2000 A.D., the Government would go in for an imaginative family planning
programme on voluntary basis. Combined with effective immunization programme to
reduce the mortality and morbidity rate among children, Family Welfare programmes
are of great significance in the context of overall development. An outlay of Rs.500
crores has been provided for Family Welfare programmes. In order to effectively use
the results of medical research, outlay for Indian Council of Medical Research has
been increased to Rs.30 crores.
54. During the Sixth Plan, the Government launched the Accelerated Rural
Water Supply Programme to assist the States and Union territories in providing drinking
water supply to villages. Members would be happy to know that the allocation during
the Sixth Plan period on this programme would exceed Rs.925 crores against the
original outlay of Rs.600 crores and that this has enabled the States to cover about two
lakh problem villages during the Plan period.
55. The potential of Indian Science and Technology for contributing to
modernisation and development is immense. An outlay of Rs.1068 crores is being
provided for Ministries of Science and Technology and Environment and Departments
like Atomic Energy, Space, Ocean Development and Electronics.
56. On the energy front, the Government attaches great importance to the
need for a gradual transition from the present dependence on oil to coal and electricity
in the medium term. Honourable Members would be happy to note that additional
power generating capacity to the extent of 14000 M.W. would have been added by the
end of the Sixth Plan period. Ibis would mean a near 50 per cent increase over the
capacity of 28,448 M.W. at the commencement of the Plan. In the Central Sector
alone, additional capacity to the extent of 3,350 M.W. has been added during the Sixth
11
Plan. For 1985-86, the Department of Power has been provided an outlay of Rs.2090
crores against Rs.1446 crores during 1984-85.
57. Coal production of 147.5 million tonnes is expected to be achieved in
1984-85. This is to be stepped up to 158.50 million tonnes in 1985-86. For the
Department of Coal, an outlay of Rs.1102 crores has been provided.
58. Honourable Members are well aware of the quantum jump in the field of
crude production, which would be 29.4 million tonnes by the end of this year compared
to 11.4 million tonnes at the beginning of the Sixth Plan. This has become possible
due to the Accelerated Production Programme initiated in 1982-83, which has raised
the annual production from Bombay High to 20.3 million tonnes from a level of 4.2
million tonnes in 1979-80. For the Department of Petroleum, an outlay of Rs.3261
crores is being provided. A provision of Rs.100 crores has been made for the Gas
Authority of India, a newly created organisation for the construction of gas pipe-lines.
59. The Government’s concern for preservation of our forests is reflected in
the creation of a separate department of Forest and Wild Life. This Department will
have an outlay of around Rs.54 crores, including Rs.26 crores for social forestry and
creation of rural fuel wood plantation.
60. The outlay for the Department of Environment is about Rs.36 crores,
which includes Rs.10 crores for initiating action on the project of Prevention of Pollution
of the Ganga. The other major environmental programmes aim at conserving biological
diversity, pollution monitoring, eco-development in critically degraded or fragile areas
and research and development, besides creation of advanced centres for priority
environmental studies.
61. Though a substantial portion has been transferred to the States as committed
non-Plan liability, the Central Plan provides for Rs.207 crores for the various
programmes benefiting the Scheduled Castes and Scheduled Tribes. Centre’s
contribution to the Special Component Plan for Scheduled Castes has been stepped up
to Rs.165 crores. In order to rehabilitate the refugees from Sri Lanka, a provision of
about Rs.9 crores is being made.
62. The Government approved a scheme for expansion of TV network in the
country in July, 1983. This plan envisaged setting up of large number of High Power
and Low Power transmitters in the country so as to make the TV programmes available
to 70 per cent of the country’s population. The number of transmitters would go up to
180 by 31st March, 1985. Outlay for 1985-86 has been fixed at Rs.110 crores for
information and broadcasting.
63. The priorities outlined in Annual Plan for 1985-86 will further accelerate
the implementation of the 20 point programme. The total amount allocated to the
programme in the Central Plan is Rs.4900 crores for the next year as against Rs.4,141
crores provided for in the current year, representing an increase of 18.3 per cent.
12
 64. I must, however, emphasise that proper implementation of the Plan requires
not only financial allocations but also better project formulation and efficient
management. It is proposed to make certain changes in the administrative procedures
to facilitate quicker plan implementation. Before an investment decision is taken,
administrative Ministries will be required to ensure that projects have been fully worked
out and the executive authorities have taken the necessary preparatory action for
implementation. It has, therefore, been decided to provide sufficient funding for
preparation of detailed feasibility reports before budgetary allocations are made for
projects. Steps are also being considered to advance the finalisation of the annual Plan
and Vote on Account to facilitate communication of funds well before the
commencement of the new financial year. These measures would result in even
implementation of projects throughout the year and avoid the rush of expenditure
towards the close of the year.
65. Non-Plan expenditure has been kept to the minimum. Next year’s Budget
provides larger transfers to States in terms of the recommendations of the Eighth
Finance Commission. Grants to States covered by the Finance Commission’s
recommendations will go up from Rs.518 crores in the Budget Estimates for 1984-85
to Rs.1,215 crores in the Budget Estimates for the next year.
66. Defence expenditure next year is placed at Rs.7686 crores (excluding
defence pensions). Interest payments are estimated at Rs.7075 crores taking into account
the increase in the volume of borrowings and the cost of borrowing. A provision of
Rs. 1100 crores has been made for food subsidy, Rs.1200 crores for subsidy on domestic
fertilisers and Rs.601 crores for subsidy on imported fertilisers. Export promotion and
market development has been allocated Rs.530 crores. Consequent on the separation
of Postal services from the Telecommunications services, the deficit of Postal services
estimated at Rs.187 crores will be borne by the Civil estimates in the Budget of next
year. Following larger small savings collections, loans to States against these collections
are placed at Rs.2375 crores.
67. A lump sum of Rs.300 corres has been provided in 1985-86 for payment
of additional instalments of dearness allowance, pensionary relief, etc., to Central
Government employees. Provision has also been made for committed expenditure on
Plan schemes completed in Sixth Plan period. Including these and other provisions,
total non-Plan expenditure in 1985-86 is estimated at Rs.32,786 crores against Rs.29,740
crores in Revised Estimates for the current year.
68. At this point, I would like to refer to a matter concerning the Central
Government employees. In the Budget for 1983-84, my distinguished predecessor had
announced the appointment of the Fourth Central Pay Commission. The Commission
which was appointed in July 1983 is still at work. Meanwhile, a very large number of
Government employees have been retiring without the benefit of a higher pension
which was anticipated as a result of the recommendations of the Commission. At
13
present, pension is calculated on the pay and a part of dearness allowance sanctioned
upto the average Consumer Price Index level of 320. The last instalment of dearness
allowance has been sanctioned with reference to the average Consumer Price Index
level of 568. I now propose, as a measure of relief to the Central Government employees
retiring on or after 31st March, 1985, to treat the entire dearness allowance sanctioned
upto the average Consumer Price Index level of 568 as pay for the purpose of retirement
benefit. Simultaneously, I also propose to remove the present ceiling of Rs.1,500/- per
month on pension and increase the ceiling of Death-cum-Retirement Gratuity from
Rs.36,000/- to Rs.50,000/, The House will agree with me that those who have devoted
the best years of their lives to the service of the country are deserving of what-ever
support we can give them.
69. Coming to receipts, the gross tax revenue at existing levels of taxation is
estimated at Rs.25,514 crores compared with Rs.23,702 crores in the current year. The
States’ share of taxes is estimated at Rs.6592 crores against Rs.5777 crores in the
current year. Out of this increase, Rs.487 crores are due to stepping up of States’ share
of basic excise duties from 40 per cent to 45 per cent from next year as recommended
by the Eighth Finance Commission. The dividend from Railways will be Rs.303 crores
higher than in the current year.
70. Receipts from market loans are placed at Rs.5100 crores against Rs.4100
crores in the current year. Small savings collections are estimated at Rs.3900 crores
against Rs.3300 crores in the current year. External assistance net of repayments is
estimated at Rs.2510 crores compared with Rs.2146 crores in the current year. Taking
into account these and other variations in the receipts, the total receipts in 1985-86 are
estimated at Rs.47,635 crores. These receipts take into account the effect of revision
of Railway fares and freights. Total expenditure is placed at Rs.51,295 crores. The
overall budgetary gap at existing rates of taxation will thus be Rs.3,660 crores.

PART B
71. The formulation of the Budget is an annual exercise but, to be meaningful,
it has to be set in a longer time frame. Our fiscal system has served us well. However,
over the years, objective conditions have changed calling for new responses. I am
quite aware that it is not possible to usher in all the changes at one stroke, yet we have
to initiate a process of reform which can be completed in a phased manner in a time
bound frame. We will be moving towards the formulation of a long-term fiscal policy
co-terminous with the Plan. I hope to initiate a debate on this after the budget session
is over.
72. In the area of direct taxes, an important priority is to create an environment
for growth, productivity and savings. The system of direct taxation which can help in
achieving these objectives will also secure better tax compliance, and will be more
equitable.
14
 73. Our approach to the reform of the personal income-tax is as follows.
First, the rates of personal income-tax should be recast and rationalised with a view to
making the structure simple and reasonable. While maintaining the progressivity of
the tax structure, it needs to be ensured that the combined effect of the rates of taxes
on personal income and wealth are not counter-productive. Second, the exemption
limit should be so fixed as to eliminate a large number of small assessments and to
provide relief to low and middle income groups. Third, the tax structure should be
stable. Fourth, in order to make more effective use of the administrative machinery in
reducing tax evasion, the emphasis in tax assessments should shift from routine
examination of a very large number of returns to a thorough scrutiny of a sample of
cases. Fifth, it must be ensured that when tax evasion is detected, the penalties are
swift and severe. Sixth, a tax, however laudable in intent, should have no place in the
statute book if it has outlived its utility.
74. The statutory rate of corporate tax in India is high, but because of various
exemptions, the effective rate is significantly lower. While each exemption has a
rationale, the combined effect of all these exemptions, taken together, is to erode the
tax base. The present system also affects different taxpayers very differently. This
cumbersome system has led to unending litigation, and has given wide discretion to
those who make the accounts and those who scrutinise them.
75. My proposals for the current year in the area of corporate taxation are
designed to introduce a directional change by discontinuing certain exemptions and
rationalising the rates. For the present, I am not going all the way partly because of
revenue considerations and partly because I would like to Watch the response to the
changes being proposed now. In order to have the benefit of the views of the Honourable
Members, I shall also put forward a set of proposals regarding corporation tax which
could be introduced in a phased manner in the next two years. I believe that an open
debate on these issues is necessary so that the decisions that we take are the right
ones. I propose to announce Government’s decisions in this regard in my reply to the
debate on the finance Bill so that there is no uncertainty in the matter.
76. In respect of indirect taxes, my immediate task is to bring about changes
which would help in reducing costs of investment in priority sectors, encourage the
growth of the small-scale sector and remove certain other distortions. During the
course of the year, I shall be giving consideration to other changes that might be
required for the indirect tax system to make its full contribution to the further
development of our economy.
77. I should make it clear that the Government is determined to pursue its
socio-economic goals without fear or favour, and those who continue to indulge in tax
evasion or other economic offences will do so at their peril.
78. Let me now come to my specific proposals. I shall first deal with the
proposals in the field of direct taxes.
15
 79. I propose to raise the exemption limit for personal income taxation from
Rs.15,000 to Rs.18,000. As a result, out of about 40 lakh assessees, around 10 lakh
will not have to pay any income-tax.
80. I also propose to restructure the rate schedule for personal incomes. After
the nil rate slab of Rs.18,000, the rate of income-tax on the slab of Rs.18,001 to
Rs.25,000 will be 25 per cent; on the slab of Rs.25,001 to Rs.50,000, the rate will be
30 per cent; on the slab of Rs.50,001 to Rs.1 lakh, the rate will be 40 per cent; and on
the income in excess of Rs.1 lakh, the rate will be 50 per cent. The new rate schedule
will result in a reduction in tax at all levels of income. On a taxable income of Rs.20,000,
the tax relief under the new rate schedule will be 50 per cent of the income-tax at
Current rates; on a taxable income of Rs.25,000, the relief will be 22 per cent; on a
taxable income of Rs.50,000 the relief will be 18 per cent and on an income of Rs.1
lakh, the relief will be 17 per cent. With the reduction in the tax rate slabs from eight
to four, the rate schedule will also stand simplified. The rate schedule applicable to
Hindu undivided families having one or more members with separate incomes exceeding
the exemption limit is also proposed to be consequently restructured.
81. I also propose to discontinue the surcharge on income-tax in the case of
all categories of non-corporate tax-payers.
82. With the proposed modifications, the maximum marginal rate of income-
tax on personal incomes will stand reduced from 61.875 per cent to 50 per cent in fact,
the average rate of tax would be even lower.
83. The calculated loss of revenue, during the financial year 1985-86, due to
the proposed rationalisation of the tax structure is Rs.200 crores on account of income-
tax and Rs.197 crores on account of surcharge. However, taking into account the
better compliance as a result of reduction of tax rates, the actual loss is estimated at
Rs.197 crores and that too in respect of surcharge. This entire loss will be to the
account of the Centre.
84. In fulfilment of the promise made in our Election Mainifesto, the scheme
of compulsory deposits by income-tax payers is being abolished with effect from 1st
April 1985. However, keeping in view the overall ways and means position, I propose
to provide that repayments of instalments in respect of earlier deposits and payment of
interest due in the financial year 1985-86 would be postponed by one year. The unpaid
amount will continue to earn interest and shall be repaid in the financial year 1986-87
along with instalments due for repayment in that year. I propose to introduce a separate
bill for this purpose this evening.
85. The structure of wealth-tax has been examined by a number of high-
powered bodies, including the Estimates Committee and the Public Accounts Committee
of Parliament. A number of suggestions have been made by them for making the
system of wealth-tax more conducive to the promotion of savings and investment in
16
the economy. The present basic exemption limit of Rs. 1,50,000 has also been
considered to be inadequate in view of the rise in prices. It may be recalled that a limit
of Rs.1 lakh had been set as early as 1964. Taking these considerations into account,
I propose to raise the wealth-tax exemption limit to Rs.2,50,000 and to provide a nil
rate slab in respect of net wealth up to Rs.2,50,000, I also propose to restructure the
wealth-tax rate schedule. Under the new rate schedule, the rate of wealth-tax on the
slab of Rs.2,50,001 to Rs.10,00,000 will be 1/2 per cent; on the slab from Rs.10,00,001
to Rs.20,00,000, the rate will be 1 per eerie and on the slab over Rs.20,00,000, the rate
will be 2 per cent. The maximum marginal rate will, therefore, stand reduced from 5
per cent to 2 per cent. I also propose to restructure the rate schedule applicable to
Hindu undivided families having one or more members with independent wealth
exceeding the exemption limit.
86. The value of one house is exempt from wealth-tax upto Rs.2 lakhs. A
taxpayer is also entitled to exemption from wealth-tax in respect of specified assets up
to an aggregate value of Rs.2,65,000. An additional exemption of Rs.35,000 is allowed
in respect of units of the Unit Trust of India and deposits under the National Deposit
Scheme. I propose to replace the separate exemption limits, aggregating Rs.5 lakhs,
by a consolidated exemption limit of Rs.5 lakhs in respect of all these assets.
87. My proposals relating to wealth-tax would not result in any loss during
the financial year 1985-86. Although the estimated loss during the financial year 1986-
87 is Rs.70 crores, I expect that, due to improved compliance, there would be no loss
of revenue over a period.
88. As both wealth-tax and estate duty laws apply to the property of a person,
the former applying to his property before death and the latter after his death, the
existence of two separate laws with reference to the same property amounts to
procedural harassment to the taxpayers and the heirs of the deceased who have to
comply with the provisions of two different laws. Having considered the relative
merits of the two taxes, I am of die view that estate duty has not achieved the twin
objectives with which it was introduced, namely, to reduce unequal distribution of
wealth and assist the States in financing their development schemes. While the yield
from estate duty is only about Rs.20 crores, its cost of administration is relatively
high. I, therefore, propose to abolish the levy of estate duty in respect of estates
passing on deaths occurring on or after 16th March, 1985. I will come forward in due
course with suitable legislation for this purpose.
89. Earlier in my speech, I referred to certain measures that the Government
proposes to take for the benefit of industrial and other workers. These include the
proposals to give worker’s dues the same priority as secured creditors in the event of
closure of companies, the proposed increase in the bonus limit, and the introduction of
a stock option scheme for exployees and workers. With the raising of the exemption,
limit for personal taxation most of the industrial workers will not be required to pay
17
any income-tax. As a measure of further relief to them, I propose to raise the monetary
ceilling on the exempt amount of retrenchment compensation received by them from
Rs.20,000 to Rs.50,000. I also propose to provide that retrenchment compensation
paid under schemes approved by the Central Government will be exempt from tax in
full. I may also inform Honourable Members that the Government is giving
consideration to the formulation of a scheme for encouraging industry to involve
workers in management and, if necessary, suitable fiscal incentives will be provided
for this purpose.
90. Under a provision made by the Taxation Laws (Amendment) Act, 1984,
salaried taxpayers are chargeable to tax on the perquisite represented by interest-free
loans or loans at concessional rates of interest provided by their employers for certain
purposes. As a measure of further relief to salaried taxpayers, I propose to repeal this
provision.
91. With a view to providing further encouragement for indigenous scientific
research, I propose to provide that lump sum consideration received by scientists for
the know-how developed by them would be spread over a period of three years and
charged to tax accordingly. I also propose to provide that industry may write off the
lump sum consideration paid for acquiring know-how in six annual instalments. In
cases where the know-how has been developed in Government laboratories,
Universities, laboratories owned by public sector companies and other recognised
institutions, the write off would be permitted over a period of three years.
92. Authors of University level text books, dictionaries, etc. in Hindi and
other Indian languages are entitled to a deduction of 25 per cent of the income by way
of royalty, copyright fees, etc. derived by them in respect of such books. This concession
is coming to an end with the current assessment year. In order to encourage the writing
of such books, I propose to continue this concession for another five years.
93. I propose to place donations to the Indira Gandhi Memorial Trust at par
with donations to other funds of national importance. I also propose to provide that
donations to the Prime Minister’s National Relief Fund will qualify for 100 per cent
deduction, as against the deduction of only 50 per cent allowed at present.
94. In the context of the need to bring tax evaders to book, I see little
justification for providing immunity from the penal provisions to those who make a
disclosure only after incriminating books of account and assets in their possession
have been seized by the Income-tax Department. I, therefore, propose to remove the
provisions made by the Taxation Laws (Amendment) Act, 1984 for the grant of
immunity from penal provisions in such cases.
95. I also propose to enter into a dialogue with State Governments and other
authorities with a view to setting up special courts empowered to try tax evaders in
respect of criminal proceedings initiated against them.
18
 96. As a measure for countering tax avoidance, I propose to plug an existing
lacuna in section 167A of the Income-tax Act by providing that an association of
persons shall be charged to income-tax at the maximum marginal rate if the individual
shares of the members, in even a part of its income, are indeterminate or unknown.
Under a provision made by the Finance Act, 1933, business profits derived by charitable
and religious trusts are not exempt from income-tax, except in certain cases.
Conformably with this provision, I propose to provide that exemption from wealth-tax
will also not be available in respect of business assets of such trusts.
97. I shall now deal with the proposals relating to corporation tax.
98. For the financial year 1985-86, I propose to reduce the basic rate of income-
tax applicable to companies by 5 percentage points. At present, closely-held industrial
companies are charged to tax at a lower rate than that applicable to other closely-held
companies. I propose to prescribe. a common rate for all closely-held companies,
except trading and investment companies. In the result, the basic rate of income-tax in
the case of certain categories of closely-held companies will stand reduced by 10
percentage points, from 65 per cent to 55 per cent. This will particularly benefit
companies carrying on employment-oriented activities, such as, consultancy and
advertising services and services for promotion of tourism.
99. The proposed reduction in tax rates, both for the corporate and non-
corporate sectors, would have to go hand in hand with the discontinuance of certain
concessions. Under a provision made in 1980, additional depreciation is granted in
respect of machinery and plant installed during the five-year period, from I st April,
1980 to 3 1 st March, 1985. In the context of the proposed reduction in the rates of tax
and the increase in the general rate of depreciation allowance, from 10 per cent to 15
per cent, with effect from the current assessment year, I do not consider it necessary
to continue the grant of additional depreciation in respect of machinery and plant
installed after 31st March, 1985.
100. Under an existing provision, expenditure incurred by companies and co-
operative societies on approved programmes of rural development is deducted in
computing their taxable profits. While the objective is laudable, a fiscal concession is
not the right instrument to achieve this objective. I, therefore, propose to discontinue
this concession, except in relation to programmes which have been approved by the
prescribed authority before 17th March, 1985. The tax exemption allowed in respect
of profits derived from the publication of books, which would lapse with the assessment
year 1985-86, is not proposed to be continued. I also propose to withdraw the tax
concession in respect of dividends received by Indian companies from certain foreign
companies.
101. The tax holiday concession is at present available in respect of industrial
undertakings that go into production before 1st April, 1985; hotels which start
19
functioning and ships which are brought into use before that date are also eligible for
this concession. I propose to extend this concession for a further period of 5 years.
102. It is necessary to provide our exporters with requisite resources for
modernisation, technological upgradation, product development and other activities
with a view to raising their efficiency and productivity, not only in the export sector
but also in the economy as a whole. In view of these considerations, I propose to
replace the tax concession under section 80HHC of the Income-tax Act by a new
provision. Under the new provision, exporters will be entitled to a deduction of an
amount, not exceeding 50 per cent of their export profits, carried to a reserve account
to be utilised for the purposes of their business.
103. To facilitate the mobilisation of internal resources by the tea industry for
purposes of investment in new machinery, fresh planting and replanting etc. I propose
to provide that companies engaged in the business of growing and manufacturing tea
in India would be entitled to a deduction up to 20 per cent of their profits deposited
in a special account with the National Bank for Agriculture and Rural Development
Withdrawals from this account would be allowed only for specified purposes in
accordance with schemes to be approved by the Tea Board.
104. With a view to leaving larger funds with banks for meeting their increasing
social commitments, I propose to discontinue interest-tax in relation to interest accruing
after 31st March, 1985. I also propose to provide that banks may make tax deductible
provisions for their bad and doubtful debts up to an amount equal to 10 per cent of the
profits or 2 per cent of the aggregate average advances made by their rural branches,
whichever is higher.
105. I also propose to discontinue the provisions relating to disallowance of 20
per cent of the expenditure, in excess of Rs.1,00,000, on advertisement, publicity and
sales promotion; running and maintenance of aircraft and motor cars; and payments
made to hotels. The provision relating to the disallowance of 15 per cent of the interest
paid by non-banking non-financial companies on the public deposits raised by them is
also proposed to be discontinued.
106. Taking into account the effect of withdrawal of some of the axisting
concessions and expected collections on account of the recent Supreme Court judgement
regarding section 80J of the Income-tax Act, loss of revenue in 1985-86 due to my
proposals in respect of relief in tax on corporate sector will be more than offset.
107. The other modifications proposed by me in the sphere of direct taxes are
of relatively minor importance. I would not like to take the time of the House by
elaborating them at this stage.
108. I will not come to my proposals relating to the phased reform of corporation
tax to which I made a reference in the earlier part of my speech.
20
 109. The scheme envisages that next year the basic rate of income-tax in the
case of all categories of companies would be further reduced by 5 percentage points.
In the third year, I propose to discontinue the surcharge on income-tax payable by
companies and to abolish surtax. At the same time, I propose to discontinue the grant
of investment allowance in a phased manner during the next two years. While
withdrawal of investment allowance may have an adverse effect on high-growth capital
intensive industries, the general reduction in corporation tax would lead to higher
retained profits which would benefit all companies. The alternative to the above
proposal is to continue the investment allowance with no further reduction in the rates
of corporation tax and surcharge. I shall be grateful for the comments of the Hon’ble
Members.
110. I now turn to my proposals on the indirect taxes.
111. Taking customs duties first, my principal proposals is with regard to crude
petroleum. Honourable Members will recall that in the last year’s Budget, auxiliary
duty on crude petroleum was raised from Rs.9.50 to Rs.100 per tonne. I propose to
increase it to Rs.300 per tonne. I also propose to levy-.on crude petroleum a basic
customs duty of 10 per cent ad valorem. The revenue yield from these proposals is
estimated to be Rs.620 crores in a full year. Taking this and other factors into account,
there will be an increase in the price of P 0 L products. In other cases, I propose to
continue the auxiliary duty at the existing rates upto the 31st March, 1986.
112. As a measure of protection to the indigenous bearings industry, I propose
to increase the basic customs duty on ball and roller bearings by 50 per cent of the
existing rates. This will result in a revenue gain of about Rs.20 crores in a year.
113. Over the years, the rate of duty applicable to project imports has gone up
and reached the level of 65 per cent. With a view to bringing down capital costs, I
propose to reduce the present customs duty of 65 per cent applicable to project imports
in general to 45 per cent ad valorem and to provide for a lower rate of 25 per cent to
imports for power projects and total exemption from duty for equipment for fertiliser
projects. I propose to extend the concessional project imports rate of 45 per cent ad
valorem to the public telephone exchange network project. These measures will totally
cost the exchequer Rs.290 crores in a year. ,
114. Honourable Members will recall that in the last year’s Budget, customs
duty on imported wood pulp and wood chips for the paper industry was reduced to 30
per cent and nil, respectively. As a measure to relieve the pressure on our forest
resources, I now propose to totally exempt imported pulp and wood chips and make
this concession available to all user industries. Customs duty on wood in certain
specified forms is also proposed to be reduced from the existing level of 100 per cent
to 10 per cent ad valorem. These concessions would entail a revenue sacrifice of
about Rs.17.70 crores in a full year.
21
 115. Not all the proposals in my basket qualify to be described as crude or
wooden. To encourage alternative sources of energy, I propose to provide for total
exemption from customs duty in respect of wind operated electricity generators and
wind operated battery chargers. I also propose to reduce customs duty on exhaust gas
analysers and smoke meters in order to help enforce anti-pollution norms. The revenue
effect of these concessions will be Rs.7.54 crores.
116. I now propose a set of measures aimed at export promotion. I am abolishing
the export duties on twelve items which comprise iron ore, managanese ore, raw
cotton, chromite ore and concentrate, cotton waste, animal feed, manganese dioxide,
deoiled groundnut oilcake, raw wool, kyanite and bridge mica. With this abolition,
export duty will now be leviable only on four items, namely, coffee, unmanufactured
tobacco, mica other than bridge mica and hides and skins. Revenue implication of this
proposal is Rs.15.05 crores.
117. Keeping in view the potential of the leather industry in the field of exports,
I am presenting a package of proposals relating to this industry. I propose to reduce
customs duties on specified machinery used for leather processing, footwear and other
leather goods manufacturing industries, from the general level of 8 1.5 per cent to 35
per cent ad valorem. I propose to fully exempt raw hides and skins, crust leather and
finished cattle leather from import duty. The existing exemption on wet blue leather is
also being made available on a long term basis. The import duty on wattle extract used
by the leather processing industry is being reduced from 87 per cent to 40 per cent ad
valorem. The proposals involve a revenue sacrifice of Rs.20.07 crores in a year.
118. Some concessions were given in the last Budget and in January, 1985 on
imports of gem and jewellery machinery. I now propose to extend the concession to
certain components of gem and jewellery machinery and to some essential tools for
operating them. The revenue effect of this proposal is Rs.53 lakhs. I also propose to
continue the concessions given in the last Budget in respect of specified items of
machinery for food and meat processing and packaging.
119. In order to give relief to the woollen textile industry, I propose to reduce
customs duty on raw wool from 50 per cent to 40 per cent ad valorem. This relief will
cost the exchequer Rs.4.80 crores in a year.
120. Honourable Members would recall that a few months ago, Government
had extended a concessional rate of customs duty of 45 per cent in respect of
components to be imported for the manufacture of fuel efficient commercial vehicles
under a phased manufacturing programme. I propose to extend this conession to
warranty spares for such vehicles. In order to help indigenisation. of the parts of
commercial vehicles, I also propose to make the same concessional rate available to
coponents imported by specified ancillary industries. The concession is proposed to
be extended to components of fuel injection pumps and warranty spares imported by
22
manufacturers of fuel injection pumps. Together, these concessions will cost the
exchequer Rs.24.7 crores in a year.
121. I propose to totally exempt from customs duties certain advanced type of
computers not manufactured in the country. Simultaneously, customs duty on four
important components of computers is being further reduced from 75 per cent to 25
per cent ad valorem with a view to reducing the costs of the indigenous manufacturer
of computers. These proposals would involve a revenue sacrifice of Rs.20.40 crores.
122. The demand of health and medical care has not escaped my attention. I
propose to reduce the duty on certain important items of medical equipment such as
Nuclear,Mapetic Resonance Scanner, CAT Scanner and Linear Accelerator, to 45 per
cent ad valorem. Three specified intermediates used in the manufacture of the anti-
T.B. and anti-Leprosy drug, Rifampicin, are being totally exempted from import duty.
I also propose to reduce the customs duty on eight other drug intermediates as also on
homoeopathic medicines. The revenue effect of these concessions is Rs.14.09 crores.
123. Government has already exempted from the levy of customs duty scientific
and technical instruments, apparatus and appliances imported by research institutions
subject to certain conditions. As a measure of further encouragement to research in
the country, I propose to exempt from customs duty consumable items of research
materials to be imported by public-funded research institutions upto a value of
Rs.50,000/- in a year. This would entail a revenue sacrifice of about Rs.2.5 crores in
a year.
124. In order to encourage domestic production of zip fasteners and discourage
their smuggling, I propose to fully exempt zip fasteners from excise duty. This is in
keeping with the other measures taken by me in this direction. Honourable Members
will recall that recently the import duty on watch components, horological machines
and raw materials was reduced, as also the excise duty on watches. This measure will
cost the exchequer Rs.3.07 crores.
125. In this context, the Honourable Members are aware of the various measures
being taken by Government to tighten the implementation of anti-smuggling measures.
We have also recently announced a liberalised scheme of rewards and incentives in
this connection. I hope Honourable Members of the House will help to create a vibrant
public opinion which alone, in the ultimate analysis, can help to reduce and eliminate
the anti-national activities of smugglers.
126. With a view to giving encouragement to our sports-men winning awards
in events of international significance, we have evolved a scheme by which they are
given suitable concessions in respect of taxes due on the awards.
127. Certain changes in the Customs Tariff Act, 1975 are also proposed. The
details of these proposals are in the Budget papers.
23
 128. Before I deal with my proposals in respect of excise duties, there is one
matter which I would like to mention. It relates to the recommendation of the Eighth
Finance Commission that there was scope for increasing the rates of stamp duty on
bills of lading, letters of credit and general insurance policies. I accordingly propose
to raise the rates of stamp duty on the instruments of bills of lading and letters of
credit. I propose, however, not to disturb the existing rates of stamp duty on general
insurance policies. The new rates of duties would be effective only from the 1st July,
1985. The accrual of additional revenue to the States and the Union territories during
the next financial year would be Rs.12.24 crores.
129. Coming now to the excise duties, let me begin with my proposals for
additional resource mobilisation.
130. The rate of duty in respect of item 68 of the excise tariff is being raised
from the existing level of 10 per cent to 12 per cent. This is likely to yield an additional
revenue of Rs.125 crores by way of central excise duties and Rs.60 crores by way of
countervailing duty in a full year. I must hasten to add that this increase will not affect
the raw materials and manufactured inputs which are intermediates, as the existing
provisions for the set off of the duty paid on goods falling under item 68 used in the
manufacture of other excisable goods, would continue.
131. The excise duty on vegetable product which has been at a low level of 5
per cent for over 15 years is being raised to 10 per cent. This measure would fetch in
a full year additional revenue of Rs.70 crores.
132. The basic excise duty on cement is being raised from Rs.205 per MT to
Rs.225 per MT for the common varieties of cement. This will result in an additional
revenue gain of Rs.66 crores on the excise side and Rs.1.60 crores on the customs side
by way of increase in the countervailing duty.
133. Four new items are being introduced in the Excise tariff which will yield
additional revenue of Rs.19 crores in a year. The first three items are marble blocks,
slabs and tiles, travel goods and organic-chemicals. The last item is a preparation
containing betel nuts and any one or more of other ingredients such as lime, catechu,
cardamom, copra and menthol, put up for sale in unit containers’. Honourable Members
will recognize this ‘coalition’ as pan masala.
134. The extent of duty differential enjoyed by mini steel plants is being reduced.
However, they will still have a duty advantage of Rs.50/- per MT. This measure is
expected to yield an additional revenue of Rs.18 crores in a full year.
135. I propose to increase the basic excise duty on aerated waters from 25
paise to 30 paise per bottle of 200 ml. and on soda water from 5 paise to 10 paise per
bottle of 200 nil. There will be proportionate increase for bottles of higher capacity. I
also propose to increase the basic duty on crown corks from 2 paise to 5 paise per
24
unit. These proposals are expected to yield an additional revenue of about Rs.16.75
crores in a full year.
136. As a measure aimed at reducing evasion, I propose to provide for purely
specific rates of duty in respect of flat glass. I also propose to rationalise the tariff
structure relating to glass. These measures will result in a revenue gain of Rs.12.5
crores.
137. I propose to raise the basic excise duty on printing and writing paper and
kraft paper, of specified varieties, by Rs.200/per MT. and to increase the basic excise
duty on certain speciality papers like coated paper, glassine paper and cigarette tissue.
The revenue gain from these measures will be Rs.10.50 crores.
138. I propose to raise the total duty on biris from Rs.3.74 to Rs.4 per thousand,
on metal jacketed batteries from 20 per cent to 25 per cent ad valorem, and on storage
batteries from 15 per cent to 20 per cent. These measures are expected to result in a
revenue gain of Rs.16.84 crores.
139. My next few proposals are rationalisation measures.
140. The concessional rates applicable to veneer matches are being extended
to cardboard matches produced in the non-mechanised sector. The differential rates of
duty for use of cardboard in matches in the mechanised sector are dispensed with.
There will be only four rates of duty, namely, Rs.1.60, Rs.4.50, Rs.5.15, and Rs.6.85
per gross boxes as against the multiplicity of rates prevailing now. I hope this measure
will result in greater use of cardboard in place of wood in the non-mechanised sector.
141. In the case of household, laundry and toilet soaps, duty rates depending
only on the value of the soap are being prescribed. The present limit of Rs.7,800 per
tonne for qualifying for the lower rate of duty is being raised to Rs.10,000 per tonne.
All soaps of value below Rs.10,000 per MT will be charged to concessional duty of 5
percent and other higher priced soaps will be charged to 15 per cent advalorem. There
will be an incidental revenue gain of about Rs.1 crore from this measure.
142. In respect of gases and tubes and flaps of tyres, the present ad valorem
levies are being converted into specific rates to simplify the assessment procedures.
143. I have also included in the Finance Bill some provisions designed to achieve
rationalisation, simplification and clarity in the tariff nomenclature in respect of
cosmetics and toilet preparations, iron and steel and non-ferrous metals. This measure
in the case of cosmetics and toilet preparations is estimated to result in a revenue gain
of about Rs.5 crores. There are certain other minor proposals with not much revenue
significance, which include revision of rates of duty in some cases and readjustment
of duties.
144. My next two proposals are a measure of simplification as well as relief.
The first relates to special excise duty. This duty, as Honourable Members are aware,
25
is levied as a percentage of the basic excise duty, the maximum being 10 per cent. The
present system entails maintenance of separate account in respect of this levy. As a
first step towards abolition of special excise duty, I propose to exempt as many as 100
items from this levy merging the special excise duty in some cases with the basic duty.
Only 32 items will now be subject to this levy. This measure will cost the exchequer
Rs.38.20 crores.
145. The second proposal regarding simplification concerns the licence fee on
television sets, VCRs and radios. While the requirement of taking out a licence in the
case of radios, television sets and VCRs is being dispensed with, a new one-time levy
is being introduced on television sets alone at a uniform rate of Rs.100 per set in lieu
of the present Licence fee of Rs.50 payable every year till the T.V. set lasts. Hence
forth, people will not have to go to the post offices for taking out or renewing licences.
This levy would be an additional duty of excise, so far as T.V. sets manufactured in
India are concerned. The additional duty of excise collected from this will accrue to
the Centre only and will not be shareable with the States. Additional duty of customs
on equal amount would be levied on television sets when imported into India. The
collection on this account is expected to be Rs.18 crores in a year on the excise side
and Rs.2 crores on the customs side.
146. I Now I come to my proposals regarding textiles. I propose to partly shift
the cotton fabrics duty to the yarn stage. Unprocessed cotton fabrics are being fully
exempted and duty burden on cotton yearn is being increased generally by about 25
per cent. However, cotton yarn in straight reel banks which is generally used by
handlooms will continue to be exempted. The concessional rates for yam in cross reel
hanks supplied to registered handloom cooperative societies, are also being continued.
Power processing of fabrics, whether in composite mills or elsewhere, will now attract
the same processing stage duty generally at a lower rate. While lowering the overall
rate, 1 have taken care to ensure that the additional duty component collected in lieu
of sales tax which goes to the States is increased. Exemption enjoyed by hand processors
is being continued. So also the exemption to handloom fabrics processed by approved
independent processors and registered handloom cooperative societies is being
continued.
147. I also propose to fully exempt shoddy woollen blankets. Excise duty on
certain poIyester-wool blended fabrics is also being reduced.
148. My proposals on excise duties relating to textiles would result in a revenue
loss of about Rs.13.85 crores in a full year.
149. As Honourable Members are aware, substantial concessions in customs
duty have been accorded in the last two years to the electronics industry keeping in
view the growth potential of this industry. I have already referred to the concessions
in customs duty, in respect of computers. I propose to completely exempt computers
26
from excise duty. I have also attempted to rationalise the existing excise tariff structure
in respect of different electronic items.
150. In order to simplify assessment of excise duty on television sets, I propose
to fix specific rates of duty relatable to the size of the T.V. screen. While doing so, I
am also exempting from excise duty black and white television sets of screen size not
exceeding 36 cms.
151. I These proposals will cost the exchequer Rs.7.72 crores in a year.
152. I propose to increase the basic excise duty on commercial vehicles from
10 per cent to 15 per cent ad valorem and on three-axled vehicles from 7.5 per cent to
10 per cent ad valorem. This would yield about Rs.45 crores in a year. However, I
propose to provide for credit of the duty paid on tyres and batteries used in the
manufacture of all commercial vehicles including three-axled vehicles. I also propose
to allow a reduction of duty by 2 percentage points in respect of commercial vehicles
if such vehicles are turbo-charged. This concession will also be extended to passenger
cars if they are turbo-charged. These two proposals will cost the exchequer Rs.82
crores in a year. The net loss of revenue would, therefore, be Rs.37 crores. I hope
these measures would help manufacturers to reduce the prices of commercial vehicles.
153. Honourable Members would recall that in the 1982 Budget, full exemption
was given to duplex paper board intended for lamination with low density polyethylene
and intended for packaging of milk. I propose to extend the concession to all varieties
of paper and paper board intended for lamination with low density polyethylene,
which should help in better utilisation and marketing of milk. I also propose to fully
exempt accessories of cycles and leather board from excise duty. These measures will
entail a revenue sacrifice of Rs.2. 10 crores in a full year.
154. My last proposal relates to the excise duty exemption for the small scale
sector. As the Honourable Members are aware, the excise duty mechanism has been
used to encourage the growth of this sector. Under the present general scheme relating
to 67 specified groups of commodities, full exemption is available upto first clearances
of Rs.7.5 lakhs and clearances thereafter upto Rs.25 lakhs are charged to duty at 75
per cent of the duty otherwise payable. However, a unit whose clearances had exceeded
Rs.25 lakhs in the preceding financial year is not eligible for the concession. In order
to see that the cut-off limit of Rs.25 lakhs does not inhibit the growth of the small
scale sector, I propose to raise the eligibility limit to Rs.75 lakhs. I also propose to
further liberalise the scheme by providing for slab rates. For clearances between Rs.7.5
lakhs and Rs.15 lakhs the rate will be 25 per cent, for clearances between Rs.15 lakhs
and Rs.25 lakhs the rate will be 50 per cent and for clearances between Rs.25 lakhs
and Rs.40 lakhs the rate will be 75 per cent, of the duty otherwise payable. ‘Me
revised scheme envisages that even when a manufacturer exceeds the limit of Rs.40
lakhs, he does not lose the concessional rates applicable at the lower slabs, tin he
27
exceeds Rs.75 lakhs. A similar scheme with some modifications is being introduced in
respect of goods falling under item 68.
155. My proposals relating to the small scale sector entail a revenue sacrifice
of Rs.20 crores.
156. My proposals in respect of customs and excise duties outlined above are
likely to yield additional revenue of Rs.707 crores from customs duties and Rs.424.29
crores from excise duties. The concessions and reliefs aggregate Rs.419.88 crores on
the customs side and Rs.164.75 crores on the excise side. The net additional revenue
from customs duties thus would be Rs.287.12 crores and that from excise duties
Rs.259.54 crores. In the excise duties, the Centre’s share would be Rs.139.59 crores
and that of the States Rs.119.95 crores. The Centre’s shares includes a sum of Rs.18
crores on account of additional excise duty on television sets. I would like to mention
that the States’ share has been calculated at the rate of 45 per cent of the net proceeds
from basic excise duties and that steps have been taken to increase the incidence of
additional duty in lieu of sales tax.
157. Copies of notifications giving effect to the changes in customs and excise
duties effective from the 17th March, 1985, will be laid on the Table of the House in
due course.
158. I had earlier mentioned that the Budget deficit at the existing rates of
taxes would be Rs.3660 crores. The proposed tax measures, taken together with reliefs
and concessions, are estimated to yield net additional revenue of Rs.311 crores to the
Centre and Rs.132 crores to the States during 1985-86. This will leave an uncovered
deficit of Rs.3349 crores. This deficit is lower than that in the current year and is
reasonable. I am confident that various policies and measures which we have proposed
will further stimulate the economy and contribute to the welfare of the common man.
159. Let me end, Mr. Speaker, as I began, with the words of the late Prime
Minister, Smt. Indira Gandhi: “We all have faith in new India. Let us put our shoulder
to the wheel”.
[16th March, 1985]

28
 SPEECH OF SHRI PRANAB MUKHERJEE MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1984-85

Sir,
I rise to present the Budget for the year 1984-85.
2. The Budget has been formulated against the background of strong recovery
in national income and agriculture, and an equally impressive improvement in our
balance of payments. These and other developments in the economy have been covered
in detail in the Economic Survey, presented to the House a couple of days ago. I shall,
therefore, be brief in reviewing the current economic situation.
3. As the House is aware, the country had to go through two years of severe
drought and one year of indifferent monsoon during the period 1979-80 to 1982-83.
Foodgrains production, which had reached 132 million tonnes in 1978-79, declined to
110 million tonnes in the following year. It recovered to 133 million tonnes in 1981-
82 but then declined again to 128 million tonnes in 1982-83 because of another severe
drought. The current year has seen a major breakthrough in foodgrains production,
and we are not only likely to recover lost ground, but also improve substantially on
the previous peak. Foodgrains production in 1983-84 is expected to exceed the target
of 142 million tonnes. Agricultural production as a whole is likely to increase by 9
per cent over the previous year. Honourable Members will agree that this is convincing
testimony to the soundness of our agricultural strategy and to the hard work of our
farmers.
4. Industrial performance shows an improvement over the previous year, but
the recovery in industrial production still seems weak. Industrial growth in the current
year is likely to be about 4.5 per cent, compared with 3.9 per cent in 1982-83. For the
four year period after 1979-80, industrial growth will average slightly more than 5 per
cent. This is well below the potential of the industrial sector. We must aim at a
growth rate of 7 to 8 per cent in industry if we are to maintain high-rate of growth of
CDP and provide employment for our growing labour force in the years ahead.
5. The national income growth in 1983-84 is likely to be in the range of 6 to
7 per cent. In the four years since the present Government took over, the average
growth rate in national income has been about 5.4 per cent which is higher than the
rate of growth in the first four years of any previous Plan. Per capita income in this
period will have risen at an average rate exceeding 3 per cent per year. This achievement
is all the more noteworthy when viewed against the background of a highly adverse
international economic environment, and-a severe drought.
1
 6. The years 1981-82 and 1982-83 were characterised by exceptionally low
rates of inflation. The annual rate of inflation which had reached a high of 21.4 per
cent in 1979-80 was brought down to 16.7 per cent in 1980-81 and further to only 2.4
per cent at the end of 1981-82. The annual rate of inflation at the end of 1982-83 was
6.2 per cent, which is unusually low for a drought year. But, there has been acceleration
in the annual rate of inflation in the current year despite an excellent crop. The initial
delay in the arrival of the monsoon and the high liquidity in the economy exerted
pressure on prices in the early part of the year. The favourable effects of a good crop
led to a decline in cereal prices after harvesting. However, this was largely offset by
sharp increases in prices of a few commodities such as pulses, certain edible oils,
rubber, tea and cotton because of both domestic and international factors. As a result,
the seasonal dip in prices, which normally occurs towards the end of September has
been weak.
7. As the House is aware, the Government has taken several measures to
minimise the impact of the drought and to contain the price rise. Action was taken to
increase procurement, availability, and releases of sensitive commodities such as wheat,
sugar, and edible oils through the public distribution system. Steps were also taken to
mop up excess liquidity with the banking system and to curtail Government expenditure.
Exports of cotton and CTC teas were restrained in order to increase domestic
availability. Further measures will be taken as required to ensure that there is no
repetition of the experience of 1979-80, when prices were allowed to increase by over
21 per cent.
8. Let me now turn to the external payments situation facing the economy.
In my budget speech last year, I had informed the House of the improvement that had
taken place in our balance of payments in 1982-83. I am happy to say that this
improvement has gained strength in 1983-84. The trade gap, which declined from
Rs.5800 crores in 1981-82 to about Rs.5500 crores in i982-83, is expected to decline
further in the current year. Receipts on invisibles account have remained buoyant and
the incentives for non-resident deposits have been highly successful. Our foreign
exchange reserves, Inclusive of IMF drawings, have increased by Rs.662 crores in the
current financial year upto 10th February.
9. Our strategy for bringing the balance of payments under control, after the
sharp deterioration that occurred in 1979-80, has paid rich dividends. In view of the
improvement in our payments position, the Government has voluntarily decided not to
avail of the balance of 1.1 billion SDR under the Extended Fund Facility of the IMF.
While intervening in the debate on the IMF loan in this House in December, 1981, the
Prime Minister had this to say, and I quote:
“It does not force us to borrow, nor shall we borrow unless it is in the
national interest. There is absolutely no question of our accepting any
programme which is incompatible with our policy, declared and accepted
2
 by Parliament. It is inconceivable that anybody should think that we
would accept assistance from any external agency which dictates terms
which are not in consonance with such policies.
This was true then, and it is true now.
10. Belying the prophecies of doom by many a self styled Cassandra, the
economy has emerged stronger as a result of the adjustment effort mounted by us.
None of the dire consequences that we were being warned about has occurred. We
have not cut subsidies. We have not cut wages. We have not compromised on Planning.
We have not been trapped in a debt crisis. We have not faltered in our commitment
to anti-poverty programmes or the welfare of our people. We entered into this loan
arrangement with our eyes open. We have come out of it with our heads high.
11. We hope that our decision to forgo the balance of the amount available to
us under the IMF loan would, in a small way, help the IMF to provide greater assistance
to other developing countries. I must also take this opportunity to express our
appreciation for the goodwill and mutual-understanding that has marked our relationship
with the IMF during the entire period of the EFF arrangement.
12. However, there can be no room for complacency. We must persist with
the policies that have brought about this favourable outcome. It is necessary to work
even harder to save imports in critical areas and to increase exports. Our exports, net
of oil, in the first seven months of 1983-84 increased by 9.9 per cent. This is a
reasonable performance considering that world trade has been stagnant for quite some
time. We would need to do even better in the future in order to meet the essential
import requirements of a growing economy, and to keep the debt service ratio at a
manageable level.
13. The Government has taken several steps in the last four years to mobilise
resources for public sector investment and to increase the rate of public savings for
financing the Plan. Apart from adjustment of the tax rates, the fiscal instrument has
been used to provide stronger incentives for savings in the form of financial assets.
Interest rates on deposits were also revised upwards with the same objective in view.
These policies have been highly successful and the inflow of funds in small savings as
well as time deposits has exceeded expectations. An important task of fiscal policy in
the years ahead is to strengthen this trend.
14. In considering the strategy for resource mobilisation we have to recognise
that while our tax rates are relatively high, the tax base is narrow. The evils of black
money and tax evasion also have to be reckoned with. The Government is fully
committed to come down heavily on tax evaders. At the same time, we must ensure
that, as far as possible, the tax system itself does not become a source of encouragement
for evasion. Simplification and rationalisation of the tax system must, therefore,
remain important objectives of our fiscal policy.
3
 15. The Central public sector enterprises had shown a net profit of Rs.618
crores in 1982-83. Although a large number of public sector enterprises have continued
to show profits in 1983-84, their overall performance has been below expectations.
The erosion of profitability was largely due to losses incurred in a few sectors, such
as steel and coal. The Government has taken steps to improve their functioning. We
must ensure that capital is used more efficiently so that larger resources are available
for future expansion.
16. In order to fulfil our social commitments and protect jobs, Government
had to take over a large number of sick units and sustain them through injection of
fresh resources. While some of them have turned the corner, a large number of them
continue to incur losses. The time has come to undertake a careful review of the
performance of sick units in the public sector with a view to reducing the drain on our
resources. This Government proposes to do. Economic viability must be the principal
test for the survival of an enterprise.
17. The growth of deposits with the banking system in the current year has
substantially exceeded their requirements of funds for credit expansion. This has, in
the short run, resulted in some excess liquidity with the banking system. In this
situation, and in order to mobilise some resources for public investment, it is considered
desirable to introduce another financial instrument with broadly the same characteristics
as longer term time deposits with banks. Under the scheme, which will be called the
“National Deposit Scheme”, certificates of deposits with a maturity of four years can
be purchased from designated outlets. The investor will have the option to en-cash
these deposits any time after one year. The interest rate will be 10.5 per cent if these
deposits are held for four years, and 10, 9 and 7 per cent if these are held for three,
two and one year respectively. Interest from these deposits will be eligible for tax
exemption upto the full limit of Rs.10,000/- under Section 80L of the Income-tax Act.
The target of receipts under this scheme is Rs.500 crores over a period of time. I
should clarify that this is a temporary scheme, and will be discontinued after this
target is reached or earlier, if monetary developments so warrant.
18. Pursuant to the recommendations of the High Level Committee on financial
institutions set up by the Government last year, it has been decided to make certain
changes in the “convertibility clause”. In view of the increases in capital costs of
projects and the investment limit for the de-licensed sector, the threshold for exemption
from convertibility clause is being raised from the existing level of Rs.1 crore to Rs.5
crores.
19. Further, in the case of non-MRTP companies, convertibility clause will
not be stipulated where the holding of equity by all financial institutions in such a
company exceeds 26 per cent. In the case of M11TP companies/large houses, however,
the existing limit of 40 per cent will continue. In order to encourage investment in
“No Industry” districts there will be complete exemption from convertibility clause in
4
respect of units proposed to be located in these districts. The functioning of nominee-
directors of institutions on the boards of assisted companies is also being revamped.
Detailed guidelines on these and other related aspects are being issued separately.
20. The Industrial Development Bank of India has been providing liberal
financing facilities for modernisation of industry. The IDBI’s scheme for this purpose
was recently extended to all industrial units and assistance under this scheme upto
Rs.4 crores is being provided at a concessional rate of interest of 12.5 per cent. In
order to reduce financing costs of modernisation schemes, it has been decided that the
rate of interest under the IDBI scheme for loans upto Rs.4 crores will be reduced to
11.5 per cent until further notice. Weak units will be provided assistance upto this
amount at an even lower rate of interest of 10 per cent.
21. As the House is aware, the Government has been giving consideration to
the desirability of a change in the financial year. As I informed the House last year,
I invited the views of the State Governments on this proposal. The response has been
generally favourable. In order to examine suggestions received from State Governments
as well as trade and industry, and to work out the modalities for effecting a change in
the financial year, I propose to set up an expert committee, which would include
representatives of Central Government, State Governments, Reserve Bank of India,
Comptroller and Auditor General and some non-official members. This committee
will be requested to submit its report by the end of September, 1984.
22. I shall now turn to the Revised Estimates for 1983-84 and the Budget
Estimates for 1984-85.
REVISED ESTIMATES FOR 1983-84
23. The House will recall that the Central sector Plan outlay for 1983-84 was
fixed at Rs.13,870 crores. This was to be financed to the extent of Rs.8,390 crores
from the budget and Rs.5,480 crores through the internal and extra-budgetary resources
of the public sector enterprises. Despite erosion in the internal resources of certain
public sector enterprises, it has been my endeavour to ensure that the total Plan outlay
during the year is not adversely affected. The Central Plan outlay in 1983-84 is now
estimated at Rs.14,059 crores. This has been made possible by an increase in the
budgetary support by Rs.1,007 crores over the Budget Estimates.
24. Budgetary support for the Posts and Telegraphs Plan has been increased
by Rs.203 crores. The Railway Plan outlay has been stepped up by Rs.100 crores
with an additional budgetary support of Rs.54 crores. In the Transport and
Communications sectors, I have provided additional funds for Space projects like
INSAT, and extension of television coverage. To maintain the progress of the
Visakhapatnam Steel Plant, the budget provision has been augmented by Rs.250 crores.
For Chemicals & Fertilizers, the enhanced allocation of Rs.133 crores is largely due
to the fall in internal resources and change in the pattern of financing. In the Energy
sector, coal projects get additional funds of Rs.30 crores to expedite on-going projects.
5
To improve the capital base of the Industrial Development Bank of India, a special
provision of Rs.130 crores has been made. Rupees 100 crores have been set apart for
the new rural landless employment guarantee programme launched during the current
year. I have also increased the provision for welfare of scheduled castes/ tribes and
backward classes and important social sectors like health and family welfare.
25. The Central assistance for States’ and Union territories’ Plans has been
increased by Rs.392 crores from Rs.4,462 crores to Rs.4,854 crores. This includes
advance Plan assistance of Rs.190 crores to States affected by failure of monsoon
particularly in the first half of the current year. Additional Plan assistance of Rs.82
crores has been provided to the State of Assam, a large part of which is for relief and
rehabilitation of the riot victims in that State.
26. Utmost care has been taken to contain the non-Plan expenditure. There
were, however, certain unavoidable commitments. Additional provision of Rs.400
crores has been made for ways and means advances to State Governments and Technical
Credits under rupee-trade agreements. The short-term loans to States for agricultural
inputs have been stepped up by Rs.110 crores. There is an increase of Rs.300 crores
in loans to State Governments, as their share of small savings will be higher on account
of higher collections. The second half of the current year witnessed floods, cyclones
and hailstorm in as many as 15 States. An additional non-Plan grant of Rs.150 crores
has been provided for the relief of distress on account of these calamities.
27. Further, I am providing additional non-Plan assistance amounting to Rs.500
crores to States. I shall refer to this later while dealing with the State Plan outlay for
next year. Out of this loan of Rs.500 crores, an amount of Rs.400 crores would help
the States to clear part of their deficits of 1982-83.
28. The provision for Defence has been increased from Rs.5, 971 crores to
Rs.6, 350 crores in the Revised Estimates. The interim relief and bonus sanctioned to
Government employees in the current year is estimated to cost about Rs.280 crores in
respect of all the departments of the Government. Subsidy on imported and domestic
fertilizers will go up by Rs.250 crores to Rs.1,048 crores as the consumer price of
fertilizers was reduced in June 1983. During the current year, because of financial
difficulties, certain public sector undertakings, particularly Heavy Engineering
Corporation, National Textile Corporation and Delhi Transport Corporation, will be
requiring larger non-Plan assistance than provided in the Budget Estimates. It has
also been decided to extend the subsidy scheme for Calcutta Port and Haldia Channel
dredging up to the end of next year.
29. Revised Estimates also include additional provision of Rs.502 crores for
subscription towards our higher quota in the IMF. This, however, will have no net
impact on the budget as payments for quota subscriptions are matched by corresponding
receipts. Taking these and other variations into account, the non-Plan expenditure in
6
the Revised Estimates is placed at Rs.24,773 crores against the Budget Estimates of
Rs.21,984 crores.
30. Coming to receipts, the Budget Estimates of receipts from income-tax
and customs duties are likely to be achieved. Corporation tax receipts will be higher
by Rs.203 crores due to larger payments by oil companies. Union excise duties are
also estimated to be Rs.85 crores higher mainly due to larger collection of cesses on
crude oil and coal. The Centre’s tax revenue, after paying the States’ share of taxes,
is estimated at Rs.15,700 crores as against the Budget Estimates of Rs.15,460 crores.
31. Under non-tax revenues, the dividend from Railways is likely to be Rs.127
crores less than the Budget Estimates. This decrease will, however, be more than
offset by increases under other heads and total non-tax revenue in the current year is
expected to show an improvement of Rs.130 crores over the Budget Estimates.
32. Under capital receipts, I am happy to inform the House that the net
collections under small savings during the current year may amount to Rs.2,200 crores
against the Budget Estimates of Rs.1,700 crores. This is a welcome response to the
incentives provided for small savings in the current year’s budget. The repayment of
Technical Credits is expected to be Rs.1,150 crores as against Rs.800 crores assumed
in the Budget. The receipt, net of outgo, will be Rs.350 crores against the Budget
Estimates of Rs.200 crores.
33. The receipts from special deposits of non-Government provident funds
and the like are estimated to be Rs.190 crores higher than the Budget Estimates.
Taking into account the deposits of surplus funds of oil sector, additional recoveries of
ways and means and short-term advances to the State Governments and other variations,
capital receipts in the current year are estimated at Rs.15,965 crores as against the
Budget Estimates of Rs.12,656 crores.
34. Total receipts are thus estimated to go up from Rs.33,250 crores to
Rs.36,929 crores. This will leave a budgetary deficit of Rs.1695 crores for the current
year as against the Budget Estimates of Rs.1586 crores. This excludes the special
loan assistance of Rs.400 crores provided to States for clearing their overdrafts at the
end of the previous year 1982-83. I am sure the House will agree that despite
unavoidable budgetary pressures, we have been able to keep the deficit within prudent
limits.
BUDGET ESTIMATES FOR 1984-85
35. Honourable Members will recall that when our Government took office in
January 1980, an important task before us was to revitalise the planning process and
to give a new thrust to the programmes of development. I am happy to say that, in the
last four years, we have been able to achieve an unprecedented increase in the tempo
of public investment.
36. For 1984-85, the approved Plan outlay of the Centre, States and Union
territories will be Rs.30,132 crores as compared to Rs.25,480 crores in 1983-84. The
7
Central Plan outlay for 1984-85 is Rs.17,351 crores, which represents a step up of 25
per cent over the approved Plan outlay of Rs.13,870 crores in 1983-84.
37. The Plan outlay for the States and Union territories is placed at Rs.12,78l
crores as compared with the final approved outlay of Rs.11,678 crores in 1983-84.
Central assistance for the Plans of States and Union territories will be Rs.5050 crores
as against Rs.4462 crores in 1983-84 Budget Estimates, representing an increase of
13.2 per cent over the allocation made for the current year.
38. Within this aggregate, Plans of individual States show a varied picture.
Some States have managed their finances well; they have been able to raise additional
resources and effectively utilise these to implement adequately sized Plans, providing
development and growth to their people. Unfortunately, some States, for reasons of
their own, have used their resources for various other purposes; they have not invested
their resources, including additional resources mobilised, for development and have
also resorted to large overdrafts on the RBI.
39. With a view to assisting even such States, various facilities and
opportunities were provided from time to time. At the beginning of the Sixth Plan
itself, recovery of outstanding advance assistance amounting to Rs.1412 crores was
postponed. This was done to enable States to start with a clean slate. However, State
overdrafts again grew, and in June 1982, I decided to clear States’ closing deficits of
the previous year with a medium term loan of Rs.1743 crores. RBI also doubled the
ways and means limits available to the States. Again last year, while presenting the
budget, I announced an increased level of Central assistance. All these measures were
taken primarily to assist States to readjust their financial affairs and to be able to
implement State Plans of adequate size.
40. Unfortunately, despite these measures, some States continued to rely
heavily on overdrafts even after March 1982. Their proposed deficits at the end of
March 1984 would have harshly affected their Plan sizes if these deficits were adjusted
against next year’ s Plan, as per normal practice. In considering the ways of overcoming
this problem, I have found myself in a predicament. On the one hand, no Finance
Minister of the country can remain unconcerned about the size of a State’s Plan. On
the other hand, if assistance is extended to defaulting States, the well-managed States
can legitimately complain that they have not got their just rewards from the Centre for
their better performance.
41. In the past few weeks, discussions were again held with the Chief Ministers
of States whose overdrafts with the RBI were high. Several State Governments have
agreed to take the necessary measures to improve their financial position and to reduce
their reliance on overdrafts. On my part, I have agreed to take further steps to provide
additional assistance to States in order to protect their Plans as far as possible. In
doing so, I have been particularly conscious of the need to keep up the momentum of
anti-poverty programmes. Central assistance is also being further increased. With
8
this, the aggregate assistance during the Plan period will amount to Rs.17,790 crores
as against Rs.15,350 crores envisaged in the Plan document. Further, as I mentioned
earlier, I have made an additional provision of Rs.500 crores in the Revised Estimates
for 1983-84. This special assistance would enable these States to clear part of their
overdrafts with the RBI. States have also been informed that closing deficits, upto the
permissible ways and means limits from the RBI, will not be adjusted from next
year’s Plan resources.
42. For those States who have managed their finances well, I am working out
a suitable scheme to provide some additional assistance to them in 1984-85. This is
only just and appropriate.
43. Mr. Speaker, Sir, I am sure that the House will agree with me that, despite
severe resource constraints of its own, the Central Government has done the maximum
that it can to solve the States’ problems. The rest, however, is upto them.
44. Altogether, in the Sixth Plan period, the public sector Plan at current
prices will be over Rs.110,000 crores. This compares with Plan expenditure of
Es.46,700 crores in the preceding five years, which of course, include three years of
“non-Plan” launched by the previous Government. In real terms too, the Sixth Plan
will constitute a massive increase over the outlays provided for in any previous Plan.
This, Mr. Speaker, is the measure of achievement of this Government in accelerating
the pace of development in the current Plan period.
45. In the last four years, the present Government introduced a number of
schemes for the benefit of the weaker sections of the society, particularly in the rural
areas. These include the Integrated Rural Development Programme, the National
Rural Employment Programme and the two new programmes announced by the Prime
Minister on 15th August, 1983, namely, the Rural Landless Employment Guarantee
Programme and the scheme for providing self-employment opportunities to the educated
unemployed. Each of these programmes is designed to create opportunities for
employment and income generation for particular target groups, while also creating
productive assets.
46. In formulating the next year’s Plan we have provided the maximum support
to these and other programmes that benefit the rural poor directly. The total allocation
for various programmes of the Ministry of Rural Development would be Rs.932 crores,
which is nearly double the amount of Rs.480 crores provided in 1983-84. For the
IRDP an allocation of Rs.216 crores is being provided, which is to be matched by the
States. The number of beneficiaries under the programme in 1984-85 is estimated at
over 3 million. For the NREP, the outlay for 1984-85 is Rs.230 crores, which will
again be matched by the States.
47. The allocation for Rural Landless Employment Guarantee Programme,
which seeks to provide employment for 100 days in a year to at least one member of
9
every rural landless family, is being stepped up to Rs.400 crores in 1984-85 as against
a provision of Rs.100 crores in 1983-84. This, together with the NREP, will provide
550 million man-days of work in rural areas in 1984-85. An allocation of Rs.25 crores
is being made for the programme for providing self-employment opportunities to the
educated unemployed. As the House is aware, the budgetary provision under this
programme will be used as capital subsidy against loans to be given by banks. I may
add that for these two new programmes, depending on the progress of expenditure,
more funds will be provided during the course of the year as necessary.
48. In the Plan for 1984-85, Rs.243 crores have been earmarked for the
accelerated rural water supply programme. The States on their part are expected to
provide Rs.364 crores for this purpose under the minimum needs programme. Over
50,000 problem villages are expected to be provided with drinking water facilities
during 1984-85.
49. The programme for integrated child development services is an important
part of our efforts to help women and children in the backward areas, urban slums and
tribal areas of our country. This programme is already in operation in 820 blocks. By
the end of 1984, the scheme will become fully operational in an 1000 identified
blocks. A provision of Rs.36 crores has been made for this scheme. A total allocation
of Rs.78 crores is being provided for various schemes of the Department of Social
Welfare in 1984-85.
50. The provision in the Central Plan for the various programmes benefiting
the scheduled castes and scheduled tribes and other backward classes has been increased
to Rs.209 crores in 1984-85 compared to Rs.176 crores only in 1983-84. Plan outlay
for the programmes in education and culture has been substantially stepped up to
Rs.204 crores in 1984-85 as against Rs.155 crores in 1983-84. Likewise, the Plan
outlay for health and family welfare programmes has also been stepped up by nearly
32 per cent from Rs.460 crores in 1983- 84 to Rs.605 crores in 1984-85. The family
welfare programmes will cover an additional 20 million persons.
51. These and other socio-economic priorities of the Government are reflected
in the 20-Point Programme which is being vigorously implemented. The total amount
allocated to the Programme in the Central Plan is Rs.4038 crores, which is an increase
of about 47 per cent over the current year’s provision. Inclusive of the outlays to be
provided by the States and Union territories, the total provision for the 20-Point
Programme will be Rs.11,858 crores, representing nearly 40 per cent of the total
annual Plan outlay of the Centre, States and Union territories.
52. An important source of strength for the economy has been the tremendous
strides made in the agricultural sector. The next year’s Plan will continue the high
priority given by the present Government to the development of this sector. Thus, the
total outlay for the various programmes of the Ministry of Agriculture will be Rs.758
crores compared to Rs.556 crores in the current financial year. The outlay includes
10
Rs.38 crores for the National Oilseeds Development: Project which together with the
on-going programmes, visualises an additional production of 9.4 lakh tonnes during
1984-85 itself.
53. To further strengthen the country’s infrastructure, higher allocations are
being provided for power, coal, railways and ports. The total provision for various
power projects adds to Rs.1764 crores, which represents a 44 per cent increase over
1983-84. The allocation for projects of the Department of Coal is Rs.1310 crores as
against Rs.1076 crores in 1983-84, and the target for coal production is 152 million
tonnes in 1984-85. The provision for the Railways in 1984-85 is Rs.1650 crores,
which is 23 per cent higher than the current year. It is expected that the revenue
earning traffic to be carried by the Railways will increase to 245 million tonnes in
1984-85. An allocation of Rs.201 crores is being made for the development of ports,
including Rs.27 crores for the deepening of the Madras harbour.
54. An outlay of Rs.3127 crores is being provided for petroleum. This includes
a sum of Rs.2685 crores for the programmes of exploration and production, and Rs.443
crores for the various schemes of refining and marketing. The target for production of
crude oil in 1984-85 is about 30 million tonnes. A provision of Rs.200 crores is also
being made for a gas pipeline project for supply of Bassein gas to new fertilizer
projects to be set up at Bijaipur, Jagdishpur, Aonla, Babrala, Shahjahanpur and Sawai
Madhopur.
55. Higher allocations have been provided for steel, non-ferrous metals, paper,
cement and several other sectors, which are important for country’s industrial
development. I would also like to draw the attention of the House to the programmes
for the development of science and technology, conservation of natural resources, and
improvement of the environment in the Plan for 1984-85. The successful positioning
of INSAT-IB in a geocentric orbit in August last, testifies to the excellent work done
by our scientists, engineers and technicians. It is also a matter of pride to us that India
has joined a select group of countries which have permanent scientific stations in the
Antarctica. India has also achieved the distinction of being the only developing country
to be given the status of ‘pioneer investor’ by the Convention on the Law of the Sea,
giving us the right to exploit the mineral resources of the deep sea beds.
56. Finally, I should mention that the incentive schemes for better performance
in selected areas, initiated in 1983-84, will continue in 1984-85 also. As the House is
aware, these schemes are designed to improve the functioning of the electricity boards,
and provide further impetus to the programmes for small and marginal farmers, rural
water supply schemes, environmental improvement in urban slums, construction of
field channels in command area development projects, and adult education for women
and elementary education for girls. A lumpsum provision of Rs.200 crores is being
made for this purpose. Lest the Honourable Members take me to be a magician, who
can do so much with so little, I hasten to clarify that the incentive scheme is designed
11
to provide additional resources linked to performance for specified schemes. There
are, of course, also separate substantial allocations for each of these schemes.
57. I have only briefly touched upon the main priorities and objectives of the
Annual Plan for 1984-85. Further details are available in the budget documents.
58. In order to provide the maximum possible outlay for the Plan, I have
taken special care to ensure that non-Plan expenditure is kept at the minimum. However,
certain increases are necessary and unavoidable. I should also add that the estimates
of receipts from and payments to State Governments take into account the
recommendations contained in the interim report of the Eighth Finance Commission.
I have already kept the House informed of this. The final report of the Commission
is now expected by the end of April, 1984.
59. I have provided Rs.6800 crores for Defence expenditure next year against
the Revised Estimates of Rs.6350 crores. I am sure the House will agree that the
requirements for Defence have to be met fully to protect the security of the country.
Interest payments next year are estimated at Rs.5600 crores against Rs.4850 crores in
the current year. The borrowings are largely for financing our developmental efforts,
and the increase is due to the success of our policies for mobilising savings. A provision
of Rs.850 crores has been made for food subsidy. The requirement for subsidy on
indigenous and imported fertilizers is placed at Rs.1080 crores. Export promotion
and market development have been allocated Rs.530 crores.
60. A lumpsum provision of Rs.300 crores has been made in 1984-85 for
payment of additional instalments of dearness allowance, pensionary relief, etc. to
Central Government employees. Including these and, inter alia, provisions which are
in the nature of adjustments, total non-Plan expenditure in 1984-85 is esimated at
Rs.26,066 crores against Rs.24,773 crores in Revised Estimates for 1983-84.
61. Turning to receipts in 1984-85, the gross tax revenues at existing levels of
taxation are estimated at Rs.22,993 crores compared with Rs.20,946 crores in the
Revised Estimates. The States’ share of taxes in 1984-85 is estimated at Rs.5739
crores as against Rs.5246 crores in the current year, which is an increase of nearly
Rs.500 crores. The net, tax revenues of the Centre will thus be Rs.17,254 crores
compared with Rs.15,700 crores in the current year. The dividend from Railways and
Posts and Telegraphs will be higher by Rs.106 crores than the Revised Estimates for
1983-84. Interest receipts and repayment of loans by public sector undertakings and
State Governments will also be higher.
62. Receipts from market loans are placed at Rs.4100 crores against Rs.4000
crores in the current year. Small savings collections are estimated at Rs.2400 crores
against Rs.2200 crores in the current year. External assistance net of repayments is
estimated at Rs.2089 crores compared with Rs.1902 crores. Next year’s Budget also
includes a receipt of Rs.200 crores from the National Deposit Scheme to which I have
12
referred in the earlier part of my speech. Taking into account these and other variations
in receipts, the total receipts in 1984-85 are estimated at Rs.40,501 crores. These
receipts include the effect of the changes in fare and freight rates of the Railways.
The total expenditure is placed at Rs.42,536 crores. The overall budgetary gap at
existing rates of taxation will thus be Rs.2035 crores.
63. I have taxed the patience of the House enough. Let me now turn to other
tax proposals.

PART B
64. In framing these proposals, I have tried to take into account the realities
of the economic situation to which I referred at the beginning of my speech. While
doing so, I hope I have not been entirely unmindful of a certain forthcoming event
which is of importance to all of us in this Parliament.
65. Mr. Speaker, Sir, my first proposal relates to the non-corporate income-
tax sector. I propose to revise substantially the entire rate structure relating to personal
taxation. The present rate of tax in the first slab of taxable income ranging from
Rs.15,001 to Rs.20,000 is 25 per cent. The House will recall that this rate was brought
down last year from the then prevailing level of 30 per cent. I now propose to reduce
this rate further to 20 per cent. Relief has been allowed at all income levels above
Rs.20,000 also. The maximum marginal rate of tax on incomes over Rs.1 lakh is
being reduced from 60 per cent to 55 per cent. The new rates in some illustrative
slabs will be as follows: in the income slab of Rs.25,001 to Rs.30,000, the new rate
will be 30 per cent as against 35 per cent at present; in the income slab of Rs.50,001
to Rs.60,000, the new rate will be 45 per cent as against 50 per cent at present; and in
the income slab of Rs.70,001 to Rs.80,000 the new rate will be 50 per cent as against
55 per cent at present.
66. The above proposal will provide relief at all levels of incomes. Taken
with the increase in the standard deduction introduced last year, I expect this measure
will provide substantial relief in particular to the fixed income groups. The revised
tax schedule will provide a relief in tax of Rs.281/- to a taxpayer with an income of
Rs.20,000, which is 20 per cent of the tax payable by him earlier. For an income level
of Rs.30,000, the relief will be Rs.844/- or 16.67 per cent of the tax payable under the
old structure, and at income level of Rs.50,000, this relief will be 10 per cent of the
tax payable.
67. The loss of revenue in the proposed rate schedule, assuming no change in
the number of taxpayers and the assessed incomes in different income slabs, is
calculated at Rs.180 crores. However, lowering of the tax rates should normally be
expected to lead to an increase in the coverage of taxpayers in different tax slabs and
also better tax compliance. Taking these factors into account, I have assumed a net
13
revenue loss of Rs.59 crores only. This loss is entirely attributable to tax relief provided
to the fixed income groups. As far as business and professional incomes are concerned,
I have assumed that the reduction in the rates will encourage better compliance and
reporting and that this will partly cover the revenue loss.
68. This proposal, Mr. Speaker, Sir, in a way continues the tax rationalisation
programme that was started by my Party in 1974; carried forward in 1976 and further
reinforced after we came back to power in 1980. The present tax structure has also
been brought down to a level which I regard as realistic and entirely appropriate. I
hope this measure will have a salutary effect on our tax culture and will induce the
maximum number of taxpayers to come forward and voluntarily declare their true
incomes.
69. At the same time, it is necessary to simplify tax administration and make
it more responsive to the needs of the taxpayers. One essential feature would be the
effort to complete assessments within the shortest possible time. As the Hon’ble
Members are aware, the scope of the summary assessment scheme covers incomes
upto Rs.1 lakh. Only a percentage of cases with incomes in this range is being
scrutinised, the selection of such cases being on random sampling basis. The target
for 1983-84 is to complete 85 per cent of the summary assessments workload. I have
instructed the Income Tax Department to further speed up the assessments.
70. For some years, the Income-tax Act has contained provisions empowering
the Central Government to acquire immovable property having a fair market value
exceeding Rs.25,000. This power is exercisable in situations where the declared
consideration for transfer of the property is less than the fair market value of the
property. To eliminate unproductive work in handling a large number of relatively
small value cases and also taking into account the rise in market prices I have modified
the provision to say that this power will be exercised only in cases where the fair
market value exceeds Rs.50,000. As a further simplification it is being provided that
the prescribed statement will have to be filed before the registering officer only in
cases where the value of consideration for the transfer exceeds Rs.25,000 as against
Rs.10,000 at present.
71. With the reduction in rates and expeditious disposal of assessments, I
believe there can now be no excuse for any leniency to be shown to those who abuse
our laws. Such cases will necessarily have to be dealt with severely. In order to
discourage tax avoidance and tax evasion, I am also introducing some further measures.
In all cases where the annual turnover exceeds Rs.20 lakhs or where the gross receipts
from a profession exceed Rs.10 lakhs, I am providing for a compulsory audit of
accounts. This is intended to ensure that the books of account and other records are
properly maintained and faithfully reflect the true income of the taxpayer. I am also
proposing that loans or deposits of Rs.10,000 or more shall be taken or accepted only
by crossed cheque or bank draft.
14
 72. I find that the existing provisions of the Income-tax Act provide that no
suit to enforce any right relating to any property held benami can be instituted in any
court by a person claiming to be the legal owner unless he has declared the Income
from such property in any return of income or the value of such property in any return
of net wealth or furnished a notice in this behalf in the prescribed form to the Income-
tax Officer. Such return or notice can at present be given at any time before the suit
is filed. With a view to curbing the practice of benami holding of property I am
proposing that it will henceforth be obligatory in all cases to give notice to the
Commissioner of Income-tax in the prescribed form within one year of the acquisition
of the property. This amendment will enable the Department to initiate appropriate
action in respect of such benami acquisition of property well before the limitation for
such action expires.
73. Having dealt with the non-corporate sector, I now turn my attention to the
corporate sector. The tax rates for this sector are not being changed. I am however
providing one facility. Last year, while raising the surcharge payable by companies
from 2.5 per cent to 5 per cent, I had given companies the option to make deposits of
the additional surcharge with the Industrial Development Bank of India. I am now
further providing that companies can henceforth exercise this option in respect of the
entire amount of the surcharge payable by them. These resources will flow back to
the corporate sector, and will be available for modernisation. In the earlier part of my
speech, I have already referred to the decision to reduce the interest rates on loans
upto Rs.4 crores being extended by IDBI under the soft loan scheme.
74. Representations had been received from various quarters that the ceiling
on the deductible amount of managerial remuneration as contained in the Income-tax
Act is low and should be raised. I am glad to inform the House that having regard to
the changes in the managerial remuneration introduced by the Department of Company
Affairs, I am also raising the ceiling limits for managerial salaries from Rs.5,000 to
Rs.7,500 per month. The ceiling in respect of perquisites will however remain
unchanged.
75. Some relaxations are also being provided to those engaged in the business
of growing, and manufacturing tea. The existing provisions provide exemption from
tax only in respect of subsidy received for replantation or replacement of tea bushes.
I am extending this tax exemption to cover subsidy received for other approved schemes
relating to rejuvenation and consolidation of areas. I hope this measure will further
lend support to our scheme for increasing production of tea.
76. My next proposal, I believe, will be welcomed by a large number of
people. Investors presently can receive dividends and interest on debentures without
deduction of tax at source, if they furnish an exemption certificate from the Income-
tax Officer or alternatively file a declaration to the effect that their income for the year
is below the exemption limit. To reduce paper work and avoid inconvenience to small
15
investors, I propose to provide that widely-held companies may, henceforth, pay interest
on debentures and dividend income upto Rs.1,000 without deduction of tax at source
provided that the payment is made by an account payee cheque or a bank draft.
77. Mr. Speaker, Sir, I notice that certain provisions of tax laws are being
misused by a section of the taxpayers. I had occasion last year to deal at some length
with taxation of charitable and religious trusts and institutions. I find that some of
these trusts and institutions are trying to circumvent the investment pattern for trust
funds laid down by the Finance Act, 1983. It is necessary to ensure that all such trusts
and institutions strictly conform to the prescribed investment pattern and that such
income or property is not used for providing benefit to the settlors, trustees, etc. I,
therefore, propose to provide for taxation of the Income of defaulting trusts and
institutions at the maximum marginal rate of income-tax.
78. While on this subject, I would like to refer to a tendency noticed to create
private trusts which carry on business. To curb such practice, I propose to provide
that where such trusts have profits and gains of business, the entire income of the trust
will be charged to tax at the maximum marginal rate, an exception being made only in
the cases where the trust is created by will for dependent relatives.
79. Another undesirable practice noticed is the tendency of some corporate
bodies to make large contributions to the so-called welfare funds. I further understand
that utilisation of these funds is discretionary and subject to no discipline. I am,
therefore, providing that deductions will be available only in respect of contributions
to such funds as are established under statute or an approved provident fund,
superannuation fund or gratuity fund. I am making this change with retrospective
effect to avoid unnecessary litigation.
80. Last year, I liberalised the scheme related to export turnover. I propose to
continue it and watch its operation for a longer period of time.
81. Last year, I had also referred to a large variety of exemptions and deductions
that had been built into our tax system over time. While each deduction by itself may
have its own merits, the aggregate effect was to complicate the tax administration and
to provide loopholes for tax avoidance or tax evasion, as also for litigation. I had,
therefore, initiated a process of review and, where necessary, doing away with
concessions which had outlived their utility. I intend to carry this process further.
82. Our experience has shown that an expenditure related concession leads to
a tendency to inflate expenditure and hence it should have no place in our tax system.
Therefore, I propose to withdraw all weighted deductions as are available under the
different provisions. The expenditure actually incurred will, of course, continue to
qualify for deduction. Only the benefit of weightage will no longer be available.
83. I am also withdrawing the exemptions available under sections 33B, 35C,
8OCC, 80D and 80E of the Income-tax Act. These deductions, notwithstanding their
16
apparent laudable objectives have either been open to misuse or have benefited only
a few. The revenue involved is marginal. I am also reducing the quantum of exemption
available under Sections 80M, 8ON and 80-0.
84. Now, I intend to announce a few concessions in respect of the Wealth-tax
Act. Hon’ble Members, I am sure, will be happy to hear that the monetary ceiling of
exemption in respect of one house owned by a taxpayer is being increased from the
present level of Rs.1 lakh to Rs.2 lakhs. This is being done to take into account the
increase in market value. I am also proposing to raise the exemption limit in respect
of specified financial assets from the present level of Rs.1,65,000 to Rs.2,65,000.
Together with separate exemption of Rs.35,000 available in respect of units of the
Unit Trust of India and proposed to be extended to deposits under the National Deposit
Scheme, the aggregate exemption in respect of the value of specified financial assets
will rise to Rs.3 lakhs as against the present ceiling of Rs.2 lakhs. Honourable Members
would recall that in the earlier part of my speech, I had referred to the success in
mobilising savings in the form of financial assets; I hope that this change will give
further impetus to it.
85. The other changes proposed by me in respect of direct taxes are of relatively
minor nature and I would not like to take the valuable time of this House by elaborating
them.
86. After adjustment of the gain to revenue on account of withdrawal or
modification of certain concessions, my proposal in regard to Income-tax will lead to
a net loss of Rs.75 crores, of which the loss to the Centre would be Rs.36.32 crores
and the loss of the States would be Rs.38.68 crores.
87. Mr. Speaker, Sir, I shall now deal with my proposals in the area of indirect
taxes. Here my main objective has been to provide further impetus to the growth of
Indian industry through tariff adjustments and substantial relief in excise duties in
carefully selected areas. I have also kept in view the need to reduce prices of certain
items for consumers and contain the rate of inflation in the economy. I am sure the
Honourable Members will not grudge, if in doing so, I have also taken a little care of
Government revenues.
88. My principal proposal relating to customs duties is with regard to auxiliary
duty of customs. The levy imposed on an annual basis since the 1973 Budget is
proposed to be continued upto the 31st of March, 1985. I also propose to raise, with
certain exceptions, the present effective rates by 5 percentage points. I am excluding
from the proposed increase essential items like fertilizers, bulk petroleum products
such as kerosene and high-speed diesel oil, and also newsprint. Fuller details of these
proposals are available in the Budget papers. This proposal is expected to yield an
additional revenue of Rs.241.73 crores in a full year.
89. The present customs duty on crude petroleum of Rs.9.50 per metric tonne
(which is being collected by way of auxiliary duty) was fixed in 1973. Without
17
affecting the domestic prices of petroleum products, I propose to raise the duty on
crude to Rs.100 per metric tonne. The revenue gain from this measure will be Rs.132.76
crores. This duty, increase is to be absorbed by the oil companies without their having
to raise consumer prices on this account.
90. The current rates of Import duties on iron and steel Items were fixed a
few years back and they are now out of line with the requirements of Indigenous
industry. I propose to raise the basic customs duty on different items of iron and steel
(other than stainless steel) by 5 percentage points or 10 percentage points, depending
upon the existing rates of duties. I also propose to levy a total customs duty of 20
percent ad valorem on stainless steel melting scrap, which is presently exempt from
customs duty. These measures are expected to yield an additional revenue of Rs.84.
20 crores.
91. I also propose to increase the import duty on zip fasteners and parts thereof,
magnetic tape and petroleum specialities, namely petroleum jelly, sodium petroleum
sulfonate and liquid paraffin. Details of the proposals are available in the Budget
papers. The revenue gain in these proposals would be of the order of Rs.5.32 crores.
92. In order to promote exports in the important sector of gems and jewellery,
customs duties leviable on a number of gem and jewellery processing and manufacturing
machines are proposed to be reduced from the respective existing rates to 40 per cent
ad valorem. The gem processing machines would enable significant reduction in
processing losses and also improve overall quality and productivity. Similarly, I also
propose to reduce customs duties on specified machines used in packaging of food
articles as well as by meat and food processing industries from the respective existing
rates to 40 per cent ad valorem. This measure is expected to encourage export of food
items in value-added form and also in consumer packs instead of in bulk. The revenue
sacrifice involved in the above proposals is of the order of Rs.5.24 crores.
93. With the advancement in machine tool technology, CNC machines are
progressively replacing conventional machine tools due to their higher productivity
and accuracy. To enable the indigenous machine tool manufacturers to offer CNC
machine tools on competitive terms, I propose to reduce the customs duty on CNC
systems to 35 per cent. The revenue sacrifice is of the order of Rs.0.82 crore.
94. To enable the paper industry to obtain its raw materials at reasonable
prices and to relieve the pressure on our forest resources, I propose to totally exempt
from customs duties wood chips for making pulp for the manufacture of paper or
paper board. On similar considerations, I propose to reduce the duty on wood pulp
imported for manufacture of paper from the existing levels to 30 per cent. These
measures involve revenue sacrifice of the order of Rs.1.10 crores.
95. Certain changes in the provisions of the Customs Act, 1962, relating to
warehousing, etc. and in the Customs Tariff Act, 1975 are also proposed. The details
of these proposals have been given in the Budget papers.
18
 96. Sir, coming now to my proposals in respect of excise duties, my main
objectives are to minimise the effects of inflation, lessen scope for tax avoidance and
evasion, give a boost to selected industries suffering from demand recession, and
ensure better utilisation of the capacity and investment already created.
97. I propose to continue upto 31st March, 1985 the levy of special excise
duties at the existing rates and with the existing exemptions.
98. My first proposal for relief is in respect of khandsari sugar. I propose to
fully exempt khandsari sugar from the levy of excise duty. I am taking this measure
in view of the labour-intensive character of this industry, and to provide further
opportunity for growth of employment in this Industry. The abolition of excise duty
will also help this industry to pay better price to cane growers, and will give relief to
a large number of khandsari units located in far-flung rural areas. The revenue sacrifice
involved in this proposal is Rs.16.42 crores. Khandsari, I am told, is also better for
health. If as a result of this measure, the health of the nation improves, I hope the
credit will flow to me and not to my distinguished colleague, the Health Minister!
99. Hon’ble Members would recall that excise duty was levied on electricity
as a revenue measure in the 1978 Budget. The net proceeds from the duty collected
on electricity are wholly distributed to the States. It is proposed to abolish the excise
duty on electricity leaving it to the State Governments to tap this source, to whatever
extent and in whatever manner they like. This will give to the States one more area
for resource mobilisation. To give the States some time to take appropriate action,
this abolition will be effective from 1st October, 1984.
100. I also propose to provide substantial relief to the textile industry with a
view to making cloth cheaper. Hon’ble Members may recall that in the 1982 and
1983 Budgets, excise duty was reduced to encourage the production of blends with
the desirable proportions of polyester. Such fabrics are becoming increasingly popular
with the people. As a further measure of relief in this area and with the overall
objective of making such fabrics available at lower prices, I propose to reduce the
total excise duty on polyester-cotton blended yarn containing more than 40 per cent
but less than 70 per cent polyester to Rs.5 per kg. The existing rates of duty on such
yarn vary generally from Rs.7.5 per kg. to Rs.22.5 per kg. depending on the extent of
polyester-cotton mix. Under my proposal all blends over 40 per cent but below 70 per
cent of polyester will pay the same reduced rate of duty., For similar blends of polyester
and viscose, the excise duty will get reduced to Rs.10 per kg. from the present rates
which generally vary from Rs.11.25 per kg. to Ra.22.50 per kg. The revenue sacrifice
on these accounts is estimated at Rs.33.25 crores in a full year.
101. Blended fabrics have also received my attention. The excise duty on
polyester-cotton blended fabrics containing more than 40 per cent but less than 70 per
cent polyester will be reduced to 2 per cent ad valorem. The Incidence of duty on
such fabrics at present varies from 7.5 per cent to 17.8 per cent ad valorem. This
19
concession would cost the exchequer Rs.26.50 crores in a fun year. I also propose
that this duty at 2 per cent ad valorem be collected as additional excise duty in lieu of
sales tax. As Hon’ble Members are no doubt aware, proceeds of additional excise
duties on textiles go to the States
102. These changes in the duty structure on polyester-cotton blended yarn and
polyester-cotton blended fabrics will, for a 87:33 blend, reduce the duty incidence by
about Rs.3.30 per square metre on a fabric carrying a wholesale price of about Rs.25
per square metre, and a retail price of Rs.35 to 40 per square metre. This duty reduction
will enable the industry to sell such fabrics at reduced prices.
103. I also propose to provide relief on cotton fabrics which still constitute a
major share of the total production of cloth in the country. I propose to reduce excise
duty on cotton fabrics of less than 51 counts and of assessable value not exceeding
Rs.5 per square metre. Such fabrics at present pay duty of excise at rates varying
from 2.38 per cent to 3.56 per cent ad valorem in the case of composite mills.
Concessional rates of duty are allowed for Independent processors processing
powerloom and handloom fabrics. I propose to fully exempt handloom and powerloom
fabrics of the above varieties processed by Independent processors. The rate of duty
for composite mill fabrics is also being reduced to 1 per cent ad valorem retaining
more or less the present differential between the independent processors and the -
composite mills. This duty would be in the nature of additional excise duty in lieu of
sales tax and will entirely go to the States. Such fabrics are mostly consumed by the
weaker sections of society. The benefits of the reduction should become available to
them in the form of lower prices. This proposal on cotton fabrics would entail a
revenue sacrifice of Rs.28.40 crores.
104. I hope, my proposals would also help the textile Industry. The Industry
should benefit through Increased demand that lower prices would generate.
105. Cotton yarn and cellulosic spun yarn in the form of cross reel hanks are
finding increasing use in the handloom sector. In the Handloom Year, I propose to
reduce the duty incidence on such yarn supplied to registered Handloom Co-operative
Societies or to organisations set up or approved for the development of handlooms, by
about 50 per cent. This would involve a loss of Rs.3 crores to the exchequer in a full
year.
106. In order to recoup some of the revenue loss flowing from the above package
of measures in respect of the textile industry, I propose to increase the incidence of
additional excise duty in lieu of sales tax from 7.5 per cent to 10 per cent on man-
made fabrics of assessable value exceeding Rs.25 per square metre. This increase
will not apply to those blended fabrics in respect of which duty is being reduced. The
impact will be on costlier fabrics which are consumed mainly by the more affluent
sections of society. They should not mind this. On this account, the exchequer will
gain by Rs.27 crores in a full year and this, too, would accrue entirely to the States.
20
 107. I also propose to reduce the duty on shoddy blankets and other similar
blankets made from shoddy yarn processed by composite mills by about 7 per cent.
Such shoddy blankets if processed by independent processors will be wholly exempt.
The revenue loss on this account would be Rs.1 crore in a full year.
108. Another industry needing urgent attention is the paper industry. This
Industry has been passing through a difficult phase troubled by rising cost of raw
materials and other inputs. My proposals aim at encouraging the production of paper
and paper board and preserving scarce natural forest resources. I have already referred
to the proposed exemption from customs duty on import of wood chips and wood pulp
for paper making. As a further measure of relief, I propose to reduce the basic excise
duty on printing and writing paper and also kraft paper produced by large paper mills
by Rs.425 per metric tonne, and corresponding concessions are being given on the
duty leviable on such paper when unconventional raw materials are used in their
manufacture. Simultaneously, the range of permissible unconventional raw materials
is being expanded.
109. No concession for use of unconventional raw material is presently available
in the case of paper boards. I propose to-reduce the basic excise duty payable on
paper boards manufactured from at least 50 per cent unconventional raw materials
from the present general level of 10 per cent ad valorem + Rs.1430 per metric tonne
to R * s.560, Rs.900 or Rs.1120 per metric tonne depending on whether the clearances
of paper and paper board from such paper mills in the preceding financial year did not
exceed 3,000 tonnes, 7,500 tonnes or 16,500 tonnes respectively. For larger paper
mills using unconventional raw materials, the rate of basic excise duty on paper boards
is being reduced to 7 per cent ad valorem + Rs.925 per metric tonne.
110. My proposals relating to the paper Industry would entail a loss of Rs.33
crores in excise duties in a full year. Along with the customs duty exemptions on
Import of wood chips and wood pulp, this package is expected to provide substantial
fiscal support to the development of indigenous paper industry and improve the
availability of paper at reasonable prices.
111. Hon’ble Members may recall that certain time bound concessions were
given in October, 1983, in respect of certain specified commodities. Having regard to
the industry’s response to that measure which was intended to stimulate production by
generating incremental demand, I propose to continue the concession for one year
with certain modifications.
112. In the case of commercial vehicles and three-axled vehicles, the concession
will be continued but the extent of duty concession granted in October, 1983 is being
reduced by 21 percentage points. I propose to remove some models of light commercial
vehicles from the purview of the exemption in order to establish parity among all
models of such vehicles in the matter of the rate of excise duty. These proposals
would entail a revenue loss of Rs.45 crores in a full year.
21
 113. I propose to continue the concessions in the case of refrigerators, deep
freezers and parts of refrigerating appliances, etc. storage batteries and domestic
electrical appliances. The total revenue sacrifice on these items would be to the tune
of Rs.19 crores.
114. In the case of tyres for buses and trucks and tyres for use off-the-road, I
do not propose to continue the concession granted in October, 1983 as there is no
further case for this concession in view of the price increases announced by this
industry. However, as a measure (if rationalisation and in order to reduce scope for
tax evasion, I propose to switch over by and large to a system of specific rates of
duties from the ad valorem rates.
115. Production of china and porcelain tableware over the last few years has
been showing signs of stagnation and the capacity utilisation has been declining.
With a view to providing relief to the industry, I propose to reduce the basic excise
duty from 30 per cent to 15 per cent on these items. This would entail a revenue loss
of Rs.1.5 crores.
116. With summer not very far away, I would like to help the Hon’ble Members
in keeping their tempers cool. I propose to reduce basic excise duty on table fans
from 10 per cent to 5 per cent and on ceiling fans of a diameter not exceeding 107 cms
from 15 per cent to 7.5 per cent. I also propose to reduce the basic excise duty on
evaporative type of coolers, including desert coolers, from 40 per cent to 30 per cent
ad valorem. These proposals would involve a revenue sacrifice of Rs.5.10 crores.
117. As a rationalisation measure, I propose to reduce the basic duty on winding
wires from 10 per cent to 5 per cent and increase the basic duty on copper wire rods
by Rs.1300 per metric tonne. On an overall basis, these changes will neither result in
a loss nor gain in revenue.
118. As Hon’ble Members will remember, many reputed artists had published
an appeal inviting our attention to piracy. As I “just can’t write these names off” I
propose to exempt sound-recorded cassettes wholly from excise duty. In view of the
upward revision of customs duty on magnetic tapes, the revenue loss on this account
is expected, by and large, to be made up.
119. As a general measure of relief I propose to fully exempt laundry soap
manufactured by KVIC units and to reduce basic excise duty from 10 per cent to 5 per
cent on certain mass consumption items such as Imitation jewellery, stainless steel
utensils, glass chimneys for lanterns, high efficient wood burning stoves, umbrellas
and saccharine. The revenue sacrifice involved in these concessions is Rs.1.13 crores.
120. Hon’ble Members may recall that an excise duty relief scheme to encourage
higher production is in operation for the past two years. I propose to continue the
scheme for one more year.
22
 121. Hon’ble Members would also recall that in the last Budget, I had
rationalised the tariff relating to iron and steel items. This year, I have undertaken a
similar exercise in respect of non-ferrous metals. The tariff entries are being revised
on a more scientific basis. These changes as in last year would be brought into effect
from a subsequent date. Tin then, the present effective rates of duty would continue.
122. I propose to increase the additional excise duty in respect of cigarettes,
The present ratio between basic excise duty and additional excise duty is being altered
to 1.75:1. This measure will result in the transfer of Rs.42.89 crores from the basic
excise duty account to the additional excise duty account in the next financial year,
and thus increase the accrual to the States. There will be a corresponding reduction
in the amount allocated to basic excise duty. The total incidence of excise duties on
cigarettes will remain unaltered.
123. There are some other minor proposals which do not have much revenue
significance. These include readjustment of duties in some cases and deletion of
some tariff items which have remained fully exempted for a long time.
124. In the light of the experience gained in the working of the Income Tax
Appellate Tribunal and the Customs. Excise and Gold (Control) Appellate Tribunal,
some amendments are proposed to be carried out in the laws relating to them. These
are mainly of an administrative nature. I do not propose to take the time of the House
over these proposals.
125. Mr. Speaker, Sir, with the phenomenal increase in central excise revenue
from about Rs.100 crores in 1953-54 to about Rs.10,100 crores in 1983-84, the Central
Excise Tariff has also substantially grown. I think, it is time to make a comprehensive
review of the tariff as it has developed over the last three decades with a view to
rationalising it. This would require a detailed study which can best be done only by
a technical study group. I propose, therefore, to appoint such a Group.
126. The proposals that I have presented will yield additional revenue of
Rs.465.41 crores in customs duties and Rs.33.10 crores in excise duties. There would
be a transfer of Rs.43.64 crores from the basic duty account to the additional duty (in
lieu of sales tax) account. The concessions and reliefs aggregate Rs.7.26 crores on the
customs side and Rs.222.43 crores on the excise side. The net yield from customs
duties is Rs.458.15 crores. The net loss from excise duties comes to Rs.189.33 crores
out of which Centre’s share would be Rs.148.95 crores and States’ share would be
Rs.40.38 crores. This takes into account the States, share from additional excise
duties in lieu of sales tax to the extent of Rs.52.31 crores. The accrual to the central
exchequer for the additional tax effort in a full year would be Rs.309.20 crores.
127. Copies of notifications giving effect to the changes in customs and excise
duties effective from the 1st March, 1984 will be laid on the Table of the House in due
course.
23
 128. I had earlier stated that the budgetary deficit at the existing rates of taxation
would be Rs.2035 crores. The tax measures proposed now, taken together with reliefs
and concessions, are estimated to yield net additional revenue of Rs.272.88 crores to
the Centre. This leaves an uncovered deficit of Rs.1762 crores. It has been my
endeavour to keep the budgetary deficit to a relatively low figure and I am sure the
Hon’ble Members would agree that this order of deficit is appropriate to our
circumstances. I hope that the low deficit, combined with my proposals for boosting
production and lowering prices, will have a salutary effect on the inflationary
psychology in the economy.
If I may, at this point, quote from Kautilya’s Arthashastra:–
A´ÉÆ BÉÖEªÉÉÇiºÉàÉÖnªÉÆ ´ÉßÉËr SÉɪɺªÉ n¶ÉǪÉäiÉ*
cɺÉÆ BªÉªÉºªÉ SÉ |ÉÉYÉ& ºÉÉvªÉäSSÉ ÉÊ´É{ɪÉǪÉàÉÂ**
129. Four years ago, my distinguished predecessor, while presenting the first
Budget of the present Government, had expressed our firm resolve to repair the damage
and restore the country’s economy to the path of stability, growth and social justice.
Mr. Speaker, we have kept that promise.
130. I commend this Budget to the House.
[February 29, 1984]

24
 SPEECH OF SHRI PRANAB MUKHERJEE MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1983-84

Sir,
I rise to present the Budget for the year 1983-84.
2. The Economic Survey for 1982-83, placed before the House a few days
ago, has given a detailed account of the trends in Indian economy during the current
year. I shall, therefore, be brief in reviewing the economic situation..
3. A drought year is always a difficult one for the economy. The decline in
agricultural production that the drought entails has an effect which goes beyond the
rural sector. The drop in the purchasing power of our farmers exerts a deflationary
influence on industry. The drought also affects power ‘generation and has an adverse
impact on the external payments. It reduces the resource base and at the same time it
calls for an increase in relief expenditure. The performance of the Indian economy in
the year that is ending has to be viewed against this background. That we have come
through it without too much damage to our productive structure and achieved remarkable
success in containing price inflation is a tribute to the resilience of our economy. It
also demonstrates the effectiveness of our policies of continued demand restraint and
judicious supply management.
4. Although the growth in gross domestic product this year will be lower
than it has been in the two previous years, we will-achieve an average growth rate of
nearly 5 per cent over the three years, which is close to the target we set for ourselves
in the Plan. At the same time, we have been able to maintain the tempo of investment.
In other words, serious as has been the impact of drought, I believe we have not
allowed it to affect the pace of development.
5. Let me now recapitulate the main highlights of the economic situation in
1982-83. On a point-to-point basis, the increase in the wholesale prices in the last
week of January was 3 per cent com- pared with the annual rate of inflation of 5.7 per
cent at the same time last year. The annual rate of increase in the consumer price
index, as of December 1982, was also significantly lower - 8 per cent as against 12.7
per cent in December, 1981. The lower rate of inflation this year is particularly
noteworthy considering that wholesale prices had increased on an average by 2.4 per
cent per month in June and July 1982 because of speculative pressures generated by
the delay in the monsoon. However, as a result of an appropriate mix of demand and
supply management policies, the situation was speedily brought under control.
6. Monetary policy continued to be deployed flexibly. The emphasis was on
1
the need for restraint while at the same time it sought to meet productive requirements
for credit. On the supply side, action was taken to build up stocks and improve
availability of foodgrains through timely imports. Procurement efforts were stepped
up so that the impact of a fall in the kharif output on stocks of foodgrains could be
minimised. Higher releases of sugar and edible oils were also arranged. These and
other supply management policies contributed significantly to the dampening of
inflationary pressures after August 1982.
7. As I have so often emphasised in this House in respect of the price situation,
there can be no room for complacency. The supply and demand situation in respect of
sensitive commodities remains in delicate balance. While we have successfully
weathered the immediate impact of the drought, we must remember that its effects are
likely to be spread over a longer period than one season or one year. The international
situation continues to be full of uncertainty and should there be a resurgence of inflation
abroad, particularly in respect of commodities that we import, it could easily disturb
our domestic price situation. We must also remain vigilant against anti-social elements,
hoarders and black marketeers.
8. The kharif foodgrains production will be lower than last year because of
adverse weather conditions. The indications, however, are that the rabi production
may be somewhat better than last year. The output of cotton is likely to be close to
the level of last year, while some decrease is expected in sugarcane and jute
production. The target of 2.35 million hectares for increase in the irrigation potential
in 1982-83 is likely to be achieved. While the agricultural sector continues to be
influenced by the vagaries of the weather, over the long run, we have been able to
increase output significantly and to reduce the disruptive effects of a drought on the
economy. This has demonstrated the basic soundness of our agricultural strategy of
extending the irrigated areas, encouraging the use of fertilisers and high yielding
varieties, widening the credit network, and ensuring fair and remunerative producer
prices for the major crops.
9. Industrial production increased by 8.6 per cent in 1981-82. In the current
year, the increase is likely to be about 4.5 per cent. For the period, April to December
1982, impressive increases were recorded in respect of critical industries, such as
crude petroleum, which increased .by 30.6 per cent, cement (10.2 per cent), fertilisers
(9.6 per cent), and power generation (7.2 per cent). It is particularly heartening that
thermal generation has shown substantial improvement and the plant load factor of
thermal plants has also improved from 45.9 per cent during April - December 1981 to
47.6 per cent this year. Sugar production is expected to be close to the record level of
last year. The overall rate of growth in industrial production was, however, adversely
affected by a sharp drop in output of cotton cloth and yarn. Certain other sectors of
industry also showed relatively low rates of growth because of slack demand or factors
such as power constraints particularly in areas dependent on hydro-electricity.
10. Over the last thirty years significant progress has been made in expanding
2
and diversifying our industrial structure he investment climate is highly favourable
and capital issues during the year have reached a record level. However, In order to
accelerate and sustain a higher growth rate of production, it is essential that the corporate
sector should pay greater attention to improving its own rate of savings by better
utilisation of capacity and economy in conspicuous and wasteful expenditure. If the
increasing requirements of funds for investment are to be adequately met, the corporate
sector must learn to look towards a larger volume of internal generation of resources.
Borrowing can only supplement and not substitute corporate savings.
11. It is also essential to improve the productivity of past investments and
reduce costs. Capital costs in the economy have increased, and due to delay in the
implementation of projects, there is a decline in the returns that the community can
legitimately monitor closely project implementation and operational efficiency. As
Hon’ble Members are aware, there has been a marked improvement in the working of
many public sector enterprises though some units continue to face problems. Net
profits of public sector units in the first nine months of this year increased to about
Rs.360 crores compared with Rs.134 crores during the same period last year.
12. The process of building up the financial infrastructure continues apace.
The banking system has been extending its coverage to the rural areas; more rural
banks have been opened and the National Bank for Agriculture and Rural Development
has commenced operations. All this would help to extend further the benefits of the
institutional credit to the rural sector. Considerable progress has also been achieved in
extending insurance to rural areas.
13. In the past few years, our balance of payments situation has been a matter
of concern. In my budget speech last year, I had taken the opportunity to indicate the
Government’s strategy for restoring the viability in our balance of payments in the
medium term. Briefly, the main elements of the strategy are to accelerate the pace of
import substitution in critical sectors such as oil and fertilisers, to increase exports,
and to improve the facilities available for remittances and investments by non-residents
of Indian origin. The House would be happy to know that we have achieved considerable
success in implementing this strategy.
14. The substantial increases in domestic production of petroleum and
fertilisers have enabled us to reduce our dependence on imports of these items in the
current year. imports of steel, non-ferrous metals, and several other items have also
been lower. import policy has sought to combine the objective of reducing the growth
of imports with the need to continue the liberal access to raw materials and capital
goods for priority sectors. Tariff policies are being effectively used to provide further
protection to indigenous industries, wherever appropriate.
15. Exports, which increased by 16 per cent in 1981-82, have shown a further
growth of 18 per cent in the first seven months of 1982-83. This is good performance
considering the uncongenial external environment marked by rising protectionism,
3
demand recession and near stagnation in world trade. The trade deficit is likely to be
lower in 1982-83. The rate of decline in our reserves, excluding International Monetary
Fund transactions, has also come down and has averaged Rs.91 crores per month in
this financial year up to end of January 1983 compared with Rs.175 crores per month
during 1981-82.
16. Our balance of payments adjustment has however, been made more difficult
by an unfavourable international environment characterised by lack of political will in
industrialised countries for economic cooperation. It is necessary that in association
with the developing and other non-aligned countries, we continue to work for basic
reform in the international financial and trading system. India also has had to bear a
disproportionate reduction in its share of concessional flows. In this situation, while
recourse to a certain amount of commercial loans is unavoidable, we have to be
extremely circumspect in relying upon this source as a means of financing current
account deficits.
17. Hon’ble, Members are aware of the geopolitical situation in the region
and the increasing burden cast upon us because of the threat to our national security.
No sacrifice is too great where the nation’s security is concerned. At the same time,
we cannot afford to slacken the development effort, however onerous the task may be
as in the ultimate analysis, the nation’s security rests on economic strength. Despite a
difficult resource situation, I am happy to inform the House that we were able to
achieve a substantial step up in the Plan outlay in 1982-83. The need for further
economy and efficiency in the use of resources can hardly be over-emphasised. We
must also continue to press ahead with additional resource mobilisation in a non-
inflationary way.
18. Fiscal policy has an important role to play in the task of harnessing the
nation’s resources. In addition to appropriate adjustments in tax rates, the necessary
administrative and legal measures are being taken to ensure that all sections of the
community pay their taxes promptly. This Government is determined to plug avenues
for tax evasion and avoidance, and to continue the fight against economic offences.
19. Raising the living standards of our people is possible only through a
progressive increase in savings and productivity. The Indian people, we must gratefully
acknowledge, have set standards of saving levels remarkable for a low income country.
It is, however, essential that these savings are invested in assets which add to productive
capacity and which directly benefit the people.
20. In the past three years, several steps have been taken to encourage the
savings habit. The interest rate mechanism and the fiscal instrument have been used to
provide an attractive return on savings in the form of financial assets. In line with the
decision to raise the interest rate on. 5-year bank deposits, announced in October last
year, it has been decided to increase the rate of interest on 5-Year Post Office Time
Deposits and Recurring Deposits from 10.5 per cent to 11.5 per cent per annum.
4
Similarly, I propose to increase the rate of interest by 1 per cent on Special Deposits
of Employees Provident Fund and other non-Government provident, gratuity and
superannuation funds. The improvement in the rate of return on these deposits would
benefit workers and small savers.
21. I also propose to liberalise the Public Provident Fund Scheme, which has
become increasingly popular among self-employed and others. Subscribers will be
allowed to continue their accounts beyond 15 years. The limit for annual subscription
is also being raised to Rs.40,000.
22. In the light of the changes that have taken place in the monetary and
economic situation in the last two years, the Government, in consultation with the
Reserve Bank of India, has reviewed the interest rates on advances by commercial
banks. It has been decided to reduce the ceiling rate of interest from 19.5 per cent to
18 per cent. The structure of interest rate is also being adjusted downwards for the
benefit of agriculture, small scale industry and exports. A separate announcement in
this respect is being made by the Reserve Bank of India.
23. The Government has provided liberal incentives for attracting remittances
and investments by non-residents of Indian origin. In the light of experience, it has
been decided to improve further the facilities available to non-residents. Last year I
had announced certain important concessions in respect of subscriptions by non-
residents to 6-Year National Savings Certificates, which carry interest at 12 per cent
per annum. In order to further improve their yield, I propose to allow an additional
interest of one per cent on these certificates if these are subscribed for in foreign
exchange. I also have some other important proposals to which I shall refer later. I am
sure that the House will agree with me that our policy frame-work meets the
requirements of non-residents, and that we can look forward to further strengthening
of the bonds that exist between them and this country.
24. I shall now turn to the Revised estimates for 1982-83 and the Budget
estimates for 1983-84.
REVISED ESTIMATES FOR 1982-83
25. The Budget estimate for the total expenditure in 1982-83 was Rs.29,219
crores of which Rs.11,345 crores was on Plan account and Rs.17,874 crores on non-
Plan account. As the year progressed, it became evident that we would need to enhance
both these broad categories of expenditure. Despite the strains imposed on the economy
by natural calamities, it has been our endeavour that outlays in respect of long-term
development should not be allowed to suffer. One of my highest priorities, therefore,
has been to protect the Plan and, in the result, the Revised estimates for Central Plan
outlay are Rs.603 crores higher than those originally budgeted.
26. Railway Plan outlay has been increased by Rs.195 crores, of which
budgetary support will account for Rs.105 crores. The budgetary support for the power
5
sector will go up by Rs.62 crores, while assistance to National Bank for Agriculture
and Rural Development has been increased by Rs.100 crores. The outlays for schemes
of family welfare have been enhanced by Rs.50 crores. Plan provisions for rural
water supply, agriculture and co-operation have also been stepped up, while the
budgetary support for the Posts and Telegraphs Plan has been increased by Rs.75
crores owing, in this case, to a shortfall in internal resources. As against these increases,
some reductions are expected in relation to Budget estimates of Plan expenditure in a
few sectors. Overall, the budgetary support for the Central Plan is estimated to go up
by Rs.262 crores to Rs.7605 crores.
27. The Central assistance for State and Union Territory Plans is also being
stepped up by Rs.380 crores, of which Rs.350 crores is the additional advance Plan
assistance to States which have been affected by drought.
28. Non-Plan expenditure will also be higher in the current year due to several
factors. Non-Plan grants to States will be higher by Rs.214 crores mainly due to
additional assistance of Rs.147 crores for States affected by floods, cyclones and
other natural calamities. Similarly, reflecting the buoyancy in small savings collections,
non-Plan loans to States on this account will be higher by Rs.200 crores. Non-Plan
loans for agricultural inputs have also been increased by Rs.50 crores. The subsidy for
indigenous fertilisers will go up by Rs.200 crores. Additional loans of Rs.209 crores
are required for certain public sector undertakings to enable them to meet their cash
losses and interest and repayment obligations to the Government.
29. The provision for Defence expenditure will be higher by Rs.250 crores.
To meet the temporary imbalance in the trade covered by Rupee Trade Agreements,
the provision for Technical Credits has to be increased from Rs.80 crores to Rs.1280
crores. The increase in Technical Credits has been due to temporary and exceptional
circumstances, and will be largely reversed during the year. Hon’ble Members will
appreciate that in a year of weak global demand, our long standing trading relationship
with the Socialist countries has been an important element in providing a measure of
stability to our export sector.
30. Excluding the loan of Rs.1743 crores to States, to which I shall refer
later, the total non-Plan expenditure is likely to go up from Rs.17,874 crores to
Rs.20,511 crores.
31. Coming to receipts, as I mentioned at the beginning, the drought inevitably
affects the income and resource base of the economy. Despite these adverse effects,
the Budget estimates of receipts from Income-tax and Customs duties are expected to
be realised. However, receipts from Union excise duties may show a shortfall of
Rs.220 crores. Apart from the impact of a lower growth in industrial production, there
has been locking up of some revenues due to pending litigation. Some shortfall in
Corporation tax is also anticipated. The Centre’s net tax revenue after paying the
6
States’ share of taxes, is estimated at Rs.13,271 crores as against the Budget estimate
of Rs.13,362 crores.
32. Non-tax revenue is, however, expected to show an improvement of Rs.613
crores mainly due to larger dividend payment by Railways, larger receipts from some
public sector units, recovery from the Indian Dairy Corporation of the value of gift
material supplied to it earlier and larger external grants.
33. Capital receipts are also estimated to go up from Rs.10,249 crores to
Rs.12,446 crores. Receipts from market loans are estimated at Rs.3800 crores against
the Budget estimate of Rs.3200 crores. As mentioned earlier, the recovery of Technical
Credits will also go up from Rs.90 crores to Rs.1080 crores. The receipts from small
savings are estimated to go up by, Rs.150 crores.
34. The total receipts are thus estimated to go up from Rs.27, 844 crores to
Rs.30, 563 crores.
35. Taking into account the above and other variations in receipts and
expenditure, the budgetary deficit in the current year is now estimated at Rs.1935
crores. This excludes the special loan assistance to States of Rs.1743 crores, which
does not have any economic impact in the current year. The larger deficit over Budget
estimates in the current year has to be viewed against the background of weak demand
in certain sectors of the economy. That it has not had a destablising effect on the
economy has been demonstrated by the price behaviour in recent months.
BUDGET ESTIMATES FOR 1983-84
36. In framing the next year’s Budget, Mr. Speaker, Sir, my aim has been to
provide for a large increase in the Plan outlay so that the pace of development, which
we have assiduously built up, is not retarded. Even this increase, I am acutely aware,
cannot be expected to fully meet the demand from various sectors, however pressing
they may seem. Some reordering of priorities among different objectives and sectors
has, therefore become necessary.
37. 1 propose to increase the Central Plan outlay to Rs.13,870 crores in 1983-
84 inclusive of a special allocation of Rs.300 crores to which I shall refer later. This
constitutes an increase of 26.1 per cent over the Plan outlay of Rs.11,000 crores in the
Budget estimates for 1982- 83. Coming on top of an increase of 27.6 per cent provided
in the Budget for 1982-83, the proposed increase would enable us to meet our urgent
requirements in critical sectors of the economy, and also provide a special thrust in
respect of programmes meant for the welfare of the weaker sections of the society.
The Central Plan will be financed by a budgetary support of Rs.8390 crores and
internal and extra- budgetary resources of Rs.5480 crores.
38. Hon’ble Members are aware that the finances of several States have
been under severe strain for some time. While the need for fiscal discipline cannot
be over-emphasised, an important objective of the Central Government has been to
7
ensure that, despite resource constraints, the State Plans also show a reasonable
order of increase. Hon’ble Members would recall that in June 1982, I decided to
clear States’ closing deficits of the previous year with a medium term loan of Rs.1743
crores. I did so to help the States to readjust their finances and achieve adequate
investment in their plans. In the current year, the Centre has provided nearly Rs.700
crores of assistance to States for drought and flood relief. Further, we have decided
to increase Central assistance to States in the next two years by Rs.1650 crores over
the balance available in the originally approved level. This will augment the Plan
resources of the States. The States have responded by agreeing to enhance their
resource mobilisation efforts.
39. The total Plan outlay for 1983-84 of the States and Union Territories is
now placed at Rs.11,625 crores. This represents an increase of 16.4 per cent over the
finally approved outlay of Rs.9989 crores in 1982-83, the highest increase so far in
the current plan period. Central assistance for the Plan of the States and Union
Territories will be Rs.4462 crores.
40. Taken together, the Plan outlays of the Centre, States and Union Territories
for 1983-84 will be Rs.25,495 crores, an increase of 21.5 per cent over the finally
approved outlay of Rs.20,989 crores in 1982-83.
41. In formulating the 1983-84 Plan, our primary concern has been to provide
maximum support to those projects and programmes which can be of immediate benefit
to the economy, and especially to the weaker sections of society. The outlays for the
Revised 20-Point Programme have been enhanced, and a special thrust is being given
to programmes that benefit the poor directly.
42. I have also taken the somewhat unconventional step of providing an
additional Rs.300 crores over and above Rs.13,570 crores set apart specifically for the
various schemes in the next year’s Central Plan. This amount will be provided as
grants to the States on the basis of their better performance in implementing specific
programmes. These programmes will benefit the weaker sections of the community
and improve the functioning of the State Electricity Boards. The co-operation of the
States is essential and, wherever appropriate, the guide-lines to be issued, would provide
for matching contributions by them.
43. Out of this allocation, I am earmarking Rs.125 crores to assist small and
marginal farmers to improve the productivity of their land. My colleague, the Minister
of Agriculture, will be announcing the details of the scheme.
44. Another Rs.125 crores would be distributed among the States on the basis
of their performance in implementing programmes in Identified areas of high priority,
which the Government will announce later. The assistance for these purposes would
be made available only to those States which demonstrate capacity to achieve targets
over and above those implied in their approved Plans.
8
 45. I have had occasion in the past to underline the importance of obtaining
maximum returns out of existing investments. The need for increasing the plant load
factors in thermal power stations cannot be over-emphasised. I, therefore, propose
to set apart the balance of Rs.50 crores out of Rs.300 crores for incentive payments
to State Electricity Boards for better performance. Most of the State Electricity Boards
achieved their peak plant load factors during the years 1975-77. Unfortunately, their
recent performance has fallen far short of these levels. I hope that this incentive
would encourage the State Electricity Boards to reach and even surpass their earlier
peaks.
46. Apart from the above special allocation, the outlay for the 20-Point
Programme in the Central Sector Plan for 1983-84 is Rs.2747 crores representing an
increase of 26.8 per cent over the outlay in the current year’s Plan. The provision for
these schemes in the approved Plan outlay of the States and Union Territories for
1983-84 will be Rs.7332 crores. Hon’ble Members will be happy to know that the
total provision for 20-Point Programme next year will thus exceed Rs.10,000 crores.
47. Next year’s programme also provides a high priority to agricultural
development. The total outlay for this sector is Rs.608 crores. This includes Rs.200
crores for the National Bank for Agriculture and Rural Development. Two major
programmes, one for oil seeds development and another for dry land farming, both
important elements in the 20-Point Programme, will also be taken up for implementation
in 1983- 84. Further, a sum of Rs.800 crores is being provided for agricultural
programmes in the approved Plan outlay of the States and Union Territories. The
outlays for irrigation and flood control are also being stepped up to Rs.116 crores in
the Central Plan and Rs.2404 crores in the Plans of the States and Union Territories.
48. The outlay for the National Rural Employment Programme, Integrated
Rural Development Programme and other schemes of the Ministry of Rural
Development would be Rs.480 crores in 1983- 84 against the likely expenditure of
Rs.419 crores in 1982- 83. The IRDP will enable about three million families in the
rural areas to cross the poverty line. The NREP will create about 350 million man-
days of work in the rural areas. The provision for these programmes will be matched
by the State Governments.
49. Hon’ble Members are aware that the Government has launched a crash
programme for providing drinking water facilities in all problem villages. The Plan
outlay for 1982-83 visualised an allocation of Rs.127.5 crores by the Centre for the
accelerated rural water supply programme. Having regard to the progress in
implementation the outlay has now been increased to Rs.155 crores. A substantially
higher outlay of Rs.200 crores has been provided for this programme in 1983-84. The
States on their part will be setting apart Rs.319 crores and in all 48,000 more villages
are expected to be covered in 1983-84.
50. One of the important programmes benefiting children is the Integrated
9
Child Development Services. With the higher target now set for the Sixth Plan, it is
proposed to extend this scheme to 200 more projects in 1983-84 over and above the
620 projects so far covered. Over half the total provision of Rs.60 crores for Department
of Social Welfare will be accounted for by this scheme.
51. An increased provision of Rs.176 crores has been made in the Central
Plan for 1983-84 for tile various programmes benefiting the Scheduled Castes and
Scheduled Tribes.
52. The Family Welfare Programmes will be implemented with renewed vigour
in 1983-84 and will cover 17 million persons. A sum of Rs.330 crores is being provided
for these programmes.
53. The Sixth Plan has placed considerable emphasis on accelerating
investment in the Energy sector. The total outlay for this sector covering petroleum,
power and coal would be Rs.5014 crores, accounting for more than 36 per cent of the
total Central Plan outlay. Crude oil production is expected to reach 21 million tonnes
this year, and increase further to around 26 million tonnes in 1983-84.
54. Inclusive of the allocation for power development under Atomic Energy
and Coal, the total outlay for the various power programmes in 1983-84 in the Central
Plan will be Rs.1222 crores, representing an increase of 31.5 per cent over that for
1982-83. The target for addition to the capacity in 1983-84 in the Central Sector will
be 1050 MW, double that of the current year.
55. The outlay for Coal sector, including lignite, will be Rs.946 crores in
1983-84. The target for production of coal is 142 million tonnes, 9 million tonnes
more than in the current year.
56. The provision for the various programmes of the Department of Steel in
the Plan for 1983- 84 is Rs.820 crores. The Plan outlay of the Mines Department has
been increased to R s. 494 crores in 1983-84 compared to Rs.292 crores in the
current year’s approved Plan outlay. This includes Rs.365 crores for the Orissa
Aluminium Project.
57. The revenue earning traffic to be carried by the Railways in 1983-84 is
projected at 241 million tonnes, which is an increase of more than six per cent over
the likely performance in 1982-83. The Plan outlay for the Railways in 1983-84 is
Rs.1342 crores.
58. The traffic handled at the ports is expected to increase to 105 million
tonnes in 1983-84 as against 95 million tonnes likely to be reached in 1982-83. Inclusive
of a provision of Rs.90 crores for the Nhava Sheva Project, and Rs.40 crores for
investment in State Road Transport Corporations, a total outlay of Rs.558 crores has
been set apart for the Shipping and Transport Ministry in 1983- 84.
59. An outlay of Rs.429 crores has been provided for the various projects of
10
the Ministry of Chemicals and Fertilizers. This includes Rs.260 crores for the Thal
Vaishet Fertilizer project. For the Hazira Fertilizer Project a provision of Rs.145 crores
has been made.
60. The total provision for the projects of the Ministry of Industry in 1983-84
is Rs.549 crores compared with Rs.480 crores in the current year. Of this, the provision
for small industries, including KVIC and coir, is about Rs.173 crores.
61. A provision of Rs.72 crores has been made for the various Plan programmes
of the Department of Science and Technology and the Council of Scientific and
Industrial Research in 1983-84. The Government has recently set up a separate
Department of Non- Conventional Energy Sources. The programmes to be undertaken
by this Department in 1983-84 would include, inter alia, establishment of 75,000
family size biogas units and 100 community bio-gas units. Inclusive-of the provision
of Rs.18 crores for the bio-gas programme, an outlay of Rs.30 crores has been set
apart for this Department in the Plan for 1983-84.
62. Mr. Speaker, it has been my effort to contain the growth in the non-Plan
expenditure. However, increases in certain important sectors have been inevitable.
Taking into account the requirements of the country’s defence, a provision of Rs.5971
crores has been made for Defence against Rs.5350 crores in the Revised estimates for
the current year. Due to increase in borrowings which are mainly used for development
purposes and also higher borrowing costs, the provision for interest is placed at Rs.4700
crores against Rs.3950 crores in the Revised estimates for the current year. The provision
for food subsidy at Rs.800 crores will be higher by Rs.90 crores compared with the
Revised estimates for the current year. The provision for subsidy on indigenous
fertilisers is estimated to go up from Rs.550 crores in the current year to Rs.700 crores
next year. A provision of Rs.550 crores has been made for cash compensatory support
and market development assistance for exports.
63. The provision for Technical Credits under Rupee-Trade Agreements is
Rs.600 crores next year as against Rs.1280 crores in the current year. A lump sum of
Rs.300 crores is being provided in 1983-84 for payment of additional instalments of
dearness allowance, pension and other reliefs to Central Government employees.
64. The House would recall that last year, I had announced certain enhanced
benefits for low paid pensioners. I propose to provide some additional relief to this
category of pensioners. From lst April 1983, the minimum amount of pension, including
dearness relief, will be raised to Rs.160 per month and the minimum amount of family
pension including dearness relief to Rs.150 per month.
65. The total non-Plan expenditure in 1983-84 is estimated at Rs.21,984 crores
against Rs.20,511 crores in Revised estimate 1982-83.
66. At this point I would like to refer to it matter concerning Government
employees. The employees had suggested some time ago that the Government may
11
appoint a Pay Body for revising pay scales. The Third Pay Commission was appointed
in April 1970 and made its report in 1973. Since then, over the years conditions have
changed in several respects. The employment under the Central Government has grown
steadily larger. Changes have also taken place in the relativities in the emoluments of
the employees of departments inter se, and also vis-a-vis other employees. For instance
several State Governments have, through gay committees or Pay Commissions, sub-
stantially revised the pay scales and other benefits of their employees. The Government
feels it would be appropriate now to appoint the Fourth Central Pay Commission.
Before the terms of reference of the Pay Commission are settled, the representatives
of the employees would be consulted. The membership of the Commission together
with the terms of reference will be announced as soon as possible.
67. So far as receipts in 1983-84 are concerned, the gross tax revenues at
the existing rates of taxation are estimated at Rs.19,964 crores compared with
Rs.17,910 crores in the Revised estimates. The States’ share of taxes in 1983-84 is
estimated at Rs.5088 crores compared with Rs.4639 crores in the current year. The
net tax revenue of the Centre will thus be Rs.14,876 crores against Rs.13,271 crores
in the current year.
68. The receipts from market loans are placed at Rs.4000 crores compared
with R s. 3800 crores in the current year. The recoveries of Technical Credits next
year will be lower as the payments will also be less. Small savings collections are
expected to yield Rs.1700 crores next year against Rs.1550 crores this year. External
assistance, net of loan repayments, is estimated at Rs.1940 crores against Rs.1724
crores in the current year.
69. Taking into account these and other variations in receipts, the total receipts
for 1983-84 are estimated at Rs.32,586 crores. These receipts include the effect of the
changes in fare and freight rates of the Railways and in the Posts and Telegraphs
tariffs as well as the continuance of the Compulsory Deposit Scheme for income-tax
payers beyond 31st March 1983, to which I shall refer later. The total expenditure is
placed at Rs.34,836 crores. The overall budgetary gap at existing rates of taxation will
thus be Rs.2250 crores.
PART B
70. Mr. Speaker, Sir, it is against the background of this review of budgetary
out-turn that I place my budget proposals before Hon’ble Members. The Budget is
more than an exercise in raising revenue or financing outlays. In a planned economy,
it represents a potent instrument for achieving national objectives and sustaining the
pace of development through appropriate financial and fiscal policies. I would,
therefore, like to share with Hon’ble Members the philosophy of my budget. It aims
at strengthening the productive forces in the economy, keeping a tight rein on inflation,
encouraging savings both in the individual and corporate sectors and promoting
essential investment. The encouragement of savings has its corollary in discouraging
12
consumption. Conspicuous consumption whether at individual or the corporate level
has no place in a society such as ours. I have also taken this opportunity to review
the effect of certain incentives and concessions in the tax law, and to modify them
where appropriate. As we are placed now, the Budget must reflect the imperatives of
attaining as speedily as possible a viable external payment situation and, therefore,
seek to promote exports and effect economies in imports through a judicious use of
the fiscal instrument.
71. Within this overall framework, it has been my objective to keep the
budgetary deficit for the next year relatively low. While it has been necessary to raise
additional resources, I have tried to do so in a non-inflationary way and without
subjecting the low and middle income groups to additional burdens.
72. I shall first deal with my proposals in the area of non-corporate income
taxes. My aim is to provide some relief at the lower end of the slabs and specially to
the salaried taxpayer. At the same time, it has been my endeavour to promote savings
at the expense of consumption. With this end in view I am providing for a more liberal
application of the exemptions pertaining to savings.
73. Coming to my specific proposals let me begin with the unpleasant bit. I
propose an increase in the surcharge in the income-tax on non-corporate taxpayers
from the present level of 10 per cent to 12.5 per cent. The revenue yield from this
measure would be Rs.47 crores in a, full year and Rs.37.6 crores in 1983-84. This will
accrue wholly to the Centre. Considering the increased burden cast on the Centre on
account of additional expenditure on national security and special assistance to the
States. Hon’ble Members will agree that this measure is justified.
74. Now for the good news. As a measure of relief to the salaried taxpayer I
am proposing that the ceiling of standard deduction be increased from the present
Rs.5,000 to Rs.6,000. The revenue loss as a result of this proposal is expected to be
Rs.19 crores in a fun year and Rs.15.2 crores in 1983-84.
75. In recent years we have increased the exemption limits in respect of income-
tax. It has, however, been pointed out to me, with some justification, that the tax rate
in the initial slab is somewhat high. I accordingly propose to split the initial slab, and
for the first slab between Rs.15,001 and Rs.20,000 the tax rate will be 25 per cent
instead of 30 per cent. The present rate of 30 per cent will, however, continue to apply
to the slab Rs.20,001 to Rs.25,000. For the next slab between Rs.25,001 and Rs.30,000
the rate will be raised by 1 percentage point to 35 per cent. Even after the increase in
rate of surcharge, individuals and certain categories of Hindu undivided families, etc.
in the lower income slabs will pay less tax than at present. The revenue effect of these
proposals would be a loss of Rs.35 crores in a full year and Rs.28 crores in 1983-84.
76. As a measure to stimulate savings, I propose to remove the ceiling of 30
per cent of gross total income in respect of savings in specified forms like life insurance,
13
provident funds, etc., while retaining the absolute monetary ceilings. Further, I intend
widening the available media for savings by including National Savings Certificates,
VI and VII issues. This would be particularly helpful to those past middle age and
towards the end of their working lives who might find it difficult to take advantage of
life insurance and other contractual forms of savings. The revenue loss from this
measure is expected to be Rs.15 crores in a full year and Rs.12 crores next year.
77. Income derived from specified long-term investments is exempt at present
up to Rs.4,000 with an additional exemption of Rs.2,000 for interest on securities and
bank deposits for a period exceeding one year. As a measure of simplification, I propose
to merge these separate exemption limits and raise it from Rs.6,000 to Rs.7,000. The
existing separate exemption of Rs.3,000 in respect of income from units of the Unit
Trust of India will continue unchanged. As a result of these proposals, the aggregate
of specified investment income which is exempt from tax would go up from Rs.9,000
to Rs.10,000. This should help to stimulate savings further.
78. Hon’ble Members would appreciate that in sum the effect of the above
proposals would be such as not to increase the tax liability of assessees in the lower
brackets of the tax scale notwithstanding the increase in the surcharge. As for the rest,
as I intend the surcharge primarily to affect consumption rather than savings I have
sought to combine the surcharge with measures designed to increase personal savings
in specified financial assets.
79. I propose to extend the operation of the Compulsory Deposit Scheme
(Income-tax Payers) Act, 1974, by a period of two years. At present, persons over 70
years of age are exempted from the requirement of making deposits. I propose to
lower this limit from 70 to 65 years. Those who attain the age of 65 years on 1st April,
1983, would be entitled to withdraw, at their option, the balance of the deposits to
their credit, on or after 1st June, 1983.
80. At present no tax on capital gains is charged in cases where the net
consideration received on transfer of a capital asset is invested in 7-Year National
Rural Development Bonds. It has been pointed out to me that this maturity period is
rather long. In order to provide investment choices and with a view to ensuring that
resources flow into desired directions, I propose to extend the exemption to cover
investment of the net consideration in a new Central Government Bond of 3 years’
maturity. a special series of units of the Unit Trust of India and debentures of the
Housing and Urban Development Corporation with maturity periods adjusted
appropriately for the interest they carry.
81. As I indicated earlier, I have decided to liberalise further the tax incentives
in respect of non-resident Indians investing in India. I propose to levy a flat rate of tax
of 20 per cent plus surcharge on incomes derived by such persons from their specified
investments in India made through foreign exchange remittances. These investments
will include shares and debentures of Indian companies, units of the Unit Trust of
14
India and Government securities. Long-term capital gains arising on transfer of such
assets will also attract tax at the proposed flat rate. Such incomes will also not be
taken into account in computing their other Indian incomes. They would not have to
go through the procedures involved in submission of tax returns, provided they have
no other income in India and tax at the proposed flat rate has been deducted from their
income. These non residents will also have the option of paying tax at the normal rates
applicable to resident taxpayers. Such investments will also be exempt from wealth-
tax. Gifts of such assets made by Indian citizens and persons of Indian origin settled
abroad to their relatives in India will also be exempt from gift tax.
82. I shall now deal with my proposals in respect of the corporation tax.
Earlier in my speech I had referred to the need to accelerate investment through
higher internal generation by companies and curbing conspicuous consumption.
I believe that both the Government and the companies can contribute towards
this objective.
83. It has been pointed out to me by several committees and representative
organisations of industry that given the rising costs of replacement and modernisation,
the internal funds available with the corporate sector are inadequate. I find substance
in this argument. Accordingly, I propose to increase the general rate of depreciation in
respect of plant and machinery from 10 per cent to 15 per cent. I am also raising the
monetary limit for 100 per cent write-off from the present level of Rs.750 to Rs.5,000
in respect of small items of plant and machinery. The other related benefits which new
investment in plant and machinery now enjoy will continue. The revenue loss on
account of liberalisation of provisions relating to depreciation would be Rs.140 crores
in a full year and Rs.112 crores in 1983-84.
84. Hon’ble Members would recall that last year I had proposed to allow
depreciation at 30 per cent of the cost of devices and systems for energy saving and
for minimising environmental pollution and for conservation of natural resources. I
propose to go farther and allow 100 per cent depreciation on devices and systems for
energy saving. In regard to devices and systems for minimising environmental pollution
and for conservation of natural resources, I propese to raise the investment allowance
from 25 per cent to 35 per cent.
85. To encourage industries to shift from urban areas and as a measure of
decongesting our overcrowded cities and reducing pollution, the capital gain arising
from transfer of buildings or lands used for the purposes of business is exempt from
tax if it is used for acquiring lands or constructing buildings for the purposes of
business at the new place. I propose to extend this exemption from tax. to capital gain
arising from transfer of machinery and plant also.
86. I had occasion earlier to refer to the lowering of the interest rate structure.
As my contribution to the relief being provided by banks and with a view to encouraging
production and investment, I propose to reduce the rate of tax charged under the
15
Interest-tax Act to half of the prevailing rate. In respect of the chargeable interest
arising after 31st March, 1983, the rate of interest-tax will be reduced from seven per
cent to three and a half per cent. About half of the loss of Rs.130 crores on account of
this measure will be recouped by the additional tax revenue as a consequence of the
lower deductible cost of borrowing to business and industry.
87. My other important objective in respect of the corporate tax structure is to
provide incentive for higher production and exports. I am, therefore, continuing the
two schemes announced last year and making them more liberal.
88. As regards the scheme for excess production, I will come to the details
later while discussing my proposals in respect of indirect taxes.
89. In respect of exports the scheme announced by me last year provided
some tax relief to exporters whose export turnover for any year exceeded that of the
immediately preceding year by more than 10 per cent. The total relief available under
last year’s scheme was also subject to a maximum of 10 per cent of tax payable. I now
propose to simplify and liberalise the scheme and remove both the minimum qualifying
amount and limit of relief. Exporters will be entitled to deduct 5 per cent of their
incremental turnover in computing their taxable income. Thus, under the new scheme
all increments in export turnover will be entitled to relief. Exports of all goods will
qualify for this concession excepting a few specified items. As the new provision will
take effect from the assessment year 1983-84, the provision made last year is proposed
to be deleted.
90. Hon’ble Members must be aware of the phenomenon of companies which
are flourishing, but are paying no tax at all, or only a nominal tax. This is largely due
to these companies availing of the tax incentives and concessions available under the
provisions of the Income-tax Act. It has been a matter of concern to us that under our
tax system several highly profitable companies are able to reduce their tax liability to
zero even though they continue to pay high dividends. It seems reasonable that profitable
and prosperous companies should contribute at least a small portion of their profits to
the national exchequer at a time when other and less better off sections of society are
bearing a burden. I therefore propose to provide that fiscal incentives and concessions
shall not absorb more than 70 per cent of the profits. This would secure that companies
pay a minimum tax, on at least 30 per cent of their profits.
91. The differential rates of tax in the case of domestic companies depending
upon the total income of the company are proposed to be removed.
92. As a measure of simplification, I propose to levy income-tax at a flat rate
of 25 per cent on the gross amount of interest received by foreign companies on loans
advanced by them in foreign currency.
93. The income-tax payable by companies at present bears a surcharge of 2.5
per cent of such income-tax. I propose to raise the rate of surcharge to 5 per cent.
16
However, in lieu of the additional surcharge payable by them, companies will be
offered the option to make deposits with the Industrial Development Bank of India
under a scheme to be notified by the Government. I am not taking credit for any
revenue gain from this measure in the expectation that the additional surcharge would
in fact be deposited by the companies with Industrial Development Bank of India. The
amount so deposited should help to provide funds for modernisation and thus flow
back to the corporate sector.
94. Our corporate tax structure is riddled with a large number of different
kinds of deductions. While each deduction may seem to have a merit the aggregate
effect is to complicate tax administration, provide opportunities for misuse and reduce
the growth of revenues. As a step towards rationalisation of this structure, I have
reviewed the various deductions.
95. The Income-tax Act at present provides for weighted deduction of expenses
incurred by a company or a co-operative society which uses products of agriculture,
animal husbandry, dairy or poultry farming as raw material. The expenses in respect
of which weighted deduction is allowed do not relate directly to the assessee’s business.
I propose to provide that such companies or cooperative societies would henceforth
be entitled only to the deduction of expenses and not to the weighted deduction.
96. The Income-tax Act provides deductions for expenditure or contributions
made by assessees for approved programmes of rural development. Ongoing
programmes approved by’ the prescribed authority will continue to enjoy the benefits
of the deduction upto the terminal date in respect of time bound programmes and
February 28, 1984 in other cases. However, with a view to preventing possibility of
misuse, it is proposed not to allow any further deductions on this score. It is not the
intention of the Government to deprive genuine rural development programmes of
corporate support. The Government would shortly establish a fund called the Prime
Minister’s Fund for Rural Development, contributions to which would enjoy exemption
under the Income-tax Act.
97. The special deduction allowed hitherto in respect of profits and gains
from business of livestock breeding or poultry or dairy farming and from business of
growing mushrooms, is proposed to be withdrawn. I see little justification for continuing
this fiscal concession to these businesses, in view of the room for abuse. However, in
order to encourage and strengthen primary co-operatives for oilseeds, fruits and
vegetables, I propose to provide full exemption from tax for such co-operatives as in
the case of dairy co-operatives.
98. The tax concession in relation to horizontal transfer of technology
was introduced in 1969. The objective was to discourage repetitive import of
foreign technology. I find that the concession has lent itself to be used for tax
avoidance. I, therefore, propose to withdraw this concession effective from
assessment year 1984-85.
17
 99. Hon’ble Members must be aware of lavish and wasteful expenditure by
trade and industry, particularly on travelling, advertisement and the like. With a view
to inculcating a climate of austerity and providing a disincentive to unproductive,
avoidable and ostentatious spending by trade and industry, I propose to provide that
20 per cent of such expenditure will be disallowed in computing the taxable profits.
The Income-tax Act provides for the disallowance of entertainment expenses beyond
a ceiling and for total disallowance of expenses on maintenance of guest houses. I
propose-to define the terms “entertainment expenditure” and “guest house” to remove
doubts about the correct import of these expressions. The revenue from these measures
in a full year will be Rs.50 crores and in 1983-84 Rs.40 crores. The effect of these
measures, combined with the increase in depreciation allowance, will be to provide a
marked preferential tax treatment of investment as against unproductive expenditure.
100. Several cases have come to notice where taxpayers do not discharge their
statutory liability such as in respect of excise duty, employer’s contribution to provident
fund, Employees’ State Insurance Scheme, for long period of time. For the purpose of
their income-tax assessments, they nonetheless claim the liability as deduction even
as they take resort to legal action, thus depriving the Government of its dues while
enjoying the benefit of non-payment. To curb such practices I propose to provide that
Irrespective of the method of accounting followed by the taxpayers, a statutory liability
will be allowed as a deduction in computing the taxable profits only in the year and
to the extent it is actually paid. This would result in a revenue gain of Rs.100 crores
in a full year and Rs.80 crores in 1983- 84.
101. It has come to my notice that some persons have been trying to avoid
personal wealth-tax liability by forming closely-held companies to which they transfer
many items of their wealth. particularly jewellery bullion and real estate. As companies
are not chargeable to wealth-tax, and the value of the shares of such companies does
not also reflect the real worth of the assets of the company, those who hold such
unproductive assets in closely held companies are able to successfully reduce their
wealth-tax liability to a substantial extent. With a view to circumventing tax avoidance
by such persons, I propose to revive the levy of wealth-tax in a limited way in the case
of closely-held companies. Accordingly, I am proposing the levy of wealth-tax in the
case of closely-held companies at the rate of 2 per cent on the net wealth represented
by the value of specified assets, such as, jewellery. gold, bullion, buildings and lands
owned by such companies. Buildings used by the company as factory. godown,
warehouse, hotel or office for the purposes of its business or as residential
accommodation for its low-paid employees will be excluded from net wealth.
102. The sum of my proposals in respect of the corporate sector, the Hon’ble
Members would appreciate is to ensure that every profitable company pays some tax
in the year in which profits accrue, that loopholes are plugged and the number of
deductions is reduced, that more funds are available for modernisation and re-
investment, that costs are reduced through lower interest charges and reduction in
18
conspicuous expenses, and that higher production, particularly for exports, receives
due encouragement.
103. Many charitable and religious trusts and institutions no doubt do laudable
work. Unfortunately, it is also true that many are used as a medium for tax avoidance,
accumulation of wealth and means of patronage and I cannot remain a disinterested
spectator. It is time some steps were taken to set matters right.
The Taxation Laws (Amendment) Act, 1975 had laid down an investment
pattern for trust funds, and trusts which failed to comply with this investment pattern
from accounting years commencing after 31st March, 1978 were liable to forfeit tax
exemption. However, having regard to the practical difficulties involved and to ensure
a more orderly change-over, this date was extended in 1977 by three years. As the
whole gamut of the provisions relating to charitable and religious trusts was under
consideration by the Economic Administration Reforms Commission, the date for
the new pattern of investment was again extended last year by a further period of
one year.
I have since considered the matter carefully. I see no justification for permitting
investment of trust funds in business concerns, including shares of companies in the
private sector. I accordingly propose to provide that all trust funds should be invested
in specified modes, such as. Government securities, units of the Unit Trust of India,
deposits with scheduled banks, approved financial corporations, etc. investment in
immovable properties will, however, continue to be allowed. I am giving notice to all
charitable and religious trusts to divest their share holdings and other investment in
business concerns by 30th November, 1983. However, trusts will be allowed to keep
shares in companies, which formed part of the original corpus as on June 1, 1973 and
bonus shares received up to that date. Some trusts carry on business on commercial
lines and derive income there from. There is no reason why such business income
should not be brought to tax. I, therefore, propose that business income of all charitable
and religious trusts including those which have hitherto been exempted by notification
will be brought to tax with effect from assessment year 1984-85. Trusts having business
income will also be required to conform to the new investment pattern if they wish to
seek tax exemption in respect of their other income.
104. Hon’ble Members are no doubt aware that estate duty in respect of
agricultural land is a State subject and that the Centre has levied estate duty on
agricultural land only by virtue of resolutions passed in this regard by States enabling
the Union to do so. Our experience is that the valuation of agricultural land leads to
administrative difficulties and litigation. The yield from this levy has also not been
significant over the past several years. Moreover, after the abolition of wealth-tax on
agricultural land, including plantations, there is little practical justification for
continuing the levy of estate duty on agricultural land. I, therefore, propose to remove
the levy of estate duty on agricultural land. Since the Estate Duty Act can be amended

19
only after the necessary resolutions of State Legislatures, a Bin for giving effect to
this proposal will be introduced later.
105. The revenue loss on account of the reduction in interest-tax will be Rs.104
crores next year. Taking into account the estimated recoupment of part of this loss, my
corporation tax proposals will yield Rs.104 crores next year. My proposals in regard
to income-tax will lead to net revenue accrual of Re. 25. 6 crores to the Centre next
year and a loss of Rs..28 crores to the States.
106. I turn now to my proposals in the area of indirect taxation. Mr. Speaker,
the House to aware that for some years now our balance of payments has been under.
strain. Despite this we have sought to maintain an import regime which provides
adequate access to imported inputs such as raw material and capital goods to the
priority sectors. At the same time, I would not like that our policies should be taken
advantage of by exporters abroad facing difficult market conditions by selling unduly
cheap in the Indian market to the detriment of Indian industry. I believe we should use
the instrument of customs duties not only to help revenue collection but to support our
balance of payments and industrial expansion. In framing my proposals I have also
tried to minimise tax avoidance and evasion and taken care to see that the measures
would not spur inflation
107. Taking customs duties first, my principal proposal is to continue the
auxiliary duties of customs first imposed from 1973 and since renewed annually. I
propose also to raise with certain exceptions the present effective rates by 5 percentage
points. The statutory rate of auxiliary, duty is proposed to be kept at 50 per cent, and
the maximum effective rate at only 35 per cent. The cushion of 15 per cent will help
us take care of any need for higher duty levels which may become necessary for
reasons such as support for indigenous production. Newsprint and crude petroleum
would not be subject to the increase in auxiliary duty. The existing full exemption
from auxiliary duties on essential items like fertilizers, kerosene, high speed diesel oil
would be continued. The revenue gain as a result of this proposal would be Rs.254.5
crores in a full year.
108. My next proposal relates to chemicals. This group of commodities is in
general subject to a basic rate of customs duty at 60 per cent ad valorem. With the
significant fall in the international prices of chemicals, I believe it would be appropriate
to raise the tariff rate to 100 per cent ad valorem and the general effective rate to 70
per cent ad valorem. Tariff rates of 40 per cent and 100 per cent applicable to certain
groups of chemicals are also being raised on the same lines. However, pharmaceutical
chemicals and drugs, insecticide, pesticide and fungicide chemicals. fertilizers, tanning
substances, etc. have by and large been kept out of the purview of the proposed
increase. This measure will yield Rs.37.5 crores in a full year.
109. I also propose to raise the effective basic import-duty on zinc metal from
45 per cent to 55 per cent ad valorem and that on lead metal from 40 per cent to 56
20
per cent ad valorem. The existing par-flail exemption from countervailing duty on
lead scrap and waste also proposed to be withdrawn. These measures will yield
additional revenue of Rs.12.8 crores in a fun year, and would also improve the financial
viability of indigenous producers.
110. For the benefit of our electronic industry, the existing concessional basic
import duty of 45 per cent ad valorem is proposed to be extended to four more items
of raw materials and components. Besides, the concessional basic import duty of 35
per cent ad valorem in respect of capital goods is proposed to be extended to 14 more
items. These steps would cost the exchequer Rs.1.22 crores in a financial year.
111. Another concession relates to bonafide gifts received from abroad by post
or air freight. The existing duty-free value limits for such gifts were fixed in 1968. I
propose to raise the duty-free limit for bonafide gifts of food articles and medicines
imported by post or as air freight, and other items imported by post to Rs.200. This
liberalisation, I am sure, would be welcomed by those who receive genuine gifts from
their friends and relatives abroad. The revenue sacrifice would be Rs.3.71 crores in a
full year.
112. I also propose to rationalise and liberalise the provisions relating to import
duties on articles of baggage which are brought by passengers returning to India. The
present duty-free limit for baggage is Rs.1000 fixed in 1978. I propose to raise this
limit to Rs.1250 for adults with corresponding increase for minors and other categories
of passengers. Keeping in mind the needs of Indian workers abroad who are generally
engaged on contracts of one year and who then return to India, I propose a higher
duty-free allowance of Rs.5000 for them for used household effects with some
exceptions. The rate of basic duty on the first dutiable value slab will remain 130 per
cent, while on the value in excess of the first dutiable slab it is being reduced from
300 per cent to 200 per cent ad valorem except for a few articles. Auxiliary duty will
be in addition. The list of articles of baggage in respect of which duty-free entry will
not be admissible is being shortened. I am sure these measures would reduce the
rigours of customs clearance for incoming passengers. I do not anticipate any fan in
revenue because of this liberalisation.
113. A few amendments to the Customs Act, 1982 are also proposed to
streamline the working of the department in the field and to enable more efficient
revenue collections. The changes relate mainly to the setting up of the inland Container
Depots and provisions relating to warehousing and drawback. A fair amount of customs
revenue remains blocked because of inordinately long warehousing of goods and it is
therefore proposed to reduce the warehousing time to one year in the case of non-
consumable stores and to three months for other goods. As a measure to expedite
drawback payments. It is being provided that for claiming drawback it would be
sufficient if the goods are entered for export to a place outside India. The minimum
amount for which a claim for drawback would be entertained is also being raised from
Rs.5 to Rs. 50.
21
 114. Power is also proposed to be taken under the Customs Act for the
Government to fix effective rates of duty on a bash different from the one spelt out in
the tariff. Thus, if the tariff, fate of duty is on ad valorem basis, the Government
would have the power to fix effective rates of duty on the basis of weight, etc.
115. Sir, coming now to my proposals in respect of excise duties my objective
has been primarily to mop up windfall gains where we believe they exist, and to limit
the incidence of additional levies on individual items to relatively small proportions.
I have also kept to the fore the important objective of promoting the small scale sector
which has been a nursery for entrepreneurship in the country and has also helped to
diffuse the concentration of economic power.
116. I propose to continue the levy of special excise duties in 1983-84 at the
existing rates.
117. Cement prices, as Hon’ble Members are aware, have been ruling high in
the markets. To mop up undue profits. I propose to raise the basic excise duty on
cement from Rs.135 to Rs.205 per tonne for the commonly used variety of cement.
The basic excise duty on cement produced in mini-cement plants will also go up from
Rs.100 to Rs.170, thus maintaining the existing duty differential of Rs.35 per metric
tonne in favour of the mini plants. The revenue gain would be Rs.182 crores in a fun
year by way of Central excise duties and Rs.6 crores by way of countervailing duties
on imports of cement.
118. Central Excise Tariff item 68 covers a miscellany of goods not elsewhere
specified in the Tariff. The rate of duty has been unchanged at 8 per cent ad valorem
from 1979. I propose to raise the rate now to 10 per cent ad valorem. This measure is
liekely to yield an additional revenue of Rs.120 crores by way of Central excise duties
and Rs.60 crores by way of countervailing duties in a full year. The increase would be
basically on finished goods since the raw materials and manufactured inputs covered
by this Tariff item will continue to be eligible for duty credit as at present. I have
taken care to protect the small scale sector, as I will be mentioning later.
119. 1 have also proposed a package of measures relating to man-made fibres,
blended yarns and fabrics. Hon’ble Members would recall that in my Budget last year
several duty changes were made to encourage the production of blends with the desirable
proportions of polyester. As a further measure in this area, I now propose to give a
competitive edge to polyester-cotton blended fabrics, vis-a-vis polyester-viscose blended
fabrics. The incidence of basic and additional duty on polyester- cotton fabrics
containing more than 40 per cent but less than 50 per cent polyester is proposed to be
reduced from 15 per cent ad valorem to 6.5 per cent ad valorem. These concessional
rates would not, however, apply if polyester filament yarn is used. The overall incidence
to duty on cotton yam containing more than 40 per cent but less than 50 per cent
polyester is also being reduced from Bs.11.25 to Rs.7.5 per kilogram. The revenue
sacrifice entailed in these changes is Rs.19.40 crores in a fun year.

22
 120. The effective duty on viscose staple fibre is being raised from Rs.4 per
kilogram to Rs.5 per kilogram. Further, to discourage the increasing imports of this
fibre, I propose to raise the import duty on ordinary viscose staple fibre from 30 per
cent to 40 per cent ad valorem and on improved varieties of viscose staple fibre also
to 40 per cent ad valorem. The-revenue gain will be Rs.5.6 crores.
121. In the case of imported polyester fibre, considering the gap between its
landed cost and domestic prices, it is proposed to raise the effective duty on polyester
staple fibre by Rs.9 per kilogram. This would yield Rs.9 crores in a full year.
122. Polyester filament yarn is used in comparatively higher priced fabrics and
I propose to raise the effective excise duty by Rs.7.50 per kilogram on filament yarns
of textile applications. This increase would be equally incident on imported filament
yarn by way of higher countervailing duty. The increase would not be applicable to
polyester filament yarn of 750 deniers and above which goes into industrial applications.
The revenue gain in a fun year would be Rs.22.5 crores by way of excise duties and
Rs.5.6 crores by way of countervailing duties.
123. In step with the above increase, I also propose to raise the effective duty
on nylon filament yarn of textile deniers by the same margin. The additional revenue
yield will be Rs.15.5 crores by way of Central excise duties and Rs.50 lakhs by way
of countervailing duties in a full year.
124. As a measure to combat tax avoidance I propose to change the basis of
duty from ad valorem to ad valorem-cum-specific rate or specific rate on a few
commodities. In respect of paper, while adopting an ad valorem-cum-specific rate; I
propose to fix a uniform rate for printing, writing and most of the other varieties of
paper and paper board. The effective basic duty for kraft paper will be 10 per cent ad
valorem plus Rs.1810 per metric tonne and for most of the other varieties of paper and
paper board, 10 per cent ad valorem plus Rs.1430 per metric tonne. The existing
concessional basic rate of 5 per cent ad valorem in respect of white printing paper
supplied to Director General, Supplies and Disposals or for educational purposes would,
however, continue.
125. I have also reviewed the present concessions available to small paper
mills. The linking of the concession enjoyed by this sector to the installed capacity of
a plant has been posing some practical problems. I, therefore, propose to rationalise
the concessions to this sector on the basis of quantum of clearances in a financial year.
The extent of exemption is also being suitably modified which should encourage the
small paper mills to increase their production substantially. Rates of duty for paper
manufactured in such paper mills using unconventional raw material will be Rs.560,
Rs.900 or Rs.1120 per tonne depending on whether the clearances of paper and paper
board from such paper mills in the preceding financial year did not exceed 3000
tonnes, 7500 tonnes or 16500 tonnes respectively.
23
 126. In regard to aerated waters it is proposed to fix specific rates of duty to
replace the existing ad valorem rates. The effective basic duty for a bottle of 200
millilitres will be, 5 paise for soda and 30 paise for others. The concessions available
to small scale manufacturers would continue.
127. The present ad valorem rate in respect of motor cars is being converted
into ad valorem-cum-specific rate. The effective rates would be based on the engine
capacity and would be different for petrol driven and diesel driven cars.
128. In the case of tyres used in two-wheeled vehicles and tractors and tyres of
specified sizes for trailers, the present basic tariff rate of 60 per cent is proposed to be
reduced to 25 per cent which is the level of the present effective rates of duty.
129. The House may recall that in November last the concessional rates of
duty on cigarettes were withdrawn and cigarettes were made liable to pay statutory
rates. The revenue realisations had been affected inter alia on account of disputes over
the method of arriving at the assessable value. With a view to ending the room for
uncertainty once for all I propose to fix specific rates of duty in respect of cigarettes.
These rates of duty would be linked to their retail sale prices printed on the cigarette
packs. Keeping in view the fact that the consumption of cheaper cigarettes is large, I
have also sought to have a graded levy based on retail prices. The duty now proposed
will, at the lowest slab, be Rs.35 per thousand cigarettes. I expect that this measure
would help the Government to realise the revenue expected from this item.
130. All these anti-avoidance measures would help secure revenue of the order
of Rs.50 crores which otherwise might have been avoided.
131. There have been strong representations from many quarters that the existing
scheme of concession in excise duty for the small scale sector hampers continuous
growth and should be liberalised. I have reviewed the matter. Under the general scheme
applicable to 70 specified groups of commodities at present, manufacturers are eligible
to get full duty exemption upto first clearances of Rs.7.5 lakhs and the concessional
rate of 75 per cent of the duty payable on clearances in excess of Rs.7.5 lakhs but upto
Rs.15 lakhs. I propose to raise the upper limit from Rs.15 lakhs to Rs.25 lakhs. At the
same time, I propose to reduce the limit of full exemption from Rs.7.5 lakhs to Rs.5
lakhs. The clearances in excess of Rs.5 lakhs upto Rs.25 lakhs would, however, enjoy
a concessional rate of duty of 75 per cent of the normal duty payable.
132. Two commodity groups, namely cosmetics and toilet preparations, and the
other, refrigerating and airconditioning appliances and machinery and their parts, bear
high rates of excise duty and will be deleted from the general scheme. An alternative-
exemption scheme has been provided for these items under which small manufacturers
with total clearances upto Rs.2.5 lakhs would be completely exempt from payment of
duty and those with turnover upto Rs.15 lakhs would pay duty at half the normal rate
on the entire clearance.
24
 133. As regards the exemption available to the small scale manufacturers of
goods falling under Tariff item 68, I propose to raise the eligibility limit of Rs.30
lakhs by way of value of clearances in the previous year to Rs.40 lakhs. This measure
would help the small scale units to avail of the benefit of exemption while expanding
their turnover. With the increase in the rate of duty from 8 per cent to 10 per cent
which I mentioned earlier, the amount of the new concessions can go up to Rs.3 lakhs
against Rs.2.4 lakhs till now.
134. For both the schemes, I propose to exclude the clearances of exempted
goods, other than those exempted under small scale exemptions, from the computation
of value of clearances for the purpose of determining the eligibility as well as availment
of exemption from duty. The net revenue effect of all these concessions for the small
scale sector will be a loss of Rs.5 crores in a full year.
135. As part of the 1982 Budget, I had announced an excise duty relief scheme
for encouraging higher production in respect of certain specified commodity groups.
I propose not only to continue the scheme but also enhance the relief in duty for
excess clearances. Under the existing scheme, there is, for excess clearances, a relief
of 20 per cent of duty for items falling in certain duty rate groups and 10 per cent for
those falling in other such groups. I propose to provide incentive in two slabs instead
of the present single slab. I also propose to increase the present incentive of 20 per
cent and 10 per cent respectively to 30 per cent and 15 per cent for the first slab of
excess clearances and to 40 per cent and 20 per cent for the subsequent slab. I am
hopeful that industry would take advantage of this liberalisation and step up production.
136. I have also proposed a few changes which would benefit State
Governments. The first is in relation to coated fabrics, both cotton and man-made and
flocked fabrics where additional excise duty (in lieu of sales tax) of 5 per cent’ ad
valorem is being proposed in addition to the duty on base fabrics. This measure would
net an additional revenue of Rs.3.4 crores in a full year. The other proposal relates to
sandalwood oil in respect of which all extant exemptions are being withdrawn. The
net gain from this proposal is Rs.30 lakhs in a year.
137. I now come to changes which do not involve any significant revenue. I
propose a few changes in the tariff descriptions relating to iron and steel items which
would align the Central Excise Tariff, as far as these items are concerned, with the
Indian Customs Tariff. The principles of classification hitherto adopted through
executive instructions are being incorporated in the tariff entry itself. The tariff entries
relating to Iron and steel would be spelt out on a more scientific basis and the problems
encountered in the matter of charging countervailing duty would also be reduced
considerably. These changes would, however, be brought into effect from a subsequent
date after the necessary groundwork. Till then, the present effective rates of duty
would continue.
138. Lest this litany of measures give the impression that the Finance Minister’s
25
proposals only relate to raising revenue, let me add that where appropriate I have
tried, as I will be announcing now, some concessions in excise duties.
139. Sugar is an important item in the family budget. I propose to reduce the
duty on both ‘levy’ and ‘non-levy’ sugar. The present ad valorem rates are being
replaced by specific rates, that is 38 paise per kilogram on ‘levy’ sugar and 50 paise
per kilogram on ‘non-levy’ sugar. The revenue sacrifice will be of the order of Rs.21.02
crores in a full year. I have, however, taken special care to see that the amount due to
the States from additional excise duty in lieu of sales tax on sugar is not affected.
140. Housewives in India, as elsewhere, have been complaining for some time
about the rise in their expenses. As a measure of economising on their fuel bills
without affecting the nutritional and, hopefully, the gastronomic value of what they
cook, I propose to exempt totally pressure cookers from excise duties. They would
now find someone else in their kitchens letting off steam.
141. With the same intention of promoting fuel economy, I propose also to
exempt fully from excise duty fuel efficient kerosene stoves.
142. The effective basic rates of excise duty on electric bulbs upto 60
watts and fluorescent tubes are now 10 per cent ad valorem and 30 per cent ad
valorem respectively. As a measure to reduce the prices of these items, and thus
help in the effort to shed more light at lesser cost, I propose to exempt fully the
former from excise and reduce the basic duty on the latter from 30 per cent to 20
per cent ad valorem.
143. In consideration of the potential of multi-axled vehicles for fuel saving,
I propose to reduce the effective basic duty on them from 15 per cent to 10 per
cent ad valorem.
144. For the benefit of farmers, who use these fertilizers, I propose to fully
exempt ammonium sulphate and calcium ammonium nitrate from excise duty, as also
agricultural grade pyrites used for reclamation of alkaline soils.
145. Aluminium pipes used in sprinkler equipment for irrigation, which at
present bear a basic duty of 16 per cent ad valorem, will also be fully exempted.
Another proposal is for exemption from excise duty of internal combustion engines
for agricultural sprayers, and also for powered cycles.
146. One of the factors leading to higher prices of prepared or preserved
foods, and food products is the cost of the metal containers used in their packaging.
I propose to exempt these items from that part of excise duty as is relatable to the
cost of such containers. This should bring about a reduction in the price of these
foods to the consumer.
147. Skimmed milk powder sold in packs upto 1 kilogram is also being fully
exempted from duty as a measure to reduce its prices to consumers.
26
 148. I also propose to fully exempt from duty several specified items of hospital
furniture which should reduce the cost of acquiring them for the hospitals.
149. These excise duty concessions would cost the exchequer Rs.35.02 crores
in a full year.
150. There are some other proposals in respect of customs and excise duties
which are relatively minor. I do not wish to take the time of the House over them.
151. The proposals I have presented will yield revenue of Rs.409.00 crores in
a fun year in Central excise duties and Rs.397.96 crores in customs duties. The
concessions and reliefs amount to Rs.83.58 crores on the Central excise side and
Rs.4.93 crores on the customs side. The net yield is, therefore, Rs.325.42 crores from
Central excise duties and Rs.393.03 crores from customs duties. The accrual to the
Central Exchequer in a full year will be Rs.589.71 crores and the share of the States
will be Rs.128.74 crores.
152. Where the changes are to be made by notifications effective from 1st
March, 1983, copies thereof will be laid on the Table of the House in due course.
153. In framing the Budget proposals, I have been greatly helped by the
observations and recommendations in reports of Parliamentary Committees and also
the reports made so far by the Economic Administration Reforms Commission. My
proposals reflect these recommendations, wherever feasible and appropriate, but I
must add that it has not been possible for the Government to take decisions finally on
all the recommendations in the reports. A number of them on important matters, such
as a Tribunal for valuation of urban properties, will be processed for a Direct Taxes
Amendment Bill, the preparation of which will be taken in hand.
154. This year I have not much to say on behalf of my Hon’ble colleague, the
Minister of Communications as he has already taken care of himself. The postal services
are being expanded every year to reach more and more people. Presently there are
over 1,41,000 post offices, and an employee strength of about 5.8 lakhs including
extra- departmental staff. With a view to meeting part of the increasing operating
costs, it has become necessary to revise the postal tariff. While I do not propose to
touch postcards and letter-cards, the tariff in respect of parcels is proposed to be
increased to yield Rs.12 crores in a full year and Rs.10 crores in 1983-84. A
Memorandum showing the proposed tariff is being circulated along with the Budget
documents. The changes will take effect from a date to be notified after the Finance
Bill is passed by Parliament.
155. I had earlier mentioned that the budgetary deficit at the existing rates of
taxation would be Rs.2250 crores. The proposed tax measures, taken together with the
reliefs and concessions, are estimated to yield net additional revenue of Rs.615.31
crores to the Centre and Rs.100.74 crores to the States during 1983-84. Besides, I am

27
taking credit for Rs.135 crores as receipts from the new Bond to be issued in terms of
the approved investments to obtain exemption from capital gains tax. After setting off
the receipt of Rs.55 crores from the existing National Rural Development Bonds already
included in the Budget, the net yield on this account would be Rs.80 crores. The
budgetary deficit would thus get reduced to Rs.1555 crores which Hon’ble Members
would agree would not put undue strain on the economy.
156. Mr. Speaker, there are no easy answers or short-cuts to development
problems faced by India. Whether we, as a nation, succeed or fail must ultimately
depend on the quality of our economic management and the cooperation of our people.
It is true that we have been able to maintain price stability despite a setback in agriculture
in the current year, increase our national income by about 5 per cent per annum in the
last three years and show some improvement in our balance of payments despite an
unfavourable international environment. These achievements. however, must not lull
us into a false sense of economic well-being. The road ahead is long and arduous.
Given the resilience and dedication of our people, we can face the future with hope
and confidence.
157. Sir, I now commend the Budget to the House.
(February 28, 1983)

28
 SPEECH OF SHRI PRANAB MKHERJEE MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1982-83

Sir,
I rise to present the Budget for the year 1982-83.
2. The Economic Survey for 1981-82, placed before the House a few days
ago, gives a detailed review of the current trends in the economy. I shall, therefore,
touch upon only a few important aspects of the economic situation which have
influenced the formulation of this year’s Budget.
3. As the House is aware, when the present Government came into office a
little over two years ago, the country was faced with a serious and deteriorating
economic situation. Gross National Product had declined by as much as 4.8 per cent
in 1979-80, the infrastructure was in shambles, and prices had increased at an annual
rate of 23.3 per cent by the end of January, 1980. It was against this background that,
while presenting the regular Budget for 1980-81, my distinguished predecessor had
informed the House that an important task before the Government was to arrest the
deterioration in the economic situation and to set the economy on the path of stability
and growth.
4. I am glad to say that we have gone a long way in achieving these objectives.
Our Gross National Product in real terms increased by 7.5 per cent in 1980-81, and is
expected to grow further by 4.5 per cent in 1981-82. The infrastructure is functioning
well inflation is being controlled. Production of foodgrains is likely to reach a new
peak this year. The industrial sector will record a growth of 8 per cent.
5. The fight against inflation has been a high priority of the Government.
Any slackening of effort on this front would have undermined the very basis of our
development. Inflation hurts all sections of the community, but it hurts the weaker
and poorer sections the most. Inflation also hurts the development process as investment
costs get distorted, and financing becomes an increasingly severe problem. It is,
therefore, a matter of satisfaction that we have succeeded in bringing down the rate of
inflation substantially.
6. At the end of January, 1982, the annual rate of inflation on a point-to-
point basis was only 4.9 per cent as against 15.9 per cent at the end of January, 1981
and 23.3 per cent at the end of January. 1980 when the present Government took over.
The deceleration in the wholesale prices has occurred in a wide range of commodities,
and is being gradually reflected in the consumer price index.
1
 7. However, the price situation requires constant vigilance, and there can be
no room for complacency. The international price situation continues to be uncertain.
At home, a drought or the failure of a major crop may well upset the demand and
supply balance. We must continue our efforts to increase the supplies of agricultural
and industrial commodities and also restrain the growth of aggregate demand. At the
same time, we must ensure that anti-social elements do not disrupt supplies and the
distribution network.
8. As I mentioned before, foodgrains production is likely to reach a new
peak in the current year. The kharif foodgrains production is estimated at around 80
million tonnes as against 77.4 million tonnes in 1980-81, and the prospects of rabi
crop are good. Sugarcane production is likely to increase substantially and sugar
production should reach a record level of over 67 lakh tonnes. Groundnut production
may be 20 to 25 per cent higher than in the last year. Significant increases are also
expected in cotton and jute.
9. The sustained good performance in agriculture is testimony to the hard
work of our farmers, agricultural scientists, and extension workers. It also underscores
the basic soundness of our agricultural strategy, which has emphasised creation of
Irrigation potential, greater fertiliser use, spread of high-yielding varieties of seeds,
and remunerative price support policies.
10. Industrial production, which had declined by 1.4 per cent in 1979-80,
recorded an increase of 4 per cent in 1980-81. In 1981-82, the growth rate will be
twice as high. A large number of industries such as petroleum and petroleum products,
fertilisers, steel, cement, vanaspati, sugar, newsprint, caustic soda, wagons and
commercial vehicles, are expected to achieve new peak levels of production during
the year. The increase in industrial production has been sustained by the concerted
action taken by the Government to improve the performance of infrastructure sectors.
In the current financial year, upto January, power generation has increased by 11.3 per
cent. Coal production in the last two years has increased by over 17 million tonnes,
and the target of 121 million tonnes for 1981-82 is likely to be exceeded. In railways
the previous record in freight loading will be surpassed and the revenue earning traffic
is expected to go up to 165 billion tonne kilometres. This has been made possible by
improvement in operational efficiency as evidenced, for example, by the significant
reduction in the wagon turn-round time during the year.
11. Monetary and credit policies during the year continued to emphasise the
requirements of meeting the credit needs for higher production, particularly in the
priority sectors, while restraining the growth of aggregate demand. In order to restrain
the growth of liquidity in the system, the cash reserve ratio was increased in phases
from 6 to 8 per cent, and the statutory liquidity ratio was raised from 34 to 35 per cent.
The Bank Rate was increased from 9 to 10 per cent and refinancing rates of the RBI
were also raised. Even so, the growth of bank credit to the commercial sector during
2
the year 1981-82 is likely to be of the order of 19 per cent which should be adequate
to meet the legitimate credit requirements of productive sectors.
12. Hon’ble Members will be happy to note that the operation of our public
sector banks has been further oriented towards extending banking facilities to under
banked rural and semi-urban areas, and enlarging the flow of credit to priority sectors
particularly the weaker sections of society. During January-November, 1981, 2517
new branches were opened by commercial banks of which 2269 were in rural and
semi-urban areas. During 1981, 22 regional rural banks were added to 85 such banks
as at the end of 1980. The priority sectors now account for about 36 per cent of the
aggregate bank credit as compared to about 33 per cent in 1979. The target to be
achieved by March, 1985 is 40 per cent. The differential rate of interest scheme has
been effectively implemented and the target of 1 per cent of aggregate credit for this
scheme is being achieved by public sector banks. The National Bank for Agricultural
and Rural Development is expected to start functioning within the next few months.
I am also pleased to inform the House that the Export Import Bank of India has been
established with effect from 1st January, 1982.
13. I would now like to refer to the balance of payments situation. As the
House is aware, there has been a substantial deterioration in our balance of payments
since 1979-80 primarily because of sharp increases in import prices, particularly of oil
and oil products. Anticipating these developments, the Government made timely
arrangements to negotiate a line of credit for SDR 5 billion from the International
Monetary Fund under its Extended Fund Facility. This was necessary to avoid the
disruption of our economy for want of essential imports and to gain time for
readjustment to the new situation. This line of credit has been accepted in order to
support an adjustment programme drawn from our strategy of planned development.
It will help us to implement our own policies which have been sanctioned and approved
by our people and Parliament.
14. The main elements of the Government’s strategy for restoring the viability
of our balance of payments in the coming years are: first and foremost, an increase in
the domestic production of petroleum and petroleum products, fertilisers, steel, edible
oils and non-ferrous metals. These account for nearly 60 per cent of our total imports.
The Government has taken necessary action to step up production and investment in
these and other critical areas.
15. We must also intensify our efforts at expanding the export base and creating
conditions conducive to larger exports. Exports have increased by 15.4 per cent
during the first 8 months of the financial year, which is encouraging. However, in
several areas, particularly in our traditional exports, such as textile fabrics, jute and
tea, we are facing unfavourable world market conditions. While sustaining exports of
these and other traditional commodities, much greater effort is now needed to expand
those exports for which world markets are growing. In recent years, our receipts from
3
invisibles, particularly from remittances by non-residents of Indian origin, have shown
a healthy growth. This has been a stabilising factor in our balance of payments, and
we must continue to provide adequate facilities for growth of receipts from this source.
16. The past two years have been years of crisis management and recovery. It
is a measure of our success that the economy is now back on the rails. This provides
us an opportunity to initiate further efforts for moving the economy forward and to
achieve the necessary medium term adjustment. The objective of policy in 1982-83
will be to maintain, the momentum of growth and to make an all out effort to achieve
the social and economic objectives of the Sixth Plan. This would call for larger
investments, and a relentless pursuit of goals of higher productivity, efficiency and
reduction in disparities. This is the message of the revised 20-Point Programme. The
Programme identifies the areas of special thrust in which there must be no compromise
on performance.
17. The tasks that lie ahead are not easy. Hon’ble Members are well aware of
the evolving geopolitical situation in our region and the difficult environment in which
we are functioning. While we strive to resolve the situation in a spirit of goodwill, we
have to take all necessary steps to safeguard the security of the nation. This burden,
which is not of our seeking, will involve sacrifices on the part of our people.
18. In the international economic sphere, there is a rising trend towards
protectionism which inhibits access to markets abroad. The environment for economic
co-operation has also deteriorated, and the flow of concessional resources is likely to
be less than envisaged earlier. In concert with other developing countries, we must
continue to press for reforms in the international economic order and to reverse these
disquieting trends. However, prudent management of the economy requires that due
account is taken of the present international situation in devising our economic policies.
19. The investment requirements of the economy are large and brook no delay.
It is essential that we now make a determined effort to mobilise more resources for
investment. Maintenance of a non-inflationary environment requires that additional
resource mobilisation represents real savings in the economy. However, adequate
resources for further investment in new capacities will not be forthcoming unless we
also take action to utilise the existing capacities fully. I am sure that this House will
share my hope that all sections of the community would do their utmost to make this
Year of Productivity a success. On its part, the Government would endeavour to
provide due encouragement to promote this objective.
20. Mobilisation of resources in a non-inflationary way must be a multi-
pronged effort. It is necessary to make appropriate adjustments in taxation and to
ensure better tax collection. The pernicious growth of black money in the economy
has been a major source of concern to the Government and Parliament. Various
economic offences have seriously eroded our development efforts. In the past, we
took a series of measures to fight against this menace. Unfortunately, this thrust was
4
diluted during the period when we were out of office. I can assure the Hon’ble
Members that our commitment to eradicate all economic offences is firm and
uncompromising. I am taking steps to ensure that the provisions of law are applied
vigorously and effectively to combat economic offences.
21. We must also continue to adjust administered prices in line with economic
costs. Uneconomic pricing policies in the public sector and in high priority industries
result in erosion of resources for further investment and lead to malpractices by
unscrupulous traders. Price adjustments carried out in the last two years have amply
demonstrated the important role of appropriate pricing policies in ensuring viable
operations, generating additional resources and reducing the scope for generation of
black money.
22. One of the strengths of our economy is the fairly high rate of savings.
Most of these savings occur in the household sector. We need to ensure that savers
have an adequate incentive to hold their savings in financial instruments. This could
play a significant role in providing more resources for investment. Over the past two
years, several steps have been taken in this direction. This thrust should continue.
23. In order to mobilise private savings for public use, the Government has
decided to issue two new savings instruments. The first is a Social Security Certificate
which has been specially designed for the small savers. Under this scheme, an
individual between the age of 18 and 45 can invest up to Rs.5000, which will triple in
10 years. The certificate will also provide social security to his family. In the case of
the investor’s demise, his nominee or legal heir will become immediately entitled to
the full maturity value of the certificate. The details of the scheme will be announced
separately. I trust that this National Savings instrument will prove particularly attractive
to large numbers in rural areas, and persons of small means everywhere.
24. The second instrument is the Capital Investment Bond which is designed
to attract a larger flow of private savings for public sector investment. These bonds
will have a maturity of ten years and carry an interest rate of 7 per cent, free of
income-tax. They will also be exempt from wealth tax, and upto Rs.10 lakhs in the
case of their first holder, from gift tax. Purchasers will have to duly account for these
investments.
25. The rate of savings that we have been able to achieve is a tribute to
the habits of thrift and good sense of our people. I have no doubt that they will
take full advantage of the new opportunities and incentives that are being given
to promote savings.
26. Remittances are an important source of foreign exchange for the country.
They are also a manifestation of the close cultural and family ties that exist between
the people of this country and the people of Indian origin abroad. In order to further
5
encourage the flow of funds from this source, it has been decided to improve the
facilities available to non-residents.
27. Any investment, without repatriation rights, made by non-residents of
Indian origin, so long as it is not for transactions in commercial property and land,
will be treated on the same footing as investments of resident Indian nationals. They
will be allowed to invest, with repatriation rights, in any new or existing company up
to 40 per cent of the capital issued by such company. They can now purchase shares
of companies quoted on the stock exchanges subject to specified limits. The interest
rates on new deposits of maturities of one year and above held in non-resident external
accounts will carry interest of 2 per cent above the rates permissible on local deposits
of comparable maturities. Gifts made in India out of deposits in these external accounts
will be free from gift tax. The non-residents can also invest in the 12 per cent 6-year
national savings certificates which, for them, will be free from wealth, income and
gift taxes. Facilities for investment in non-resident external accounts and in Indian
companies will be extended to companies, partnership firms, trusts, societies and other
corporate bodies owned, to the extent of at least 60 per cent, by non-residents of
Indian origin.
28. I shall now turn to the Revised estimates for 1981-82 and the Budget
estimates for 1982-83.
REVISED ESTIMATES FOR 1981-82
29. I am happy to inform the House that there has been an all round
improvement in revenue receipts during 1981-82. It is gratifying that despite significant
tax concessions given in 1981-82 Budget, the receipts from income-tax are likely to
be Rs.1,520 crores as against the Budget estimates of Rs.1,444 crores. Similarly, the
receipts from corporation tax are likely to go up from Rs.1,690 crores in Budget
estimates to Rs.1,962 crores in the Revised estimates. This increase is due to higher
profits accruing to Oil and Natural Gas Commission and Oil India following the
increase in the prices of crude effected last July. The receipts from customs duties are
also expected to go up from the Budget estimates of Rs.3,833 crores to Rs.4,140
crores in the Revised estimates.
30. As regards Union excise duties, the House will be happy to note that they
are expected to go up from Rs.7,117 crores to Rs.7,501 crores i.e. Rs.384 crores more.
This is clearly indicative of the marked growth in industrial production in the current
year. The gross tax revenues are now estimated to be Rs.15,754 crores compared with
Rs.14,668 crores in the Budget estimates. After deducting the States’ share of various
taxes, net tax revenue of the Centre is estimated to be Rs.943 crores more than the
Budget estimate of Rs.10,537 crores.
31. Non-tax revenues and capital receipts are also estimated to show an
improvement of Rs.579 crores over the Budget estimate of Rs.12,795 crores. Market
borrowings and small savings collections would be higher by Rs.100 crores and Rs.50
6
crores, respectively. The receipt from Special Bearer Bonds amounted to Rs.875
crores in the current year against the Budget estimate of R9.800 crores. In addition
to these receipts, there would be an increase of Rs.200 crores in the recoveries of
ways and means advances from State Governments, and of Rs.117 crores in recoveries
of technical credits under rupee trade agreements.
32. On the expenditure side, total budget support for the Plan is estimated to
go up to Rs.10,394 crores as against Budget estimates of Rs.9,771 crores. The Central
assistance for State and Union Territory Plans, including the programmes of Rural
Electrification Corporation, is being stepped up by Rs.156 crores. A large part of this
increase is on account of higher advance Plan assistance to those States which have
suffered from drought.
33. In the Central Plan, outlays for railways and coal have been increased by
Rs.157 crores and Rs.105 crores respectively. Considering the growing pace of
disbursements of Agricultural Refinance and Development Corporation, Industrial
Development Bank of India and other financial institutions, additional Plan support of
Rs.389 crores is being provided to them in the current year. In view of the erosion in
the internal resources of the Posts and Telegraphs Department, a higher budgetary
support of Rs.173 crores is being provided. On the other hand, shortfalls are anticipated
in Plan expenditure in certain other sectors. On the whole, the budgetary support for
the Central Plan is estimated to go up by Rs.467 crores in the Revised estimates.
34. The Budget estimates provided for non-Plan expenditure of Rs.15,100
crores. This expenditure will also be higher in the current year due to several reasons.
The provision for defence expenditure is being increased from Rs.4,200 crores to
Rs.4,600 crores. Similarly, the provision for non-Plan loans to State Governments is
being increased from Rs.1,296 crores to Rs.1,591 crores. This is mainly due to larger
share of States out of collections from national small savings, and higher ways and
means advances which, of course, are being recovered during the course of the year
itself. The provision for food subsidy is being increased from Rs.650 crores to Rs.700
crores, subsidy on controlled and handloom cloth from Rs.106 crores to Rs.172 crores
and the provision for cash compensatory support and market development for exports
from Rs.390 crores to Rs.477 crores. Provision for technical credits under rupee trade
agreements has also to be increased from Rs.50 crores to Rs.175 crores. A provision
of Rs.91 crores has been made in the Revised estimates for contributing India’s share
to the increased capital of the International Bank for Reconstruction and Development.
Taking these and other variations into account, non-Plan expenditure in the Revised
estimates is placed at Rs.16,160 crores.
35. The total expenditure is estimated to be Rs.26,554 crores in the Revised
estimates compared with Rs.24,871 crores in the Budget estimates. As against this,
the, total receipts are now estimated at Rs.24,854 crores compared with Budget estimate
7
of Rs.23,332 crores. Thus, the current year is expected to close with a deficit of
Rs.1,700 crores, against the Budget estimate of Rs.1,539 crores.
BUDGET ESTIMATES FOR 1982-83
36. The Budget estimates for 1982-83 would show that I have given the highest
priority to increasing the Plan outlay. The improvement in the economic situation in
the last two years gives us an opportunity to make a major thrust towards achieving
the goals of the Sixth Plan. I am providing for an outlay of Rs.11,000 crores for the
Central Plan in 1982-83. In making sectoral allocations, I have tried to emphasise the
programmes for the uplift of the poor as enumerated in’ our 20-Point Programme as
wall as the investment needs of the infrastructure sectors.
37. The next year’s Central Plan represents an increase of 27.6 per cent over-
the Plan outlay of Rs.8,619 crores in the 1981-82 Budget estimates. This Hon’ble
Members will no doubt appreciate, is a very large increase considering, particularly,
the commitments needed for safeguarding national security.
38. The Central Plan will be financed by a budgetary support of Rs.7,343
crores and Internal and extra-budgetary resources of Rs.3,657 crores. The internal
and extra-budgetary resources of public sector enterprises would thus account for
33.2 per cent of the Plan outlay as against 26.8 per cent in the previous year.
39. The total of Plan outlays for 1982-83 of the States and Union Territories,
including a provisional outlay for West Bengal, is placed at Rs.10,137 crores. This
represents an increase of 14.4 per cent over the outlay of Rs.8,860 crores in 1981-82.
Central assistance for the Plan of the States and the Union Territories will be Rs.4,002
crores compared with Rs.3,462 crores in Budget estimates for 1981-82. Taken together,
the Plan outlays of the Centre, States and the Union Territories for 1982- 83 will be
Rs.21,137 crores, an increase of 21 per cent, over Rs.17,479 crores in 1981-82.
40. In line with the Sixth Plan strategy, substantial increases in outlays are
envisaged in crucial sectors of the economy. In respect of crude petroleum, there has
already been a substantial expansion of output in the current year. With a view to
sustaining the tempo of increased production, the outlay for this sector, including
refineries and petro-chemicals, has been fixed at Rs.2.045 crores for 1982- 83, which
represents an increase of 90 per cent over the current year. The outlay for coal is
being increased to Rs.877 crores as against Rs.578 crores in 1981-82, an increase of
52 per cent. In the power sector, the outlay in the Central Plan is Rs.929 crores
compared with Rs.721 crores in 1981-82. Taken together, the outlay for the energy
sector, is 62 per cent higher than the current year, and constitutes 34 per cent of the
Central Plan outlay.
41. The new Central power projects include installation of additional capacity
of 1000 MW each at the Korba and Ramagundam super-thermal power stations. . The
total outlay for the power sector in the State and Central Plans taken together is
8
Rs.3,977 crores compared with Rs.3,326 crores in 1981-82. Additional generating
capacity of 3500 MW is expected to be commissioned during 1982-83.
42. The revised 20-Point Porgramme cans for intensified effort in a number
of areas, which are vital for the development of the economy and for the welfare of
our people, especially the weaker sections of the society. Effective implementation of
this programme will be a step forward towards the realisation of our goal of social
justice. This will call for concerted effort at all levels. In 1982-83, higher outlays
have been provided for several areas emphasised in the 20-Point Programme:
- a provision of Rs.2.133 crores has been made for irrigation and Command
Area Development in the Central and State Plans as against a provision of Rs.1,830
crores in 1981-82;
- the outlay for agriculture in the Central and State Plans has been raised to
Rs.1,202 crores from Rs.1,047 crores in 1981-82, including provisions for pulses,
oilseeds and dry land farming;
- a provision of Rs.190 crores has been made for the Integrated Rural
Development Programme in the Central sector compared with Rs.145 crores in 1981-
82, an increase of 31 per cent. This would be matched by an equivalent provision by
the States. Each block will receive Rs.8 lakhs compared with Rs.6 lakhs in 1981- 82.
With this provision more than three million rural families are expected to be assisted
in 1982-83;
- the provision in the Central Plan for the National Rural Employment
Programme is also being increased to Rs.190 crores. This amount too is to be matched
by an equal provision by the States. This programme is expected to generate
employment of about 350 million man-days in rural areas besides creating durable
community assets;
- Central assistance for the Special Component Plans for Scheduled Castes
has been raised to Rs.120 crores from Rs.110 crores in 1981-82. This will be
supplemented by a Central Investment of Rs.13.5 crores in the Scheduled Castes
Development Corporations, with a contribution of the same order by the States. The
Tribal Sub-Plan will also have a higher outlay of Rs.95 crores in 1982-83;
- the outlay for the Centrally sponsored Accelerated Rural Water Supply
Programme is being increased to Rs.127.5 crores to supplement the State Plan outlay
of Rs.273 crores. This will cover an estimated 45,000 problem villages;
- a provision of Rs.74 crores is being made for house sites for rural landless
persons and Rs.29 crores are being provided for environmental improvement of slums
in the State Plans;
- an outlay of Rs.354 crores is planned for rural electrification. About
25,000 villages will be electrified and 4.25 lakh pump sets energised in 1982-83;

9
 - a provision of Rs.5 crores has been made to facilitate setting up of 75,000
biogas plants, compared with 35,000 in 1981-82. Likewise, the Social Forestry Scheme
is being expanded to cover 4 lakh hectares in 1982-83. Apart from providing much
needed fuel wood, these afforestation programmes would help prevent soil erosion
and restore the ecological balance;
- the outlay for family planning is being increased to Rs.245 crores compared
with Rs.155 crores in 1981-82. In view of the crucial role which village health guides
can play in the family planning movement, the Centre has decided to fund the Village
Health Guide Scheme fully;
- a provision of Rs.120 crores has been made in the Central Plan for
health care. This will substantially augment universal primary health care facilities,
and accelerate national programmes for control of leprosy, T.B. and blindness, with
special emphasis on early detection and treatment. A provision of Rs.82 crores has
been made in the Minimum Needs Programme of the States for expanding rural
health services;
- programmes for welfare of women would have an outlay of about Rs.16
crores in the- Central Plan which would augment the State Plan provisions. Special
importance is being given to the programme of functional literacy for adult women for
which a provision of Rs.4.6 crores is being made as against Rs.3 crores in 1981-82;
- the Integrated Child Development Services Programme is being expanded
to 1000 projects by the end of the current Plan as against the earlier target of 600
projects. An additional 320 projects are proposed to be taken up in 1982-83;
- for the Adult Education Programme, the Central Plan provides an outlay
of Rs.14.25 crores in 1982-83. Major part of this expenditure is for the Rural
Functional Literacy Project. In 1982-83, it is proposed to establish such projects in
75 additional districts;
- the outlay for the development of village and small industries has
been raised to Rs.340 crores in the Central and State Plans as against Rs.315
crores in 1981-82.
43. The Central assistance for development of hill areas has been raised to
Rs.112 crores as against Rs.92 crores in 1981-82. The Government has also recently
extended to all hill areas the liberalised pattern of Central assistance comprising 90
per cent grant and 10 per cent loan.
44. The Central Plan outlay for the transport sector, including railways, roads,
ports and civil aviation is being stepped up to Rs.1,757 crores from Rs.1,535 crores in
1981-82. My colleague, the Minister for Railways has already informed the House
about the Railways Plan for 1982-83. In order to remove congestion at ports, an
10
intensive modernisation programme, including augmentation of container handling
facilities and construction of additional berths, is being implemented.
45. A provision of Rs.480 crores has been made in the Plan for 1982- 83 for
the various programmes of the Departments of Heavy Industry and Industrial
Development, including Rs.97 crores for the Khadi and Village Industries Commission.
This also includes Rs.84 crores for the three large paper projects at Tuli in Nagaland,
and at Nowgong and Cachar in Asssam. Hon’ble Members would be happy to know
that the Nagaland Paper Project will be going into production shortly. Work on three
public sector cement projects will be started in 1982-83. The total installed capacity
for cement in the country is expected to go upto 38 million tonnes in 1982-83 as
against 32 million tonnes in 1981-82.
46. The Plan outlay for steel for 1982-83 is Rs.860 crores. This includes a
provision of Rs.250 crores for the Visakhapatnam Steel Plant. The first phase of 1.2
million tonnes capacity is expected to be completed by the end of 1985. The work
of establishing transport and raw material linkages for the Vijayanagar Steel Plant
project is on hand. The Plan also includes an outlay of Rs.140 crores for the Orissa
Aluminium Project.
47. For the chemicals and fertilisers sector, Rs.507 crores have been
provided. Including Rs.210 crores for the Thal-Valshet project and Rs.120 crores
for the Hazira project.
48. The successful launching of satellites in 1981 bears testimony to the
dramatic strides made by our country in space technology. As part of the space
programme, the APPLE space craft was launched in June, 1981. This is being utilised
for various experiments, such as national Television and Radio hook-up, digital
communication. inter-connection of computers and subscriber trunk dialling. A major
objective of the Government is to harness science and technology to bring about
social and economic change. An outlay of Rs.184 crores has been provided for the
Science and Technology sector in the Central Plan for 1982-83.
49. The Government attaches special importance to renewable energy sources.
The Commission for Additional Sources of Energy has initiated several important R
& D and demonstration projects in the areas of solar thermal, photovoltaic, wind,
biomass and integrated energy systems. The Government has exempted the manufacture
of solar energy devices from industrial licensing.
50. A notable achievement has been the successful expedition to Antarctica
by our scientists. Following the collection of poly-metallic nodules from the sea bed
for the first time by our ships last year, it is proposed to undertake a detailed survey
in the Indian Ocean. An allocation of Rs.17 crores has been included in the plan of
the Science and Technology sector for the recently created Department of Ocean
Development.
11
 51. While I have tried to contain non-Plan expenditure for the next year,
certain increases have been unavoidable. Defence expenditure is estimated at Rs.5,100
crores as against Rs.4,600 crores in the Revised estimates for the current year. Hon’ble
Members will, I am sure, agree with me that in view of the uncertain external
environment, the requirements of national defence should be fully met.
52. The provision for non-Plan loans to State Governments including ways
and means advances is estimated at Rs.1,732 crores as against Rs.1,591 crores in
1981- 82. Due to increase in Internal and external debt, which is utilised for funding
development programmes, the provision for interest will go up from Rs.3,200 crores
in the Revised estimates to Ps.3,800 crores in 1982-83. The provision for subsidies on
account of food, fertilisers, and controlled and handloom cloth is Rs.1,270 crores. A
provision of Rs.500 crores has been made for cash compensatory support and market
development assistance for exports.
53. I am also providing a lump sum of Rs.350 crores in 1982-83 for payment
of additional instalments of dearness allowance and pension relief to Central
Government employees. The Government has received representations from pensioners
that they should be given some relief in view of the rise in prices. In the Budget last
year, my distinguished predecessor had announced some benefits to pensioners. I now
propose to give further relief especially at the lower levels of pension. The minimum
amount of pension plus relief will be increased to Rs.150 per month. The minimum
amount of family pension plus relief will also be increased to Rs.140 per month.
These measures will benefit about 7 lakh low paid pensioners, and 2 lakh family
pensioners. I would like to add that about 85 per cent of the former category are
retired Defence personnel. The House will agree with me that those who have devoted
the best years of their lives to the defence of the country are deserving of whatever
support we can give them.
54. The total non-Plan expenditure for 1982-83 is estimated at Rs.17,874 crores
as against Rs.16,160 crores in the Revised estimates for 1981-82.
55. As regards receipts in 1982-83, the gross tax revenues at the existing rates
of taxation are estimated at Rs.17,614 crores compared with Rs.15,754 crores in the
Revised estimates. The States’ share of taxes in 1982-83 is estimated at Rs.4,716
crores compared with Rs.4,274 crores in the current year. The Centre’s net tax revenue
will, therefore, be Re.12,898 crores as against Rs.11,480 crores in the current year.
56. The receipts from market loans are estimated at Rs.3,200 crores compared
with Rs.2,900 crores in 1981-82. Small savings are estimated to yield Rs.1,400 crores
as against Rs.1,300 crores in the Revised estimates. External assistance, net of loan
repayments, is estimated at Rs.1,669 crores as against Rs.1,381 crores in 1981-82.
57. Taking into account these and other improvements in non-tax revenues
and capital receipts, as well as the effect of changes in fare and freight rates of the
12
Railways, and in the Posts and Telegraphs tariff to which I shall refer a little later, the
total receipts for 1982-83 are estimated at Rs.27,134 crores. The total expenditure is
placed at Rs.29,219 crores. The overall budgetary gap at the existing rates of taxation
will thus be Rs.2,085 crores.
PART B
58. Sir, before I present my tax proposals, I would like to indicate the broad
objectives I have kept in view. While we take comfort in our success in reducing
inflation, it is of the utmost importance that the Budget itself should not give rise to
further inflationary expectations. Any large uncovered deficit beyond prudent limits
is inherently inflationary. It also gives rise to adverse expectations with regard to the
behaviour of prices. It is therefore my major concern to keep the budgetary deficit as
low as feasible.
59. Another important objective is to avoid measures which would place undue
burdens on the low income and middle income groups. These groups are the worst
sufferers in times of inflation.
60. As I have already indicated, providing adequate incentives for increasing
production and savings in the economy is a prime objective of this Budget. Larger
savings and increases in productivity can significantly help moderate inflationary
pressures and also generate resources for development. The buoyancy in revenue and
the decline in the rate of inflation in the environment of strong agricultural and industrial
growth in 1981-82 confirm this.
61. Sir, coming now to direct taxes, my first proposal concerns salaried
taxpayers. There have been many representations that the income-tax exemption limit
should be raised, taking account of increases in the cost of living. I cannot accept, as
a principle. that income limits for exemption from tax should be fixed with reference
to cost of living. Nevertheless, I believe some relief to salaried taxpayers within the
lowest taxable slab would be appropriate. At present, salaried taxpayers are entitled
to a standard deduction equal to 20 per cent of the salary, subject to a ceiling of
Rs.5,000. I propose to raise the rate of deduction from 20 per cent to 25 per cent,
without disturbing the ceiling of Rs.5,000. This will give a significant measure of
relief to those with salaries upto Rs.20,000. The loss of revenue would be Rs.21.58
crores in 1982-83.
62. Another measure of relief seems deserved, for those at the end of their
working lives. I propose to exempt from income-tax, subject to certain conditions,
the encashment benefit in lieu of unavailed earned leave given to employees when
they retire.
63. Taxpayers who are not in receipt of house rent allowance are entitled to a
deduction upto Rs.300 per month in respect of the house rent paid by them. However,
persons receiving house rent allowance are entitled to an exemption up to Rs.400 per
13
month in respect of the house rent allowance received by them. I propose to raise the
monetary ceiling from Rs.300 to Rs.400 per month also for those who are not receiving
house rent allowance.
64. The owner of a self-occupied house is entitled to a deduction, from the
annual letting value of the House, of an amount equal to one-half of the annual letting
value or Rs.1,800 whichever is less. I propose to raise the monetary ceiling of Rs.1,800
to Rs.3,600.
65. The annual letting value of a newly constructed house let out m rent is
reduced for tax purposes by an amount up to Rs.2,400 in respect of each residential
unit for a period of five years. With a view to providing a stimulus for construction
of houses, particularly for persons with relatively lower incomes, I propose to raise
the monetary limit of Rs.2,400 to Rs.3,600.
66. I propose to liberalise the scheme of deduction in respect of long-term
savings such as life insurance, provident fund contributions, etc. A deduction of 100
per cent will be allowed in respect of the first Rs.6.000 of the qualifying savings, plus
50 per rent of the next Rs.6,000 of such savings plus 40 per cent of the balance. The
monetary ceiling in respect of the savings qualifying for deduction is also being raised
from Rs.30,000 to Rs.40,000. The higher monetary ceiling in respect of the qualifying
savings in the case of authors, playwrights, artists, musicians, actors, sportsmen and
atheletes, is also being raised from Rs.50.000 to Rs.60,000. These incentives for
larger savings will result in a revenue loss of Rs.26.17 crores in a full year and Rs.19.76
crores in 1982-83. It may be desirable in due course to provide a wider choice of
eligible modes of savings to taxpayers. I therefore propose to extend the existing tax
concession in relation to investment in notified Central Government securities.
67. I find that out of the new life insurance policies issued by the Life Insurance
Corporation of India, nearly 15 per cent policies lapse before the end of the following
year. Such a high volume of lapses shortly after the issue of the policies is a matter
of concern. It also implies that the very purpose for which the tax concession is
allowed in respect of premia on such policies, which is to promote long-term savings
through life insurance, is frustrated. I propose, therefore, to provide that where a
taxpayer discontinues a life insurance policy before premia for two years have been
paid, no deduction will be allowed in respect of the premia in any paid under the
policy and, if such deduction has been allowed, the same shall be withdrawn.
68. Under the existing incentives for stimulating savings and investment,
income up to Rs.3, 000 from investment in specified financial assets, such as
Government securities, units in the Unit Trust of India, bank deposits and shares in
Indian companies, is exempt from income-tax. In addition, income up to Rs.2,000
from units in the Unit Trust of India is exempt from tax. I propose to raise the ceiling
of Rs.3,000 to Rs.4,000 and the separate ceiling in respect of income from units, from
14
Rs.2,000 to Rs.3,000. This measure will result in a revenue loss of Rs.12.12 crores in
a full year and Rs.9.09 crores in 1982-83.
69. As a parallel measure, I propose to raise the ceiling of the value of
investments in specified financial assets exempt from wealth-tax from Rs.1,50,000 to
Rs.1,65,000. In addition, the separate exemption of Rs.25,000 provided in respect of
units in the Unit Trust of India is proposed to be raised to Rs.35,000. The revenue
loss will be Rs.1.54 crores in a full year, but there will be no loss in 1982-83.
70. At present, taxpayers are allowed a deduction, in the computation of taxable
income, of 50 per cent of amounts invested in equity shares of new industrial companies
and companies engaged in providing long-term finance for construction or purchase
of houses for residential purposes. The maximum investment in a year qualifying for
this deduction is limited to Rs.10,000. With a view to encouraging larger investments
in such companies, I propose to raise the monetary ceiling for investment to Rs.20,000.
71. While I have given some relief to those in the lowest taxable income
range, I consider that there is scope for more progression in the tax rates for high
incomes. I, accordingly, propose to modify the rates of personal taxation, so as
to raise the rate of income-tax on the slab of Rs.60,001 to Rs.70,000, from 50 per
cent to 52.5 per cent, and m the slab of Rs.85,001 to Rs.1,00,000, from 55 per
cent to 57.5 per cent. This would yield Rs.3.24 crores in a full year and Rs.2.43
crores in 1982-83.
72. Deduction of tax at source from dividends, interest on securities and
other interest causes considerable inconvenience, and even hardship, to a large number
of small investors whose taxable income is below the exemption limit. For the
convenience of such persons, I propose to provide that income-tax shall not be
deducted at source if the recipient furnishes a declaration to the payer of such income
to the effect that his estimated total income of the relevant year will be below the
exemption limit.
73. I also propose to provide that tax will not be deducted at source from
interest paid on such securities of the Central Government or a State Government as
may be notified by the Central Government in this behalf.
74. The tests of “residence” in India laid down for taxation purposes result in
hardship to Indian citizens earning income in foreign countries who come to India for
short spells. An individual is regarded as resident in India in a year if he stays here in
that year for 30 days only, and also maintains a dwelling house here for 182 days or
more. As this test causes hardship to persons working outside India, who come home
even on relatively short visits, I propose to delete this test of residence.
75. Under another test, persons who have been in India for 365 days or more
in the four years preceding the relevant year, become resident in that year by being in
India for 60 days or more in that year. In the case of Indian-citizens who are employed
15
abroad and who come to India on leave or vacation, the period is 90 days. I propose
to extend this benefit also to the self-employed and those in other occupations,
Irrespective of their avocation abroad or the nature of their visit to India.
76. Indian citizens who go abroad for purposes of employment are now
chargeable to tax in India on their foreign income, if they have stayed in India for
more than 60 days that year. I propose to liberalise the provision so that an Indian
citizen who leaves India in any year for purposes of employment shall not be treated
as resident unless he has been in India for 182 days or more in that year.
77. I will now come to some proposals regarding foreign exchange earnings.
I propose to provide some tax relief to exporters whose export turnover for any year
exceeds that of the immediately preceding year by more-than 10 per cent. The tax
relief, to be calculated at a specified percentage of such excess turnover, would be
limited to 10 per cent of the income-tax otherwise payable on export profits. The rate
at which the tax relief will be calculated and the goods qualifying for the purposes of
this concession will be notified by the Central Government.
78. With a view to strengthening the competitiveness of our construction
contractors who have undertaken projects outside India, I propose to exempt 25
per cent of the profits derived by them from such foreign contracts, subject to
certain conditions.
79. With a view to augmenting the capital base of Indian banks engaged in
banking operations in foreign countries, I propose to provide that those banks which
are approved in this behalf by the Central Government would be entitled to a deduction
upto 40 per cent of their income carried to a special reserve account.
80. Interest-tax levied under the Interest-tax Act forms integral part of our
credit policy. However, taking note of the escalation in costs of industrial projects,
I propose to exempt scheduled banks from payment of interest-tax on the interest
received by them on loans sanctioned in foreign currency for import of capital plant
and machinery. With a view to improving the competitiveness of export of capital
plant and machinery, I propose to exempt interest paid on credit sanctioned by
scheduled banks for export of capital plant and machinery on deferred payment
terms outside India.
81. Investment allowance at the higher rate of 35 per cent is granted in respect
of machinery and plant installed for the manufacture of articles made with know-how
developed in Government laboratories, public sector companies, recognised institutions
and universities. This concession is available in relation to machinery and plant
installed up to 31st March,1982. I propose to extend this tax concession for a further
period of five years.
82. Dividends received by a domestic company from an Indian company
engaged exclusively or almost exclusively in the manufacture of specified articles are
16
completely exempt from income tax. Having regard to the importance of basic drugs,
synthetic rubber and rubber chemicals (including carbon black), I propose to extend
the benefit of this tax concession to dividends received from companies engaged in
the manufacture of these articles as well.
83. At present, scheduled commercial banks are allowed a deduction in respect
of provisions made by them for bad and doubtful debts relating to advances made by
their rural branches. The deduction is limited to 1.5 per cent of the aggregate average
advances made by the rural branches. In order to promote rural banking and to assist
non-scheduled commercial banks operating in the rural sector, I propose to extend the
benefit of this tax concession to them also.
84. Energy saving and protection of the environment are high priority areas.
I therefore propose to allow depreciation at 30 per cent on devices and systems for
energy saving, or for minimising environmental pollution or for conservation of natural
resources. The list of the qualifying items will be notified in due course.
85. At present, taxpayers are entitled to 100 per cent deduction in respect of
donations made to approved institutions engaged in carrying out programmes of rural
development. I propose to extend this concession to donations made to approved
institutions for use in programmes of conservation of natural resources.
86. Hon’ble Members will be happy to hear that I propose to place donations
made to the National Children’s Fund at par with donations made to other funds of
national importance such as the National Defence Fund, the Jawaharlal Nehru Memorial
Fund, and the Prime Minister’s National Relief Fund.
87. I consider that some rationalisation of the taxation in respect of capital
gains is desirable. In the case of non-corporate taxpayers, long-term capital gains up
to Rs.5,000 are deducted in full. Of the balance amount, a deduction of 25 per cent
is allowed where the gains relate to lands and buildings and of 40 per cent where the
gains relate to other assets. I propose to modify these provisions so as to relate the
deduction to the period for which the capital asset has been held by the taxpayer, and
allow a larger deduction in cases where the asset has been held for a longer period.
The aggregate deduction in respect of capital gains relating, to gold, bullion or jewellery
will, however, be restricted to Rs.50,000 only.
88. There is an acute shortage of housing, and house building activity has to
be given impetus. With a view to providing an incentive to taxpayers who do not own
a residential house, I propose to exempt from tax long-term capital gains arising from
the transfer of other assets where the net consideration is invested by the taxpayer in
a residential house.
89. At present, capital gains arising from the transfer of a house used for
personal residence by the taxpayer are exempt from income-tax to the extent that such
gains are utilised by the taxpayer for constructing or purchasing a house for purposes
17
of personal residence within a specified period. These conditions often lead to hardship.
I therefore propose to remove these restrictive conditions.
90. Charitable and religious trusts are required to conform to the investment
pattern laid down in the income-tax Act. Any trust which has not changed over to this
pattern of investment will forfeit exemption from tax from the assessment year 1982-
83. These trusts have been given adequate notice to change their investment pattern
and, ordinarily, I would not have proposed any modification in these provisions.
However, I find that the whole gamut of the provisions relating to charitable and
religious trusts is under consideration by the Economic Administration Reforms
Commission. As the Government would like to carefully consider the recommendations
of the Commission in this matter, I propose to amend the relevant provisions so that
such trusts do not forfeit exemption from income-tax for the assessment year 1982-83.
91. My distinguished predecessor had made an announcement in the Lok Sabha
on the 31st March, 1981 that the provisions of the income-tax Act relating to the
investment pattern of trust funds would be modified, so as to permit charitable and
religious trusts or institutions to invest the trust funds in immovable properties as
well. I am proposing an amendment of the relevant provisions of the income-tax Act
to fulfil the assurance given by him.
92. While the levy of wealth-tax on agricultural property was discontinued by
the Finance (No.2) Act, 1980, owners of tea, coffee, rubber and cardamom plantations
continue to be chargeable to wealth-tax. Our experience is that the valuation of
agricultural land forming part of such plantations leads to administrative difficulties,
complaints of harassment and litigation. The yield from this levy is also insignificant.
I, therefore, propose to discontinue the levy of wealth-tax on such plantations as well.
93. The value of tools and instruments necessary to enable the taxpayer to
carry on his profession or vocation is exempt from wealth-tax up to an aggregate
amount of Rs.20,000, which appears inadequate. I propose to raise it to Ps.50,000. I
also propose to raise, from the present Rs.30,000 to Rs.75,000, the ceiling of the value
of conveyances, including motor cars, for the purpose of exemption from wealth-tax.
94. Stamp duty paid on an instrument relating to the gift of any property is
allowed as a deduction from the gift-tax payable by the taxpayer in cases where the
amount of gift-tax exceeds Rs.1,000. I propose to allow the benefit of this deduction
even where the gift-tax payable does not exceed Rs.1,000.
95. The Hotel-receipts Tax Act, 1980 provides for the levy of a tax on the
gross receipts of luxury hotels. As the levy of this tax may adversely affect the flow
of foreign tourists into India, I propose to discontinue this levy in relation to the
chargeable receipts of such hotels accruing or arising or received by them after the
27th February, 1982. The revenue loss would be about Rs.6 crores.
96. The other proposals in the field of direct taxes are of relatively minor
18
importance. I would, therefore, not like to take up the time of the House by referring
to them here.
97. Hon’ble Members would have noted that in the direct tax proposals I
have set out, I have endeavoured to preserve stability in the tax system, while providing
substantial incentives for savings. I have also rationalised the capital gains tax and
provided some concessions where necessary.
98. Mr. Speaker, Sir, I now turn to the area of indirect taxes. Taking customs
duties first, my principal proposal is with regard to auxiliary duties of customs. This
levy, which has been imposed on an annual basis since the 1973 Budget, is proposed
to be continued during 1982-83. The balance of payments position has been under
pressure in recent times and will continue to be so for some time to come. However,
a liberalised regime, of imports has been a feature of our economic policies. This will
be continued in order that investment and production, particularly in essential and
priority sectors, are not hampered or slowed down. There is no strong reason, however,
why those who have access to imports in a difficult situation should grudge to pay a
little more. I accordingly propose to increase the rates of auxiliary duties by 5
percentage points on all categories of imports, with some exceptions.
99. I am excluding from the proposed increase in auxiliary duty essential
items like crude petroleum, bulk petroleum products, such as kerosene and high speed
diesel on, and some other items on which import duty rates have been adjusted in the
recent past on price parity considerations. Fuller details of these proposals are available
in the Budget papers.
100. My proposals relating to auxiliary duties of customs are expected to yield
an additional revenue of Rs.290 crores.
101. In the light of the present market conditions, and the need for encouraging
a few selected industries, it is necessary to effect certain changes in the basic customs
duties. I propose to raise the basic customs duty on cork and cork articles from 40 per
cent to 60 per cent ad valorem; on certain categories of dyestuffs, from 60 per cent to
100 per cent ad valorem; and oii-cirtain other categories of dyestuffs, pigments and
colours and paints and varnishes, from 100 per cent to 150 per cent ad valorem. I also
propose to increase the basic customs duty on certain items of iron and steel, such as
melting scrap of stainless steel and heat £esisting steel, and certain categories of alloy
steel excluding stainless steel and heat resisting steel, from the existing levies to 60
per cent ad valorem. The effective rate of basic customs duty on copper pipes and
tubes, blanks and SoRlow bars of prescribed specifications will be increased from 40
per cent to 60 per cent ad valorem. The basic customs duty on polyester chips is being
increased from 100 per cent to 140 per cent. These proposals are likely to result in
additional revenue of Rs.42 crores.
102. It may be recalled that in the last Budget, an effective customs duty of 15
19
per cent ad valorem was imposed on imported newsprint on which there continues to
be large foreign exchange outgo. The Government has received representations against
this levy. I propose to convert the ad valorem levy to a specific total levy of Rs.825
per metric tonne so as to obviate automatic increase in its incidence on account of
rising international prices. There will be no revenue loss.
103. The indigenous.zinc and lead industries are facing difficulties owing to
escalation of input costs, particularly of imported concentrates. In order to enable
them to increase their capacity utilisation, I propose to reduce the total customs duty
incidence on imported zinc concentrates from 50 per cent to 15 per cent ad valorem
and that on lead concentrates from 50 per cent to 5 per cent ad valorem. Simultaneously,
I propose to increase the customs duty on imported zinc metal from 50 per cent ad
valorem to 80 per cent ad valorem. In order partly to offset the revenue loss, I propose
to increase excise duties on indigenously produced zinc metal, zinc scrap and zinc
products by Rs.715 per metric tonne and that on lead metal and scrap by Rs.374 per
metric tonne. The excise duty on zinc pipes and tubes will go up from 38.5 per cent
to 49.5 per cent ad valorem. These measures, taken together, would result in an
overall loss of about Rs.41 lakhs.
104. With a view to improving the competitive position of Indian chromite
ore in the context of falling prices in the export market, I propose to convert the
existing specific rates of export duty applicable to different grades of the ore and
concentrates to an ad valorem duty of 10 per cent. The revenue sacrifice is of the
order of Rs.1 crore.
105. I also propose to fully exempt two fertilizers Calcium Ammonium Nitrate
and Ammonium Sulphate from customs duties. The import duty on internal combustion
engines and non-interchangeable parts of such engines for manufacture of power tillers
is also proposed to be reduced from 125 per cent to 50 per cent.
106. I propose to fully exempt 10 more bulk drugs imported for manufacture
of life-saving drugs and medicines. Details are being notified.
107. During the past few years, the Government has been using the fiscal
mechanism for accelerating the growth of the electronics industry. As a further step
in this strategy, I propose to raise the basic customs duty on electronic items such as
computers, calculating machines, accounting machines, cash registers and certain
electronic sub-assemblies from the existing levels of 40,50 and 60 per cent to 100 per
cent ad valorem. On the other hand, I propose to extend the scope of the present
import duty concessijn- to-cover 45 new items of capital equipment and 13 new items
of raw materials and components used by the electronics industry. The customs duties
leviable on these items are proposed to be reduced from the respective existing rates
to 35 per cent ad valorem in the case of machinery and instruments and to 55 per cent
ad valorem in the case of raw materials and components. The net revenue gain from
these proposals is Rs.13 crores.

20
 108. Representations have been received that it is not always possible for units
in the Free Trade Zones to export their entire production, and that a provision should
be made to allow a proportion of the goods manufactured in these Zones to be cleared
into the domestic tariff area. It has been decided, subject to certain conditions, to
allow such removals upto 25 per cent of the production of a unit for sale or use within
the country on payment of appropriate duties. Provision is being made in the Finance
Bill to amend the Chstoms and Central Excise Acts for the purpose.
109. On the Central excise side, the levy of special duties of excise is proposed
to be continued at the existing rates during the year 1982-83. The existing exemptions
from the special duty are also proposed to be continued.
110. As I said earlier, my basic approach has been that additions to revenue
from Central excise duties should essentially come from increased production. I am
also avoiding recourse to measures which could affect retail prices over a wide spectrum
of goods.’ I have accordingly selected only a very few items for increased taxation. In
selecting these items, I have kept in view the demand and supply situation which has
resulted in undue profits to trading channels, the scope for subjecting certain articles
of elite consumption to a higher rate of tax, and the need to restructure the excise and
customs duties applicable to certain basic industries.
111. The Government has decided to Introduce a scheme of ‘levy’ and ‘free’
sle of cement, and a dual pricing policy based on this concept. Details of the new
scheme are being notified by the Government separately. There has been no increase
in the low level of basic excise duty on cement since January, 1977, even though
thereafter the price of cement has increased very substantially. I propose to increase
the total excise duty on ordinary portland cement, portland pozzolana cement, blast
furnance slag cement and masonry cement, from Rs.71.50 to Rs.135 per metric tonne.
The more expensive special varieties of cement will be subject to higher rates of duty.
The effective total ;excise duty on cement produced in mini cement plants is proposed
to be fixed at Rs.100 per tonne. I also propose to impose a basic customs duty of 10
per cent ad valorem on imported cement, together with full countervailing duty. No
auxiliary duty would be leviable on imported cement. These proposals will give
additional revenue of Rs.158.73 crores on the Central excise side and Rs.39.60 crores
on the customs side. The impact of the proposed increase in excise duty per bag of
cement of 50 kilograms would work out to Rs.3.175.
112. In the recent past, certain expensive electronic goods favoured by the
affluent are being produced in increasing quantities. These are now subjected to a
very low incidence of duty at 8 per cent ad valorem under item 68 of the Central
Excise Tariff. I now propose to carve out new entries in the Excise Tariff, and subject
video cassette recorders and reproducers, television cameras and video cameras, and
simililar goods to a basic exicse duty of 25 per cent ad I valorem. Blank and recorded
video and audio tapes of the spool and cassette types, as also video cIlacs, are also

21
proposed to be subject to a basic duty of 25 per cent ad valorem. Recordings which
are not for commercial purposes will be exempt. I also propose to levy basic duty at
a higher rate of 40 per cent on electronic machines for games of skill or chance,
including those used for television games and video games. These proposals would
yield revenue of Rs.3.83 crores.
113. Toilet preparations not containing alcohol are liable to Central excise duty
at the basic rate of 100 per cent ad valorem whereas those containing alcohol attract
duty under the Medicinal and Toilet Preparat16-ns-(E-xcise Duty) Act at only 60 per
cent ad valorem or Rs.13.20 per litre of pure alcohol content, whichever is higher.
Some misuse because of these differential rates has come to notice. I, therefore,
propose to raise the alternative ad valorem rate to 100 per cent ad valorem so as to
place both categories of toilet reparations more or ess at par. The revenue yield from
this measure is expected to be Rs.2.3 crores and would accrue mostly to the States.
114. Hon’ble Members may-recall that the Textile Policy Statement of March,
1981 envisaged a review of fiscal levies on man-made fibres and yarn. While cotton
will continue to enjoy the predominant position in textiles, it is necessary to encourage
increased consumption of blends of cotton and man-made fibres and yarns, if we are
to achieve the Plan target of even a modest increase in the per capita availability of
cloth. For some time past, blended fabrics containing polyester fibre in proportions
too small to impart the requisite durability and easy-care properties to the fabrics are
flooding the market with stampings thereon which would mislead the public. From
the point of view of better utilisation of polyester fibre, it is necessary to encourage
blends of desirable proportions and discourage blends which do not really serve the
intended purpose. I therefore propose to make certain changes in the fiscal levies
applicable to man-made fibres and yarns. I propose to increase the duty on blended
cotton yarn and celluosic spun yarns containing up to on e-sixth by weight of polyester
fibre from the existing average total incidence of Rs.1.63 per kilogram to Rs.7.5 per
kilogram. The total incidence on such blended yarns containing more than one-sixth
but less than 50 per cent of polyester fibre, which seem to be desirable blends in
Indian conditions, is proposed to be reduced from Rs.22.50 per kilogram to Rs.11.25
per kilogram. Similarly, the incidence on blends containing 50 per cent or more but
less than 70 per cent of polyester fibre is being reduced from Rs.30 per kilogram to
Rs.22.50 per kilogram. There will be no change with regard to blends containing 70
per or more of polyester fibre.
115. It is proposed to increase the total incidence of Central excise duty on
acrylic fibre from Rs.12.50 to Rs.17.50 per kilogram and simultaneously to reduce the
countervailin g duty an imported fibre from Rs.37.50 to Rs.30 per kilogram.
116. Turning to viscose staple fibre, the excise duty is being raised from
Rs.3.125 per kilogram to Rs.4 per kilogram and the duty on polynosic: and high wet
modulus fibres is being reduced from Rs.5 to Rs.4 per kilogram.

22
 117. Acetate filament yarn which is used in the decentralised sector is not
produced in adequate quantities in the country. It is proposed to reduce the customs
duty on it from 125 per cent to 20 per cent ad valorem so as to facilitate imports of
this yarn.
118. I do not propose to change the excise or basic customs duty rates applicable
to other fibres such as acetate fibre and polyester fibre and other filament yarns such
as viscose, nylon and polyester filament yarn.
119. These proposals would result in a net loss of Rs.13 crores on the Central
excise side and a gain of Rs.12.94 crores on the customs side.
120. At present, there is no basic excise duty leviable on man-made fabrics,
the incidence of such duties having been shifted to the fibre and yarn stages. These
fabrics attract only additional excise duties in lieu of sales tax. While the present rate
structure is progressive on fabrics having ex-factory price up to Rs.10 per square
metre, it is not so in respect of the higher priced fabrics since the duty applicable to
them is a uniform 51 per cent ad valorem. There are very high priced fabrics in this
range, catering to affluent consumption, and these fabrics can well bear a moderate
increase in duties. I therefore propose to introduce further progression in the rate
structure in such a way that fabrics having ex-factory prices of more than Rs.20 per
square metre would attract duty at 71/2 per cent ad valorem. The additional revenue
from this proposal is estimated at Rs.35 crores, which will g6-to-t-Se-States. The
proposal would also be a step towards fulfilment of the Centre’s commitment to the
States to increase the overall incidence of additional excise duties in lieu of sales tax,
as a percentage of the value of clearances. I am sure that Parliament and the States
would whole-heartedly welcome this step.
121. The overall effect of the duty changes on blended fabrics containing cotton,
cellulosics and polyester would be a decrease in the price of desirable blends and an
increase in the price of other less desirable blends.
122. I have included in the Finance Bill some provisions designed to achieve
simplification and greater clarity in the tariff nomenclature and thereby minimise the
scope for classification disputes. These measures are not designed as revenue raising
exercises, but because of the changes in classifications, some revenue will accrue.
The proposals cover, among others, major petroleum products, artificial and synthetic
resins and plastic materials.
123. I also propose to rationalise and restructure the tariff relating to paper and
paper boards, the primary objective being to exempt small scale paper converters
from payment of excise duty and to release them from excise control. In order to
recoup the consequent loss in revenue, I propose to raise the basic excise duty on
industrial varieties of paper and paper boards by a small margin of 21/2 per cent ad
valorem. However, certain converted papers of high value-added categories are
23
proposed to Se-subject to basic excise duty at 321/2 per cent ad valorem. Similarly,
specified articles made of paper and paper board are proposed to be brought within
the purview of the tariff item but effectively restricting the levy to printed cartons and
printed boxes.
124. In recent years, the scheme of input excise duty relief has been extended
to cover certain specified industrial products. I propose to further extend input duty
relief in respect of synthetic rubber, carbon black and rubber processing chemicals
going into the production of tyres. To make up for the revenue loss, I propose to raise
the duty leviable on tyres from a total of 60.5 per cent to 66 per cent ad valorem.
While tyres for tractors and scooters will also enjoy the benefits of the input duty
relief. I do not propose to increase the final duty rates them. As this is intended to be
a balancing exercise, no credit for additional revenue is being taken.
125. As the House is aware, the administered price of aluminium metal is
revised periodically, keeping in view escalations in input costs. In order to contain the
incidence of excise duty, it is proposed to levy duty at specific rates. The rates would
be Rs.3,085 on electrolytic grade ingots, Rs.3,125 on billets, Rs.3,330 on wire rods
produced by primary producers and Rs.3,280 on wire bars. There would be no change
in the rates of countervailing duties. The proposal will give some relief to the finances
of State Electricity Boards.
126. As an anti-avoidance measure, I propose to add to the present ad valorem
levy on flat glass, a specific levy at the rate of Rs.5.50 per milimetre thickness per
square metre. Effective rates of duty are being prescribed at lower levels for different
categories of flat glass.
127. The Government has received a large number of representations alleging
malpractices in the biri industry, on account of the present differential rates of excise
duty applicable to branded and unbranded biris. Many State Governments and
Associations have urged that this distinction should be done away with. A suggestion
to the same effect has also been made in a recent meeting of Labour Ministers. Taking
note of these points, I propose to do away with the existing duty differential and to
subject both branded and unbranded biris to a uniform composite duty rate of Rs.3.60
per thousand. Simultaneously, the existing quantum of unbranded biris eligible for
duty free clearance is also being reduced from 30 lakhs to 20 lakhs in a financial year.
This would still leave self-employed family units, petty shop-keepers, etc. out of the
tax net.
128. The general scheme of excise duty concession applicable to small
manufacturers of 72 specified groups of commodities is being extended to manufacturers
of asbestos fibre and yarn. Some misuse of the scheme with a view to avoiding excise
duty on popular brands of aerated waters has come to notice. I therefore propose to
take aerated waters out of the scope of the general scheme and devise a new scheme
for it. Essentially, small manufacturers who sell their products under their own brand
24
or trade names would continue to enjoy the benefits available under the present scheme.
However, manufacturers who produce and bottle aerated waters under brand or trade
names in pursuance of agreements with the owners of such brand or trade names
would not be eligible for the concession. This also is purely an anti-avoidance measure.
129. The general scheme referred to earlier seems to have been similarly
exploited by certain small manufacturers of synthetic organic dyestuffs. Under the
present scheme, clearances up to Rs.71/2 lakhs are fully exempt and an additional
Rs.71/2 lakhs are subject to duty at 3/4ths of the duty rate applicable to the organised
sector. In view of the relatively high rate of duty en dyestuffs and the fact that
techniques of production of some dyestuffs are comparatively simple, it appears there
has been a proliferation of small units with consequent deleterious effects on the
quality, and also on the industry as a whole and on exports. I, therefore, propose to
delete dyestuffs from the purview of the general scheme. Under a new scheme which
is being announced in respect of dyestuffs, very small manufacturers whose clearances
do not exceed Rs.1 lakh per annum will be fully exempt from excise duty. In the.case
of other small manufacturers, clearances upto Rs.15 lakhs of dyestuffs will be subject
to 50 per cent of the duty applicable to the organised sector. All manufacturers will
be brought under excise control. The monetary content of the present scheme of relief
is, by and large, maintained under the new scheme.
130. At present, certain specified consumer electronic goods manufactured in
the small sector attract duty rates lower than the normal rates. To restrict this duty
concession to genuine small manufacturers, it is proposed to restrict the scheme of
duty exemption to manufacturers with total annual turnover not exceeding Rs.2 crores.
131. With regard to the match industry, I do not propose to disturb the existing
duty structure. Small manufacturers whose clearances have not exceeded 150 million
matches in the preceding financial year would continue to be eligible for the
concessional rate of duty of Rs.1.60 per gross boxes on clearances upto 120 million
matches in the financial year. The concession will not be available if the matches are
marketed under the labels of manufacturers who pay duty at Rs.4.50 or Rs.7.20.
132. As Hon’ble Members are aware, the Government has been using the excise
duty mechanism as a powerful incentive for the growth of the cottage sector of the
match industry. A number of manufacturers in the middle sector have, however,
challenged in courts of law, the excise concession scheme for the cottage sector and
obtained judgements in their favour. This may result in refund of substantial amounts
of duty to the middle sector units. As the element of duty at the higher rate would
have already been passed on to the millions of consumers, any refund of such duties
would only result in unjust enrichment. A provision has been made in the Finance
Bill to obviate this contingency.
133. There have been some disputes in the recent past regarding the
determination of assessable values of excisable goods from a given cum-duty price,
25
resulting in considerable litigation. This has resulted in locking up substantial amounts
of revenue. It is proposed to suitably amend section 4 of the Central Excises and Salt
Act to make it clear that in computing the amount of duty of excise deductible from
the cum-duty price, the effective amount of duty of excise payable on the goods under
assessment shall alone be taken into account. This amendment is being given effect
to, retrospectively from let October, 1975.
134. It has been the long-standing practice to charge excise duty on goods used
for captive consumption within the factory where they are produced. Some doubt
had, however, been cast on this position as a result of judgements of some High
Courts, which interpreted certain provisions of the Central Excise Rules to hold that
duty could not be collected on such goods as they had not been removed from the
factory. A number of manufacturers have also obtained stay orders from courts based
on the same grounds. The matter has been taken up in appeal. Nevertheless, in order
to place the position beyond doubt, the relevant Central Excise Rules have been suitably
amended. A provision has also been included in the Finance Bill so that these
amendments will have retrospective effect and the collections of duty made in
accordance with the existing practice will also be validated.
135. As the House is aware, 1982 has been designated by the Prime Minister
as the “Productivity Year”. With the improvement in infrastructural facilities,it is
hoped that industrial- production would register further growth in the current year.
The fiscal meqhanism could be judiciously deployed in furthering this objective. With
this in view, I propose to formulate a scheme of excise duty concession for increased
production of goods during the period of 12 months commencing on the let March,
1982 and ending on the 28th February, 1983. The scheme would cover 38 tariff items
including some basic raw materials, other important industrial inputs and certain
finished products. Some of the items are caustic soda, fertilisers, synthetic resins,
steel ingots and steel products. internal combustion engines, wires and cables, two
and three wheeled motor vehicles, light and heavy commercial vehicles, tractors, railway
wagons, man-made fibres and filament yarn, tyres and writing and printing paper. A
full list may be found in the Budget papers. The benefits of the scheme would accrue
only in cases where the production in the 12 months period referred to above exceeds
110 per cent of the production during the base period, namely, the 12 months ending
on the 28th February, 1982. The duty concession would be 1/5th of the total amount
of duty paid on the excess production computed, as explained earlier, in respect of
goods carrying basic excise duty of 20 per cent ad valorem or less, and 1/10th of the
duty in other cases. The amount so computed for the whole period would be given as
a credit which may be utilised for payment of Central excise duty during the financial
year 1983-84.
136. The scheme will apply also to small scale manufacturers, who actually
pay duty. It is proposed to ensure that those small scale units which are eligible for
the benefits of the relevant excise duty concession schemes and are within the respective
26
cut-off points during the year 1981-82, would continue to be eligible to the said benefits
in 1983-84, even if they produce and clear goods in excess of the eligibility limits in
the Productivity Year.
137. I am sure that industry will rise to the occasion and respond to this generous
gesture of the Government and achieve new peaks of production. Since the Government
would also be a beneficiary of the higher production in the shape of increased collection
of excise duties, I do not propose to take any amount as revenue loss on account of the
proposed concession.
138. I have already referred to the need to minimise the impact of my proposals
on the middle and poorer sections of society. I propose to go further and give some
concessions on articles of special interest to those sections. I propose to partially or
fully exempt from excise duties several articles of common consumption. Some of
these products are of interest to the student community, some are of general utility, yet
others of interest to the disabled and me in the interest of horticulture. I propose to
fully exempt from excise duty, pencils, erasers, pens including ball point pens and
refills, laboratory glassware, enamelware, thermos flasks and parts, water coolers,
candles, tooth brushes, spectacles and spectacle frames, one-day alarm ‘ clocks,
domestic water filters, handpumps, Braille typewriters, invalid carriages and helmets.
Further, I propose to reduce the basic excise duty on specified fruit and vegetable
preparations from 15 per cent to 10 per cent ad valorem. I also propose to increase the
present value limits of Rs.15 per pair of footwear for eligibility to full duty exemption,
to Rs.30 per pair. Lac is also being exempted. In order to reduce the packaging cost
involved in the sale of milk in laminated paper packs, I propose to exempt from excise
duty low density polyethylene film and paper to be used by the Indian Dairy Corporation
for the manufacture of such paper packs. This measure should enable larger marketing
of milk in paper packs which have a longer shelf life, and also help in the fuller
utilisation of surplus milk produced in flush seasons.
139. At present, mopeds of engine capacity upto 75cc beat a reduced rate of
excise duty of 10 per cent ad valorem. This fuel-saving personalised conveyance is
becoming increasingly popular particularly in urban and semi-urban areas. I propose
to extend the concession to mopeds of engine capacity upto 100 cc which are expected
to be more fuel-efficient.
140. I had referred earlier to certain adjustments of excise and customs duties
consequent on a review of the fiscal levies on man-made fibres and yarn. The
production of blended cloth in the handloom sector is at present around 12 million
metres. In order to enable the handloom sector to register faster growth, I propose to
fully exempt from excise duties polyester blended fabrics woven on handlooms from
processing stage duties, if they are processed in factories set up by State Handloom
Development Corporations or Apex Co-operative Societies approved in this behalf by
the Central Government. This concessiozy involves a revenue loss of Rs.4 crores. I

27
also propose to exempt metallised man-made filament yarn from the whole of the
excise duty considering its use in saris and the like. The value of this concession is
about Rs.1 crore.
141. These excise duty concessions I have just referred to entail a total revenue
sacrifice of Rs.13.77 crores in a full year.
142. Where the changes are to be made by Notifications effective from 28th
February, 1982, copies thereof will be laid on the Table of the House in due course.
143. My proposals will yield a net sum of about Rs.196.18 crores from excise
duties and Rs.391.35 crores from customs duties. The yield from duties under the
Medicinal and Toilet Preparations (Excise Duties) Act will be Rs.2.30 crores in a full
year. Taking all the proposals together, the net accrual to the Central exchequer in a
full year will be Rs.487.60 crores and that to the States will be Rs.102.23 crores.
144. I now have something to say on behalf of my Honlble colleague, the
Minister of Communications. As the House is aware, postal services have been
extended over the years throughout the country. There are over 1,40,000 post offices.
The service is highly employment intensive, with more than 5.6 lakh employees
including extra- departmental staff. Salaries and wages therefore constitute a major
part of the operating expenses of the Postal Department. The postal services are
presently under-priced and the rates are inadequate even to meet the direct cost of
several services. The grant of additional instalments of dearness allowance, and
increases in other operating expenses, add significantly to these costs. A revision of
tariffs for some postal services has therefore become unavoidable. Accordingly, it is
proposed to raise the rate for printed post cards from 20 paise to 25 paise, letter cards
from 25 paise to 35 paise and envelopes of the lowest weight slab from 35 paise to 50
paise. There will be no increase in the rate of the ordinary post card which is generally
used by the common man, even though this service involves an annual loss of about
Rs.20 crores. The tariff for book-post articles is also proposed to e raised from 25
paise to 30 paise. The postage for a registered newspaper has remained at the very
low level of 2 paise for many years now. It is proposed to fix it at 5 paise for a single
newspaper, with suitable adjustments for higher weight slabs. Even after this revision,
the newspaper service will be subsidised to the extent of Rs.7 crores a year.
145. A memorandum showing the proposed tariffs is being circulated along
with the Budget documents. The changes would take effect from a date to be notified
after the Finance Bill is passed by Parliament. The revisions proposed are estimated
to yield an additional revenue of Rs.35.33 crores in a full year and about Rs.26 crores
in 1982- 83.
146. I had mentioned that the budgetary deficit at the existing rates of taxation
would be Rs.2,085 crores. The tax measures proposed now, taken together with the
reliefs and concessions, are estimated to yield net additional revenue of Rs.470 crores
28
to the Centre and Rs.63 crores to the States during 1982-83. Besides, the States will
get an additional revenue of over Rs.2 crores from the increase in the duty on medicinal
and toilet preparations. I am taking credit for Rs.250 crores as receipts from the
Capital Investment Bonds which I referred to earlier. This would leave an uncovered
deficit of Rs.1,365 crores in 1982-83, which is substantially lower than the estimated
deficit for the current year.
147. Mr. Speaker, Sir, I have set forth a framework of policies with a view to
encouraging higher savings, investment and production in the economy. Plan outlays
are being stepped up substantially, particularly for sectors emphasized in the 20-Point
Programme. Adequate provision has been made for national security. Despite these
commitments, the budgetary deficit has been contained within reasonsable limits. To
achieve this, a measure of resource mobilisation was inescapable. I have, however,
taken care to see that resources are raised without building new inflationary pressures.
In particular, I have tried to avoid placing burdens on the low and middle income
groups. The Budget constitutes a challenge to all those who are associated with the
implementation of our development plan. It is an invitation to farmers, industry and
labour for higher productivity; to the trading community for ensuring healthy marketing
and distribution; and, indeed, to all our people, soldiers and civilians, to march forward
shoulder to shoulder in the twin tasks of national development and defence.
148. Sir, I now commend the Budget to the House.
(FEBRUARY 27, 1982)

29
 SPEECH OF SHRI R.VENKATARAMAN MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1981-82

Sir,
It is my privilege, once again, to present the Budget to this august House.
2. The Budget for 1981-82 has been formulated in an economic situation
which continues to be difficult, but also shows great improvement over the desperate
conditions prevailing a year ago. The “Economic Survey” presented to the House this
week contains a detailed review of developments in the past year. I shall, therefore,
only review the highlights of the economic situation as a background to presenting the
strategy of next year’s budget.
3. Hon’ble Members will recall that when our Government took office in
January 1980, we inherited an economy in extremely poor shape. It was reeling from
a disastrous economic performance in 1979-80, when the Gross National Product
declined by 4.5 per cent and prices increased by over 21 per cent. Neglect and
mismanagement of the infrastructure had produced a crisis situation in key sectors
such as coal, power and railways.
4. Faced with this grim situation, our overriding objective was to arrest the
deterioration and set the economy once again on the path of stability and growth. This
was no easy task. The severe drought of 1979-80, and the accumulated problems in
management of the infrastructure, cast a long shadow over 1980-81.
5. Efforts to improve infrastructure performance deserved and received the
highest priority in 1980-81. A mechanism for crisis management was established, with
special administrative arrangements to monitor and co-ordinate Government action in
this area, and to set clear priorities. It took time for these efforts to bear fruit, but by
the middle of the fiscal year, all the three sectors, power, coal and railways showed
distinct improvement.
6. Power generation suffered in the early months of 1980-81 because of very
low hydroelectric generation. This was a direct consequence of the acute drought of
1979, which left the reservoirs severely depleted through the lean summer months of
1980. Hydro-electric generation picked up after July when most of the reservoirs were
replenished by the monsoon. There was also a very substantial improvement in thermal
generation. The problems of coal availability which had plagued thermal power plants
during 1979, were substantially overcome and rail movement of coal to thermal plants
was organised on a priority basis. Strenuous efforts were also made to improve

1
operational efficiency by initiating betterment and renovation programmes in the States
with technical advice from Central Agencies. As a result, thermal electricity generation
in November and December 1980 was 21 per cent higher than in the same months in
1979. For the year as a whole, electricity generation is likely to show an increase of
about 6 per cent over 1979-80. However, in the second half of 1980-81 generation
would be about 13 per cent higher than the second half of the previous year.
7. Coal production in 1980-81 also shows a marked improvement. The
production of coal and lignite had remained more or less stagnant at about 106 million
tonnes since 1976-77. This frustrating spell of stagnation has been broken and
production is expected to exceed 115 million tonnes in 1980-81. Better availability of
power was one of the important factors behind this improved performance.
8. The railways have shown improvement in the movement of freight in
recent months, breaking a pattern of deterioration witnessed over the past three years.
9. Industrial production in 1980-81 reflected. The progress made in removing
infrastructure constraints. I have already mentioned that hydro-electric generation was
very low in the first three months of 1980-81 because of the depletion of reservoirs.
The resulting shortage of power depressed industrial production through much of the
first half of 1980-81. However, with the easing of infrastructure constraints in the
second half of the year, industrial production has picked up. For the year as a whole,
it is likely to show a growth of about 4 per cent. This compares with a decline of 1.4
per cent in 1979-80.
10. In addition to efforts at improving infrastructure performance, the
Government also took wide ranging measures designed to create conditions conducive
to rapid industrial expansion. Hon’ble Members will recall that the Budget for 1980-
81 contained specific fiscal incentives designed to encourage investment activity. This
was followed by the industrial Policy Statement of July 1980 in which several
promotional measures were announced. Steps were also taken in the course of the
year to increase the flow of investment finance to industry. A new policy has been
enunciated to permit investment funds from oil exporting developing countries to
flow into new units in selected industries in the form of portfolio investment. The
guidelines for issue of debentures were revised to permit more effective use of this
instrument for mobilisation of funds.
11. Although the promotional impact of these measures could not manifest
itself fully in 1980-81 because of infrastructure bottlenecks, they have undoubtedly
set the stage for longer term industrial expansion in the coming years.
12. The performance of agriculture in 1980-81 gives every ground for
satisfaction and provides great reassurance about the basic health of this vital sector
of our economy. The weather in 1980-81 was favourable in most, but by no means all
parts of the country, and this created conditions conducive to an agricultural recovery.
2
The total production of food grains in 1980-81 is likely to exceed 132 minion tonnes,
which is more than 23 minion tonnes higher than in 1979-80. It will surpass the
previous peak level achieved in 1918-79, and yet weather conditions were less
favourable than in that year. The gains in food grains production in 1980-81 have been
accompanied by a very substantial recovery in sugarcane production. Production of
fibre crops was also good.
13. This excellent performance testifies to the soundness of the agricultural
strategy we introduced in the late sixties. This strategy was vigorously pursued in
1980-81. A concerted effort was made to ensure adequate production of quality seeds.
The area under high yielding varieties was expanded to 48 million hectares compared
with only 35.2 million hectares in 1979-80. Large imports of fertilisers were undertaken
to supplement domestic production. Fertiliser consumption in terms of nutrients is
estimated to have increased from 5.26 minion tonnes to 5.6 million tonnes. Expansion
of Irrigation received special attention and the agricultural extension machinery was
strengthened to ensure a more effective transfer of technology.
14. The excellent performance of agriculture, combined with the beginning
of a recovery in industry is likely to produce an overall growth of 6.5 per cent in the
Gross National Product. This is an important achievement, but I must caution against
complacency. The progress made needs to be consolidated, and further momentum
must be built up if the recovery of 1980-81 is to mature into full-fledged growth next
year. This calls for a realistic assessment of the strengths, as well as the weaknesses,
of the economy.
15. The economy continued to be subject to inflationary pressure during 1980-
81 although there can be no doubt that there was a marked improvement over 1979-
80. The increase in prices during 1980-81 upto the end of January 1981 has been 13.5
per cent. It was nearly 20 per cent in the same period of the previous year. Inflationary
pressures were particularly severe in the first half of the year because of the after
effects of the drought of 1979 and this was especially evident in the behaviour of
sugar, gur and khandsari prices. With the improvement in the supply situation in the
second half of the year, there was a definite improvement. Prices declined from the
middle of October to the end of December. They have risen since then, partly because
of the unavoidable increase in petroleum prices effected in January. However in recent
weeks, the increase in prices has moderated.
16. I must caution however that although inflation has abated, it has not been
overcome. The economy remains subject to continuing cost push pressures, including
especially the transmission of international inflation through rising prices of oil and
other essential imports. Since these cost push pressures are likely to persist, continued
vigilance is required in the coming year. It is essential to evolve a strategy for coping
with cost-push inflation effectively by tackling - the problem at its roots. This is not
only a matter of demand management. It also requires an all out effort to increase
efficiency and achieve higher productivity.

3
 17. Monetary and credit policies in 1980-81 were tailored to the requirements
of the inflationary situation and commercial credit was strictly regulated. In addition,
steps were taken to ensure that the distribution of bank credit conforms to our economic
and social priorities. The Reserve Bank has evolved guidelines to ensure that an
increasing share of priority sector credit is directed to weaker sections, especially
those Identified in the 20 point programme. According to these guidelines, 40 per cent
of priority sector lending is to be earmarked for the agricultural sector. Half of the
direct lending by commercial banks to agriculture and allied activities will be directed
to small and marginal farmers and agricultural labourers. Furthermore, 12.5 per cent
of total credit advanced to small-scale industries will be reserved for rural artisans,
village craftsmen and cottage industries.
18. The expansion of banking in the rural areas is continuing and the
programme of establishing Regional Rurki Banks has been accelerated. There were
only 60 such banks at the end of December 1979. There will be one hundred by the
end of March 1981. Another 25 Regional Rural Banks will be established in the year
1981-82. It is proposed to increase their number to 170, covering 270 districts, by the
end of the Sixth Plan. A National Bank for Agricultural and Rural Development will
be established as an apex institution to meet the credit needs of the rural community
and a bill to this effect will be introduced shortly.
19. This is an appropriate occasion to inform the House that we have decided
to undertake a major re-organisation of the Life insurance Corporation in order to
strengthen its ability to meet the challenges of the future. The Corporation has an
impressive record of extending insurance services to the community. In the process it
has grown very considerably in size. It has, therefore, become desirable to restructure
the Corporation into more manageable units in the interest of operational efficiency,
and also to allow an element of healthy competition. Accordingly, we have decided to
re-organise the Corporation into five independent units with a co-ordinating body to
provide supervision and guidance on matters of common interest. I have no doubt that
these changes will improve the quality of service rendered to policy holders. This re-
organisation will impart a greater degree of dynamism into the working of these
institutions, and this will help to extend life insurance into the rural areas, where only
limited headway has been made so far.
20. The balance of payments situation facing the country gives cause for
concern. Rising prices of imported oil have added enormously to the external payments
burden on the economy. The import bill for crude oil and petroleum products is likely
to reach Rs.5,600 crores in 1980-81, compared with only Rs.1,677 crores two years
ago. Most of the increase is due to the increase in on prices. The total import bill in
1980- 81 is likely to be around Rs.11,300 crores whereas exports are projected to be
only Rs.7.100 crores. Even after allowing for the surplus on net invisibles, the country
has to finance a balance of payments deficit of about Rs.2,000 crores in 1980-81. This
is much larger than the amount of external assistance available and it has led to a
4
significant draw - down of foreign exchange reserves. It is, therefore, essential to
evolve a strategy for bringing the balance of payments under control. The Government
has already taken a number of steps in this direction.
21. High priority has been accorded to oil and natural gas exploration in order
to reduce our dependence on imported supplies as much as possible. The Oil and
Natural Gas Commission has found evidence of hydrocarbons in several structures
both offshore and onshore and it is essential to pursue the exploration and development
effort with all the resources at our command. To this end, an ambitious programme is
envisaged for the Oil and Natural Gas Commission and 011 India Ltd. The urgency of
the situation is also such that the Government has decided to supplement our domestic
capability by engaging foreign parties on contract, on a production sharing basis, to
hasten the pace of exploration and development of potential oil fields. It is expected
that the foreign companies selected under this scheme will commence work in the
second half of 1981-82.
22. The balance of payments situation also cans for strong support to exports
and the Government has taken several important initiatives in this regard recently.
Hon’ble Members will recall that in my Budget Speech last year I stated that the
Government had taken a decision to establish an Export-import Bank to assist in the
financing of international trade. The details of this proposal have now been worked
out, and it is proposed to introduce a Bill in the current session for setting up the
Export import Bank as a Statutory Corporation. I am providing Rs.70 crores in the
Budget for this purpose.
23. There is also considerable scope for import substitution by increasing
domestic production and expanding capacity in sectors such as steel, cement, fertiliser,
non-ferrous metals and oilseeds. This is being vigorously pursued.
24. The strategy of the Budget I am about to present flows from my assessment
of the state of the economy. We have come out of the crisis situation which prevailed
a year ago. The agricultural sector has recovered and is well poised for continued
growth. The industrial recovery is as yet partial, but the various policy initiatives
already taken have created conditions favourable for an industrial revival. With further
improvement in infrastructure performance, the constraints on industry in the coming
year should be substantially eased. The emphasis in 1981-82 must therefore shift from
crisis management to growth.
25. The tasks ahead of us have been clearly indicated in the Sixth Plan, which
has now been approved by the National Development Council. The Plan establishes a
target of 5.2 per cent growth per annum and cans for an ambitious public sector
investment programme of Rs.97,500 crores. As in the past, agricultural development,
with special emphasis on the weaker sections, is the centrepiece of our development
strategy. But the Sixth Plan also identifies some other areas which have become
especially critical. The energy-transport system comprising such critical sectors as
5
power, coal, oil, ports and railways, requires massive investments if these sectors are
not to become a constraint upon economic growth.
26. The Budget must make a beginning in undertaking these large and urgent
tasks. But it must do so in the full knowledge that the threat of inflation has not been
fully overcome. The fiscal deficit should therefore be kept within tolerable limits. At
the same time, taxation must be used judiciously so that it does not fan the flames of
inflation as happened in 1979-80.
27. Along with fiscal discipline we must also take steps to encourage the flow
of private savings into the financial system. Only thus can we ensure adequate
availability of non-inflationary financing to meet the rapidly expanding needs of the
economy. This flow of resources into the financial system is threatened in two ways
and we must tackle both.
28. First of all, it is threatened by the pernicious growth of the black economy.
This generates income flows which cannot easily surface in the financial system, and
are therefore directed into socially harmful activity such as hoarding, profiteering,
speculation and wasteful consumption. This only stokes the fires of inflation. The
Government has recently taken a major initiative to direct some of the resources
circulating in the black economy into the public exchequer through the sale of Special
Bearer Bonds. Further action on a wide front is necessary to check the generation of
black money so that this social evil is progressively eliminated from our society.
29. A second impediment to financial savings is the existence of high rates of
inflation. In an inflationary situation it becomes essential to provide adequate incentives
to financial savings. Since bank deposits are the most important single mechanism for
financial savings, it has been decided to raise the interest rate on maturities from one
and upto five years. An announcement to this effect is being made by the Reserve
Bank. The interest rate paid on deposits above 1 year maturity and upto 2 years will
be raised from 7 per cent at present to 7.5 per cent. The rate paid on deposits above
two years and upto three years will be raised from 7 per cent at present to 8.5 per cent.
The rate paid on deposits above three years maturity will be raised from 8.5 per cent
at present to 10 per cent.
30. The interest rate paid by banks on deposits above 5 years is unchanged,
but a new National Savings Certificate will be issued with a maturity of 6 years which
will carry an interest rate of 12 per cent. This will provide the necessary incentive for
encouraging longer term savings.
31. In addition to these measures. I propose to raise the interest rate ceiling
on debentures from 12 per cent at present to 13.5 per cent. This is in line with the
other interest rate changes proposed, and it will encourage large industrial units to
raise their requirements of investment finance through their own efforts. It is essential
that these units, which have the capacity to mobilise resources through the financial
6
markets, should make greater efforts in this direction and thus reduce the burden on
the term lending institutions.
32. At present, public companies are permitted to accept deposits from the
public upto 25 per cent of the aggregate of their paid up share capital and free reserves.
They are also allowed to accept deposits upto 10 per cent of paid up capital and free
reserves either from their shareholders or from others when guaranteed by a Director
of the company. These limits do not apply to inter company deposits. These provisions
governing company deposits will be continued. However, it is proposed to impose a
ceiling of 15 per cent on the interest rate which can be paid on these deposits. The
requisite orders giving effect to these decisions are being issued.
33. As a further step in facilitating investment in industry we have decided
to relax the requirement under the Stock Exchange guidelines that promoters can
only hold a maximum of 40 per cent of the equity of a new company. This provision
conflicted in some cases with the requirement of the financial institutions that
promoters put up a minimum percentage of the total cost of the project. This potential
contradiction between two different requirements had given rise to considerable
difficulties in the implementation of new projects. In order to overcome these
problems, promoters will be allowed to hold higher equity than the 40 per cent limit
during the initial stages of a project. However, equity holdings above 40 per cent
will have to be divested within three years from the date of commercial production
by an offer of sale to the general public. This rationalisation should speed up the
implementation of new projects in industry.
34. I am confident that these wide-ranging measures will help to encourage
the flow of savings into the financial system and increase the availability of funds
for industrial investment. They create highly favourable conditions for growth in the
coming year.
35. Having outlined the broad approach I have adopted in formulating the
Budget and some associated policy initiatives, I will now turn to the Revised estimates
for 1980-81 and the Budget estimates for 1981-82.
REVISED ESTIMATES FOR 1980-81
36. The Budget estimates for 1980-81 had envisaged a deficit of Rs.1,445
crores. However, as a result of discussions between the States and the Planning
Commission, the State Plan outlays were increased in a number of cases. Central
assistance for State Plans was increased by Rs.310 crores. We have also to provide
additional assistance of Rs.58 crores to the Rural Electrification Corporation. The
provision of short-term loans to the States for supply of agricultural inputs also had to
be increased by Rs.25 crores.
37. In addition, the Central Government has to provide assistance of Rs.90
crores to the States to help in flood relief work. Special loan assistance of Rs.76
7
crores is being provided to certain North Eastern States including Assam to meet the
gap in their resources caused by their exceptional difficulties.
38. A larger provision for subsidies is being made than originally envisaged.
The provision for net outgo on imported fertilisers is being increased by Rs.104 crores.
The provision for food subsidy, subsidy on controlled cloth and provision for cash
compensatory support and market development for exports are also being increased
by Rs.110 crores.
39. The provision for Defence expenditure has to be increased by
Rs.200 crores.
40. The financial position of certain public sector undertakings did not show
the recovery anticipated at the Budget stage. Additional non-Plan assistance of Rs.104
crores to these undertakings has therefore become necessary.
41. Turning to the Central Plan expenditure, I am happy to inform the House
that expenditure in crucial sectors like power, coal and petroleum has been satisfactory.
The House will also be happy to note that the level of disbursements of the Agricultural
Refinance and Development Corporation has far exceeded the initial Budget estimates,
and I am, therefore, providing an additional sum of Rs.126 crores to the Corporation.
An additional provision of Rs.50 crores is being made for industrial Development
Bank of India to enable it to meet its rising commitments. In certain sectors like steel
and civil aviation, there has been a shortfall in internal resources generation and
budgetary support for their Plans has to be significantly stepped up. There may be
some shortfalls in the Plan expenditure in some sectors. However, even after taking
these into account, the budgetary support for the Central Plan in 1980-81 will be
Rs.297 crores higher in the Revised estimates.
42. The total expenditure of the Central Government is now estimated at
Rs.22,808 crores compared with Rs.21,467 crores in the Budget.
43. Turning to receipts, I am happy to inform the House that despite the
concessions in income tax allowed in the Budget for 1980-81, tax revenues have not
suffered. My judgement that lower rate of taxation will promote better voluntary
compliance seems to have been vindicated. The receipts from Corporation tax would
be higher by Rs.35 crores compared with the Budget estimate of Rs.1515 crores.
Receipts from Union Excise duties are also estimated to be higher by Rs.99 crores
compated with the Budget estimate of Rs.8265 crores. The receipts from Customs
duties are likely to exceed the Budget estimate of Rs.2989 crores by as much as
Rs.361 crores in the current year due to larger imports and higher international prices.
After deducting the States’ share of various taxes, the net tax revenue of the Centre is
now estimated to be Rs.419 crores more than the Budget estimate of Rs.8922 crores.
44. Capital receipts too, show an improvement of Rs.245 crores over the
Budget estimate of Rs.7,694 crores. This is because of higher market borrowing of
8
Re.104 crores and estimated receipts of Rs.200 crores from the sale of Special Bearer
Bonds, offset by some shortfalls elsewhere.
45. Total receipts are now estimated at Rs.20,833 crores compared with the
Budget estimates of Rs.20,022 crores. The current year is now expected to close with
a deficit of about Rs.1.975 crores. The House will appreciate that almost the entire
increase in the budgetary deficit is accounted for by larger budgetary support for State
and Central Plans.
BUDGET ESTIMATES FOR 1981-82
46. The Budget for 1981-82 reflects the objectives, priorities and programmes
of the Sixth Plan. Plan outlays of the Centre, States and Union Territories in 1981-.82
wee estimated at Rs.17,479 crores compared with Rs.14,593 crores in Budget estimates
1980-81. This represents an increase of nearly 20 per cent. The Plan outlay of the
Centre for 1981-82 is being stepped up very considerably to Rs.8,619 crores from
Rs.7,340 crores in Budget estimates 1980-81, an increase of 17.4 per cent. This will
be financed by budgetary support of Rs.6,309 crores, and internal and extra budgetary
resources of Public Sector Undertakings of Rs.2310 crores. The total of the approved
Plan outlays of States and Union Territories will be Rs.8,860 crores as against Rs.7,253
crores in Budget estimates 1980-81, that is, an increase of 22 per cent. A provision of
Rs.3,462 crores has been made for Central assistance for the Plans of the States and
Union Territories.
47. Agriculture has a preponderant role in our economy and its development
sets the pace for the economy as a whole. The Annual Plan outlay for agriculture in
the Central and State Plans has been stepped up to Rs.1,047 crores from Rs.925 crores
in Budget estimates 1980-81. Expansion of the area under irrigation is the most
important single factor enabling a shift to high productivity scientific farming.
Accordingly it is proposed to add 2.5 million hectares under irrigation in 1981-82.
The outlay for major and medium irrigation in the Annual Plan of the Centre and
States for 1981-82 is being raised substantially to Rs.1408 crores from Rs.1213 crores
in Budget 1980-81. The outlay on minor irrigation will be Rs.301 crores compared
with Rs.286 crores in 1980-81.
48. Parallel with the effort at boosting total agricultural production, the Annual
Plan lays great stress on special programmes to benefit the weaker sections of rural
society such as landless labour small and marginal farmers, rural artisans and scheduled
castes and scheduled tribes. One of the important programmes which this Government
has launched for this purpose is the National Rural Employment Programme. We are
providing Rs.180 crores in the Central Plan for this programme and this will be matched
by an equal amount from the States.
49. Another important initiative aimed at helping the weaker sections is the
integrated Rural Development Programme. This programme absorbs the earlier
complementary, and sometimes overlapping programmes aimed at particular sections
9
of the population. We have provided Rs.198 crores for this programme as well as for
special programmes such as Desert Development and Drought Prone Area Programmes.
With an equivalent contribution from the States, it is expected that the integrated
Rural Development Programme will help 3 million families to go above the poverty
line in 1981-82.
50. Central assistance for the Special Component Plans for Scheduled Castes
was introduced in the very first Budget of the present Government. We have provided
Rs.110 crores for the next year. In addition, Rs.13 crores will be invested in the
Scheduled Castes Development Corporations of States. Along with an equal contribution
from the States, this will enable these Corporations to raise substantial funds from the
financing institutions. The tribal sub-plan, which is the vehicle for the development of
tribal areas will receive an augmented provision of Rs.85 crores during 1981-82,
compared with Rs.70 crores in 1980-81. A provision of Rs.92 crores has been made
for the Special Hill Development Programme compared with Rs.61 crores in 1980-81.
51. In pursuance of the Government’s policy to accelerate the provision of
safe drinking water in problem villages, an amount of Rs.110 crores has been allocated
in. 1981- 82. Together with the provisions made in the State Plans, this would enable
about 38, 000 additional villages to be covered during the next year.
52. The Annual Plan accords high priority to the all important task of expanding
capacities in sectors such as oil, coal and power. It is proposed to provide Rs.580
crores for coal and lignite projects in 1981-82. This represents an increase of 31 per
cent over the provision of Rs.443 crores in 1980-81.
53. Large increases have also been made in the outlay for power in the Central
Plan. We have provided Rs.721 crores in 1981- 82 compared to Rs.520 crores in the
last Budget. This reflects the expanding role of the Centre in the power sector. We
propose to take up the Dulhasti Project in Jammu and Kashmir and the Koel Karo
project in Bihar in the Central sector in the coming year. The total outlay for the
power sector in the State and Central Plans taken together is Rs.3326 crores compared
to Ra. 2745 crores provided in the Plan for 1980- 81. Additional generating capacity
of 3000 MW is expected to be commissioned during 1981-82. The Rural electrification
programme provides for electrification of 22,000 villages and energisation of 4.25
Iakh pumpsets in the coming year.
54. In keeping with the high priority accorded to exploration and development
of on and natural gas resources, the Plan outlay for the petroleum sector has been
increased to Rs.1011 crores in 1981-82 compared with Rs.780 crores in the current
year. An outlay of Rs.67 crores is proposed in the petro-chemical sector.
55. An outlay of, Rs.796 crores is being provided for steel in 1981-82. A
significant development in this area is the recent commissioning of the Demonstration
Plant for Sponge Iron Production at Kothagudem. This project is of special significance
10
to India since the technology for production of sponge iron by using non-coking coal
will enable us to overcome the constraints imposed by the limited reserves of coking
coal in our country.
56. The Annual Plan for 1981- 82 envisages a significantly higher outlay of
Rs. 223 crores for minerals development against Rs.130 crores in 1980-81. This includes
a provision of Rs.90 crores for the Orissa Aluminium Project which will be implemented
by the new National Aluminium Company registered with headquarters at Bhubaneswar
in Orissa. The bulk of the project cost is expected to be financed by external credit
and commercial borrowings.
57. In tune with our concern for improving transport facilities, we have
enhanced the outlay in the Central Plan for the transport sector to Rs.1535 crores from
Ra.1351 crores in 1980-81. Hon’ble Members are already aware that a substantial
increase has been made in the Plan outlay of the Railways from Rs.760 crores in
1980-81 to Rs.980 crores. A provision of Rs.108 crores has been made for the
development of ports which includes construction of additional berths sit Kandla,
Tuticorin and Visakhapatnam.
58. In tune with our drive to improve and modernise communication facilities.
It is proposed to extend 2 lakhs direct telephone connections during 1981-82. An
outlay of Rs.518 crores for Posts and Telegraphs including communications has been
provided in the Plan.
59. An outlay of Rs.390 crores is being provided for chemicals and fertilisers
which includes substantial provision for the gas-based fertiliser projects at Thal Vtishet,
Hazira and Namrup. Proposals for new nitrogenous and phosphatic fertilisers plants
are also being finalised.
60. Village and small industries have an immense potential for providing
employment while sustaining the traditional arts and skills of the village artisans and
craftsmen. An outlay of Rs.162 crores has been earmarked for these sectors adding to
the outlays of Rs.153 crores in the Plans of the States and Union Territories.
61. Finally I cope to the an important question of population growth. All our
efforts at eradicating poverty will be frustrated if we cannot reduce the rate of population
growth. We have taken up revitalisation of the Family Welfare Programme in earnest.
A provision of Rs.155 crores is being made for this programme in 1981-82.
62. The Government is deeply concerned about the lack of adequate
communication facilities in the North-East., We have therefore, decided to take up six
National Highways with a total length of 1700 Kms. at a total cost of Rs.70 crores. It
has also been decided to establish a more direct connection from Nowgong to Dimapur
on National Highway No. 36 at a cost of Re.16 crores. Certain missing links on the
road running along the indo-Bangladesh Border in Meghalaya will be completed at a
cost of Rs.26 crores. Railway facilities in this area are also being augmented. Hon’ble
11
Members are aware that the Third Level Air Service has already started funtioning in
the North-Eastern Region.
63. Non-Plan expenditure has been subjected to careful scrutiny to keep it to
the minimum. Defence expenditure is estimated at Rs.4200 crores as against Rs.3800
crores in the current year. I am sure the House will agree with me that in these difficult
times the reasonable requirements of defence should be fully met.
64. A provision of Rs.3124 crores is being made for interest payments as
against Rs.2685 crores in the current year, the increase being mainly on account of
internal debt. Due to the increase in prices of naphtha and other inputs, the cost of
production of indigenous fertilisers has also gone up. The cost of imported fertilisers
has also increased. Accordingly, the Budget for 1981-82 provides for a higher subsidy
on fertilisers of Rs.679 crores as against Rs.468 crores in the current year.
65. Provision for non-Plan loans to public sector undertakings has been reduced
from Rs.454 crores in the current year to Rs.318 crores in view of the anticipated
improvement in their performance and financial position in the next year. A lump sum
provision of Rs.200 crores is also being made in next year’s Budget to cover the
incidence of additional expenditure on dearness allowance to Central Government
employees. In future, dearness relief to pensioners will be paid at the rate of 2.5 per
cent of pension for each 8 point rise in the consumer price index instead of at the rate
of 5 per cent for each 16 point rise as at present. The procedure for payment of
dearness relief to pensioners is also being streamlined. These changes will mitigate
the hardships faced by pensioners.
66. Hon’ble Members are aware that India will have the privilege of holding
the next Asian Games in 1982 in the capital. The expenditure necessary next year for
the games is being provided in the budgets of the Ministries concerned. Most of the
expenditure will be on improvement and creation of permanent assets like roads,
stadia, and other sports facilities.
67. The total non-Plan expenditure for 1981-82 is estimated at Rs.15100 crores
compared with Rs.13736 crores in the current year.
68. As regards receipts for 1981-82, the gross tax revenues at the existing
rates of taxation are estimated at Rs.14472 crores compared with Rs.13133 crores in
the current year, showing an increase of Rs.1339 crores over the Revised estimates.
The States’ share of taxes in 1981-82 is estimated at Rs.4206 crores compared with
Rs.3792 crores in the current year. Consequently the Centre’s net tax revenue will be
Rs.10266 crores as against Rs.9341 crores in the current year.
69. The receipts from market loans are estimated at Rs.2800 crores compared
with Rs.2604 crores in the current year. Small savings are estimated to yield Rs.1250
crores next year compared with Rs.1100 crores in the current year. External assistance,
net of loan repayments, is estimated at Rs.1379 crores as compared with Rs.1258
12
crores in the current year. A credit of Rs.800 crores has also been taken for receipt
from sale of Special Bearer Bonds in the next financial year.
70. Taking into account the effect of the changes in the fare and freight rates
of railways, changes in the P&T tariff to which I will refer a little later and the
continuance of the Compulsory Deposit Scheme for income-tax Payers beyond
31.3.1981, the total receipts for 1981-82 are estimated at Rs.23061 crores. The total
expenditure for next year is estimated at Rs.24871 crores. The overall budgetary gap
at the existing rates of taxation will thus be Rs.1810 crores.
PART B
71. Income-tax and other direct taxes are important instruments for raising
resources and reducing disparities. We propose to achieve these objectives by plugging
of legal loopholes and effective administration rather than by enhancement of rates
which often leads to tax evasion and generation of black money. My proposals are
also designed to further our Party’s avowed policy of affording relief to the middle
classes in these difficult times.
72. Hon’ble Members will recall thdt last year the exemption limit, for income-
tax on personal incomes was raised to Rs.12, 000. But the nil slab rate was retained at
Rs.8,000. The House will be glad to know that I propose to raise the exemption limit
for income-tax in the case of non-corporate taxpayers other than registered firms and
Hindu undivided families with one or more members having separate income exceeding
the exemption limit, from Rs.12,000 to Rs.15,000. With a view to providing significant
relief to middle income groups, 1 further propose to raise the nil rate slab from Rs.8.000
to Rs.15,000 and also restructure the rate schedule up to Rs.30,000. The rate of income-
tax on the slab of Rs.15,001 to Rs.25,000 will be 30 per cent and on the slab of
Rs.25,001 to Rs.30,000, 34 per cent. The rates of income-tax on higher slabs will
remain unchanged. As a result of these changes, about 14 lakhs of taxpayers will go
out of the income tax net. I venture to claim that never have so many people been
freed from the burden of income taxation at one stroke. Apart from this, another 11.5
lakhs of taxpayers in the income brackets of Rs.15,001 to Rs.30,000 will also get
varying degrees of relief. The reduction in the tax liebility at income level of Rs.15,000
will be Rs.990; at Rs.20,000, Rs.495 and at Rs.25,000, Rs.220. There will be no
change in the tax liability in the case of taxpayers having income exceeding Rs.30,000.
Thus I have provided in me year income-tax exemption and /or reduction to over 25
lakhs of income-tax assessees out of about 40 lakhs of assessees in the country.
73. At present, salaried taxpayers are entitled to a standard deduction in an
amount equal per cent of the salary upto Rs.10,000 and 10 per cent of the balance
subject to an overall ceiling limit of Rs.3,500. These limits were fixed in 1974. In
view of the subsequent rise in prices, and as a means of relief to salaried taxpayers, I
propose to enhance the rate of standard deduction to 20 per cent subject to a higher
ceiling of Rs.5,000. Hon’ble Members will be happy to know that this benefit will be
13
applicable to pensioners also. At present, employees in receipt of conveyance allowance
are entitled to a standard deduction of Rs.1,000 only. It is now proposed that they
should be given the benefit of full standard deduction.
74. In view of the urgent need to raise the level of savings in the economy, 1
propose to continue the Compulsory Deposit Scheme for income-tax Payers for another
two years.
75. The corporate sector has a crucial role to play in the growth of the national
economy. I have earlier in my speech referred to the various steps taken for improving
the climate for investment in industry. I now propose to reduce by 5 per cent the
surcharge on income-tax payable by all classes of companies i.e. from 7.5 per cent to
2.5 per cent. This will add to the internal availability of funds in the corporate sector
and should improve the scope for investment financing from their own resources. This
step will reinforce the impact of the measured-which I have indicated earlier for
mobilising financial resources for industrial investment.
76. As Hon’ble Members are aware, all categories of-tax-payers are required
to pay advance tax m pay-as-you-earn basis. Surtax is, however, not payable by
companies in advance. I propose to remove this anomaly and provide that surtax
will also be payable in advance during the financial year preceding the relevant
assessment year.
77. The Eleventh Schedule to the income-tax Act contains a list of industries
which do not qualify for specified investment related tax concessions under the
income-tax Act. For example, investment allowance or tax holiday is not admissible
in respect of these industries unless they are in the small-scale sector. Industries
included in this Schedule were originally considered to be of low priority. However,
on reviewing the list, I do not find any justification for treating many of the listed
industries as of low priority. Accordingly, 14 groups of industries will be removed
from this Schedule and will now become eligible for the specified tax concessions.
These industries include electric fans, pressure cookers, glass and glassware,
pigments, colours, paints, enamels, varnishes, blacks and cellulose lacquers,
chinaware and porcelainware, mosaic tiles and glazed tiles, synthetic detergents,
amplifiers or any other apparatus used for addressing the public, vacuum flasks and
other vacuum vessels, etc. These industries, some of which have export potential,
will now become eligible for the specified tax concessions.
78. Hon’ble Members will recall that the Government had taken several
measures last year to curb the use of private discretionary trusts as a device for tax
avoidance. Another tax avoidance device that has come to the notice of the Government
is the creation of oral trust. With a view to checking this abuse, I propose to subject
oral trusts to income-tax at the maximum marginal rate and to wealth-tax at the flat
rate of 3 per cent or at the appropriate rate applicable in the case of an individual,
whichever course is more beneficial to the revenue. This proposal will take effect
from the assessment year 1981-82.
14
 79. Another device being used for avoiding proper tax liability is the
creation of associations of persons without defining the shares of members. This
enables the creation of a large number of taxable entities which, under the existing
law, will be chargeable to income-tax separately. I now propose that such
associations of persons be charged to income-tax at the maximum marginal rate
and to wealth-tax at the flat rate of 3 per cent or at the appropriate rate applicable
in the case of an individual, whichever is higher. This proposal will also take
effect from the assessment year 1981-82.
80. Earlier in my speech, I have referred to the prospective participation of
foreign companies in the field of oil exploration and production. In this connection, it
is necessary to take several steps relating to tax matters. Firstly, it is proposed to
extend. the income-tax Act and the Companies (Profits) Surtax Act to the off-shore
areas. Secondly, it is proposed to insert suitable provisions in the income-tax Act and
the Companies (Profits) Surtax Act to enable the Central Government to provide, by
a notification in the Official Gazette for an exemption, reduction in rate or other
modification in respect of income-tax or surtax in favour of any class of persons
engaged in the business of mineral oils and gas in association with the Central
Government or any person authorised by it. Notifications under the new provisions
when made will be placed on the Table of both the Houses of Parliament. It is also
proposed to amend section 42 of the income-tax Act relating to special provision for
deductions in the case of business of the prospecting for or extraction or production of
mineral oils so as to extend its scope to cover cases where the Government itself does
not participate in such business but does so through any person authorised by it.
81. While the search for additional quantities of oil should continue with
unabated vigour, there is also an urgent need to accelerate the development and use of
renewable energy resources and to promote their utilisation. The renewable energy
sources which have already been brought to the threshold of commercial use by our
scientists and engineers include solar, biomass and wind energy. Some fiscal incentives
to promote use of these non-conventional forms of energy are called for. I, therefore,
propose to enhance the depreciation allowance on machinery or plant installed for
manufacturing renewable energy devices and systems from 10 per cent available at
present to 30 per cent. Depreciation on renewable energy devices and systems used
for business or profession will also be allowed at the enhanced rate. Other measures
under contemplation by the Government include long to the relevant industries on
suitable terms from financial institutions and exemption from certain taxes and duties.
82. 1 had earlier in my speech referred to the imperative need to promote our
exports in view of our difficult balance of payments situation. To encourage
establishment of export-oriented industries in the Free Trade Zone, the Government
proposes to allow complete tax holiday in respect of units set up in these Zones for an
initial period of five years in lieu of other concessions.

15
 83. Tea is one of our important export-oriented industries. At present,
development allowance equal to 50 per cent of the expenditure incurred on plantation
of tea bushes in-any new area or on any land which has been previously abandoned is
allowed in computing the income from tea business. For this purpose, the expenditure
qualifying for development allowance is restricted to Rs.12,500 per hectare of land
situated in hilly areas and Rs.10,000 per hectare in other areas. Having regard to the
increase in the cost of planting in recent years, I propose to raise these ceiling limits
to Rs.40,000 per hectare of land situated in Darjeeling district, Rs.35,000 per hectare
in respect of land situated in other hilly areas and Rs.30,000 per hectare in plains.
84. Under section 35B of the income tax Act, domestic companies and non-
corporate taxpayers resident in India are entitled to a weighted deduction in the
computation of the taxable profits at the rate of one and one-third times the amount of
qualifying expenditure incurred by them on development of export markets. The scope
of this provision was curtailed last year as it had been misused for claiming a weighted
deduction in respect of expenditure incurred in India on activities which had no direct
relation with the basic objective of development of export markets. In order to guard
against such misuse, while at the same time protecting all legitimate effort at export
market development, the Government is framing rules which will identify a number of
specific activities to be allowed under section 35B. The necessary notification in this
behalf will be issued shortly.
85. Electronics is both a labour-intensive and export-oriented industry. I,
therefore, propose to include the electronic component industry in the Ninth Schedule
to the income-tax Act and provide that dividends derived by a domestic company from
an Indian company engaged exclusively in the manufacture of electronic components
will be completely exempt from income-tax.
86. The small-scale industrial undertakings enjoy certain tax concessions under
the income tax Act. For this purpose, an industrial undertaking is regarded as a small-
scale industrial undertaking if the aggregate value of the machinery and plant installed
therein as on the last day of the previous year does not exceed Rs.10 lakhs. I now
propose to raise this limit to Rs.20 lakhs in line with the new definition of a small-
scale industry.
87. Under the existing law, in computing taxable income, a deduction equal
to 20 per cent of the profits and gains derived from the business of publication of
books is allowed. I propose to extend this concession for a period of five years with
effect from assessment year 1981-82.
88. At present, approved financial corporations and public housing finance
companies are entitled to a deduction in respect of the specified percentage of income
carried to special reserve, subject to certain conditions. The aggregate of the amounts
qualifying for such deduction is, however, subject to an overall ceiling equal to the
16
amount of the paid-up share capital. In order to enable such corporations and companies
to build-up such reserves further, I propose to double the present ceiling.
89. Under the existing law, resident individuals and Hindu undivided families
are entitled to a deduction in respect of medical treatment of physically or mentally
handicapped dependants. I propose to double the amount of this deduction to Rs.4,800
in respect of a dependant who is hospitalised for a period of 182 days or more during
the relevant accounting year and Rs.1,200 in other cases. The House will doubtless
welcome this concession being given in the international Year for the Disabled Persons.
90. I propose to give some significant concessions under the Estate Duty Act.
The present limit of Rs.50,000 for estate duty was fixed in 1958. I propose to raise it
to Rs.1.5 lakhs the same as under the Wealth-tax Act. I also propose to provide that
one residential house or part thereof will be valued for estate duty purposes on the
same basis as for the purposes of wealth tax. Since the Estate Duty Act can be amended
only with the concurrence of State Legislatures, a Bill for giving effect to these proposals
will be introduced later.
91. I propose to make certain amendments in the income-tax Act to upgrade
the qualifications for appointment as members of the income-tax Appellate Tribunal.
92. Other amendments to the direct tax laws are of minor significance. I would
not like to take up the time of the House by referring to them in detail here.
93. The reduction in the rates and other concessions in respect of income tax
on personal incomes would result in a loss of Rs.146 crores in a full year and Rs.115
crores during 1981-82. Having regard to the pattern of sharing of income-tax between
Centre and States, these concessions will entail a loss of revenue of Rs.29 crores to
the Centre in 1981-82. The loss of revenue on account of reduction in the rates of
corporation tax and other concessions to companies will largely be balanced by the
payment of surtax in advance by companies. I am, therefore, not assuming any loss of
revenue on this score for 1981-82.
94. I now turn to my proposals on indirect taxes. My basic approach is that
additional revenue should flow largely from increased production. However, there is
need to mobilise additional resources to finance the Sixth Plan. While seeking to raise
additional resources I have nevertheless kept in mind the imperative need to avoid
hardship to the middle and poorer sections of consumers and to provide a larger
measure of relief to the small-scale sector of our industry.
95. Taking Customs duties first, my principal proposal relates to auxiliary
duties of customs. This duty has been levied on an annual basis since the 1973 Budget.
While continuing this levy I also propose to raise the rates of auxiliary duties as a
measure of additional resource mobilisation. In recent years we have been following
a fairly liberal import policy. The difficult balance of payments outlook points to the
need for conserving foreign exchange. The tariff mechanism judiciously used, can
17
help conserve foreign exchange and also raise some revenue. I, therefore, propose to
increase the rates of auxiliary duties by 5 per cent ad valorem, on all categories of
imports with a few well-merited exceptions. This will obviate a sharp increase in the
landed cost of any particular article.
96. Auxiliary duties of customs are now leviable on imported goods broadly
on a three-tier basis. Items subject to a basic duty upto 60 per cent ad valorem, for
example, basic raw materials, bear an auxiliary duty of 5 per cent ad valorem; on
items such as semi-processed goods and intermediates, where the rate of basic duty is
60 per cent ad valorem or above but less than 100 per cent, the rate of auxiliary duty
is 15 per cent ad valorem; and where the rate of basic duty is 100 per cent ad valorem
or above such as on finished consumer goods, the rate of auxiliary duty is 20 per cent
ad valorem. In other cases the rate of auxiliary duty is 5 per cent ad valorem, except
crude petroleum on which the rate is Rs.9.50 per metric tonne. There are also some
items which are fully exempt from auxiliary duty. My proposal is to increase the rate
of auxiliary duty to 10 per cent ad valorem wherever the rate of auxiliary duty is now
5 per cent; to 20 per cent ad valorem wherever is now 15 per cent; and to 25 per cent
ad valorem wherever the rate is now 20 per cent. I do not, however, propose to increase
the auxiliary duty on crude petroleum.
97. In line with the approach I have explained, I propose to withdraw the
present full exemption from auxiliary duties of customs in respect of certain items of
capital equipment and subject them to auxiliary duty of customs at the rate of 5 per
cent ad valorem. This increase would cover, among other things, imports of machinery
as project imports as also items of machinery on which the concessional rate of 25 per
cent ad valorem is applied. This measure would, apart from yielding additional revenue,
afford some additional protection to the indigenous machine building industry which
has, of late, had to face a significant escalation in input costs
98. I said earlier that I would exclude some items from the proposed increase
in the auxiliary duties of customs imports of essential items like-edible oil will be
exempted from the proposed increase. Bulk petroleum products such as kerosene and
high speed diesel oil and steel imported for buffer stock operations will also not
attract the increased levy. Items on which import duty rates have been changed in the
recent past with a view to maintaining parity with prices of domestic products have
also been kept out of the purview of the increased levy. Further keeping in view our
commitments under the General Agreement on Tariffs and Trade. I propose to give up
the auxiliary duty in respect of three items involving a small revenue sacrifice. Further
details of the proposals are available in the Budget Papers.
99. These proposals are expected to yield an additional revenue of about
Rs.250 crores.
100. My next proposal relates to levy of import duty on newsprint. At present

18
this item is fully exempt. There is a large foreign exchange outgo on imports of
newsprint. There is no reason why this commodity should not bear a moderate rate of
customs duty. I, therefore, propose to impose an effective customs duty of 15 per cent
ad valorem on imported newsprint. I expect this measure to yield an additional revenue
of about Rs.21crores.
101. Imports of stainless steel bars and wire rods now attract a duty of 75 per
cent because they have industrial applications. But there is reason to believe that some
of these imports are being diverted for rerolling into strips and sheets used in the
manufacture of utensils. I, there fore, propose to raise the effective customs duty on
stainless steel bars and wire rods from 75 per cent to 175 per cent ad valorem. I have,
however, taken care to see that this increase does not affect imports of stainless steel
wire rods which are used for the drawing of wires. This measure is expected to yield
an additional revenue of Rs.5 crores.
102. I also propose to raise the basic customs duty on plain shaft bearings
from 60 per cent to 100 per cent ad valorem. This increase should help to restrict
large scale imports of bearings such as thin-walled -bearings, which have been affecting
the indigenous industry. This proposal is expected to yield an additional revenue of
Rs.2.75 crores. On similar considerations it is proposed to raise the basic customs
duty on computers and computer peripherals from 40 per cent to 50 per cent ad
valorem. The likely revenue gain from this increase would be Rs.1 crore.
103. I will now come to excise duties. The House will recall that in 1978 the
Additional Excise Duties (Textiles and Textile Articles) Act was passed, in terms of
which an additional duty of excise was levied on certain textiles and textile articles
at 10 per cent of the basic excise duty leviable. The revenue from this excise levy
was intended to meet the expenditure incurred by way of subsidy on controlled
cloth. The production of controlled cloth is being stepped up, with emphasis on
larger production of dhotis and sarees which are of special significance to the poorer
sections of society, particularly in rural areas. As a result, the provision for subsidy
under this scheme would rise to nearly Rs.100 crores in the coming year. The revenue
at the existing rate of additional excise duty is only about Rs.66 crores. I, therefore,
propose to raise the rate of additional excise duty from 10 per cent to 15 per cent of
the basic excise duty on all the items which are now covered by the levy. This would
yield an additional amount of about Rs.33 crores and help finance the increased
outlay on controlled cloth.
104. As regards special excise duties, I propose only to continue them at the
existing rates. The exemptions in force are also being continued.
105. My remaining proposals under Union excise duties are mainly designed
to achieve simplification and greater clarity.

19
 106. Hon’ble Members would be aware that there is a graded structure of duty
on matches, the mechanised sector paying Rs.7.20 per gross boxes, the middle sector
paying Rs.4.50 and the cottage sector Rs.1.60. In the light of the report of the Dandekar
Committee and a special study made by the Government, it has become necessary to
discourage a tendency of middle sector units towards mechanisation of certain labour-
intensive processes. Accordingly, I propose that the concessional rates of duty i.e.
Rs.4.50 for middle sector units and Rs.1.60 for cottage units, will not be available if
pawer is used in the labour-intensive processes of frame-filling, dipping splints in
match composition, box making, box filling, labelling and bande rolling and packaging
if such units use power for any of the above processes, they will be liable to a duty
rate of Rs.5.50 per gross boxes, which would be intermediate between the rate. of
Rs.7.20 applicable to the fully mechanised sector and Rs.4. 50 now applicable to the
non-mechanised middle sector. I would like to stress that this is not intended as a
revenue measure. It is intended only to protect through the excise mechanism, the
employment potential of the non-mechanised sector’.
107. With a view to preventing the possible infiltration of the middle sector
into the cottage sector and in order to ensure that the benefit of the lowest rate of duty
accrues to genuine cottage sector units, it is Proposed to reimpose a ceiling on the
clearances by cottage sector units at concessional rates. The new ceiling, which is
proposed to be fixed at 120 million matches per unit per annum, is much more liberal
than the ceiling of 75 million that existed prior to the 1980 Budget. The pattern of
production and clearance will be kept under watch and this ceiling will be reviewed if
circumstances so warrant. The changes I have proposed are fair to all segments of the
industry and are designed to promote both employment and production in the best
possible manner.
108. Another rationalisation measure relates to the concession available to
manufacturers of goods falling under Tariff Item 68, who undertake work on ‘job’
basis. Under the present scheme duty is being effectively collected only on the ‘job
charges’ paid by the principal manufacturer to the job worker. In the operation of the
scheme, however, several difficulties have been experienced, particularly on the question
of what is ‘job work’. There have been cases where some manufacturers have taken
undue advantage of the concession. I, therefore, propose to replace the present scheme
by me in which, instead of levying duty separately on the job charges paid to the job
worker, the duty will be paid by the principal manufacturer on the value of the finished
goods. This step should be generally welcomed by ancillary units which undertake
work on job basis.
109. I also propose to rationalise the Central Excise tariff entry and the rate
structure relating to tyres with a view to making the legislative intent clearer and
minimising the scope for disputes in classification and assessment, particularly in
regard to off-the-road tyres used in bulldozers, scrappers and other earth moving
equipments. While proposing the necessary amendments, I have taken care to maintain
20
the existing rates of duties and duty concessions in respect of tyres both for agricultural
tractors and their trailers.
110. The other major area where rationalisation of the tariff entries has been
proposed is in regard to non-ferrous metals under the respective entries in the Central
Excise Tariff. There has been considerable debate and dispute m the question of
assessment of waste and scrap of these metals. To set these at rest it is proposed to
specifically cover waste and scrap of these metals under the respective tariff entries.
111. In addition to the above, a few other amendments to certain tariff entries
as also the insertion of a separate tariff item for polyester film have been proposed.
The details of these changes may be seen from the Budget papers.
112. I now turn to a proposal which seeks to fulfil a long-standing demand of
State Governments. The scheme of levy of additional excise duty in lieu of sales-tax
is at present applicable to sugar, tobacco and some textile items. The National
Development Council had recommended that the revenue yield from Central excise
duties and additional excise duties be in the ratio of 2:1 as far as possible. At a
Conference of Chief Ministers, I gave an assurance that an effort would be made to
achieve this ratio in respect of these commodities as a whole.
113. I have considered how best this assurance can be fulfilled. The simplest
solution will be to make a change in the ratio for sharing of revenues from cigarettes
as between the Centre and the States. As against the present ratio of 76:24 between;
basic excise duty and additional excise duty in the composite rate applicable to
cigarettes, the ratio is proposed to be changed to 72.5:27.5. This will be combined
with a uniform increase in the specific duty element in the ‘composite rate from
Rs.21.00 to Rs.21.25 per thousand. The overall revenue from cigarettes will remain
practically unchanged. There should, therefore, be no justification for manufacturers
to mark up the prices of cigarettes. With these changes, the overall ratio between the
yields from basic and special excise duties m the me hand and additional excise duties
m the other is expected to improve to 2:1 taking the three items sugar tobacco and
textiles together. This will result in a transfer of about Rs.21.72 crores from revenues
under Central excise to the revenue under additional excise duty.
114. I have also a minor proposal which is basically of interest to the State
Governments. Under the Medicinal and Toilet Preparations Act, 1959, excise duties
are leviable m medicines and toilet preparations which contain alcohol, narcotics and
narcotic drugs. Certain changes have been proposed in the Act with a view to effecting
a switch over to the metric system and also to eliminate avoidance of duty in certain
cases. The changes proposed, however, have very little revenue significance.
115. I shall now turn to concessions in the area of indirect taxes. This
Government is committed to the pursuit of a vigorous policy of promoting small scale
industry in the interest both of employment and broader development of
21
entrepreneurship. Accordingly, I propose to increase the duty exemption limit under
the general scheme of excise duty concessions applicable to 72 excisable commodities
from Rs.5 lakhs in terms of value of clearances to Rs.7.5 lakhs. Clearances in excess
of Rs.7.5 lakhs will continue to benefit from the existing concessional duty limited to
three fourths of the applicable rates of excise duty up to a clearance of Rs.15 lakhs in
a financial year as at present. This measure should benefit a substantial number of
small manufacturers and enable them to compete more effectively with large units. I
am sure that all sections of the House will welcome this enlargement of the scheme of
concessions enjoyed by small scale industry.
116. Under the excise duty concessions available at present to small
manufacturers of some products, notably Item 68 goods and specified electronic goods,
one of the criteria for eligibility is the value of investment in plant and machinery. I
propose to increase the eligibility limit of such investment from the present figure of
Rs.10 lakhs to Rs.20 lakhs, in line with the revised definition of ‘small scale units’
under the new industrial Policy. Here again I am confident that my proposal will be
welcomed by all the Hon’ble Members.
117. In the last Budget I had announced wide ranging duty concessions with a
view to encouraging the development of the electronics industry. As a further step in
this direction, I propose to extend the scope of the import duty concessions so as to
cover 59 new items of capital equipment and 23 new items of raw materials and
components used by the electronics industry.
118. At present, the handloom sector of the woollen industry does not enjoy
any special duty concessions. This sector has a good growth potential. I, therefore,
propose to reduce substantially the processing stage duty on woollen fabrics produced
on handlooms on the lines of the concessions which are available to cotton fabrics
produced on handlooms.
119. I also propose to extend the concessional import duty of 25 per cent ad
valorem to a few more important drug intermediates. This step should induce indigenous
manufacturers to go in for production of more basic drugs.
120. Last year, I had fully exempted cotton and cotton-viscose blend hosiery
from excise duty. I now propose to extend this exemption to all hosiery articles falling
under Item 68 of the Central Excise Tariff.
121. Another duty concession relates to ‘flocked’ fabrics where the excise duty
is being reduced from the present level of the base fabric duty plus 30 per cent ad
valorem to the base fabric duty plus 15 per cent ad valorem on the consideration that
the present duty burden is heavier than warranted, particularly on flock-printed fabrics.
Further, on colour scanners for the printing industry, the basic customs duty is being
reduced from 100 per cent ad valorem to 60 per cent ad valorem.
122. In this international Year of the Disabled, it is fitting that appropriate tax
22
relief measures should be extended to our handicapped brethern. Artificial limbs and
rehabilitation aids for the handicapped are already exempted from Central excise duty
under Item 68. I now propose to exempt fully from excise duty Braille watches for the
use of the blind.
123. I also propose to exempt from excise duty Braille paper which is necessary
for printing books for use by the blind.
124. I further propose to substantially reduce the customs duty on hearing aids
and Braille watches imported for personal use by post or air.
125. The increased levy of auxiliary duties of customs to which I have earlier
referred will not be applied to goods such as orthopaedic appliances, Braille watches
and parts, tricycles for the crippled, hearing aids and, parts. I am sure that this House
will wholeheartedly endorse these proposals.
126. The various concessions and reliefs in excise and customs duties which I
have announced will entail a sacrifice of revenue of Rs.9.35 crores in a full year.
127. My taxation proposals will yield a sum of about Rs.35.57 crores in a full
year by way of excise duties and Rs.285. 00 crores by way of customs duties. The
concessions I have announced add up to Rs.7.05 crores on the excise side and Rs.2.30
crores on the customs side. The net yield is, therefore, Rs.28.52 crores from excise
duties and Rs.282.70 crores from customs duties. The accrual to the Central Exchequer
in a full year will be Ra. 300.50 crores.
128. I hope it would not have escaped the notice of Hon’ble Members that this
is perhaps the first Budget in recent years in which no increase has been effected in
excise duties for raising general revenues.
129. I would now like to say a few words on behalf of my Hon’ble colleague,
the Minister of Communications. A substantial programme of development of
telecommunication facilities is envisaged during the Sixth Five Year Plan. It is, therefore,
appropriate that the Department should generate internal resources to a reasonable
extent for financing its Plan. The additional dearness allowance sanctioned to employees
and other increases in the cost of operations have already eroded the existing surplus
of the Department. It has, therefore, become necessary to revise certain
telecommunication tariffs. At present the rate of telephone call charge in measured
rate telephone system is 30 paise per call unit for calls exceeding 250 but not more
than 1750 in a quarter. It is proposed to increase this charge to 40 paise per call unit.
The manual trunk can charges for calls of ordinary category for a unit period of 3
minutes in the distance slabs of 100 to 200 kilometres are being increased from Rs.6
to Rs.8 and in the distance slab of 200 to 500 kilometres from Rs.10 to Ra.12. These
measures are estimated to yield Rs.35.78 crores in a full year. The additional revenue
during 1981- 82 will be of the order of Rs.20 crores and has been taken into account
in estimating the receipts of Posts and Telegraphs. It is also proposed to increase the

23
rates of deposits for telephone connections under ‘Own Your Telephone’ system. This
revision will yield about Rs.5 crores to the Government by way of additional deposits
in 1981-82. The details of these revisions are shown in a memorandum which is being
circulated along with the Budget papers. The changes will be given effect to from a
date to be notified after the Finance Bill is passed by Parliament. There will be no
change in either postal or telegraph rates.
130. I had earlier stated that the resources gap estimated at existing rates of
taxation is Rs.1810 crores. The various tax measures I have presented, together with
the reliefs offered, will yield net additional revenue of Rs.271 crores to the Centre.
This leaves an uncovered deficit of Rs.1539 crores. This deficit may appear large, but
taking a total view of the economic situation I believe it is within the limits of fiscal
prudence. The inflationary potential of the Budget must be viewed in the context of
the full package of policy measures which I have outlined. This package contains
many incentives for higher production and increased utilisation of capacity. This should
stimulate a considerable supply response during the coming year and as I have
mentioned, signs of this upturn are already evident. I attach great importance to
expanded supplies as the critical element in keeping inflationary pressures in check.
The package also contains important incentives to savings which will undoubtedly
help in this regard. Furthermore, monetary and credit policies will be so designed as
to ensure that Government recourse to deficit financing takes place within a balanced
and measured overall expansion of credit in the system.
131. Mr. Speaker, Sir, the economic situation remains difficult and yet full of
great opportunities for development and growth. I have tried to present a Budget
which gives maximum support to forces that can move us forward on the path of
growth with stability and social justice. It sets the stage for all of us to work towards
the achievement of our economic and social goals so clearly laid out in the Sixth Plan.
Economic policy can only do this much. Hard work, discipline and the innate good
sense of the people of this ancient land must do the rest.
132. Sir I commend this Budget to the House.
(FEBRUARY 28, 1981)

24
 SPEECH OF SHRI R. VENKATARAMAN MINISTER OF FINANCE,
INTRODUCING THE BUDGET FOR THE YEAR 1980-81 (FINAL)

Sir,
I rise to present the regular Budget for the year 1980-81.
2. Presenting the interim Budget in March this year I gave an account of the
poor shape of our national economy and the magnitude of the task facing the nation.
The Economic Survey presented to the House last week confirms the brief review
made by me in March. As it gives a detailed account of the present condition of the
Indian economy and its problems and prospects, I shall content myself with highlighting
only a few aspects in order to give the House an idea of the gravity of the economic
problems faced by this Government, the action it has taken so far to solve them and
the need for other measures some of which I. shall outline in the course of this speech.
3. The most important and disconcerting fact about the Indian economy is
that the gross national product declined in 1979-80 by about 3 per cent. A fall in
agricultural production of about 10 per cent and a reduction of about one per cent in
industrial production were responsible for this outcome. The set-back in agriculture
was partly on account of the severe drought which affected large parts of the country.
The decline in industrial production was mainly the result of a serious deterioration in
the infrastructure.
4. The performance of power, coal and railway sectors was one of the most
serious deficiencies m the economic scene. No doubt the drought was responsible for
a decline of 2.2 per cent in hydel production but what stands out is the inability to
meet increased demand through increased thermal generation despite substantial
additions made to generating capacity in the past three years. Inadequate supply of
coal and its poor quality, poor maintenance, equipment damage resulting in increasing
planned and unplanned outages and poor management were responsible for the decline
in the percentage of thermal capacity utilisation to as low as 45 per cent.
5. In coal again it was the same story. Despite massive investments the
production of coal and lignite in 1979-80 was just 106 million tonnes, marginally
better than the level reached four years ago. The poor performance of DVC and
the failure to maintain law and order in the coal mining areas of Bihar and Bengal
contributed to the set-back in coal production. At the same time coal could not be
transported to thermal stations in adequate quantities because of difficulties in
railway movement.
6. In 1979-80 the revenue earning traffic of the Railways in terms of tonnes
1
originating declined by 3.3 per cent from the level reached in 1978-79. The performance
of the Railways in terms of tonnes originating of revenue earning traffic has been
declining continuously since the peak reached in 1976-77. The deficiencies in the
three sectors, power, coal and railways, reinforced me another and inflicted severe
damage on the national economy.
7. With the serious deficiencies in infrastructure it was not surprising that
there was a fall in the production of major commodities like steel, cement, non-electrical
machinery, aluminium and other non-ferrous metals and cotton textiles. Sugar
production also fell by 28 per cent. There was a decline in capacity utilisation in
industry in general.
8. In a situation in which aggregate supply dropped sharply, there was a
steep rise in prices. In the fiscal year 1979-80 prices rose by 20 per cent. In some
commodities like sugar, gur, khandsari, oilseeds and edible oils the rise was particularly
steep. There was also a persistent upward trend in a wide range of manufactures and
intermediates owing to the low level of production. The direct and indirect effects of
the increases in the prices of crude oil and oil products also contributed to the
inflationary pressures in the economy as also the long delayed, adjustments in
administered prices of commodities like coal and steel. This naturally gave rise to
speculative expectations and the liquidity in the system due to large expansion of
money supply in the previous years aggravated the price situation.
9. The other area in which there was a deterioration following from all these
factors was the balance of payments. It is true that our overall foreign exchange reserves
declined by only Rs.56 crores in 1979-80 but the trend in the various forces operating
m the balance of payments has been reversed perceptibly. Export growth in value
terms has only been 8 per cent or so which means there was hardly any growth in
terms of volume as world inflation has proceeded at about 10 per cent in 1979-80. On
the other hand imports have increased by about 25 per cent principally on account of
increased oil bill because of steep rise in the prices of oil and oil products and the
consequential impact on other imports such as fertilizer. The result is that the trade
gap in 1979-80 was Rs.2232 crores, double the size of the trade deficit in 1978-79.
This has led to a deficit on the current account. The rate of growth of remittances
which has in the recent past turned the trade deficit into a surplus on current account
also decelerated in 1979-80.
10. Such a dismal economic situation was to a large extent the result of the
policies - or should I say lack of policies - of the previous Government. For instance,
vacillations in sugar policy contributed to a fall in the area under sugarcane, decline
in sugar production and the frittering away of large stocks of sugar carried over from
previous seasons through releases which could not be sustained over a period. Had
they pursued a more responsible policy on sugar, we would not have been in the
unenviable position of having to import sugar for domestic consumption.
2
 11. In infrastructure the lack of coordinated policy in the three sectors of
coal, transport and power was responsible for their unsatisfactory performance. The
large Budget deficit of Rs.2700 crores in an economy flush with liquidity and a policy
of sweeping taxation m articles of common consumption in a situation of declining
production were responsible for the spurt in prices. Finally, the lack of adequate
emphasis on export promotion was partially responsible for the reversal of the trend
in our balance of payments.
12. What is important now is to devise ways and means to arrest the
deterioration and set the economy on the path of stability and growth. The fact that we
have a Government which enjoys the confidence of the people and is decisive should
make a qualitative difference; as also the fact that there will be much greater cooperation
between the Centre and the States, now that our party has been so enthusiastically
returned in the State elections. At the end of May, 1980, we still have food stocks of
about 18 million tonnes owing to our earlier foresight. Foreign exchange reserves
stood at Rs.4890 crores as on May 30, 1980. These elements of strength will be
effectively utilised to improve the situation. But the House should realise that the
magnitude and complexity of the. problems we have inherited do not admit of quick
and easy solutions. However, the problems are so urgent that we shall tackle them
with determination and with the cooperation of all sections of our people.
13. Since it came to power this Government has taken a number of steps to
correct the deficiencies in the economic system. Since restoration of infrastructure
brooked no delay Government constituted a Cabinet Committee on infrastructure under
my Chairmanship to monitor the situation continuously. As power shortages have
been an impediment to the growth of production the Committee has devoted a good
deal of attention to rectifying the power situation. The Committee wanted to ensure
that thermal generation did not suffer for lack of coal and, therefore, decided to make
more wagons available for loading coal to thermal stations. As a result the number of
wagons loaded daily with coal for thermal stations has gone up from 2900 in January
to 3200 in May, 1980.
14. Coastal shipping has been revived to supplement movement of coal by
rail and is expected to achieve progressively a target of one lakh tonnes per month to
meet the needs of western and southern regions.
15. Due to a number of steps taken coal production increased by 9.4 lakh
tonnes in April, and 10.4 lakh tonnes in May, 1980 as compared with April and
May, 1979.
16. There has been a dramatic improvement in the port situation. The number
of ships waiting for a berth in Bombay, Calcutta and Madras has come down sharply
by May, 1980. A good indicator of the improvement in port conditions is the removal
of the congestion surcharge for major ports including Bombay and Calcutta from
April 1980.
3
 17. As the rainfall during the period October, 1979 to May, 1980 was also
deficient causing drought conditions to continue in many States affecting 220 million
population, the present Government, immediately after assuming office, mounted relief
operations on a massive scale. Central teams were deputed to these and other States
and an allocation of Rs.150 crores was made for drought relief. More than 10 lakh
destitutes were provided free food. In addition, about 65 lakh persons were employed
daily under the special Food for Work Programme. Government has decided to continue
this programme till the end of September, 1980. The existing subsidy on agricultural
inputs, including nitrogenous fertilizers, to small and marginal farmers in the
mono-cropped drought affected areas where no rabi crops could be grown has also
been extended till the end of March,1981.
18. A 12-point programme of drought management which provides the basic
framework and approach for fighting the drought has been evolved and recommended
to the States. A large number of rigs have been deployed for sinking wells and a
significant percentage of wells bored has proved successful. These steps are expected
to bring about permanent improvements in availability of drinking water in the drought
affected, States.
19. The demand for petroleum products, particularly diesel, increased during
the last few months owing to a number of circumstances including the drought. The
problem was compounded by almost total cessation of supplies from January onwards
from the four refineries dependent on Assam crude which between them normally
produce around 350,000 tonnes of petroleum -products per month. The situation was
tackled with the utmost vigour. Firstly, the maximum quantities of diesel and kerosene
were imported between January and April, 1980, 6.2 lakh tonnes of kerosene and 1.1
million tonnes of diesel oil were imported as compared with 4. 7 lakh tonnes and 4.8
lakh tonnes respectively in January-April 1979. Secondly, the movement of these
commodities was speeded pp by all available means. The result has been an increase
in the level of supplies amounting to 10 per cent compared with the corresponding
months in 1979 and avoidance of a possible adverse effect on rabi production due to
a diesel shortage.
20. With regard to prices Government has taken a number of important steps.
The coverage of the public distribution system has been widened. With regard to
edible oils not only has Government undertaken adequate imports but it has also made
arrangements to see that a sizable portion of these imports go into direct consumption.
It is hoped that about 3 lakh tonnes of imported oil will go into direct consumption
through the public distribution system and cooperatives. In sugar, Government has
activated the disrupted dual pricing system.
21. In keeping with our developmental thrust towards the poorest, the banks
have been asked to ensure that a significant proportion of the enlarged priority sector
credit will flow to the beneficiaries of the 20-Point Economic Programme, which is

4
being revitalised. To further strengthen the linkage between block level development
activities and the bank’s credit programmes, the banks have been asked to open by the
end of the year, branches at all unbanked block headquarters.
22. Honourable Members are aware of the critical role played by our exports
in our developmental effort. Therefore, the Government had, over the years,
endeavoured to provide all facilities and full encouragement to export promotion efforts.
The management of credit and investment finance for export promotion in an
increasingly competitive international market is, however, becoming more and more
complex. There is thus a need for a specialised institution which will become a focal
point for all aspects of export credit and which will devote concentrated attention to
the needs of the exporting community. Government has, accordingly, decided to set up
an Export-import Bank, to assist the financing of our international trade. We hope this
specialised institution will give the desired boost to our export promotion efforts.
23. In the light of the problems currently facing the economy the tasks to be
accomplished are clear enough. As there is a great deal of inflationary potential in the
economy, the prime objective of our policy will be to achieve price stability. This will
have to be done through an increase in aggregate supply and a moderation of aggregate
demand. Therefore, we intend to continue our efforts to improve the working of the
infrastructure and to augment available facilities with investment wherever necessary.
Secondly, the accent will be on utilising existing capacity more effectively, without
slackening efforts to increase capacity, to augment supplies of vital commodities like
steel, cement, aluminium and fetilizers. This will simultaneously increase production
and employment, reduce the need for imports and benefit revenue.
24. With regard to demand management, we shall have to pursue a policy of
linking bank credit expansion to productive and priority purposes and check the
diversion of funds to speculative ends. We will also have to pursue an interest rate
policy which will help in the abatement of inflationary pressures without hurting
productive activity. At the same time profiteers and hoarders intent on exploiting
current shortages for personal gain will have to be dealt with sternly. Smuggling will
have to be countered through Conservation of Foreign Exchange and Prevention of
Smuggling Activities Act and other means.
25. Since there is a great deal of liquidity in the system, there is an obvious
need to minimise the growth of money supply by keeping the budget deficit at a much
lower level than in 1979-80. This will require a fiscal policy which will reduce wasteful
and unnecessary expenditure, invest resources in increasing the economy’s production
potential and maximise the revenue potential of the existing tax system.
26. In view of deterioration in our balance of payments we will have to
emphasise the promotion of exports to a far greater extent than has been done in the
past three years. At the same time, it is necessary to minimise the growth of imports
5
through a much more energetic policy for augmenting domestic production in areas
like edible oils, steel, cement, fertilizers, oil and oil products.
27. Government also intends to pursue policies which will encourage savings
and investment in the economy. Since 1971, a convertibility clause is being inserted in
agreements governing financial assistance to industrial units by public financial
institutions. It has been repeatedly represented by industry that the rigours of the
convertibility clause are inhibiting investment. Government has carefully considered
the matter and has decided that the policy guidelines for convertibility clause be
modified on the following lines:
(a) The mandatory insertion of convertibility clause will in future apply to
financial assistance exceeding Rs.1 crore instead of Rs.50 lakhs prescribed at present.
(b) The financial institutions should hereafter exercise the conversion option
in such a way that they do not acquire more than 40 per cent of the share capital of an
existing concern. However, in case of persistent default in repayment of loans or
mismanagement of an assisted company or continuous closure of an industrial unit of
a company producing goods and services essential to the community, the financial
institutions might, with the concurrence of Government, exercise their conversion
option in such a way that their shareholding can go up to 51 per cent or above.
(c) Under the existing soft loan scheme for modernisation of jute, cotton
textiles, cement, sugar and certain engineering industries, no convertibility clause is
being inserted at present. This exemption is being extended to assistance for
modernisation in any industry and for rehabilitation of sick units.
Government hopes these policy changes would remove the present inhibitions
and encourage fresh investment in and modernisation of industry.
THE PLAN AND BUDGET ESTIMATES FOR 1980-81
28. In our preoccupation with the immediate problems of economic
management we should not lose sight of the need to build up the growth potential of
the economy over the medium term. If we do not do so, the short-term difficulties will
only grow further. The reconstituted Planning Commission will present the new
programmes and priorities when the Plan is formulated by the end of this year. But
meanwhile a Plan for the year 1980-81 has been formulated which will be dovetailed
into the Sixth Plan later. The broad objective of the Plan would be to achieve a higher
growth rate of 5 per cent per annum.
29. The annual Plan for 1980-81 seeks to revive and restore the health of the
economy and accelerate the pace of growth and employment generation. Though the
priorities laid down by the earlier Government are not acceptable to us, we have
recognised that on-going projects should be fully provided for. Within the room for
manoeuvrability permitted by this consideration, we have effected changes in plan
6
provisions or provided for new programmes so as to give a reorientation to the Plan in
the desired direction.
30. The new Planning Commission has made a quick review of Plan
programmes and priorities. I am glad to announce that in the light of this review the
annual Plan outlay for 1980-81 of the Centre is being raised to Rs.7,340 crores, an
increase of Rs.767 crores over the outlay in the interim Budget; compared with last
year’s original outlay it is higher by 14.5 per cent. It will be financed by a budgetary
provision of Rs.5,322 crores and internal and other resources of public sector
undertakings of Rs.2,018 crores. A provision of Rs.3,094 crores has been made for
Central assistance to the outlay on States’ Plans, Union territories’ Plans and sub-plans
of hills and tribal areas, special component plans for the scheduled castes, schemes of
the North Eastern Council, Rural Electrification Corporation and natural calamities.
Inclusive of their own resources their Plan outlay will be Rs.7,253 crores as against an
outlay of Rs.6,099 crores in 1979-80. Altogether the total Plan outlay of the Centre,
States, Union territories, schemes of North Eastern Council, etc., would amount to
Rs.14,593 crores in 1980-81 as compared with Rs.12,511 crores in 1979-80 - a step up
of 16.8 per cent.
31. It is this Government’s firm belief that economic growth could be
accelerated and its fruits widely shared only if employment opportunities in rural
areas are significantly augmented. Development will have no meaning to the vast
majority of our people if the poor in the rural areas are not able to secure a livelihood
through satisfactory productive work. As an integral part of the new Plan, we have
therefore, decided to launch a massive National Rural Employment Programme based
on a strategy which will seek to blend opportunities for self-help and optimum utilisation
of available local resources. Such a programme will go a long way towards revitalising
the rural economy and developing the infrastructure facilities so essential to the life of
the community.
32. The Food for Work Programme initiated by us in 1977 has an important
part to play in this regard. But in the last two years this programme has displayed
certain cardinal weaknesses. In many cases, no attempts have been made to develop
an inventory of projects which will meet not only the local needs but also fit in with
the overall national priorities. There was also no firm indication of annual allocation
of foodgrains. The programme thus in effect continued on an ad hoc basis. No
arrangements were also made for financing the cash component of the works
programme undertaken by the State Governments with the help of foodgrains
allocated to them. The result was that they could not undertake works which could
have led to the creation of durable assets and the building up of productive potential
of the areas concerned.
33. In the new National Rural Employment Programme, States will receive
assistance not only in the form of foodgrains but also cash assistance so as to enable
7
them to undertake truly productive works of lasting benefit. The Budget estimates
which have been presented to the House provide Rs,340 crores in 1980-81 for this
programme. It is estimated that the programme, if properly implemented, could generate
850 to 900 million man days of additional employment. Some part of the provision for
this scheme would be specifically earmarked for’ high priority programmes like social
forestry, fuel plantation, rural community housing and water supply and nutrition.
Rs.10 crores have been provided for the Food for Nutrition Programme.
34. The process of economic growth will be incomplete unless the benefits of
such growth reach the weakest sections of society. Therefore, the improvement of the
socio-economic conditions of the scheduled castes should be a major element of our
strategy of development. Comprehensive special component plans for the scheduled
castes will have to be drawn up with the objective of earmarking outlays in all relevant
sectors in proportion to the scheduled caste population in each State. Such outlays are
to be utilised for helping the scheduled caste families to acquire income generating
assets and relevant skills for the betterment of their living conditions. The Budget
breaks new ground by providing for a special central assistance of Rs.100 crores to
the States to act as a catalyst in the generation of more funds from other sources
including financial institutions. This will enable the authorities to provide as a package
all the inputs needed in an integrated programme of promotion of the socio-economic
condition of scheduled castes.
35. A provision for Central assistance of Rs.70 crores has been made for the
development of tribal people and areas under the Tribal sub-plan. Additional pockets
with a population of 10,000 and having at least 50 per cent tribal concentration will be
identified, thus bringing nearly 75 per cent of the tribal population in eighteen States
and Union territories within the Tribal sub-plan. Greater emphasis will, be laid on
selected programmes which can benefit the tribal families.
36. A provision of about Rs.50 crores has been made in the annual Plan for
1980- 81 for providing house sites for the landless and weaker sections as part of the
20-Point Economic Programme. The Rural Housing-cum-Hut Construction Scheme
for landless workers being operated under the revised Minimum Needs Programme
provides not only house sites but also assistance for the construction of huts. This
provision will be supplemented under the National Rural Employment Programme
which will cover community housing projects in rural areas. Nearly 8 lakh landless
families are expected to benefit under this scheme.
37. Since India lives in its villages and nearly 70 per cent of its population
derives its livelihood from agriculture, the prosperity of the country depends upon the
modernisation of agriculture. The year 1979~80 is a grim reminder of the importance
of the performance of agriculture to the development of the Indian economy. The Plan
outlay on agriculture and rural development in the current year is being increased to
Rs.2,247 crores from Rs.1,811 crores in 1979- 80. This includes the provision in the

8
Central Plan of Rs.158 crores for Small Farmers Development Agency, Drought Prone
Areas Programme, integrated Rural Development Programme, etc. ; Rs.32 crores for
better exploitation of inland and marine fish potential; Rs.54 crores for Operation
Flood II Project; Rs.59 crores for schemes of agricultural research and education
oriented towards improving agricultural productivity through better seeds, better
agronomic practices, better water management and better use of fertilizers and other
essential inputs; and Rs.10 crores to increase the production of oilseeds to reach a
target of 12 million tonnes.
38. The current levels of international prices of oil and oil products have
highlighted the importance of other fuels. Forests can play an important part in providing
one such fuel. AS forests in India have suffered fast destruction by people in their
search for fuel, it is essential that people’s participation in the development of forests
is secured on an urgent basis. Social forestry in villages will besides meeting the
energy requirements of the people also provide additional employment. The raising of
fuel and fodder is proposed to be made a part of Minimum Needs Programme and it
will receive high priority in the National Rural Employment Programme.
39. We have to press on with the task of increasing the area under Irrigation
to avoid fluctuations in production and to increase productivity. Therefore, the outlay
on major and medium irrigation projects including flood control for 1980- 81 is
being stepped up to Rs.1380 crores from Rs.1258 crores last year. The minor irrigation
programme would continue to receive special attention and an outlay of Rs.266
crores has been made for this purpose. This provision will be supplemented by large
financial support from the Agricultural Refinance and Development Corporation.
The additional irrigation potential resulting from all this expenditure is expected to
be 2.5 million hectares.
40. Clean and safe drinking water is essential for improvement of the quality
of life in rural areas. The Central Plan for 1980- 81 provides an outlay of Rs.100
crores as against Rs.80 crores in 1979- 80. Inclusive of the provisions in the States’
Plans, a total sum of Rs.294 crores will be available for this vital programme. It is
expected that by the end of the current year, 35,000 additional villages identified as
problem villages will be having protected water supply arrangements. A part of the
outlay has been earmarked for rigs to be supplied to States for boring wells in drought
affected areas. An additional sum of about Rs.40 crores has been allocated in the
current year to the drought affected States to take up new water supply schemes and
complete those already in hand.
41. The khadi, village and small scale industries sector has the highest
employment potential next to agriculture. The outlay on this sector in the current
year will be Rs.150 crores and additional production during the year is estimated at
Rs.146 crores. The House will recall that the 20-Point Economic Programme has
particularly emphasised the development of the handloom sector in this context. In

9
pursuance of this objective, we propose to set up a national level Handloom
Development Corporation for providing a package of marketing and developmental
assistance for the handloom industry. Provision has also been made for establishing
an institute of Handloom Technology in the North-Eastern region, which is well
known for its exquisite handloom products.
42. The provision for the power sector has been raised by over 11 per cent
i.e., from 11p.2466 crores in 1979-80 to Rs.2745 crores. The work on the four Super
thermal power stations in the different regions of the country is being accelerated.
Total outlay oil the rural electrification programme will be Rs.285 crores in 1980- 81.
-The target in 1980- 81 is the energisation of 4 lakh pump-sets and the electrification
of 25,000 villages.
43. Similarly, an outlay of Rs.473 crores is being provided in 1980-81 as
against Rs.364 crores last year for improving the production of coal (including lignite).
This includes a provision of Rs.92 crores for the Neyveli Lignite Corporation. The
bulk of this allocation is for the second mine project which will produce 4.5 million
tonnes per annum and the second thermal power station with a generating capacity of
630 MW. A production target of 113.5 million tonnes has been set for coal for the
current year as against the actual production of 106 million tonnes in 1979-80.
44. In view of the impact on the balance of payments of the rising prices of
oil there can be no two opinions about the urgency of developing our own oil resources.
The Plan outlay for the petroleum sector for 1980-81 is Rs.837 crores, Rs.215 crores
more than the outlay last year. The Budget provides only Rs.99 crores out of this. This
outlay is for the completion of facilities for Phase III development of Bombay High
and advance action in. regard to Phase IV so as to build up a production capacity of
12 million tonnes per year. It also includes the expenditure required for the development
of the South Bassein Gas field and the gas pipeline to the new fertilizer projects.
On-shore exploratory drilling in the eastern region is to be intensified in view of the
region’s higher potential for hydro carbon discoveries.
45. The Central Plan outlay m chemicals and fertilizers is being raised to
Rs.319 crores in 1980-81 to provide adequately for new gas-based fertilizer plants in
Maharashtra and Assam. In addition, a provision of Rs.20 crores has been made for
fertilizer projects in the cooperative sector.
46. The Central Plan also provides in the current year an outlay of Rs.803
crores for the steel sector as against Rs.600 crores last year. The outlay includes a
provision of Rs.200 crores for raising the capacity of the Bokaro Steel Plant to four
million tonnes per annum and an outlay of Rs.190 crores for the Bhilai Steel Plant for
a similar expansion. Work on the Salem Project will proceed at the required pace with
an outlay of Rs.57 crores. A substantial beginning will be made on the new
Visakhapatnam Steel Plant with a provision of Rs.70 crores. The target of saleable
10
steel in the current year has been fixed at 8.76 million tonnes as against the anticipated
production of 7.22 million tonnes in 1979-80.
47. An outlay of Rs.130 crores is being made in 1980- 81 for the mines
sector. This includes a provision of Rs.10 crores for the new east coast aluminium
project, Rs.28 crores for the Malanjkhand Copper Project and Rs.19 crores for the
intensification of the activities of the Geological Survey of India and the Mineral
Exploration Corporation.
48. A provision of Rs.64 crores has been made for BHEL for its continuing
schemes and for the production of large size turbo generators at Hardwar and the
expansion of boiler manufacturing capacity at Tiruchy.
49. Since port congestion also has figured prominently as a constraint till
recently, a provision of Rs.102 crores is being made in 1980-81 for developing major
and minor ports. However, only a sum of Rs.60 crores has been provided in the
Budget as the rest of the expenditure is being met from internal resources of the Port
Trusts. Bombay, Madras and Cochin are being equipped to handle the anticipated
increase in container traffic. A beginning has been made on the integrated development
of Cochin Port.
50. The Plan outlay for 1980- 81 for the Posts & Telegraphs Department is
Rs.415 crores. It is proposed to provide additional 1.75 lakh lines switching capacity
and 1.7 lakh direct exchange lines and other facilities. The number of post offices in
rural, backward and hilly areas is also proposed to be increased. The norms for providing
telegraph and telephone facilities in tribal areas have been further liberalised to cover
areas having a population of 2500 in a group of villages within a radius of 10 kms.
Provision has also been made for the expansion of manufacturing capacity for switching
equipment.
51. Family Planning programme suffered a serious set back in the past three
years. A revitalisation of this programme must constitute an important element of the
new Five Year Plan, if an improvement of the living conditions of our people is our
goal. A provision of Rs.250 crores is being made in 1980-81 for health and family
welfare. Of this, Rs.140 crores will be for family welfare. The emphasis in the family
welfare programme will be on- educating the people about the desirability of a small
family and providing the necessary technical services on an adequate scale. An attempt
will also be made to provide improved health services in rural areas, eradicate
communicable diseases and provide health education.
52. The development problems of a poor society of 650 million people are
bound to be stupendous. For a solution of these, within a reasonable time, it will be
necessary to harness the forces of science and technology. India is favourably placed
with regard to the development of science and technology in that she has a large pool
of scientific and technical man-power and a vast institutional infrastructure developed
11
over the last thirty years. While our scientific institutions can help to advance the
frontiers of knowledge, it is science based technology which can help to raise production
and productivity. Therefore, an outlay of Rs.116 crores has been provided in the Central
Plan for 1980-81 for science and technology.
53. I will now make a brief mention of a few changes in the non-Plan
expenditure. The provision for Defence expenditure is Rs.3600 crores, Rs.300 crores
more than the provision made in the interim Budget. The provision for export subsidy
has been increased from Rs.330 crores to Rs.355 crores, in view of the need for a
larger export effort.
54. Loans to State Governments, as their share of small savings collections,
are being stepped up from Rs.650 crores in the interim Budget to Rs.715 crores, in
view of the anticipated improvement in these collections. Short term loans to State
Governments for agricultural inputs are also being increased by Rs.50 crores. Besides,
additional provision has also become necessary to meet unavoidable commitments
like additional dearness allowance to Central Government employees, purchase of
heavy water for atomic power plants, etc. However, the above increases in non-Plan
expenditure will be partially offset by reduction in fertilizer subsidy.
55. The Constitution envisages provision of free legal aid by Government in
order to ensure that an opportunity for securing justice is not denied to any citizen
because of economic or other disabilities. The concept of legal aid has also been dealt
with by a Committee on Juridicare headed by Justice P.N. Bhagwati, whose Report
dated 31st August, 1977 has been laid before Parliament. Several States have been
attempting legal aid programmes. It is proposed to coordinate these schemes and also
initiate suitable schemes at the Centre after an examination of the various aspects. A
committee for guiding the legal aid schemes and implementing the same is being
constituted with a Supreme Court Judge as its Chairman. The Budget for 1980-81
makes a provision for this purpose.
56. Taking into account the effect of the above and some other changes, the
total non-Plan expenditure is now estimated at Rs.13,051 crores as against Rs.12,822
crores in the interim Budget.
57. As regards receipts in the current year, at existing levels of taxation
Corporation tax is estimated to yield Rs.11 crores more than what was reflected in the
interim Budget; this improvement is mainly based on the actual trends of collection in
1979-80. On the basis of latest available data on estimated levels of imports and
production during the current year, Customs duties and Union Excise duties are also
expected to yield Rs.40 crores and Rs.108 crores respectively more than anticipated in
the interim Budget. However, these increases will be more or less offset by the recent
decision of Government to withdraw customs and excise duties on fertilizers. Taking
into account States’ share of taxes, net tax revenue at existing rates of taxation is
estimated at Rs.8723 crores as against Rs.8725 crores in the interim Budget.
12
 58. On the basis of the latest indications available, external assistance, net of
repayments, in 1980-81 is estimated at Rs.1252 crores showing an increase of Rs.56
crores over the figures included in the interim Budget. In addition we expect to avail
of a loan of Rs.540 crores from the Trust Fund of the International Monetary Fund in
1980-81 and the Budget assumes credit for this.
59. There is a welcome increase in small savings collections. The estimate
for 1980-81 is now placed at Rs.1100 crores as against Rs.1000 crores in the interim
Budget. Of the increase of Rs.100 crores, Rs.65 crores will accrue to the States as
their share.
60. It has been decided that a part of the investible resources of Life Insurance
Corporation, General Insurance Corporation, and Unit Trust of India should be lodged
with Government in Special deposit accounts to augment resources for financing the
Plan. Budget for 1980-81 takes a credit of Rs.100 crores on account of these deposits.
61. When we are seeking to step up investment in public sector, it is necessary
to adopt an innovative approach to the problem of mobilising resources for sustaining
such investment. As Honourable Members know, private sector companies raise
resources in the form of deposits from the public. Government feels that there is no
reason why public sector companies with competent professional management should
not do so. Accordingly, we have decided to allow selected public sector units to
raise public deposits on the same lines as the companies in the private sector. When
this scheme makes headway, dependence of these public sector enterprises on
budgetary support will get reduced. But I have refrained from taking credit for such
relief at this stage.
62. Taking into account other variations and also the effect of the changes in
the fare and freight rates of Railways and of changes in Posts and Telegraphs tariff, to
which I will refer a little later, the total receipts in 1980- 81 are estimated at Rs.19,827
crores as against Rs.18,980 crores in the interim Budget. Total expenditure is estimated
at Rs.21,467 crores. The deficit at existing rates of taxes will thus be Rs.1640 crores.
PART B
63. I now turn to my proposals in the field of direct taxes. In framing these
proposals, I have borne in mind certain broad considerations, namely, that the rate of
direct taxes should be such as to promote voluntary compliance; that the farmers,
workers and the middle class should be afforded some relief in pursuance of the
commitment in our Party’s manifesto and some stimulus should be provided for raising
the level of savings and investment in the national economy. At the same time, a
concerted attempt should be made to counter certain widely prevalent devices for tax
avoidance through fragmentation of income and wealth.
64. The middle class is among the worst hit by the rise in prices in recent
years. As Hon’ble Members are aware, even skilled workers in the organised sector
13
are now liable to income-tax, at the present level of exemption. in order to afford a
measure of relief to this class of persons, I propose to raise the exemption limit for
income-tax on personal incomes from Rs.10,000 to Rs.12,000. With a view to keeping
the sacrifice of revenue within manageable limits, the nil rate slab of income is being
retained at Rs.8,000. As a result, in cases where the taxable income exceeds Rs.12,000,
the incidence of income-tax, excluding surcharge, will remain at the existing levels,
subject to the grant of marginal relief in cases where the taxable income exceeds the
exemption limit by a small margin. This proposal will benefit more than six lakhs of
income-tax payers.
65. Honourable Members will recall that the rates of income-tax on the personal
incomes were reduced in 1974 on the basis of a recommendation of the Direct Taxes
Enquiry Committee and this process was taken one step further in 1976 when these
rates were again lowered. The reduction in rates had largely fulfiled the expectation
that it would lead to better tax compliance. Unfortunately, the movement in this direction
was reversed under the Janata Government and the rates of income-tax were increased
in stages. I am of the view that the position in this regard should be set right. I
accordingly propose to reduce the surcharge on personal incomes in the case of all
categories of non-corporate taxpayers from 20 per cent to 10 per cent. This will not
only bring down the maximum marginal rate of tax from 72 per cent to 66 per cent but
w111 benefit taxpayers in all slabs of income.
66. In view of the somewhat steep rise in prices of assets, I also propose to
raise the exemption limit for wealth-tax from Rs.1 lakh to Rs.1.5 lakhs with effect
from the current assessment year. In cases where the taxable wealth exceeds this
limit, the tax burden will, however, be retained at existing levels, subject to the usual
marginal relief.
67. Government hopes that these concessions will provide the necessary
inducement to the vast majority of our taxpayers for correct declaration of their incomes
and wealth.
68. I propose to counter some of the more commonly used devices for
tax avoidance.
69. As Hon’ble Members are aware, the separate treatment accorded to Hindu
undivided family in tax laws has been widely used for avoidance of proper tax liability.
I accordingly propose to de-recognise partial partitions of Hindu undivided families
both for income and wealth taxation. Partial partitions made on or after lst January,
1979 will not be recognised for tax purposes and taxes will continue to be levied on
the basis that the existing Hindu undivided family had continued to remain joint.
70. At present, Hindu undivided families having one or more members with
independent income exceeding the exemption limit are charged to income-tax at rates
which are somewhat higher than those applicable in the case of individuals. In order
14
to further restrict the use of Hindu undivided family for the purposes of tax avoidance,
I propose to raise the rates of income-tax in the case of such Hindu undivided families.
The maximum marginal rate of 66 per cent will now apply on the slab of income over
Rs.50,000 and the rates on some of the lower slabs will also be raised to somewhat
higher levels. With these two changes in regard to tax treatment of Hindu undivided
families, I hope that the urge for forming multiple Hindu undivided families merely
for fragmentation of income and reduction of tax liability will be weakened.
71. Honourable Members will recall that the Government had in 1970 taken
several measures to prevent the use of private discretionary trusts as a device for tax
avoidance. Experience, however, shows that these measures have not been fully effective
and the proliferation of such trusts has not been curbed to the desired extent. I, therefore,
propose to tighten the provisions in respect of private trusts. At present, discretionary
trusts are taxed at a flat rate of 65 per cent of their income and 1.5 per cent of their
wealth, or at the rates applicable in the case of individual, whichever is higher. Under
my proposal, such trusts will be charged to income-tax at the maximum marginal rate
and to wealth-tax at the flat rate of 3 per cent or at the appropriate rate applicable in
the case of an individual, whichever is higher. I also propose to make several other
provisions in relation to taxation of ‘private trusts with a view to plugging some
loopholes which have come to the notice of Government. All these provisions will
take effect from the current assessment year.
72. Charitable and religious trusts are sometimes used for acquiring or
maintaining control over business or industry for private ends. In 1975, we had laid
down a pattern for investment of funds of charitable or religious trusts if they were
to continue to enjoy the tax exemption. With a view to enabling such trusts to change
over to the new pattern of investment in a smooth and gradual manner, the law
provided that the new pattern may be adopted before 1st April, 1978. This date was
subsequently extended to 1st April, 1981. Such trusts have, therefore, been given
ample time to adjust to the new policy. I want to put them m notice that this time
limit will not be extended.
73. Our tax laws have always sought to encourage long-term savings through
life insurance, provident funds and other similar instruments. Unfortunately, the efficacy
of the provisions for encouraging savings was impaired last year when the incentives
for savings were drastically reduced. Honourable Members should be glad to know
that I propose to restore incentives for such savings to the pre-1979 budget levels. The
taxpayers will thus be entitled to 100 per cent deduction in respect of the first five
thousand rupees of the qualifying savings, 50 per cent in respect of the next five
thousand rupees and 40 per cent of the balance.
74. As a further measure for promoting savings in the household sector, I
propose to give an option to income-tax payers to retain moneys in their Compulsory
Deposit Accounts beyond the due dates on payment of interest at the existing rate

15
applicable to such deposits. Further, I propose to liberalise the tax exemption in respect
of interest on balances with recognised provident funds. At present, interest on such
funds is exempt from income-tax to the extent it does not exceed one-third of the
salary income of the employee. I propose to remove this ceiling limit.
75. It is essential to promote new investment in industry. At the same time,
the fiscal system should not lead to a bias in favour of capital-intensive techniques.
Keeping these twin objectives in view, I propose to continue the tax holiday in respect
of new industrial undertakings, ships and hotels, but in a modified form. Under my
proposal, tax holiday will be available in respect of new industrial undertakings, ships
or approved hotels with reference to a specified percentage of the income derived
from these sources. In the case of companies, 25 per cent of the profits derived from
these sources will be exempt for a period of seven years. In the case of non-corporate
taxpayers, the percentage of exempted profits will be 20 per cent. In the case of
co-operative societies, the tax holiday will be available for a period of ten years as
against seven years in the case of other categories of taxpayers. This concession will
be available in the case of all small-scale industrial undertakings which go into
production after 31st March, 1981 but before 1st Apr11,1985, that is, till the end of
the new Five-Year Plan period. For other industrial undertakings, the concession will
apply only where they do not produce articles or things listed in the Eleventh Schedule
to the income-tax Act. The concession will also be available in the case of approved
hotels which start functioning or new ships which are acquired during that period.
76. It is necessary to encourage new investment particularly in view of
shortages in several key sectors of the economy. As a special stimulus for new
investment, I propose to allow, in the year of installation, an additional depreciation in
an amount equal to 50 per cent of the normal depreciation on new machinery or plant
installed during the new Plan period. The proposed additional depreciation will not be
admissible in respect of ships, aircraft, road transport vehicles, office appliances or
machinery or plant installed in office premises or residential accommodation.
77. There is a widespread feeling of frustration among the scientific community.
This Government is keenly aware of the contribution which our scientists and
technologists can make to the economic regeneration of India and is determined to
promote research and development activities in a big way. I, therefore, propose to
allow a weighted deduction in an amount equal to 125 per cent of the actual expenditure
incurred on scientific research in any in-house R & D facility where such expenditure
is incurred on a programme approved by the prescribed authority having regard to the
social, economic and industrial needs of India. in addition, I propose to extend the
scope of the existing provision for a weighted deduction on the expenditure incurred
on scientific research under sponsored programmes in approved laboratories so as to
cover the expenditure similarly incurred in in-house R & D facilities of public sector
companies. I have no doubt that the Honourable Members will welcome these
concessions.
16
 78. At present, income-tax payers are required to pay advance tax during the
financial year on the basis of their own statements or estimates. Where the estimated
advance tax is likely to fall short of the tax on current income by more than 33-1/3 per
cent of the estimate, the taxpayers are required to make an upward revision of the
estimates. I propose to reduce this margin from 33-1/3 per cent to 20 per cent in the
case of companies. There will be no change for other taxpayers. This change will
enable us to realise a larger share of the tax due as advance tax and thus have a
favourable impact on Government’s ways and means position in 1980-81.
79. In order to encourage the employment of blind and handicapped persons
in business and industry, I propose to provide for a weighted deduction of one and
one-third times the salary paid to such persons by employers where such salary does
not exceed twenty thousand rupees in a year. Further. I propose to enhance the deduction
currently available in computing the taxable income of blind and handicapped persons
from five thousands rupees to ten thousand rupees.
80. At present, standard deduction in computing the salary income is not
available in the case of pensioners. With a view to affording some relief to pensioners
who are amongst the worst hit by the rise in prices, I propose to extend the benefit of
standard deduction in their case as well.
81. In order to encourage our sportsmen to compete in international events, I
propose to allow a deduction equal to 25 per cent of their foreign earnings if these are
brought into India in foreign exchange. This provision will apply in relation to the
current assessment year and onwards. I also propose to allow higher deduction in
respect of savings made by sportsmen through life insurance and provident funds, etc.
as currently available in the case of authors, playwrights, artists, musicians and actors.
Sportsmen will thus be entitled to deduct contributions made to life insurance and
provident funds up to 40 per cent of their professional income and 30 per cent of the
remaining income, subject to a maximum of Rs.50,000.
82. In 1978, certain restrictions were placed on the deductible amount of
expenditure on advertisement, publicity and sales promotion. These restrictions have
particularly hurt small and medium business. I, therefore, propose to do away with
these restrictions.
83. At present, income from poultry and dairy farming and livestock breeding
is exempt from income-tax upto 33-1/3 per cent of such income or ten thousand
rupees, whichever is higher. I feel that time has come when persons deriving income
from these sources should also contribute a little more to the national exchequer. I
accordingly propose to restrict the deduction in respect of such income to one-third of
such income or fifteen thousand rupees, whichever is less.
84. At present, agricultural property is included in the taxable wealth for the
purposes of the levy of wealth-tax. At the time when agricultural property was brought
17
within the tax net, it was hoped that it would be a potent instrument for mobilising
resources from the affluent section of agriculturists. But our experience of over the
last decade has been most disappointing. The amount realised as wealth-tax on
agricultural property has generally been less than Rs.1 crore per annum. The valuation
of agricultural land has posed difficulties leading to complaints of harassment. As this
tax has clearly failed to achieve its original objective, I propose to discontinue the
levy of Wealth-tax on agricultural property except in the case of owners of tea, coffee,
rubber and cardamom plantations. I am sure that this measure will be widely welcomed
by our farmers.
85. I also propose to make certain amendments in the income-tax Act to
counteract certain court decisions which have resulted in unintended benefit to
taxpayers. The Finance Bill further contains certain proposals for the amendment of
direct taxes which are of minor significance. I will not take the valuable time of the
House in explaining the same.
86. The reduction in rates and other concessions in respect of direct taxes
should ordinarily involve loss of revenue. However, I am of the view that reduction in
rates will lead to significantly improved compliance with tax laws. The legislative
amendments made for countering tax avoidance devices and the changes in the
provisions in regard to advance tax should result in larger accretion of revenue. On a
broad judgement of the overall impact of all the proposals relating to income-tax avid
wealth-tax, I am not assuming any loss of revenue. I recognise, however, that there
may be need for some adjustment in the inter-se shares of Centre and States under
income-tax. Such adjustments will be made in the course of the year in the light of
trends in collections.
87. An upward adjustment of lending rates should moderate the inflationary,
pressures in the economy. I accordingly propose to revive interest-tax in relation to
interest earned by scheduled commercial banks after 30th June, 1980. The scope of
the levy is being extended to cover also interest received by the larger all-India industrial
finance institutions, namely, IDBI, ICICI, IFCI and IRCI. The tax will be levied at the
rate of 7 per cent m the chargeable amount of interest as in the past. This measure will
yield Rs.217 crores in a full year and about Rs.108.5 crores in the year 1980-81.
88. With a view to checking lavish expenditure incurred on accommodation
and entertainment in luxury hotels, I propose to introduce a Bill in the current session
to levy a new tax at 15 per cent on gross receipts of hotels in which the minimum
tariff for a single room is 75 rupees per day. The new levy is proposed to be made
effective from lst September, 1980. This will yield about Rs.12 crores in a full year
and the revenue during 1980-81 will be of the order of Rs.5 crores.
89. I shall now turn to my proposals on indirect taxes. In framing my proposals
I have kept in view the following objectives. To the extent additional resource
mobilization is inescapable, this should be done in such a way as not to enhance the
18
burden on any commodity significantly. Subject to this consideration, the small scale
segment of our industry should be encouraged. Industries with significant employment
and export potential should be provided encouragement through suitable adjustment
of duty structure. The duty burden on some articles of common consumption should
be reduced or totally removed.
90. At the outset I would like to put the Honourable Members at ease by
pointing out that my proposals are modest. I have tried to avoid the usual device of
picking out selected items for new or increased levies ht relatively high rates.
91. For this year, I have sought to spread the effect of the additional taxation
thinly on a wide range of products, taking care to leave out articles of common
consumption. I propose to achieve this objective through the special excise duty which
is even now leviable on all excisable goods at 1/20th of the basic excise duty, but from
which a number of commodities have been exempted. Under my proposal, the special
excise duty will be levied on those items which are at present, exempt from the levy,
at the rate of 1/20th of the effective basic excise duty rates applicable. Certain
commodities will, however, continue to be totally exempt from the levy. Thus there
will be no special duty on motor spirit including naphtha, kerosene, high speed diesel
oil, light diesel oil and liquefied petroleum gas or on coal or electricity. Again, the
special excise duty will not be levied on matches, or on vanspati, or on goods falling
under Tariff Item 68. Where special excise is already leviable at 1/20th of the effective
basic duty, I propose to increase this to 1/10th of the effective basic duty. This increase
will not, however, apply to furnace oil, asphalt, bitumen and tar, petroleum products
not otherwise specified and calcined petroleum coke. Sugar and processed vegetable
non-essential oils will also not be subjected to the increased levy. Cigarettes, which
are at present totally exempt from special excise duty will be subjected to special
excise duty at 1/10th of the basic excise duty rates. These proposals would yield a
revenue of Rs.197.71 crores in a full year. The impact of these proposals relating to
special excise duties will also yield a sum of Rs.16.75 crores in the shape of
countervailing duties on imported goods.
92. Soda ash and caustic soda command a sizable premium in the market on
account of persistent shortages. I propose to mop up a part of this premium by raising
excise duty on these products from 10 per cent to 15 per cent ad valorem. I also
propose to increase the excise duty on starch from 10 per cent to 15 per cent ad
valorem. This step will bring these chemical products on a par with other chemicals
products which, in general, bear excise duty at 15 per cent ad valorem. Synthetic
rubber at present bears duty at the very low level of 5 per cent ad valorem. As a
revenue measure, I propose to raise the excise duty on synthetic rubber from 5 per
cent to 10 per cent ad valorem. Similarly, the rate of excise duty on specified acids is
being raised from 10% to 15% ad valorem. These measures would fetch in a full year,
additional revenue of Rs.18.93 crores.
93. On revenue considerations, I propose to subject molasses to a specific
19
duty of Rs.30 per metric tonne under a separate Item in the Central Excise Tariff
instead of 8 per cent under Item 68 of the Central Excise Tariff at present. The levy is,
however, proposed to be restricted to molasses produced in vacuum Dan sugar factories.
Molasses produced in khandsari sugar units, which goes inter-alia for edible purposes,
is proposed to be exempted. The revenue yield as a result of this proposal is estimated
to be Rs.4.24 crores in a year.
94. I now come to proposals which are designed to provide a higher degree of
protection to certain sectors of indigenous industry. The first proposal relates to audio
frequency amplifiers, an item reserved for the small scale sector. In view of the adverse
effect of imports of this item, I propose to increase the customs duty on imports from
75 per cent to 120 per cent ad valorem. My other proposal relates to imported unexposed
colour positive cinematograph films in respect of which the basic customs duty is
proposed to be raised from 50 paise to Rs.1/- per linear metre to enable the indigenous
public sector unit to withstand competition from imports. I also propose to increase
the countervailing duty on imported computers from 10 per cent to 20 per cent ad
valorem as a measure of affording protection to the indigenous computer industry.
These measures are designed to yield additional revenue of about Rs.1.83 crores in a
full year.
95. I have only one more revenue proposal in the field of indirect taxes. This
relates to passengers’ baggage. As Hon’ble Members are aware, baggage allowances
were substantially liberalised in 1978 and, for the generality of Indian passengers
going abroad for short visits, the allowances consist of Rs.1,000 worth of duty-free
goods and Rs.2,000 worth of goods on payment of duty. Despite this liberalisation,
goods in the nature of baggage continue to be imported by many passengers in quantities
substantially higher than the permissible limits. This is mainly due to the prevailing
craze for foreign goods and the high margin of profit on the sale of these goods in
India. Such cases of import of baggage Items in excess of the permissible limits
necessitate initiation of adjudication proceedings which generally have the effect of
slowing down the tempo of passenger clearance in our international airports. I have
given thought to this problem and I am making two proposals in this regard. The first
is a pure revenue measure of increasing the effective rata-of duty on baggage articles
in excess of the free allowances from 120 per cent ad valorem to 150 per cent ad
valorem. This measure is to come into force immediately and is expected to yield an
additional Rs.2 crores in a full year. The second measure to be brought into force
shortly, provides for the levy of duty at a flat rate of 320 per cent on baggage imported
in excess of the- permissible limits, that is, in excess of what can be passed free or on
a duty of 150 per cent. At present, such articles would be treated as unlicensed imports,
resulting in confiscations, fines and penalties designed to wipe out any profit on their
sale. The increased rate of duty is intended to replace these fines and penalties, without
having to go through the time-consuming process of adjudication. Goods which are
obviously in the nature of trade goods will, however, still attract penal action.
20
 96. I have a few other proposals which are essentially in the nature of
rationalisation measures. The first one relates to aerated waters. In the interest of
simplification. It is proposed to do away with the existing distinction between aerated
waters containing caffeine and those not containing caffeine for the purpose of excise
duty. Instead, it is proposed to levy on all flavoured aerated waters a uniform duty at
40 per cent ad valorem. The revenue effect of the proposal is expected to be negligible.
97. I have given considerable thought to the problems thrown up as a result of
the changes made in the 1979 Budget in the excise duty structure applicable to the
match industry. While the duty advantage enjoyed by the cottage sector obviously
needs to be maintained, the non-mechanised middle sector should not be allowed to
make inroads into the cottage sector. In order to ensure that the benefit of the lower
rate of duty accrues only to the genuine cottage sector units, I propose to confine the
duty concession to match boxes bearing approved labels and sold to or marketed
through the KVIC, State Agencies and registered cooperative societies. At the same
time, I do not find justification for the continuance of the existing limits placed on the
clearances of matches by the cottage sector at the concessional rate of duty. I, therefore,
propose to abolish the existing limit on production by the cottage sector units. I am
confident that this package of measures will result in accelerated growth of the cottage
sector of the match industry.
98. There have been complaints of malpractices in the biri industry by
manufacturers who have been taking advantage of the liberal exemption limit applicable
to the unbranded sector which is at present 60 lakhs of biris per manufacturer per year.
With a view to reducing the possibilities of malpractices, I propose to lower this
exemption limit to 30 lakhs of unbranded biris per manufacturer per year, which will
still leave out of the excise net the really small manufacturer and the self employed
manufacturer. This is not designed as a revenue measure.
99. Some of the provisions in the Finance Bill are aimed at rationalisation
or clearer definition of certain central excise tariff items to remove doubts or
difficulties which have come to notice. The details of these measures may be found
in the Budget papers.
100. I shall now turn to concessions in the area of indirect taxes. The small
manufacturer plays a significant role in our economy. I would like to improve his
competitive position vis-a-vis the large manufacturer and thus widen the entrepreneurial
base of our economy. Only in this way can we check concentration of economic
power. There is already a scheme of excise duty concessions applicable to manufacturers
of 70 excisable commodities, under which clearances upto Rs.5 lakhs in value in a
year have been exempted from duty. I now propose to liberalise this concession in two
respects. First I propose to include two more groups of commodities under the scheme.
These are chemicals, namely, sodium bichromate, bleaching powder, calcium carbide
and artificial and synthetic resins and plastic material. Besides, the coverage is being

21
widened in respect of paper and paper boards. But the second and important concession
which I propose to introduce is that in respect of all the commodities covered by the
scheme, clearances between Rs.5 lakhs and Rs.15 lakhs will bear only three-fourths of
the applicable rate of excise duty as against the normal duty at present. This measure
should benefit a large number of small manufacturers. The revenue sacrifice will be of
the order of Rs.6.50 crores in a full year.
101. Last year’s Budget made a change which affected a substantial number of
small manufacturers of goods falling under the residuary Item 68 of the Central Excise
Tariff. Honourable Members will recall that the quantum of duty-free clearances was
reduced from Rs.30 lakhs to Rs.15 lakhs. I had opposed this change then. As a measure
of undoing the hardship caused to such small manufacturers, I propose to provide for
complete exemption from duty for clearances upto Rs.30 lakhs per annum. In other
words, small manufacturers of goods falling under Item 68 of the Central Excise
Tariff, whose capital investment on plant and machinery does not exceed Rs.10 lakhs,
will be eligible for complete exemption from duty on their first clearances of goods
upto Rs.30 lakhs in a financial year provided their clearances during the preceding
financial year did not exceed Rs.30 lakhs. For the remaining part of the current financial
year, the quantum of clearances eligible for full exemption from duty will be fixed at
a correspondingly lower figure. This concession is expected to cost Rs.2.4 crores in a
full year.
102. Paper and allied products are in short supply in the country and new
investment in this sector has not been readily forthcoming. Much can be done by
smaller units to help in filling the production gap. To encourage them, I propose to
extend a concessional rate of duty of 20 per cent ad valorem as against the present rate
of 30 per cent, to paper and paper board produced by small manufacturers whose
clearances in the preceding financial year did not exceed 300 tonnes of paper and
paper board. This concession will cost a little less than Rs.1 crore in a full year.
103. The electronics industry has considerable employment and export potential.
We have the necessary skills and expertise and these should be harnessed through
appropriate fiscal incentives for development of the electronics industry in a big way.
This is a field which offers great scope to small scale manufacturers. I am, therefore,
proposing some duty concessions in respect of the industry. There will be a reduction
in customs duty on specified items of capital goods such as machines and instruments
required by the electronics industry and not produced within the country. The customs
duty on such items will be reduced from the present levels of duty (which in some
cases are as high as 89% ad valorem) to a total of 25% ad valorem. Similarly, I also
propose to reduce the customs duty on specified raw materials and components required
for the electronics industry from their present levels (which in some cases are higher
than 200% ad valorem) to 45,9 ad valorem plus countervailing duty where an excise
duty is leviable under Item 68. These two concessions will cost the exchequer Rs.4.7
crores in a full year.
22
 104. The experience of other countries shows that the growth of consumer
electronics facilitates in due course the development of other sophisticated lines of
production in electronics. Television is a powerful medium of communication and
education. With a view to enabling a. large number of people to get the benefit of this
medium, I propose to reduce the excise duty on cheaper priced T.V. sets from 15% ad
valorem to 10% ad valorem, and to effect a corresponding reduction in the duty on
other T.V. sets from 30% to 25% ad valorem. These concessions would entail a revenue
sacrifice of Rs.1.5 crores in a year.
105. Radio is an equally powerful instrument of education and entertainment
and is more widely in use. Government considers that single and two band radio sets
should be popularised in rural areas. The licence fee m such sets has proved to be
irksome and inhibits purchase of radio sets by the rural folk. It is, therefore, proposed
to abolish the fee in respect of single and two band radio sets including transistor sets.
This measure, which I am sure will be widely welcomed, will cost Government about
Rs.4 crores.
106. Our computer industry is still in its infancy, compared with those of other
countries. In order to provide an additional incentive for indigenous production and
improvement, I propose to reduce the excise duty m indigenously manufactured
computers from 25% to 20% ad valorem.
107. Ship building is a high priority industry and has an important part to play
in promoting economic self reliance. The Indian ship building industry is finding It
increasingly difficult to face competition from foreign shipyards. I, therefore, propose
to extend full exemption from excise duty to ocean going vessels built in Indian
shipyards. This relief would cost about Rs.5 crores in the current financial year.
108. Honourable Members would be aware that Government has been following
the practice of bringing down the import duty on selected machinery items having no
indigenous angle to 25 per cent ad valorem as a measure of reducing capital costs in
industries. Carrying this process further, I propose, this year, to reduce the import duty
to 25 per cent ad valorem on twelve more items of capital equipment. These include
five Items of machinery used in the printing industry, such as High speed Letter press
rotary and off-set rotary printing machines, Mono/Lino Type Casting machines, etc.
These concessions would entail a revenue sacrifice of Rs.1.84 crores in a full year.
109. The cost of high pressure gas cylinders constitutes a significant portion of
the total capital outlay required by the Gas industry. With a view to reducing, at least
in part, this capital outlay, I propose to extend complete exemption from customs duty
on steel tubes imported for fabrication of high pressure gas cylinders. I also propose
to reduce the excise duty m such cylinders from the existing level of 15 per cent, to 8
per cent ad valorem. which is the duty level applicable under Item 68. These two
measures, taken together, are estimated to cost Rs.1.89 crores in a full year.
23
 110. I have a proposal of general application, which is intended to facilitate
manufacturers of excisable goods, using inputs on which excise duty is leviable. In
order to give relief in such cases, two procedures are in vogue at present. One is what
is called the set-off procedure The other is the proforma credit procedure under rule
56A of the Central Excise Rules. The proforma credit procedure is generally recognised
to be more beneficial and less Irksome to the manufacturers. I, therefore, propose to
replace the existing concessions based on the set-off procedure by similar concessions
based on the proforma credit procedure. I am sure that this measure will be welcomed
by the industry.
111. It is a little painful for me to remind Honourable Members that last year’s
budget had increased excise duty m a number of articles of common consumption to
a significant extent. I propose to reverse this trend. Thus -
- Specified life-saving drugs, 30 in number, will be fully exempted from
excise duty. The list will be kept under periodical review with a view to adding more
items as may be warranted;
- Controlled cloth is meant for the weaker sections of society and its cost
should be as low as possible. I, therefore, propose to exempt controlled cloth from
excise duty.
- Cotton and Cotton-viscose blend hosiery consisting of Items like banians
are of relatively low value and these are now subject to excise duty at 8 per cent. I
propose to exempt them fully from excise duty.
- Cycles are the poor man’s conveyance. I, therefore, propose to totally
exempt cycles and cycle parts falling under Item 68 from excise duty.
- Sewing machines, which are indispensable to the housewife and also enable
the weaker sections to earn a living, will also be fully exempted from excise duty.
- Pressure cookers which take the drudgery out of the house wife’s daily
tasks and save fuel now attract duty at 15 per cent. I propose to reduce it to 10 per
cent.
112. I also propose to make substantial reductions in excise duty m some other
Items of everyday use.
Accordingly-
- Excise duty on cheaper varieties of toilet soap will be reduced from 10
per cent to 5 per cent;
- Excise duty on tooth paste will be reduced from 20 per cent to 10
per cent;
- Vacuum and gas-filled bulbs not exceeding 60 watts will have the duty
reduced from 15 per cent to 10 per cent.

24
 113. I am sure these substantial concessions, which would cost the exchequer
approximately Rs.15 crores in a full year, will be welcomed by Parliament and by the
public. I also hope that industry and trade will play fair by the consumer and pass on
the benefit of these duty reductions to the consumer.
114. Our Party’s election manifesto has referred to the need to encourage
dieselisation of taxis. In fulfilment of this commitment and with a view to giving an
incentive for taxi-owners to go in for dieselisation, I propose to extend full excise
duty exemption to diesel engines used for conversion of petrol driven taxis.
115. My second proposal is aimed at giving relief to the cycle rickshaw driver.
Powered cycle rickshaws are already exempt from excise duty. To encourage
motorisation of non-powered cycle rickshaws. I propose to extend full duty exemption
for internal combustion engines used for this purpose. I am sure Honourable Members
will welcome this measure, as a visible sign of our keenness to reduce physical strain
and at the same time encourage this relatively cheap means of transport.
116. Before I leave the field of indirect taxes, I have a major declaim of policy
to announce. For the past couple of decades, there has been a persistent public demand
for the setting up of an independent Appellate Tribunal for customs and central excise
matters, somewhat similar to the set-up on the Direct Taxes side. This demand has
recently been endorsed by the Estimates Committee of Parliament. Government has,
in the past, not been in favour of such a system, as it was felt that it would not be
appropriate in the case of indirect taxes, and that the present departmental machinery
was in fact adopting an objective approach. I think a time has come when we should
gracefully accept the common view, which is based m the dictum that justice should
not only be done but should also seem to be done. It is in this spirit that provision has
been made in the Finance Bill for setting up an Appellate Tribunal to hear appeals in
respect of customs, central excise and gold control matters. This Tribunal will be
independent of the executive machinery charged with the responsibility of day-to-day
administration of revenue laws. I have no doubt that this measure will meet with the
whole-hearted approval of Parliament and of trade and industry.
117. My taxation proposals will yield a sum of Rs.223. 22 crores in a full year
in central excise duties and Ra.39.58 crores in customs duties. The reliefs I have
announced add up to Rs.34.75 crores m the central excise side and Ra.7.93 crores m
the customs side. The net yield is, therefore, Rs.188.47 crores from Central excise
duties and Rs.31.65 crores from customs duties. The accrual to the Central exchequer
in a full year will be Rs.144.85 crores and the share of the States will be Rs.75.27
crores.
118. Where changes are proposed to be made by notifications, effective from
the 19th June,1980, copies of such notifications will be laid on the Table of the House
in due course.

25
 119. I wish to say now a few words on behalf of my honourable colleague, the
Minister of Communications. Payment of dearness allowance and sanction of bonus
linked to productivity to the staff of the Posts and Telegraphs Department have increased
the working expenses of the Department. It has, therefore, become necessary,-to increase
the tariffs on a few selected services. In making tariff revision proposals, Government
has carefully avoided revision of charges for such services as are generally used by
the common man. There will be no increase in the price of post cards and inland
letters. The tariff for letters is, however, being increased from 30 paise to 35 paise at
the lowest slab. The rate for parcels will be stepped up from Rs.1.50 to Rs.2.00 for
every 500 grams. The charges for installation and shifting of telephone connections
are also being increased. Local calls beyond 5,000 cans in a quarter will be charged at
50 paise per call as against 40 paise at present. A memorandum showing the proposed
tariffs is being circulated along with Budget papers. It will be seen that the charges for
the bulk of postal and tele-communications services have been left untouched. The
changes would take effect from a date to be notified after the Finance Bill is passed
by Parliament. The proposed tariff revisions are estimated to bring in an additional
revenue of Rs.27.10 crores per annum. The additional revenue during the year 1980-81
would be of the order of Rs.13 crores and has been taken into account in estimating
the revenues of the Posts and Telegraphs.
120. The tax effort net of reliefs proposed in the Budget will m the whole bring
in about Rs.282 crores for the current year, of which Rs.223 crores will accrue to the
Centre. There will be a residual deficit of Rs.1417 crores which I propose to leave
uncovered. This deficit is only a little over half the deficit of last year. It is my
judgement that a deficit of this order will not have a significantly adverse impact m
the economy. If the monsoon turns out to be normal and if we continue the sound,
economic policies already initiated, there is every hope that there will be an appreciable
improvement in agriculture and industrial production resulting in a significant growth
of GNP. We shall also pursue a responsible monetary policy so that expansion of bank
credit for unproductive or speculative purposes is held in check.
121. Sir, within the constraints imposed by the difficult economic situation
inherited by the present Government, I have endeavoured my best to provide relief to
those who deserve it most. But since reliefs can only be palliatives and the real need
of a poor society is growth, I have tried to impart a judicious stimulus to investment.
With the higher levels of investment, in the public sector as well as the private sector,
and its particular sectoral distribution, both production and employment should register
a substantial increase. This Government has a special responsibility towards the weaker
sections of society who have so enthusiastically supported it. The Budget seeks to
protect them through special programmes designed to promote their wen being. It is
also our firm resolve that no matter how difficult the economic situation is, the minimum
basic needs of consumption of the poorer sections and the middle classes will be met
26
through a reinvigorated public distribution system. With a strong and cohesive
Government it should be possible to utilise fully the existing production potential.
122. My Budget represents a modest contribution to the process of restoring
the country’s economy to the path of stability, growth and social justice. Its success,
however, depends upon the cooperation of all people who work in the fields or factories,
power stations or ports, railways or coal mines. The people of this country have high
hopes about the ability of the present Government to achieve these goals and I am sure
will be prepared to give their whole hearted support in this task. It should be the
common endeavour of all of us, rising above partisan prejudices and passions to
harness the people’s enthusiasm for the tasks of development.
(June 18, 1980)

27
 SPEECH OF SHRI R. VENKATARAMAN MINISTER OF FINANCE
INTRODUCING
THE BUDGET FOR THE YEAR 1980-81 (interim)

Sir,
I rise to present the interim Budget for the year 1980-81.
2. The massive mandate that our Party has received from the people of India
is clearly a mandate to pursue with renewed vigour various programmes for social and
economic development initiated by us before 1977 but which were disrupted during
the thirty-three months of the Janata-Lok Dal rule. Instead of building further the
strong and resilient economy which we had left behind in 1977, they have allowed it
to drift, through inaction and mismanagement, into stagnation. Our commitment to
repair this damage, to work tirelessly for rapid economic development, for removal of
poverty and social inequalities and for the implementation of the 20-point programme
is firm and irrevocable. However, the state of the economy that we have inherited
from the Janata-Lok Dal rule of thirty-three months is such that we shall need some
more time to assess the damage suffered by the economy and to evolve a coherent
medium-term strategy for revival and restoration of its health. This, of course, does
not mean that we will not take effective steps to deal with the pressing short-term
problems until such a consistent medium-term strategy has been evolved. Later in my
speech, I shall outline briefly the various steps which our Government has taken in the
last eight weeks to restore a measure of confidence and stability to the economy.
Clearly, there is need to adopt many other measures to get our country moving again
along the cherished path set out by Gandhiji and Jawahar Lal Nehru. For the outline
of such an integrated approach, I plead with the House to wait until I come forward
with the regular Budget for 1980-81 in a few weeks.
3. The interim Budget and the Demands for Grants being made available to
Honourable Members reflect by and large the continuation of on going expenditure
sanctioned earlier and certain minimum unavoidable changes. They do not reflect
adequately the present Government’s policies and programmes because since we took
office we have not had enough time to formulate these. We feel that the Plan framed
by the previous Government is inadequate to fulfil the policies and programmes set
out by us in our election manifesto and on the basis of which we have received a
massive mandate. We have therefore to wait till the priorities and plan outlays for
1980-81 are finalised by the Planning Commission to be appointed. I shall come to the
House again with a comprehensive programme when these decisions have been taken.
1
 4. In the current year the economic situation has deteriorated greatly. The
year 1979-80 is likely to record a decline of 1 to 2 per cent in Gross National Product.
Agricultural production is expected to show a decline of something like 8 per cent and
industrial production will be stagnant if not marginally lower than last year. The growth
in key sectors like power, coal, steel, cement and fertilizers will be wholly inadequate
to meet the needs of a growing economy. Prices have risen by about 20 per cent in the
course of the current financial year. In particular, prices of some of the Items of
common consumption such as sugar, gur and khandsari, potatoes, onions and edible
oils have recorded very sharp increases. This pressure on prices is as much due to
domestic supply constraints as to the large budget deficit. The trade gap is going to be
vastly larger because of the increase in prices of imports like petroleum and petroleum
products and because of the larger imports of commodities like steel, cement due to
poor domestic production. On the other hand, exports have not grown adequately
because of lack of a* clear policy.
5. It will be easy to make the drought in the last kharif season an excuse for
the deterioration in the economic situation in 1979-80. It is true that the drought was
serious in large parts of the country in the current season but me would have thought
that the new agricultural strategy initiated by our party in the late 1960s could have
enabled Government to minimise the impact of the fluctuations in weather conditions.
Had power production been higher and had arrangements for supplying seeds, fertilizers,
diesel, etc., been more effective, It would have been possible to insulate the economy
to a much greater extent against the kind of decline in production that has occurred in
the last kharif season. A Government which takes credit, as the previous Janata
Government did, for the good performance in 1977-78 and 1978-79 merely underscores
Its dependence on good weather and its lack of effective policy instruments. And
when the first test came in the form of a drought, the Government showed the
bankruptcy of its policy and failed miserably to protect the common people. What has
come to their rescue as well as to that of the poor people of the country has been the
procurement and public distribution system that our party had built up earlier and the
large stocks of foodgrains that it had left to them. We must be thankful to the previous
Government for the small mercy they had shown in not dismantling the public
distribution system completely.
6. The mismanagement of the economy in the past three years can be seen
most vividly in the crisis situation which prevails in the infrastructure sectors. Although
large additions to power generating capacity have occurred year after year as a result
of the decisions taken by our Party’s Government earlier, the ability to generate power
from this additional capacity has been very poor. Poor management, law and order
problems, disturbed industrial relations - all of which could have been set right had
Government shown the necessary determination and imagination - have come in the
way of higher production. Coal production has remained virtually stagnant for the last
four years. Railways on the other hand have been carrying a continuously declining
2
volume of traffic. We have had to witness the unedifying spectacle of the Power
authorities blaming the Railways and Coal authorities for their deficiencies and these
in turn blaming the Power authorities and each other for their failures. This dismal
record has, only to be compared with the performance in the earlier years to realise
what an effective policy can achieve.
7. I have referred to the developments in the past three years not with a view
to apportion blame or trade accusations but merely to highlight the historical setting
in which our current problems have to be viewed. This is clearly not the time for
indulging in mutual recriminations. The real challenge is to evolve a viable national
consensus for solving the formidable problems now facing the country. In this vital
national task, we seek the active cooperation of all sections of this House. I would like
to take this opportunity to share with the House the manner in which we are tackling
the present grave economic crisis. Since we assumed office, systematic efforts are
being made to improve the functioning of vital infrastructure sectors such as coal,
power, ports and Railways. A Cabinet Committee on industrial infrastructure has been
able to identify some short term solutions designed to improve the working of these
vital sectors. Arrangements for supply of coal to thermal power plants have been
streamlined and these are beginning to show positive results. Efforts are being made
to improve the capacity utilisation of thermal plants so as to neutralise to the maximum
extent the shortfall in the generation of hydro power. The Railways are gearing
themselves to carrying out their tasks with greater speed and efficiency. I am confident
that the measures which we have taken will have a favourable impact on the growth
of industrial production, on the utilisation of available capacities and in moderating
pressure on prices.
8. Apart from the functioning of infrastructure sectors, Government has been
greatly worried about the pressure m prices. We have inherited a highly explosive
inflationary economy. Despite several handicaps, vigorous efforts are now being made
to augment supplies of essential commodities like vegetable oils, kerosene and diesel
and to ensure their equitable distribution. Through a more effective functioning of
public distribution system and systematic efforts to curb hoarding and black-marketing,
we are trying to contain the pressure on prices of commodities which are in short
supply. A medium term strategy is being evolved to encourage higher production of
consumer goods like sugar, cement, paper, etc. in the background of world wide
inflationary pressures, our task of stabilising domestic prices at a reasonable level is
no doubt far from easy. However, Government is determined to use all available
instruments to moderate pressure m prices of essential commodities. Fiscal and
monetary policies will be so designed as to assist in control of inflation without affecting
essential investments in key sectors of the economy.
9. While in the limited time that we have had at our disposal since we assumed
office our attention has of necessity been focussed largely on pressing immediate
problems, we are beginning to evolve a comprehensive integrated strategy for achieving
3
our cherished social and economic objectives. Since the bulk of Indian population
lives in rural areas, development of agriculture and allied activities must receive high
priority in our plans for social and economic transformation of our economy. It was in
pursuit of this objective that our Party’s election manifesto in 1977 had committed us
to the early establishment of an Agricultural Development Bank as an apex institution
for meeting the credit needs of our farmers. 1 am glad to report to the House that the
Reserve Bank of India is now actively engaged in drafting the legislation of the proposed
National Bank for Rural Development. It was again our Government which in February
1977 had set for the public sector banks a minimum target of 33.3 per cent of total
advances going to the hitherto neglected sectors of agriculture, village and small
industries. Earlier this month, I have reviewed with the Chairman of public sector
banks the performance of the banking system in achieving this target as well as the
role that the banking system can play in accelerating the implementation of the 20-point
programme. I am glad to report that public sector banks have agreed to accept the
obligation of raising the share of priority sectors in their total lending to 40 per cent
in the next five years. This will greatly help in strengthening the productive base of
rural India. in meeting the credit needs of rural areas, priority attention will be given
to requirements of small and marginal farmers and landless labourers.
REVISED ESTIMATES FOR 1979-80
10. I now turn to a brief explanation of the Revised Estimates for 1979-80.
11. A deficit of Rs.1382 crores was estimated in the Budget for 1979-80.
Certain decisions taken by the previous Government and other post-budget
developments have severely affected the budgetary position of the Centre in the current
year. As the Honourable Members are aware, supplementary demands involving
additional expenditure of Rs.1300 crores had to be presented in the last session of
Parliament. I will, therefore, not like to take the time of the House by dwelling at
length on the various items of additional expenditure. I shall confine myself now only
to certain major areas of increases.
12. Expenditure on food subsidy in the current year will be Rs.600 crores i.e.
Rs.40 crores more than the Budget estimate of Rs.560 crores-mainly due to increase
in the procurement prices of wheat and paddy.
13. Owing to increase in the cost of imported fertilizers, increased volume of
fertilizer imports and higher handling costs, the subsidy on imported fertilizers will be
Rs.176 crores wore than the Budget estimate of Rs.144 crores. Similarly, due to higher
cost of production, the subsidy on indigenous fertilizers will be Rs.19 crores more
than the Budget estimate of Rs.304 crores.
14. The provision for export subsidies including loss on sugar exports will be
Rs.31 crores more than the Budget estimate of Rs.332 crores.
15. Defence expenditure in the current year is estimated at Rs.3273 crores
against the Budget provision of Rs.3050 crores.
4
 16. Non-Plan assistance to State Governments had to be stepped up in
the current year by Rs.120 crores to enable them to meet the expenditure on
relief for natural calamities and drought. Loans to State Governments against net
collections of small savings will also be Rs.225 crores more than the Budget
estimate of Rs.400 crores.
17. Other post budget developments include supply of foodgrains to
Bangladesh involving an expenditure of Rs.29 crores, and ‘on account’ payment
of Rs.30 crores to State Governments in connection with the General Elections to
Lok Sabha. Besides, the decisions taken in March 1979 for liberalisation of
dearness allowance formula and pensionary benefits have also added to the
expenditure of various Government departments, including Defence, Railways
and Posts and Telegraphs.
18. So far as Plan expenditure is concerned, it is a matter of regret that the
implementation of many of the Central Plan schemes has not been satisfactory.
Consequently, the budgetary support for Central Plan is estimated to be less by as
much as Rs.332 crores. However, the provision for ‘food for work’ programme has
been stepped up by Rs.300 crores during the course of the year as a small provision
of only Rs.50 crores had been made for this programme initially, and consequently,
the net shortfall in the Central Plan expenditure will be Rs.32 crores.
19. The Central assistance for States’ and Union Territories’ plans had to be
stepped up by Rs.194 crores during the current year. Of this increase, Rs.125 crores is
by way of advance Plan assistance to States affected by drought.
20. Coming to receipts, owing to poor performance of the economy and the
general decline in economic growth, the revenues of Central Government from
corporation tax in the current year are expected to register a sharp decline of Rs.150
crores compared to the Budget estimate of Rs.1530 crores. ‘The revenues from Union
excise duties have also been adversely affected largely by the decision of the previous
Government to withdraw excise duty on coal and reduce the duties on petroleum
products. The excise duties are estimated to register a shortfall of Rs.183 crores in the
current year compared to the Budget estimate of Rs.6008 crores. However, collections
of income-tax and receipts from customs duties are expected to yield Rs.498 crores
more than the Budget estimate of Rs.3638 crores, Centre’s share of net revenue is now
estimated to be Rs.199 crores more than the Budget estimate of Rs.8020 crores.
21. The near collapse of infrastructure and the adverse economic factors have
severely affected the working of various public sector undertakings. Consequently,
not only their profitability has been eroded, but their capacity to meet their repayment
and interest obligations to Government has also been undermined. A shortfall of nearly
Rs.260 crores on this account is anticipated in the current year.
22. The slow pace of disbursements in certain externally aided projects and

5
delay in getting reimbursement for the Kudremukh Project from the Iranian authorities
are likely to result in a shortfall of Rs.219 crores in net external aid during the
current year.
23. The increase in prices of imported crude and petroleum products has also
led to erosion of the receipts and deposits with Government relating to oil products of
over Rs.300 crores.
24. These deteriorations in non-tax receipts have, however, been partially offset
by a larger market borrowing of Rs.111 crores over the Budget estimate of Rs.1850
crores and estimated higher small savings collections of Rs.925 crores as against the
Budget estimate of Rs.650 crores.
25. Taking these and other variations into account, the budgetary deficit in
the current year is estimated at about Rs.2700 crores.
BUDGET ESTIMATES FOR 1980-81
26. I shall now say a few words about the interim Budget for 1980-81.
27. In the Budget for 1980-81 which is now being presented for purposes of
vote on account, budgetary support for Central Plan is placed at Rs.4500 crores.
Government is considering revamping of the present scheme of ‘food for work’ to
make it a more potent instrument of employment generation. For the present, therefore,
a provision of only Rs.70 crores is being made in the Budget for the existing scheme.
Taking this also into account, budgetary support for Central Plan will be Rs.4570
crores against the Budget estimate of Rs.4411 crores for 1979-80.
28. Extra budgetary resources for the Central Plan are estimated at Rs.2003
crores next year as against Rs.1604 crores in the current year’s Budget. The total
Central Plan outlay for next year is thus placed at Rs.6573 crores as compared to
Rs.6015 crores in the current year’s Budget.
29. Central assistance for States’ and Union Territories’ Plans, including the
schemes of the Rural Electrification Corporation and assistance under ‘income
Adjusted Total. Population’ formula, is plated at Rs.2823 crores as against Rs.2697
crores in the Budget for 1979-80. The Planning Commission has in consultation
with the representatives of State Governments and Union Territories settled the outlays
for their Annual Plans for 1980-81. A reasonable step-up in the outlays has been
provided so that the tempo of development may be maintained. The States have
assured the Planning Commission that they will keep the resources at the assessed
level and adhere to the commitments made by them to mobilise additional resources
to finance these outlays.
30. Provision for food subsidy in 1980-81 is Rs.600 crores, i.e. at the same
level as in the Revised estimate for the current year. Pending a clearer picture of the
volume of imports needed to supplement domestic production, subsidy on imported
and indigenous fertilizers next year is placed at Rs.600 crores.
6
 31. Defence expenditure is estimated at Rs.3300 crores at this stage against
Rs.3273 crores in the current year.
32. Provisions for other non-Plan expenditure have been made keeping in
view the need for utmost economy.
33. The Centre’s share of tax revenues at existing rates of taxation is estimated
at Rs.8725 crores next year, as against Rs.8219 crores in the Revised estimate for the
current year.
34. Receipts from market borrowings are estimated at Rs.2500 crores against
Rs.1961 crores in the current year. Small savings collections are estimated to fetch
Rs.1000 crores as against Rs.925 crores in the current year. External assistance, net of
repayments, is estimated at Rs.1196 crores as against Rs.918 crores in the Revised
estimate of the current year.
35. The total receipts of the Central Government in 1980-81 are estimated at
Rs.18980 crores. The total expenditure in the next year will be Rs.20215 crores. Overall
budgetary gap at the existing rates of taxation will thus be Rs.1235 crores.
36. I propose to introduce today a Finance Bill which seeks to continue the
existing rates of income-tax for the financial year 1980-81. However, I have also three
proposals of a non-controversial nature for the amendment of the income-tax Act. I
shall now briefly explain these proposals.
37. Some State Governments have set up statutory corporations for the
promotion of socio-economic interests of members of the Scheduled Castes and the
Scheduled Tribes. I propose to exempt from income-tax the income of all statutory
corporations or bodies, associations or institutions wholly financed by the Central or
a State Government, established for promoting the interests of the members of the
Scheduled Castes and the Scheduled Tribes.
38. As the Hon’ble Members are aware, residents of Ladakh were exempted
from payment of income-tax upto and including the assessment year 1979-80 in respect
of income accruing or arising to them from any source in that district or outside India.
I propose to continue the tax exemption for a further period of three years.
39. Under an existing provision, awards for literary, scientific and artistic
work or attainment, instituted by the Central Government or by any State Government
or approved by the Central Government, are exempt from income-tax. I propose to
extend this tax concession to approved awards for outstanding work in alleviation of
the distress of the poor, the weak and the ailing. Hon’ble Members will be glad to
know that this provision will set at rest doubts about the taxability of the Nobel Prize
awarded to Mother Teresa in recognition of her service to suffering humanity.
40. There is no change in the rates of customs and Central excise duties.
However, provision has been made in the Finance Bill for the continuance of the
auxiliary duties of customs and special duties of excise at the existing rates for the
year 1980-81.
(March 11, 1980)

7
 SPEECH OF SHRI CHARAN SINGH DEPUTY PRIME MINISTER
AND MINISTER OF FINANCE INTRODUCING THE BUDGET
FOR THE YEAR 1979-80

Sir,
I rise to present the Budget for the year 1979-80.
2. The Economic Survey for 1978-79 placed before the House a few days
ago presents a detailed account of the trends in the economy for the current year. I
shall therefore confine my observations to a few salient aspects of the economic situation
in the context of which the budget has been formulated.
3. The performance of the Indian economy during the current year is a matter
for great satisfaction. Agricultural production has continued at a record level for the
second year in succession. This achievement is not due entirely to favourable seasonal
factors. The increased production is in good part also the result of increased availability
of irrigation and fertilizer, use of improved seeds, increased research and extension
activity and extended price support and procurement operations. It is also in a great
measure due to the energy and toil of minions of farmers who have undertaken
investment, absorbed new technology, adopted new cultural practices and contributed
to the general good by growing two ears of corn in place of one.
4. So long as there is great poverty and unemployment in the country,
particularly in the rural areas, and agriculture has the largest potential for generating
employment, and providing purchasing power to the large majority of the people,
there can be no let up in the task of agricultural improvement. Our objective should be
to raise productivity further by using improved technology and more inputs. This
requires larger investment, greater effort in a variety of ways and better organisation.
5. Industrial production is also expected to register an increase of 7 to 8 per
cent in the current year. This is due to an improvement in the production of a large
number of industries. In particular, the increase in production has been sharp in
electricity generation, food industries, electrical and non-electrical machinery, metal
products, textiles and transport equipment. The overall supplies of basic materials like
cement, fertilizer, steel and non-ferrous metals were augmented by sizable imports so
that shortages did not act as a constraint on domestic growth.
6. If this rate of agricultural and industrial growth is to be maintained in the
coming year, supplies of basic goods should increase through larger investment. That
is why the Government is pushing ahead with a large investment programme in
irrigation, electricity generation, cement, steel, fertilizers and transport.
1
 7. Price stability which this Government achieved last year has continued
through the current year as well. The wholesale price index on 10th February, 1979
was only 0.9 per cent above the level a year earlier and 0.4 per cent above the level
two years earlier. Such a record of price stability in a period in which national income
growth was about 11 per cent would be difficult to find elsewhere in the world. This
has been brought about by well-conceived supply and demand management policies.
The role of increased agricultural and industrial production and a liberalised import
policy in vital areas needs to be underscored in this regard. Simultaneously, a monetary
policy restricting the flow of credit for speculative activities in the economy and
directing the credit towards productive sectors has been pursued.
8. An expanding investment programme needs an increasing volume of
resources. But resource mobilisation does not seem to match requirements. Government
finds that there is a tendency on the part of various sectors of the economy to look
upon tax concessions as the only way of improving their sagging fortunes. It must be
realised that If the resources needed for development are to be raised without inflation,
there will have to be a greater readiness on the part of people who can bear further
taxation to shoulder additional burden.
9. Another instrument of resource mobilisation has also not yielded the results
expected. The surpluses of public sector undertakings have in 1977-78 been significantly
lower than anticipated. It looks as if the results may, not be appreciably better in the
current year as well. Considering that total investment in these enterprises is of the
order of Rs.12,800 crores, this is disappointing indeed.
10. Savings in the economy have to increase if a rising level of investment is
to be financed in a non-inflationary way. This can be achieved, among other things, by
cutting down wasteful expenditure whether in Government or in the private sector.
Economy in Government expenditure can be brought about by restricting non-
development expenditure, particularly such subsidies as do not serve any specific
social or economic purpose. Private saving should be raised by a ruth-less curbing of
luxury expenditure and adoption of a more austere life style in tune with our traditional
values and the hard facts of our economic life.
11. Exports which had recorded dynamic growth in the three years prior to
1977-78, have actually shown a decline in the first eight months of the current year.
This disturbing trend is due to a number of factors, including restrictions on some of
our more dynamic items in importing countries recessionary tendencies in the developed
world and increased domestic demand for certain exportables. It is most essential that
we reverse the declining trend in total exports by pursuing an active promotion policy.
12. In addition to stressing the promotion of exports of manufactured goods,
we should not lose sight of the fact that as a large agricultural country there is need to
pursue an active policy with regard to the promotion of exports of agricultural products.
A policy which will increase exportable surpluses of such items as fruits, vegetables,
2
certain types of vegetable oils, oil extractions and spices, needs to be pursued vigorously
because It will not only raise the incomes of the farmers but also generate additional
employment in the rural areas.
13. The rising level of imports shows that the process of utilisation of reserves
for development has begun. In addition to imports of a consumer good like edible oil,
those of developmental goods like steel, cement, fertilizer, non-ferrous metals have
increased substantially. Import policy has been liberalised and, wherever necessary,
import duties have been reduced or waived altogether in order to facilitate imports of
capital goods, spare parts, components and raw materials and thus remove constraints
on production and investment.
14. The rate of growth of the country’s foreign exchange reserves has slackened
in the current year. This is partly the result of the trends in exports and imports and the
slowing down of the growth of invisible earnings. It does not look as If we can expect
a continuous growth in these If account is taken of the various national and international
developments. Therefore, though the level of our reserves is high at present, there is
need to husband them carefully.
REVISED ESTIMATES FOR 1978-79
15. Let me now take up the Revised Estimates for 1978-79.
16. On the expenditure side there have been a number of post-budget
developments which cast additional burdens on the Centre in the current year.
17. As the Hon’ble Members are aware, some of the State Governments
had, in recent years, been persistently overdrawing in excess of their borrowing
entitlements from the Reserve Bank. To enable the States to start with a clean slate
and avoid overdrafts in future, we had decided to extend special loans to the States
to clear their overdrafts as at the end of 1977-78. The payments on this account
amount to Rs.555 crores. Assistance to the States for gratuitous relief to people
affected by natural calamities had to be increased to Rs.40 crores from the original
provision of Rs.10 crores.
18. To give the farmers a higher return on their produce, the procurement
prices of rice, wheat and coarse grains were increased during the year involving
additional expenditure of about Rs.42 crores. After allowing for certain arrear payments
to the Food Corporation and larger receipts following an increase in issue price of
wheat from December 1978, expenditure on food subsidy during the current year will
be Rs.114 crores more than the Budget Estimate of Rs.466 crores.
19. Expenditure on export assistance will be Rs.130 crores higher than the
Budget provision of Rs.251 crores due partly to substantial spill over claims of previous
year. Loss on sugar exports of 8.5 lakhs tonnes in 1978 will be Rs.23 crores more than
the original provision of Rs.10 crores.
3
 20. Non-Plan assistance on a larger scale than what was anticipated at the
Budget stage had to be provided to a number of public sector units which experienced
financial difficulties. Coal India will be requiring assistance of Rs.173 crores, against
the provision of Rs.90 crores. Certain other units like the Fertilizer Corporation and
National Textile Corporation also need substantial additional assistance. As a result,
non-Plan loans to the public undertakings will be Rs.159 crores more than the Budget
Estimate of Rs.250 crores.
21. As small savings fetched more than what was anticipated, loans to State
Governments towards their share of collections will also be Rs.165 crores more than
the Budget provision of Rs.300 crores; a part of the increase is on account of the spurt
in collections towards the end of the previous year.
22. Defence expenditure in the current year is estimated at Rs.2845 crores as
against the Budget provision of Rs.2945 crores.
23. The progress of Central Plan expenditure has been somewhat uneven and
overall Budget support for Central Plan expenditure is estimated to be less by Rs.201
crores as compared to the provision of Rs.4520 crores made for it. The major shortfalls
are anticipated in petroleum, fertilizer and telecommunication projects. 011 and Natural
Gas Commission will require Rs.63 crores less due to rephasing and postponement of
certain works of its off-shore programme. 011 industry Development Board will also
require Rs.68 crores less due to shortfall in petroleum sector’s outlay. Fertilizer projects
will require Rs.36 crores less as compared to the original provision of Rs.236 crores;
the shortfall relates mainly to Trombay V and Cohcin Phase II units and the new gas
based fertilizer plant to be set up in Maharashtra. The outlay on telecommunication
projects, which is mostly financed out of internal resources, is anticipated to be Rs.46
crores less, mainly due to delay in receipt of equipment and stores.
24. A shortfall of Rs.25 crores is anticipated in agricultural schemes. Certain
agricultural schemes have not picked up the necessary tempo owing to delays in
implementation by the State Governments or in formulation of the detailed schemes
and inadequacy of necessary infrastructure. These problems are being tackled. Certain
schemes have, however, made good progress. Hon’ble Members would be glad to
know that the food for work programme is becoming a major instrument of rural
development and employment promotion and the provision of Rs.30 crore made for
the scheme has been stepped up to Rs.100 crores and is expected to generate 40 crore
man-days of work during the year. Dairy development, which will also provide gainful
employment and increased incomes in the rural areas, has been allocated Rs.19 crores
more over the Budget provision of Rs.11 crores.
25. The current Budget provides Rs.2761 crores for assistance to State and
Union Territory Plans. As Hon’ble Members are aware, States affected by floods this
year suffered serious erosion of resources and would not have been able to finance
their approved Plan outlays without additional assistance from the Centre. It had
4
accordingly become necessary to provide additional Plan assistance of Rs.325 crores
to those States. Rural Electrification Corporation had also to be provided with Rs.39
crores more from the Budget to finance its approved Plan schemes which are in the
State sector. According to Revised Estimates, Central assistance for State and Union
Territory Plans in the current year is placed at Rs.3112 crores.
26. As regards receipts in the current year, collections from small savings are
expected to exceed the Budget Estimate of Rs.460 crores by Rs.140 crores, thanks to
the sustained efforts of Central and State agencies concerned. Deposits of non-
Government provident funds are also estimated to be Rs.75 crores more than the
Budget Estimate of Rs.225 crores. Gold sales, for which no credit was assumed at the
Budget stage, have fetched Rs.86 crores. Recoveries of temporary credits extended in
earlier years to bilateral trading countries will also show an improvement of Rs.75
crores following larger imports from them.
27. Dislocation of industrial production in the eastern part of the country
consequent on floods this year, and decline in the profit margins of certain major
public sector undertakings have adversely affected receipts from corporation and income
taxes. The receipts are estimated to be about Rs.102 crores less than the Budget Estimate
of Rs.2577 crores. Union excise and customs duties taken together show an
improvement of Rs.145 crores. While, consequent on liberalisation of import policy
and larger imports to meet domestic requirements, customs duties are expected to
yield Rs.250 crores more than the Budget Estimate of Rs.1860 crores, Union excise
duties, on the other hand, will fetch Rs.105 crores less than the Budget Estimate of
Rs.5299 croree. This shortfall is, among other things, due to lower realisation on
sugar consequent on withdrawal of duty on khandsari sugar and fall in sugar prices
after decontrol. There has been shortfall in excise revenue from kerosene, man-made
fibres, aluminium and copper, which is, however, more than made up by larger receipts
of import, duties on these commodities.
28. Utilisation of external aid has slowed down due to a shift from programme
to project assistance by multilateral aid giving agencies and also allocation of a greater
proportion of bilateral assistance from some countries to specific projects. In both
cases, the concerned projects are slow moving and, consequently, gross aid receipts
are expected to be Rs.447 crores less than the Budget Estimates. Steps are however
being taken to accelerate the pace of disbursements.
29. Taking other variations in receipts and expenditure into account the overall
deficit in the current year is estimated at Rs.1590 crores as against the original estimate
of Rs.1071 crores. This is exclusive of the additional burden of Rs.555 crores cast on
the Centre by the loans to certain States for clearing their past deficits which, being in
the nature of a book adjustment, will not have an economic impact in the current year.
BUDGET ESTIMATES FOR 1979-80
30. I shall now present the estimates of expenditure for 1979-80.
5
 31. This budget reflects the impact of the recommendations of the Seventh
Finance Commission which have been accepted by Government. While a larger transfer
of resources to States in pursuance of ‘the award of the Commission is eminently
desirable for strengthening our federal polity, it creates serious problems for the Centre’s
finances in the short run. This budget seeks to cope with these problems.
32. The annual Plan of the Centre, States and Union Territories for 1979-80
would be Rs.12511 crores compared with an approved total outlay of Rs.11649 crores
in 1978-79. This represents an increase of 7.4 per cent. However, in assessing these
figures Hon’ble Members should bear in mind that an estimated sum of Rs.835 crores
has been transferred as committed expenditure from the Plan side to the non-Plan side
in the Central and State Plans. Taking into account this transfer, the step-up in
developmental effort in 1979-80 would be of a significant order.
33. The Central Budget for 1979-80 provides a sum of Rs.7108 crores for
the Central Plan and for assistance towards the Plans of States and Union Territories.
A provision of Rs.2300 crores has been made for Central assistance towards outlays
of States’ Plans, Union Territories’ Plans, and the sub-Plans of Hills and Tribal areas,
schemes of North-Eastern Council and Rural Electrification Corporation. Inclusive
of their own resources, the Plans of States, Union Territories, North Eastern Council,
etc. will amount to Rs.6099 crores in 1979-80 as against an outlay of Rs.5985 crores
in 1978-79.
34. The provision in the Budget for the Central Plan amounts to Rs.4808
crores. Together with the internal and other resources of public sector undertakings
amounting to Rs.1604 crores, Central Plan in 1979- 80 will, therefore, be of the order
of Rs.6412 crores, as against Rs.5664 crores in 1978-79.
35. Subsequent to the determination of the outlays for the Central Plan and
the Plans of the States for 1979-80, a decision has been taken at the recent meeting of
the National Development Council to effect some modifications in respect of Centrally
sponsored schemes. The funds now allocated for some of the Centrally sponsored
schemes will be released for distribution among the States on the basis of a new
formula. Consequential adjustments, in the Budget provisions for 1979-80 for these
schemes, will be made in the course of the year.
36. As Hon’ble Members are aware, the, objective of eradicating poverty
and unemployment is basic to our new development strategy. This calls for a
radical restructuring of the priorities in our Plans. Agricultural and rural
development have therefore been assigned the pride of place in our Plans. But
Government recognises that the-requisite degree of reorientation of development
plans can be achieved only over a period of time. We propose, however, to
accelerate the pace and thrust of programmes which have a material bearing on
agricultural growth and promotion of employment.
37. The Plan outlay on agriculture and rural development has been raised
6
from Rs.1754 crores in 1976-79 to Rs.1811 crores in 1979-80. An outlay of Rs.258
crores has been provided for accelerating the integrated rural development programme
in 2000 blocks covered by any one of the special programmes and in 300 other blocks
not covered by any of the special programmes so far. The focus will be on the
Improvement of the economic conditions of small and marginal farmers agricultural
labourers, rural artisans and scheduled castes and scheduled tribes. A provision of
Rs.50 crores is being made for the food for work programme. I have no doubt that I
shall have to raise this figure steeply taking into account the experience in the current
year. Such an increase will, however, have no inflationary impact as we will be drawing
upon our accumulated stocks of food grains.
38. Government does not have to stress in this House the importance of
irrigation for agricultural development. The outlay on major, medium and minor
irrigation projects including flood control for 1979-80 will be Rs.1488 crores compared
to Rs.1401 crores in 1978-79. Most of this outlay will be in the budgets of State
Governments. The target for the creation of additional irrigation potential in 1979-80
has been fixed at 3.2 million hectares as against a target of 2.8 million hectares in
1978-79. In order to increase the pace of development of minor irrigation, a scheme is
being worked out for extending the subsidy on minor irrigation, given at present only
to small and marginal farmers, to farmers whose land holding is between 2 and 4
hectares, but at a reduced rate. To this end a provision of Rs.10 crores is being made.
The Plan provision for the minor irrigation programme will be supplemented with
resources available from the Agricultural Refinance and Development Corporation.
The financial support made available to the Agricultural Refinance and Development
Corporation from the Central budget has been increased from Rs.133 crores in 1978-
79 to Rs.159 crores in 1979-80.
39. In the context of the great importance we attach to rural development and
employment oriented programmes in rural areas, it is necessary to ensure that in the
coming years the flow of institutional finance to rural areas will be smooth, steady
and at reasonable rates of interest. In addition to many steps already taken, Government
has decided to exempt the Agricultural Refinance and Development Corporation, the
premier refinancing agency for agricultural term loans, from income tax. This
concession, together with other measures we are contemplating, will enable the
Agricultural Refinance and Development Corporation to reduce the rate of interest at
which it refinances loans for minor irrigation and land development by about 1 per
cent; the Reserve Bank will take corresponding steps to ensure that the full benefit of
this reduction of about one per cent is passed on by the commercial banks to the
ultimate borrower. As a result, farmers will find it cheaper and therefore more attractive
to invest in minor irrigation and land development.
40. Hon’ble Members are aware that as part of the strategy of rural
development, a National Dairy Development Programme, known as Operation Flood
II, intended to raise the nutritional standards of the people, generate employment and

7
augment incomes in rural areas through a viable subsidiary occupation had been
approved. An outlay of Rs.32 crores has been provided in the Central Plan for 1979-
80 for this programme. On completion it will provide gainful employment for about
10 million farm families and assure increased availability of milk to our people.
41. Rural electrification plays an important part in agricultural and rural
development. The total outlay for the rural electrification programme will be Ils.285
crores in 1979-80. An additional sum of Rs.50 crores will be mobilised for this purpose
through commercial banks, the Agricultural Refinance and Development Corporation
and the Rural Electrification Corporation. Comparable figures in 1978- 79 are Rs.277
crores and Rs.20 crores respectively. As against 22000 villages expected to be electrified
in 1978-79, the target for 1979-80 has been set at 25000 villages.
42. With the increase in agricultural output there is an obvious need for
increased storage to minimise wastage. A scheme is therefore being worked out to
have subsidised storage facilities in rural areas. This will have two fold benefits: grain
can be stored near the place of production thus reducing wastage; and it will reduce
the cost of storage for Government because godowns can be built cheaper and the cost
of holding inventories will be borne by the farmers.
43. This Government is committed to the acceleration of the rural water supply
programmes so as to make safe and reliable drinking water available in all problem
villages. The Central Plan for 1979-80 includes a provision of Rs.80 crores for this
programme as against Rs.60 crores allocated in 1978-79.
After this Government came to power in March 1977, 18000 villages
were provided with water supply in 1977-78. The target for 1978-79 is 27000. I wish
to assure the House that Government will have no hesitation in allocating more funds
for this purpose if the programme makes faster progress.
44. Economic exploitation and social discrimination against scheduled castes
and scheduled tribes will not cease unless programmes for their development are built
upon a sound economic basis. Therefore Central ministries and State Governments
have been asked to incorporate a special component in their Plan for 1979-80 for
these categories so that they may secure an adequate flow of benefits from the various
sectoral programmes. The outlay on welfare programmes for scheduled castes and
other backward classes will be Rs.117 crores in 1979-80.
45. A provision of Rs.70 crores has been made for the tribal sub-plan for
1979-80. This will supplement the flow of funds from State Governments under different
heads of development. The States would also be receiving grants under the
recommendations of the Seventh Finance Commission for providing incentives to
their staff working in the difficult conditions in the tribal areas.
46. The development of village industries is an important component of the
Central Plan. A provision of Rs.193 crores has been made in 1979-80 in the Central
8
sector as against Rs.140 crores originally provided for in the current year. This outlay
would be supplemented by suitable provisions in the State Plans and by institutional
resources available on easy terms and conditions.
47. Handloom is our most important village industry. There are nearly 4 million
handlooms providing employment to about 10 million people. They produced 2500
million metres of cloth in 1978-79 and the target for 1979-80 is 2700 million metres.
A provision of Rs.28 crores is being made in 1979-80 to organise weavers into
cooperative societies, to enable apex cooperative bodies in this sector to do better
marketing and to promote intensive development for export.
48. In keeping with the Government’s policy of extending postal services in
rural areas, it is proposed to open 5000 new post offices and provide 10,000 postal
counters through mobile post offices in 1979-80. Outlay on telecommunications will
be Rs.359 crores in 1979-80 with greater emphasis than hitherto on extending these
facilities to rural areas.
49. Care has also been taken to provide adequately for the development of the
basic infrastructure on which the progress of agriculture and industries alike would be
dependent. Thus the provision for power, coal, fertilizers and chemicals, minerals,
petroleum, steel and roads and railways has been increased from Rs.2733 crores in the
Central Plan for 1978-79 to Rs.3122 crores in 1979-80.
50. The growth of power production has an important role to play in the
development of agriculture as well as industry. Allocation for the power sector in
1978-79 had been stepped up substantially to Rs.221.7 crores. The tempo of
development is sought to be speeded up, still further in 1979-80 and an outlay of
Rs.2466 crores is being provided. The bulk of the Plan provision for power will be in
the State Plans but an allocation of Rs.382 crores is for power projects in the Central
sector. A major start in 1979-80 will be the super thermal station at Farakka. It is
expected that 3000 MW generating capacity will be added in 1979-80 as against 2500
MW in the current year. The facilities for distribution of power are also being improved.
51. Self-sufficiency in fertilizer production is an important objective of
Government policy. A provision of Rs.254 crores for investment in fertilizer plants
has been made in the Plan for 1979-80. This will cover expenditure on a number of
on-going projects which will raise production in the public sector from 12 lakhs tonnes
of nutrients this year to 20 lakh tonnes in 1979-80. Also, starts will be made on two
off-shore gas based plants on the west coast and an additional gas based unit in Assam.
52. The demand for steel has increased by about 15 per cent in the current
year due to increased activity and investment in the economy. The increased production
of mini steel plants has averted a serious shortage which would have otherwise occurred.
An outlay of Rs.600 crores being made for the steel sector in 1979-80 has to be
viewed in the context of the growing demand. This provision will enable. work on the
expansion of Bokaro and Bhilai Plants and on the new plant at Salem to be continued.
9
 53. Coal is as basic to our development as power and there is an urgent need
to raise its production. Coal production in the current year is estimated not to exceed
a figure of 102 million tonnes as severe floods affected production. The allocation for
the coal sector has been raised from Rs.267 crores in the current year to Rs.346 crores
in 1979-80.
54. Oil is an equally important source of energy and Government attaches
great importance to the exploration and development of oil fields so that our dependence
on imported oil is minimised. The development of Bombay High will be substantially
completed next year. With the commissioning of the 3 million tonne expansion at the
Koyali refinery, the country’s refining capacity has touched 30 million tonnes per
year. Allocations to this sector in 1979-80 will be Rs.6221 crores.
55. Roads are of vital importance to the nation and a provision-of Rs.120
crores is proposed for 1979-80 for national highways, strategic roads, roads in the
border areas in the north and roads of Inter-State economic importance. This %%411
be supplemented by allocations from the State Plans to cover State highways and
district and rural roads.
56. In our country urbanisation has led to a growth of slums and squatter
settlements. Essential facilities like water supply, community latrines and baths, wide
and paved streets and provision of street lighting have been badly lacking for these
people. Government has decided therefore to pursue actively a policy of slum
improvement. Against a total expenditure of Rs.43 crores on slum improvement in
1974-78, an outlay of Rs.190 crores has been envisaged in the period 1978-83. The
States will have to push through this programme in a big way. If they undertake to
mobilise additional resources for this purpose by taxing the affluent sections in the
urban areas, Government will be happy to supplement their efforts. Government will
examine in consultation with the States how the slum improvement programme can be
accelerated so as to alleviate the living conditions of the urban poor.
57. In realigning the priorities in the educational sector, Government attaches
the highest importance to the education of the masses. The provision for adult education
in the Central Plan for 1979-80 is being accordingly increased and comes to nearly 20
per cent of the total outlay of Rs.84 crores for education in the Central Plan.
58. It is now widely accepted that the programmes of development of
agriculture or rural industries will not make sufficient progress unless the rural
population acquires the relevant skills. Very little headway has, however, been made
in the training of rural youth to acquire these skills. This is partly because of a lack of
an effective training programme and partly a lack of proper organisation linking skills
with capital. Since such training is an essential precondition of the success of the
production programme, Government proposes to make financial provision for a
programme of ‘training rural youth for self employment’ in the course of the year as
soon as the details of such a programme axe worked out.
10
 59. There is little doubt that the growth of population at the present rate needs
to be checked if economic development is to lead to a perceptible increase in the
standard of living of the people. Unfortunately, as a result of the wrong, approach to
family planning followed in the past, this programme has suffered a serious set back.
It should be our endeavour to put the newly introduced family welfare programme on
a sound footing so that the national objective of reducing the birth rate to 30 per
thousand in 1982-83 from the current level of 33 per thousand may be achieved. The
Community Health Workers Scheme which was started in October 1977 in 741 primary
health centres was a significant innovation of the Javata Government in extending
elementary medical care to rural areas. It is proposed to cover a third of the country
under the scheme in 1979-80 and the entire country by 1982-83.
60. Non-Plan expenditure has been limited to what is strictly necessary keeping
in view the need for economy consistent with efficiency.
61. Pefence expenditure is estimated at Rs.3050 crores as against Rs.2845
crores in the current year.
62. Provision for food subsidy at Ils.560 crores will be Ps.10 creres less than
in the current year. Rs.448 crores have been provided next year for fertilizer subsidies
as against Rs.319 crores in the current year.
63. Debt service charges at Rs.2161 crores will be about Rs.304 crores more
than in the current year, the increase being mainly on account of internal debt.
64. Statutory grants to States will be Rs.232 crores as compared to Rs.514
crores in the current year. The provision next year is based on the recommendations of
the Seventh Finance Commission. The Commission has also recommended additional
grants to certain States to cover their net interest liability and for upgradation of
standards of administration. I have not, at this stage, included any provision for payment
of grant-in-aid for these purposes and shall come before the House with request for
supplementary funds after the action programmes for schemes of upgradation are
drawn up and finalised by the State Governments concerned and the net interest liability
assessed as recommended by the Commission.
65. Government is sure that Hon’ble Members will share its concern at the
growing volume of Government expenditure. It is therefore important to contain the
growth of this expenditure and also to ensure that the funds are utilised effectively for
the promotion of the common good. Government has therefore decided to appoint a
Commission with suitable terms of reference to conduct a comprehensive inquiry into
Government expenditure. It will, among other things, examine the impact of public
expenditure on the promotion of growth and reduction of poverty and recommend
ways and means of making public expenditure more effective in solving the problem
of poverty.
66. Coming now to Receipts, gross tax revenue in 1979-80 at existing rates of
11
taxation is estimated at Rs.10822 crores, showing an increase of Rs.658 crores over
the Revised Estimates for the current year. Of this increase, Union excise duties will
contribute Rs.381 crores and corporation and income taxes Rs.248 crores.
67. As mentioned earlier, substantially larger devolution of Central taxes and
duties will have to be made to the States from the next financial year in accordance
with the recommendations of the Seventh Finance Commission. At the present level
of taxation, States’ share next year is estimated at Rs.3235 crores which is Rs.1278
crores more than in the current year. Consequently, Centre’s net tax revenue, at Rs.7587
crores, will be Rs.620 crores less than in the current year.
68. Market loans will yield Rs.1860 crores as against Rs.1653 crores in the
current year. Net external assistance, after meeting repayment and interest liabilities,
is estimated at Rs.878 crores, including drawals against new credits. Small savings
collections will fetch Rs.650 crore’s. Loan repayments by States, excluding ways and
means advances, are placed at Re. 554 crores as against Rs.754 crores in the current
year. The decline is due to debt rescheduling recommended by the Seventh Finance
Commission.
69. The total receipts of the Central Government for 1979-80 will be Rs.16551
crores. Total expenditure for the coming year will be Rs.18526 crores. The overall
budgetary gap at the existing rates of taxation will thus be Rs.1975 crores.
PART B
70. I now come to my proposals on fresh taxation.
71. A gap of this magnitude cannot obviously be covered without a large tax
effort. However, in addition to mobilising the required resources, my tax proposals
aim at three objectives which, I think would be acceptable to everyone in this House.
In a country in which the bulk of the population lives below the poverty line disparities
in income have to be minimised. Such disparities lead to luxury consumption which
affects the propensity to save and the will to work hard. Therefore, tax policy should
seek to reduce such disparities.
72. Secondly, they aim at increasing production and avoiding waste. Poverty
elimination requires primarily an increase in production. Since resources are scarce,
tax policy should prevent a diversion of resources to wasteful and unproductive uses
and conserve them for productive purposes. It should also discourage such consumption
as is positively injurious to people’s health.
73. Thirdly, they aim at eliminating unemployment and underemployment by
stimulating agricultural production, by encouraging labour intensive techniques of
production and by improving the competitive capacity of small scale and cottage
industries in relation to large-scale industry.
74. Let me take up direct taxes first.
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 75. I propose to raise only the rate of surcharge for Union purposes on income-
tax in the case of all categories of non-corporate taxpayers from 15 per cent to 20 per
cent. The effect of this proposal will be to raise the marginal rate of personal income-
tax from 69 per cent at present to 72 per cent. This measure will yield an additional
revenue of Rs.46 crores in a year. The accretion during 1979-80 will, however, be of
the order of Rs.37 crores. This is a small sacrifice I am asking the 35 lakh taxpayers,
who constitute an insignificant proportion of the total population, and who receive a
substantial share of the country’s income, to make for their poorer fellow citizens.
76. I am aware of the views of the State Governments against recourse to
surcharge for Union purposes as the revenue accruing from surcharge is not shareable
with the States. But in framing my other fiscal proposals I have taken care to see that
the States get their legitimate share of the gains from the additional tax effort of the
Centre.
77. Under the rate schedule prescribed in the Finance Act, 1978, in cases
where the taxable income exceeds the exemption limit by a small margin, the tax
liability is limited to 70 per cent of the excess over Rs.10, 000. This provision operates
rather harshly in some cases. In order to provide for a smoother progression in marginal
cases, I propose to limit the tax payable in such cases to 30 per cent of the excess over
Rs.10, 000. This will benefit individuals having incomes up to Rs.12, 000.
78. In view of the Imperative need for resources, I propose to continue the
Compulsory Deposit Scheme for income-tax Payers for a further period of two years.
This will generate additional resources to the tune of Rs.160 crores during the financial
year 1979-80.
79. Inequalities of wealth have even less justification than inequalities of
income. I, therefore, propose to raise the rates of wealth-tax on high slabs of net
wealth. The rate will now be 3 per cent, as against the current rate of 2.5 per cent, on
the net wealth between Rs.10 lakhs and Rs.15 lakhs and 5 per cent, as against 3.5 per
cent, on the net wealth over Rs.15 lakhs. The rates of wealth tax on slabs upto Rs.10
lakhs will remain unchanged. There will be corresponding changes in the rates
applicable to Hindu undivided families having one or more members with independent
net wealth exceeding the exemption limit. These changes will yield an additional
revenue of Rs.6.6 crores in a year. Since, however, the new rates of wealth-tax will
apply prospectively from the assessment year 1980-81, there will be no accretion to
revenue during 1979-80.
80. It has to be recognised that by merely adjusting direct tax rates we cannot
reduce disparities in income and wealth to tolerable levels. As the House knows, tax
evasion which is the basic cause of generation of black money greatly affects.the
progressive impact of direct taxes. Black money is a corrosive influence which works
through the entire economy. It is Important that this scourge is fought through the
effective implementation of our tax laws. I wish to assure the House that I shall
address myself to this task with the utmost zeal and vigour.
13
 81. As I am raising the surcharge on income-tax on personal incomes, I think
the corporate sector should also be required to contribute a little more to the exchequer.
I accordingly propose to raise the surcharge on income-tax in the case of companies
from 5 per cent to 7.5 per cent. This will not cast a heavy burden on them, because the
effective rate of taxation on corporations is lower than the nominal rates. This measure
will yield an additional revenue of about Rs.35 crores in a year. The accretion during
the year 1979- 80 will, however, be of the order of Rs.28 crores.
82. The scheme of taxation of capital gains was modified in 1977 in several
directions. One of the changes made was to provide for exemption from income-tax
on long-term capital gains If the sale proceeds of any asset were re-invested within six
months in certain preferred assets. Since asset owners secure capital gains largely
through no effort on their own part, this exemption confers an unfair advantage on
asset holders as compared to income earners and thus contributes to the disparity in
society. I, therefore, propose to withdraw this exemption of capital gains in respect of
transfers made after 28th February, 1979. This measure will yield an additional revenue
of Rs.14 crores annually. Since, however, advance tax is not payable in respect of
capital gains, there will be no accretion to revenue during the year 1979-80.
83. The present concessions in respect of long-term savings through life
insurance premia, provident fund contributions and other approved forms of savings,
though they subserve certain desirable social and economic objectives, give a
disproportionately large tax benefit to taxpayers in higher income brackets. At present,
100 per cent deduction is allowed in respect of first Rs.5,000 of qualifying savings, 50
per cent on the next Rs.5,000 of such savings and 40 per cent on the balance. Under
my proposal, while the first Rs.5,000 of qualifying savings will continue to be eligible
for 100 per cent deduction, the deduction in respect of the next Rs.5,000 of such
savings will be reduced to 35 per cent and in respect of the balance to 20 per cent.
This measure will yield Rs.9.6 crores annually. The accretion during the financial year
1979-80 will be Rs.7.6 crores.
84. I propose to lower the threshold for payment of advance tax by the
registered firms from Rs.30, 000 to Rs.20, 000. This measure will yield an additional
revenue of Rs.12 crores during 1979-80.
85. The large scale unemployment in the country requires the promotion of
labour intensive techniques instead of capital intensive techniques. While it may be
true that in some industries the choice of techniques is limited, our preference should
be for labour intensive methods of production wherever feasible. Our fiscal laws and
tax concessions in particular should be so designed as to foster production techniques
which enlarge opportunities for employment.
86. I, therefore, propose to appoint an Expert Committee of economists and
tax administrators to study the impact of concessions provided for in our tax laws -
particularly those relating to corporation tax and Central excise-on the techniques of
14
production used in industry and make recommendations which will encourage the
adoption of labour intensive methods of production. The composition of the Committee
and its terms of reference will be settled soon and it will be asked to submit its Report
with the least possible dealy.
87. One of the tax concessions which is related to the employment of capital
is the ‘tax holiday,, provision in the income-tax Act. This concession is at present
available in respect of all industrial undertakings that go into production before 1st
April, 1981. I propose to withdraw this concession in the case of industrial undertakings
engaged in non-priority industries listed in the Eleventh Schedule to the income-tax
Act, if they go into production after 31st March, 1979.
88. In recent years, commercial banks, particularly public sector banks, have
been asked to reach out into the rural areas and to expand rural credit. in order to
promote rural banking and to assist the scheduled commercial banks in making adequate
provisions from their current income to provide for risks in rural advances, I propose
to amend the income-tax Act to grant a deduction in respect of provisions made for
bad and doubtful debts by scheduled commercial banks relating to advances made bv
their rural branches. Such a deduction will, however” be limited to 1.5 per cent of the
aggregate average advances made by the rural branches. This measure will result in a
revenue loss of Rs.12 crores during 1979-80 but it will be in a good cause.
89. I have earlier referred to the exemption from the corporation tax which
I wish to extend to the Agricultural Refinance and Development Corporation. This
is in line with a similar exemption already being enjoyed by the Industrial
Development Bank of India. This decision will result in a revenue loss of Rs.5
crores annually. The loss during 1979-80 is estimated at Rs.10 crores because advance
tax paid during 1978-
79 also is refundable.
90. At present, expenditure incurred by companies and co-operative societies
on approved programmes of rural development qualifies for deduction in computing
their taxable profits. For this purpose, the programme has to be approved by the
“prescribed authority”, which is an Inter-Ministerial Committee headed by the
Secretary, Ministry of Agriculture and Irrigation. Companies and co-operative
societies have shown considerable interest in rural development programmes. To
expedite the clearance of such schemes of rural development, I propose to provide
that they will henceforth be approved at the State level by a Committee consisting
of the Commissioner of Income tax and a senior officer of the State Government
nominated by it.
91. I also propose to exempt from income-tax donations made by tax-payers
to approved institutions engaged in imparting training to persons to equip them for
implementing rural development programmes.
15
 92. At present, taxpayers engaged in business or profession alone are entitled
to 100 per cent deduction in respect of donations made to approved institutions engaged
in carrying out programmes of rural development. I propose to extend this concession
to other categories of taxpayers as well. A similar dispensation will be extended to
donations for scientific research made to approved scientific research associations,
universities, colleges and other institutions.
93. I propose to provide that insurance premia paid by federal milk co-operative
societies for insuring cattle belonging to members of affiliated primary co-operative
societies shall be allowed to be deducted in computing their taxable profits.
94. In order to promote the cultivation of mushrooms, I propose to exempt
from income-tax one-third of the income derived from the business of mushroom
growing under controlled conditions, or Rs.10, 000, whichever is higher.
95. As Hon’ble Members are aware, the Finance (No. 2) Act, 1977 has
conferred exemption from income-tax on the Khadi and Village Industries Commission.
I now propose to exempt from income-tax the income of the State Khadi and Village
Industries Boards set up under the State Acts.
96. Consumer co-operative societies have been doing commendable work
in supplying goods to consumers at reasonable prices. In order to encourage the
development of such societies so that they can play a proper part in the public
distribution system that is sought to be developed, I propose to raise the quantum
of tax-exempt profits in the case of such societies from the present level of
Rs.20,000 to Rs.40,000.
97. The scope of section 35B of the income-tax Act relating to export markets
development allowance was curtailed last year. I have referred earlier to the decline in
exports in the current year and the need to promote them. Therefore to enable exporters
to develop export markets on a long-term basis, I propose to liberalise the scope of the
export markets development allowance. A weighted deduction under section 35B of
the income-tax will now be available to all exporters at a uniform rate of 133.3 per
cent of the qualifying expenditure. For this purpose, expenditure on advertisement or
publicity outside India in respect of the goods, services or facilities dealt in or provided
by the taxpayer in the course of his business will be included in the qualifying
expenditure. This concession will result in a revenue loss of about Rs.5 crores annually.
The loss in 1979-80 will, however, be of the order of Rs.4 crores.
98. In order to encourage the writing of University level text books in Findi
and other Indian languages, I propose to allow a deduction equal to 25 per cent of the
income derived by the authors of such books. Authors of dictionaries and encyclopaedias
in these languages will also get the benefit of a similar deduction in the computation
of their taxable income. This concession will be available for the assessment year
1980-81 and four subsequent years.
16
 99. While I want to step up the drive against tax evasion, I also would like
to promote greater expedition in the settlement of income-tax cases. At present. the
income tax Settlement Commission is debarred from proceeding with a case if the
Commissioner of income-tax objects to the application being proceeded with on
certain grounds. The Direct Tax Laws Committee has recommended that the
application for settlement should be rejected only after the Commission is satisfied
that the objection has been raised by the Commissioner on proper and valid grounds.
I propose to implement this recommendation subject to the safeguard that before
over ruling the objection raised by the Commissioner of income-tax, the Settlement
Commission should hear him.
100. The Direct Tax Laws Committee has also proposed certain amendments
to the income-tax Act and the Wealth-tax Act with a view to plugging some loopholes
in the provisions relating to prevention of tax avoidance through intra-family transfers
of income and wealth. I have accepted their recommendations and given effect to
them through the Finance Bill.
101. As I mentioned earlier the second objective of my proposals is to prevent
the life style of the affluent sections from having an adverse impact on saving and
investment through the demonstration effect. In this connection, the lavish manner in
which expenditure is incurred on accommodation and entertainment in luxury hotels
calls for serious notice. With a view to checking such conspicuous consumption in
luxury hotels, I propose to levy a new tax on the gross receipts of hotels. Since it is my
intention that States should continue to levy sales tax as hitherto on items of food and
drink supplied to guests in hotels, the sale proceeds of these items will not be included
in the tax base. The details of this new measure are being worked out and the necessary
legislation in this regard will be introduced in Parliament soon.
102. Other changes being made in the income-tax law through the Finance Bill
are of minor significance and are largely in the nature of clarification and rationalisation
of existing provisions.
103. The total addition to revenues from an these tax measures will be Rs.101.2
crores in a full year and Rs.58.6 crores during 1979-80. Of this, about Rs.12 crores
will accrue to the States as their share in 1979-80. Besides, additional resources of
Rs.160 crores will accrue in 1979-80 from the continuance of the Compulsory Deposit
Scheme for income-tax Payers.
104. I now turn to indirect taxes.
105. I would like to straightaway indicate the more significant reliefs in excise
duties which I propose to provide. The Central excise duties on all chemical fertilizers,
will be reduced to 50 per cent of the existing rates. This will mean that the basic
Central excise duty on urea, which is the most important chemical fertilizer, will be
reduced from 15 per cent ad valorem to 7-1/2 per cent ad valorem; that on single and
17
triple super phosphate fertilizer will be reduced from 7.5 per cent to 3.75 per cent ad
valorem. This reduction will also be correspondingly reflected in the countervailing
duties leviab7e on imported chemical fertilizers. With this change, it should be possible
to reduce the price of urea by about Rs.100 per tonne. The prices of other kinds of
fertilizers will also become lower with reference to the excise duty relief now
announced. This decision would result in a sacrifice of revenue of Rs.75.6 crores
under Central excise and Rs.30 crores under customs.
106. Although the number of electric pumpsets is increasing rapidly with
increasing rural electrification, farmers have still to use pumpsets driven by diesel
engines in large parts of our country. As a measure of relief to this large class I
propose to reduce the excise duty on light diesel oil from the existing level of Rs.155.72
per kilolitre to Rs.75 per kilolitre. I am aware that only 45 per cent of this oil is used
in the agricultural sector. Since It is difficult to monitor end use and a significant
quantity of even the balance is used for generating power and by small industry, I
propose to extend the benefit of this reduction in excise duty to an users without any
distinction. The loss to the exchequer on account of this concession will be Rs.12.40
crores per annum.
107. I also propose to exempt power tillers imported by State Agro-Industries
Corporations and the Central Government totally from customs duty as these
implements can promote agricultural production in small holdings. Hon’ble Members
may be aware that indigenously manufactured power tillers are already exempt from
Central excise duties.
108. Pipes made of PVC resins can reduce seepage and wastage of water in
fields and thereby increase the effectiveness of irrigation. Since I wish to make this
raw material available at cheaper prices for the manufacture of PVC pipes for irrigation
and at the same time prevent a misuse of the concession for other purposes, I propose,
as an experimental measure, to exempt PVC resins imported for the purpose from
customs duties as soon as the modalities of a scheme which will serve both the
objectives have been worked out.
109. I would also refer to the relief in the field of drugs and medicines. I
propose to fully exempt from customs duties 22 specified bulk drugs required for the
formulation of life saving drugs, and to reduce the customs duty on 17 specified bulk
drug intermediates from a total of 75 per cent ad valorem to 25 per cent ad valorem.
On the excise side, I propose to exempt patent or proprietary medicines, including life
saving drugs, from the levy of the special excise duty. Taking these measures together,
the revenue sacrifice is estimated to be of the order of Rs.7.04 crores a year.
110. I now turn to a proposal of far reaching significance. This concerns un-
manufactured tobacco, excise on which dates back to the year 1943. This levy brings
the excise machinery into contact with a large number of growers and licensees. I
propose to completely exempt un-manufactured tobacco from excise duties, including
18
additional excise duties and thus, relieve at one stroke, nearly a million tobacco growers,
curers, small dealers and warehouse licensees from excise control. I have no doubt
that this bold decision to do away with a vexatious levy-a legacy of the colonial era -
will be widely welcomed by farmers in the tobacco growing tracts of our country.
This measure would involve loss of central excise revenue of the order of Rs.121.20
crores. I, however, propose to recoup Rs.115.71 crores of this loss through suitable
upward adjustments in the rates of duties on manufactured tobacco products.
111. I shall touch upon cigarettes later. For the present, I shall deal with the
other manufactured tobacco products. In respect of branded biris, the present tobacco
stage duty plus biri duty comes to about E s. 3 per thousand biris; I propose to fix a
consolidated rate of E s. 3.60 per thousand branded biris. Unbranded biris produced
by manufacturers of both branded and unbranded biris will pay the same duty. At
present unbranded biris are exempt from biri duty; but they are subject to tobacco
stage duty which works to about ninety paise per thousand biris. I propose to levy a
nominal consolidated duty of Rs.1.60 per thousand on other unbranded biris. However,
to provide relief to the really small manufacturers of unbranded biris I propose to
exempt manufacturers who produce only unbranded biris from payment of duty on
their clearances of the first 60 lakh biris in a year. I also propose to make suitable
upward duty adjustments in respect of chewing tobacco, snuff and smoking mixtures.
I also propose to levy a duty of 20 per cent ad. valorem on branded manufactured
hookah tobacco.
112. As an interim measure, I propose to provide for suitable relief in product
stage duty in the case of those products manufactured out of duty-paid un-manufactured
tobacco except in respect of smoking mixtures and manufactured hookah tobacco.
113. Hon’ble Members will recall that the Indirect Taxation Enquiry Committee
under Shri L.K.Jha submitted Part II of its final report in January, 1978. The Committee
has indicated the broad lines on which rationalisation of the excise tariff should be
attempted both in the short term as well as in the long term. I have given close and
careful consideration to, the Committee’s recommendations. A major restructuring of
the excise tariff has to be ruled out in view of the need for resources and, on other
pragmatic considerations. Also there is reason to apprehend that a major departure
from the present pattern of excise taxation may upset the balance between different
sectors of production. However, as part of the follow-up action on the Committee’s
recommendations, I have attempted to restructure the excise duty rates on a wide
range of consumer and finished products.
114. Let me state at the outset that as a result of this restructuring, the number
of effective excise duty rates have been reduced from 28 to 16 in respect of commodities
covered by the present exercise. I have also availed of this opportunity to introduce
further progression in the duty structure and stepped up the duty on quite a few luxury
and semi-luxury items. Excise duties are being increased on cosmetics and toilet
19
preparations (other than perfumed hair oil) from 63 per cent to 100 per cent, on air-
conditioners from 105 per cent to 110 per cent, on parts of refrigerating and air
conditioning machinery from 105 per cent to 125 per cent, on stereo and hi-fi equipment
from 36.75 per cent to 40 per cent, on higher priced television sets from 21 per cent
to 30 per cent, on higher priced radios and radiograms from 36.75 per cent to 40 per
cent. I have maintained the duty differential of 15 per cent ad valorem in respect of
those electronic products where such duty differential exists for small scale units.
115. I have also taken this opportunity to step up suitably the duty rates on
durable consumer articles on the consideration that the outlay on these Items is mostly
of a non-recurring nature and the incidence of duty is spread over a period of time. In
this category. I propose to increase excise duties on pressure cookers from 10.5 per
cent to 15 per cent, on steel furniture from 21 per cent to 25 per cent, on domestic
electrical appliances from 26.25 per cent to 30 per cent and on safes and strong boxes
from 21 per cent to 35 per cent.
116. I have also selected some consumer Items like soap, tooth paste, tooth
brush and detergents, for increase in duties taking care, at the same time, to see that
the goods produced by the small units in the decentralised sector are not adversely
affected by this increase. Excise duties will go up on household and laundry soap
from 5.25 per cent to 20 per cent, on low priced toilet soap from 10. 5 per cent to 15
per cent, on high priced toilet soap from 15.75 per cent to 20 per cent, on detergents
from 13.13 per cent to 20 per cent and on tooth paste from 10.5 per cent to 25 per
cent. I also propose to impose a 25 per cent duty on tooth brushes. Let me state clearly
that my objective in increasing the rates on these commodities is partly to ensure that
the small-scale manufacturers, with the advantage of duty exemption, are able to
increase their share of the market for these products.
117. Among food Items, I have avoided imposing any further burden on articles
of mass consumption such as processed edible oils or vanaspati. I have, in fact, reduced
the duty on vanaspati by exempting it from special excise duty. However, I have
considered Items like prepared or preserved food, instant coffee, biscuits, processed
cheese, cocoa powder, chewing gum and chocolate as fit for further increases, bearing
in mind the sections of the society that consume such items. Thus, excise duties are
increased on instant coffee from 21 per cent to 25 per cent, on prepared or preserved
food, biscuits and processed cheese from 10.5 per cent to 15 per cent, and on cocoa
powder, chewing gum and chocolates from 10.5 per cent to 20 per cent. in aerated
waters, I propose to increase the duty rate on plain soda from 15.75 per cent to 20 per
cent. In respect of other aerated waters I propose to have two rates - one of 60 per cent
for those containing caffeine and the other of 30 per cent for those not containing
caffeine. I also propose to withdraw the present concessional rate applicable to
clearances of the first 50 lakh bottles in a financial year. However, the existing
exemptions in respect of aerated waters in favour of small manufacturers will continue.
20
 118. In restructuring the duty rates on consumer products, I have reduced the
incidence on a number of Items by exempting them from special excise duty. I would
like to make particular mention of the duty reduction from 42 per cent to 30 per cent
on fluorescent lighting tubes, which are widely used for street lighting and which help
in reducing the consumption of electricity. J also propose to extend the scope of the
present excise exemption for low priced footwear valued upto Rs.5 per pair to footwear
valued upto Rs.10 per pair.
119. I have also rationalised the rates applicable to personalised modes of
transport. Moped, which are used by comparatively less affluent people and consume
less fuel, will bear a lower duty of 10 per cent as against the existing rate of about
13.1 per cent. Scooters, motor cycles and threewheelers will bear 20 per cent as
against the existing rate of 13.13 per cent while cars will pay duty at 25 per cent as
against the existing rate of 18.38 per cent. The concessional rate applicable to cars
used as taxis and auto-rickshaws will be increased from 10 per cent to 15 per cent.
The rate on commercial vehicles will also go up marginally from 13.1 per cent to 15
per cent as part of the scheme of rationalisation.
120. In manufactured inputs, I have mainly confined myself to streamlining
the existing rates having regard to their usage and their relative importance. The details
of these changes are contained in the Budget papers.
121. Another tax reform suggested by the Indirect Taxation Enquiry Committee
is to extend proforma credit facilities in respect of the duty paid on, inputs used in the
manufacture of finished products. Presently, such facilities are available in a limited
area. Wide extension of these facilities as recommended by the Committee would
have major revenue implications apart from throwing additional administrative burden
in working these procedures. However, industry has been urging that this measure be
given a trial. I propose to extend, as an experimental measure, the provision of proforma
credit to some of the products of the engineering industry, where the incidence of duty
on inputs is perceptible. While doing so, I have also proposed upward rate adjustments
in respect of some of the final products. The details of these changes are available in
the Budget papers.
122. The net revenue effect of the proposals for restructuring the Central excise
tariff, along with a few minor changes in some of the items affected, is a gain of about
Rs.100 crores in a full year.
123. 1 now turn to substantive proposals to raise resources.
124. On the excise side, the most important proposals relate to a few major
products of the petroleum group. Hon’ble Members are aware that the OPEC countries
have announced a phased programme of increase in the price of crude oil. We are still,
to a significant extent, dependent on imports of crude oil and the anticipated increase
in the out-flow of foreign exchange consequent on the increases in crude prices is
21
substantial. After the initial drop in consumption of petroleum products in the wake of
the steep increase in crude prices in the year 1973, consumption has registered a
sizable upward trend. From the point of view of evolving a viable energy policy which
minimises the strain on our foreign exchange resources, I have no doubt that it is
essential to restrain the consumption of the more important petroleum products. My
revenue proposals have been formulated keeping this important objective in mind.
125. I propose to raise the Central excise duty on motor spirit from the existing
level of Rs.2253.88 to Rs.2750 per kilolitre. Since the bulk of the consumption of
petrol is by the upper classes in society I have no regrets in doing this. I also propose
to raise the duty on high speed diesel oil from the existing level of Rs.404. 04 to
Rs.500 per kilolitre because of the rapid growth in its consumption.
126. As Hon’ble Members are aware, kerosene was being used, in the past, to
adulterate high speed diesel oil when there was i price differential in favour of kerosene.
It has been our endeavour in the last few years to check this tendency by maintaining,
as far as possible. parity between the rates of duty on these two products. Besides, we
have had, in the recent past, to rely heavily on imports of kerosene. Bearing these
considerations in mind, I propose to increase the duty on kerosene from the existing
level of Rs.408. 19 to Rs.500 per kilolitre. I also propose to effect a sympathetic
increase in the rate of duty on liquefied petroleum gas, which is primarily used as
cooking fuel in urban and semi-urban areas, from the existing level of Rs.262. 50 per
metric tonne to Rs.400 per metric tonne.
127. My proposals relating to the petroleum products are expected to yield
an additional revenue of Rs.223. 25 crores under Central excise and Rs.55.7 crores
under customs.
128. Next, I propose to increase the rate of duty on the residuary heading Item
68 of the Central Excise Tariff from the existing level of 5 per cent to 8 per cent ad
valorem. This will yield an additional revenue of Rs.100 crores. As Hon’ble Members
are aware, there is already a provision for giving set off of the duty paid on goods
falling under item 68 which are used in the manufacture of other excisable goods. The
increased levy should, therefore, not have any appreciable cascading effect.
129. As the House is aware, small scale manufacturers producing goods falling
under Item 68, whose clearances of all excisable goods during the preceding year had
not exceeded Rs.30 lakhs, 13resently enjoy exemption from duty payable on their first
clearances upto a value of Rs.30 lakhs. There have been persistent representations that
in computing the eligibility of a small-scale unit for this concession, the value of
goods falling under iterns other than Item 68 should be excluded. There have also
been demands that clearances for exports should be excluded so that the units in the
small-scale sector are encouraged to step up their export efforts. I accept the validity
of these demands. Keeping these as well as the proposed increase in duty under Item
68 in view, I propose to rationalise the existing scheme of exemption. Under the
22
revised scheme which would be effective from 1st April, 1979, small scale
manufacturers whose clearances for home consumption of goods falling under Item
68 in the preceding financial year did not exceed Rs.30 lakhs
would enjoy complete exemption from the duty payable under item 68, on their
first clearances of a value upto Rs.15 lakhs; they would pay duty at 4 per cent, which
is half of the rate of duty proposed for this item, on clearances between Rs.15 lakhs
and Rs.30 lakhs.
130. As the Hon’ble Members are aware, the scheme of excise duty concession
to encourage higher production in selected industries, which was announced in the
year 1978, is due to expire on 31.3.1979. I do not propose to continue the scheme
beyond this date. This withdrawal is expected to yield an additional revenue of
Rs.40 crores.
131. I have also taken this opportunity to review a number of existing
notifications and I propose to modify or withdraw some of them. The details of this
will be found in the Budget papers.
132. In my search for additional resources I have, of necessity, to fall back
upon the old faithful, cigarettes. I have already referred to the withdrawal of the
duty on tobacco at the unmanufactured stage which is borne by cigarettes. I now
propose to adjust the rate structure on cigarettes in such a way as to further secure
an additional sum of Rs.60 crores from this item. Taking into account the revenue
expected to accrue from this measure and the recasting of the rate structure applicable
to the manufactured tobacco products, which I have referred to earlier, the States
share in respect of additional excise duty in lieu of sales tax will go up by Rs.18.31
crores a year.
133. As Hon’ble Members are aware, the excise duty mechanism has been
used consciously to encourage the production of matches in the non-mechanised sector.
I propose to carry this process further by stepping up the duty on matches produced by
the mechanised sector from the existing level of Rs.4. 83 pet gross boxes of 50 matches
to Rs.9. 20. I also propose to round off the existing level of duty applicable to the non-
mechanised sector, other than cottage units, from the existing level of Rs.4. 52 to
Rs.4. 50. As regards cottage sector units, I propose to reduce the duty applicable to
them from Rs.3. 36 to Rs.1. 60. I am sure this package of measures will result in a
further accelerated growth of the non-mechanised sector in general and cottage units
in particular. The additional revenue yield from this measure is expected to be of the
order of Rs.8 crores during a year.
134. Machine-made carpets produced in a few organised units constitute an
Item of elite consumption. I can see no justification for encouraging this line of
production when we have a large number of traditional carpet weavers whose skills
have. won international renown. I would not like the livelihood of these weavers to
23
be threatened by the proliferation of machine-made carpets. I, therefore, propose to
impose a duty of 30 per cent on such machine-made carpets. Handmade carpets will
be totally exempt from this levy. The estimated additional yield from this proposal
is Rs.1.9 crores.
135. Consistent with the above approach, with a view to encouraging labour
oriented non-power processing sector of the, cotton textile industry, I propose to
withdraw the concessional rate of 8 per cent ad valorem on power-processed white
powerloom cotton fabrics of finer varieties so that such fabrics also pa the same rate
of 1.2 per cent ad valorem as is applicable to other power-processed fabrics.
136. This Government is committed to the encouragement of the handloom
sector. The competitive capacity of handloom fabrics in relation to fabrics produced
by powerlooms and composite mills has to be improved further. I, therefore, propose
to increase the excise duty on cotton and cellulosic spun yarn of finer counts used by
composite textile mills and powerlooms by about 10 per cent of the existing rates.
Details of these changes are available in the Budget papers. Additional revenue expected
from these measures is about Rs.10 crores.
137. The special duties of excise imposed as a part of the 1978 Budget are due
to expire on 31.3.1979. I propose to continue these levies for another year at the
existing rate of 1/20th of the effective basic excise duties. However, it is proposed to
exempt from this levy items in respect of which rates have been restructured as well
as the new levies; the existing exemption in respect of electricity, coal and Item 68
will also be continued.
138. I shall now deal with the proposals concerning customs duties. The most
important of them relates to withdrawal of the existing exemption from countervailing
duties of customs applicable to imported goods, which attract classification under
Item 68 of the Central Excise Tariff. When this residuary entry was introduced in that
Tariff in 1975, Imported goods were exempt from the corresponding countervailing
duty of customs. This exemption which was initially granted when the excise duty on
indigenous goods was 1 per cent ad valorem has continued, even though the rate has
successively been stepped up to 5 per cent. As I have already state I have proposed a
further increase in the Central excise duty under item 68, from 5 per cent to 8 per cent
ad valorem. In this context and as a measure of protection to the indigenous goods
classifiable under-item 68, I propose to withdraw the existing exemption in respect of
imported goods. In withdrawing this exemption, however, I have not proposed any
change in the duty in regard to project imports and also the (items of machinery on
which the customs duty was, in the recent past, reduced to 25 per cent ad valorem on
the consideration that such machinery is not indigenously produced. This measure
will yield an additional revenue of Rs.96 crores by way of countervailing duty.
139. In the context of the sizable gap between supply and demand of edible
oils, substantial imports of these oils have taken place in the past and are continuing.

24
As a means of assuring remunerative prices to indigenous producers of oil seeds, I
propose to levy basic customs duty on palm oil, rapeseed oil, soyabean oil, sunflower
oil and palmolein oil at 121 per cent ad valorem. They will, however, be exempt from
auxiliary and countervailing duties. This measu-re is expected to yield an additional
revenue of Rs.33.5 crores.
140. It is proposed to continue the auxiliary duties of customs for the next
financial year at the existing levels.
141. Taking Union excise duties and customs duties together, my proposals
will lead to a net revenue gain of Rs.606.14 crores in a full year, of which Rs.413.15
crores will accrue to the Centre and Rs.192.99 crores to the States.
142. Where changes are proposed to be made by notifications, effective from
the 1st March, 1979, copies of such notifications will be laid on the Table of the
House in due course.
143. Members are aware that in respect of every international journey paid for
in Indian currency, Foreign Travel Tax is being collected from passengers. In order to
simplify the administration of the tax, and to guard against the possibility of evasion,
I propose to revise the scheme and replace the ad-valorem levy with a specific one.
The new arrangements will be-brought into force as soon as possible after legislation
in this behalf is enacted. This measure will not have any significant revenue effect.
144. I have now a few words to say on behalf of my colleague, the Minister of
Communications. As Hon’ble Members are aware, the unit costs of a number of our
postal services exceed the revenues they fetch. Moreover, the modernisation of
telecommunication services involves large capital investment. These factors necessitate
an increase in postal and telecommunication tariffs. A memorandum showing the
proposed tariffs is being circulated along with the Budget papers. The letter card
(inland letter) and the letter will cost five paise more. The rate for the post card has
been left untouched. As regards telecommunication tariffs, the ordinary telegram of 8
words will cost Rs.2.25 as against Rs.2 at present and each additional word will cost
30 paise as against 25 paise at present. The rate for Press telegrams will however
remain unchanged. Local call charges, beyond 1750 calls per quarter, will be 40 paise
per call, as against 30 paise at present. I will not go into other details which are given
in the memorandum. The tariff revisions, which will be given effect to from a date to
be notified by the Government after the Finance Bill is passed, are estimated to result
in additional revenue of Rs.57.96 crores per annum, The yield during 1979-80 is
placed at Rs.48.30 crores and has been accounted for in estimating the internal resources
of the Posts and Telegraphs.
145. Our tax effort will bring in about Rs.665 crores, of which Rs.205 crores
will accrue to the States leaving Rs.460 crores with the Centre. Taking also into account
Rs.160 crores of accretions of compulsory deposits by income-tax payers, there will
25
be a residual deficit of Rs.1355 crores, which I propose to leave uncovered. I have
assessed carefully the inflationary potential of a deficit of this size. The large food
output of the current year, the large stocks of food and other commodities that we
have, the large volume of foreign exchange reserves and a continuation of the current
supply management and restrictionist monetary policies give me confidence that we
shall be able to maintain reasonable price stability in the coming year.
146. With this I have come to the end of my labours. I have attempted in this
budget to put the maximum emphasis on agricultural and rural development and labour
intensive industry, because it is now accepted by all that only that way can we eradicate
poverty and unemployment in the country. I have, however, not neglected large Industry
and infrastructure in the process. On the contrary, I have positively encouraged them.
But I have no sympathy with those industries which cater to the wants of the rich. We
can have no room for production which caters to the rich and is thus a visible
manifestation of the disparities which exist in society.
147. The elimination of the kind of poverty which exists in our country cannot
be achieved overnight. It is a long process which involves large investment through
the mobilisation of surplus resources wherever they exist in society, better organisation
and the development and transfer of appropriate know how to millions of small persons
engaged in agriculture and allied occupations and village industries throughout the
country. The ultimate objective is not merely to raise the standard of living of the poor
but to build a society of men and women with skills, resources, imagination, and
above all, hope. I like to think that this budget is a small step in that direction. But its
success really depends upon a national consensus about the desirability of the objective
and the need to work hard for it and a willingness on the part of the powerful and
affluent sections of society to make the necessary sacrifices. I seek the help of this
House in achieving such a consensus and securing the required sacrifices.
(February 28, 1979)

26
SPEECH OF SHRI H.M. PATEL MINISTER OF FINANCE INTRODUCING
THE BUDGET FOR THE YEAR 1978-79

Sir,
I rise to present the Budget for the year 1978-79.
2. The Economic Survey has presented a detailed review of the trends in the
Indian economy for the current year. I shall, therefore, refer only briefly to them.
3. We inherited a highly explosive inflationary situation when we took office.
Prices in 1976-77 went up by over 12 per cent. In a year in which real gross national
product increased by less than 2 per cent, money supply went up by 20 per cent. Thus
at the beginning of 1977-78, the economy was faced with a massive excess of liquidity
which threatened to unleash a fresh bout of inflation. In the early part of the year, our
Government, in the process of honouring its commitments made to the people, withdrew
the compulsory deposit scheme and also restored the statutory bonus of 8.33 per. cent.
These measures no doubt further added to the pressure of demand. Against this
background, it is most gratifying that the economy has been so managed during the
current year as to ensure that the prices did not increase. Hon’ble Members will be
pleased to note that the wholesale price index is today lower than the level inherited
by us from the previous Government.
4. This relative price stability has been achieved by pursuing an active policy
of supply management and public distribution and a policy of restriction on money
and credit. The issue of cereals and sugar from the public stocks has been liberal.
Large quantities of edible oil, cotton and artificial fibres were imported to make up
domestic shortfalls. Exports of a number of essential commodities were regulated and
export duties were adjusted in order to increase domestic availability. Both
administrative and monetary steps were taken to ensure that speculative hoarding did
not take place and cornered stocks came on to the market. At the same time an active
support programme was pursued with regard to many commodities other than cereals
to ensure incentives for adequate production. We can justifiably claim that significant
progress was made towards evolving an integrated price and distribution policy for
essential commodities.
5. I derive added satisfaction from the fact that relative price stability has
been maintained against the background of a rapidly expanding economy. The gross
national product will register a satisfactory growth of 5 per cent in the current year
as compared to 1.6 per cent in 1976-77. Agricultural production which had declined
sharply last year is expected to more than make up the lost ground. Foodgrain
1
production is expected to exceed last year’s level by about 10 million tonnes despite
the natural disasters in the South. The production of commercial corps is also expected
to improve considerably.
6. This result has been achieved in part due to good weather but to an even
greater extent because of the increased irrigation potential, increased use of fertilizers,
pesticides and high yielding variety seeds. Additional irrigation potential created during
the year will be 2.23 million hectares- the highest achieved in a single year so far. The
use of fertilizers is expected to go up by 23 per cent to 4.2 million tonnes. The area
under high yielding variety seeds is expected to increase to nearly 35 million hectares
in 1977-78, an increase of more than 2 million hectares over the previous year. Clearly
the basis now exists for a more dynamic growth of agriculture in the years to come.
7. The balance of payments continues to be strong. Export growth has,
however, slowed down considerably. Slow growth of the world economy, growing
protectionism, a sharp decline in some commodity prices and a lack of demand for
others account for this. It is important, therefore, that we do not relax in our export
efforts. We should indeed continue to strengthen the export organisation that has been
built up and the image of Indian exports that has been created while simultaneously
improving the competitiveness of our exports further.
8. The country’s foreign exchange reserves have risen further, despite an
increase in imports, because of continued inward remittances and a small surplus on
trade account. Since reserve accumulations amount to lending abroad, these should be
drawn down and used for internal development by a poor country like India.
9. A number of steps have been taken to utilise these reserves but the
continued accretion indicates that these are not enough. I, therefore, propose to create
a new facility under which term lending financial institutions and public sector banks
win provide rupee finance on appropriate terms to cover the import costs of approved
projects. This will be in addition to the rupee finance which is already being made
available to cover domestic costs. A consortium of banks will be formed to provide
such loans, supplementing the finance by the term lending institutions.
10. At the same time, I want to dispel the impression that our reserves are so
large that they have to be spent without any real justification. The fluctuations in our
balance of payments arising from swings in agricultural production and in the prices
of some of our essential imports are large, and we do not have a secondary line of
reserves as the developed countries have. A substantial volume of reserves is thus
necessary for us to have manoeuvrability and flexibility in our development policy.
We should, therefore, use them wisely to increase our development potential and not
fritter them away.
11. Industrial production in the current fiscal year is expected to show an
increase of 5-6 per cent. This is no doubt less than the growth of industrial production
2
in 1976-77. However, it has to be recognised that the lower growth rate this year is to
a large extent due to the shortage of power which is directly attributable to the past
neglect of this vital sector. Besides, a substantial part of the increased output of major
industries in 1976-77, such as iron and steel and coal went into inventories rather than
in satisfying final demand. By contrast, inventories in these industries have shown a
healthy decline in the current year.
12. It goes without saying that we cannot be satisfied with the present rate of
growth of industrial production. We must strive for acceleration in industrial growth
since it can make a material contribution in generating new employment opportunities,
maintaining price stability and providing savings for future growth. An increase in
public investment, particularly in infrastructural facilities such as power, coal, transport
and irrigation can provide the necessary fillip. In addition, there is an urgent need to
improve project implementation and make an effective use of resources.
13. An improvement in the state of consumer goods industries depends upon
cost reduction through more efficient operation and modernisation and on generation
of a more broadbased demand. An increase in rural incomes resulting from the increased
emphasis on agricultural investment and rural development should prove beneficial to
a wide range of industries. This only reinforces our conviction that rural development
should constitute the heart of the future strategy of growth.
14. The role of exports should not be underestimated in this regard. Export
demand has sustained to a significant extent industries like engineering, leather, iron
and steel, textiles and sugar. Though in a continental economy like India export led
growth may be out of question, the important role which exports can play in sustaining
production and investment needs to be emphasised. The relative freedom and
manoeuvrability which growing export earnings have given to policy making underscore
the importance of a sustained export drive.
15. In spite of the considerably better economic performance during the current
year, the basic problems of unemployment and poverty continue to be with us. A year
is too short a period to make any serious impression on these gigantic problems. We
made a beginning last year by allocating more resources to agriculture and ancillary
services, irrigation and rural infrastructure. We will have to persist along these lines
because it is only over time that the necessary increase in output and employment will
come about. The effort to plan, build an implementation organisation, arrange supply
lines of inputs and marketing will have to go on unremittingly. The details of this
general strategy of development will be available to us when the new Plan is presented
to the nation next month.
16. Certain broad decisions which will be part of this strategy have already
been taken. Government have formulated a target of creating an additional irrigation
potential of 17 million hectares in the next 5 yeaRs.Nine million hectares will be
under major irrigation and 8 million hectares will be under minor irrigation so that an
3
optimal use will be made of both surface and ground-water resources. Simultaneously
efforts will be made to ensure that this potential as well as existing facilities are used
effectively. The supply of inputs will be increased through investment in industries
like electricity and fertilizeRs.Government will also promote the use of organic manures
along with chemical fertilizers to protect the quality of the soil over the long run.
Command area development programmes will be implemented vigorously.
17. In many parts of the country a large proportion of the area under
cultivation is without irrigation at present and it will be without irrigation in the
future as well because of lack of adequate surface or ground water resources. These
areas also have to prosper if rural disparities are not to widen. Therefore much more
attention will have to be paid to dry cultivation met-hods. This is extremely important
because all of our millets, and a large proportion of pulses, oilseeds and cotton are
grown under such conditions, leading to low growth of output and violent fluctuations
in output and prices.
18. Along with agriculture small industries and rural industries have an
-Important part to play in the elimination of poverty and unemployment. The new
Industrial Policy Statement embodies this goal of government policy. Large area; of
production have been reserved for cottage and small industries and an improved
organisation which will help them grow faster has been outlined. At the same time,
since many of these industries may not be viable without a great deal of technical
improvement, there is an urgent need to undertake research and render technical
assistance to them. I earnestly hope that efforts in this direction will be made by
public sector enterprises and others in the organised sector.
19. Industrial unrest has been causing a great deal of anxiety this year. A
certain reaction to the earlier constraint under the obnoxious emergency regime is
understandable. But output is likely to be affected seriously if this unrest is allowed to
continue unabated. While the legitimate demands for additional emoluments should
be met, these have to be appraised against the socio-economic realities of the country.
It is, therefore, important to have guidelines to determine a wages, incomes and prices
policy. We have appointed a study group to suggest guidelines for such a policy. Its
report is due to be submitted shortly. A loss of production is not in the interest of the
country. It is, therefore, of the utmost importance that labour management and
government cooperate in bringing about harmonious industrial relations.
20. The availability of resources for development does not seem to have
kept pace with the need for investment. This is because of the rapid increase in
non-development expenditure and the erosion of the resource base. Therefore, it
is necessary to practise the utmost economy in administrative expenditure and to
curtail the various concessions and subsidies given to different sections of society
without adequate economic justification. We should aim at greater cost
effectiveness through better project planning and implementation. The working
4
of public sector projects should be improved still further so that their surpluses
contribute more to the public exchequer.
21. There is also an urgent need to increase individual and corporate saving if
increased investment expenditure is to take place without any adverse pressures on
prices. This would require greater simplicity in the life style of those individuals who
can save, and a greater efficiency and a reduction in inessential expenditure on the
part of corporations.
REVISED ESTIMATES FOR 1977-78
22. In the Revised Estimates for 1977-78, the revenue from income and
corporation taxes shows a shortfall of Rs.36 crores and Union excise duties are
expected to yield Rs.140 crores less than the Budget Estimates of Rs.2336 crores
and Rs.4593 crores respectively. This is mainly due to the slower growth of industrial
production in certain sectoRs.The yield from customs revenues and the interest-tax,
on the other hand, is expected to show an improvement of Rs.52 crores and Ps.16
crores over the Budget Estimates of Rs.1728 crores and Rs.99 crores respectively.
After allowing for States’ share of taxes and duties, which remains at Rs.1799 crores
as in the original Budget, Centre’s share of tax revenue will be less than the Budget
estimate by Rs.100 crores.
23. Market loans will exceed the Budget figure of Rs.1000 crores by Rs.183
crores, because of larger deposit accretions with banks. But net receipts on account
of external assistance will be lower than the Budget Estimate of Rs.1052 crores by
Rs.275 crores. This is due to the fact that a larger proportion of aid received now is
project aid which is by nature slow disbursing. Programme assistance, which would
have been utilised quickly, has been reduced because of the improvement in our
balance of payments.
24. During the course of the year a number of decisions taken by Government
for the benefit of large sections of the population cast additional burdens on the Budget.
To benefit farmers, the procurement prices of paddy and wheat were increased during
the year without raising the issue prices from the public distribution system. Again,
urea prices were further reduced by Rs.100 per tonne in October last year, though in
the course of the year the cost of imported fertilizers increased significantly and the
retention prices to domestic manufacturers of fertilizers were raised to improve their
viability. This policy of pricing fertilizers involves a subsidy from the Central Budget
which is much more than the revenue from import and excise duties on fertilizers.
25. A number of benefits were given to Central Government employees. An
additional instalment of dearness allowance was sanctioned to them during the year.
The rate of interest on Government provident funds has been enhanced and the incentive
bonus scheme for those subscribers who do not make withdrawals has been further
liberalised. The pensioners too were sanctioned another instalment of relief from
September, 1977. These and other concessions given add up to a substantial expenditure.
5
 26. Non-Plan revenue expenditure, excluding Defence, is likely to exceed the
Budget Estimate of Rs.5436 crores by Rs.118 crores. Of this increase, Rs.84 crores is
under export promotion due mainly to a spill over of payments pertaining to 1976-77
and the introduction in the current year of a system of quicker disbursement of assistance
to exporters. Barring this increase, non-Plan revenue expenditure has been kept
practically within the original Budget despite the additional burdens already mentioned.
This is a welcome departure from the trend in the past several years of a steep increase
in non-Plan expenditure. We have been able to achieve it by enforcing the utmost
economy and pruning inessential expenditures to the maximum extent possible.
27. The variations in non-Plan capital expenditure have been somewhat wider.
There has been a net increase of Rs.100 crores on account of technical credits to
foreign countries under bilateral rupee trade agreements. These credits will be repaid
when the imbalance in trade is corrected subsequently. The net outgo on account of
fertilizer imports will be Rs.190 crores more due partly to bunching of imports towards
the end of the year, and partly to a rise in international prices.
28. As Hon’ble Members are aware, we have restored to the workers the
minimum bonus of 8.33 per cent for the year 1976. A wage settlement was also reached
with port and dock workers involving arrear payments from January, 1974. These
have imposed an additional financial burden on public sector enterprises. This and
certain other adverse factors have led to an increase of Rs.113 crores in the budgetary
support to public sector undertakings.
29. The expenditure on Defence continues to be the same as in the original
Budget, viz. Rs.2752 crores.
30. Revised Estimates show that Plan expenditure from the Budget on
petroleum, fertilizers, steel and telecommunications is going to be substantially less
than in the Budget. This was mainly due to slippages in delivery schedules of machinery
and equipment and in civil construction. Also, a few public sector undertakings were
able to generate more internal resources than anticipated earlier and therefore needed
less budgetary support for financing their Plan outlay.
31. On the other hand, the total outlay on agriculture including rural
development is expected to increase by Rs.12 crores. Plan expenditure on health will
also be higher by Rs.13 crores, mainly on account of the intensification of the malaria
eradication programme. New schemes and accelerated work on on-going schemes,
specially those linked to steel and power plants, have led to an increase of Rs.13
crores in the outlay on the coal sector.
32. Overall, the budgetary outlay on Central Plan schemes is expected to be
Rs.230 crores less than the original Budget provision of Rs.3978 crores. I am not at all
happy about the pace at which expenditure on Plan projects takes place. What is
needed is a drastic change in organisation. It is proposed to devote much greater
attention to this question in the coming months.
6
 33. Central assistance to the States’ Plans will be Rs.2031 crores as against
Rs.1617 crores provided in the Budget. An additional sum of Rs.414 crores was provided
as a cover for the gap in States’ resources for financing their Plans and as advance
Plan assistance to the States affected by the recent unprecedented natural calamities.
34. When I presented the Budget last year I had estimated a budgetary deficit
of Rs.84 crores. This was after 1 had taken credit for a borrowing of Rs.800 crores
from the Reserve Bank of India on the assumption that foreign exchange reserves
would be drawn down during the year. My anticipation of the country’s ability to draw
down the foreign exchange reserves has not materialised. Since I had made a clear
commitment that I would use this credit from the Reserve Bank only if the reserves
were drawn down, I do not propose to resort to this borrowing. The total budgetary
deficit is now expected to be of the order of Rs.975 crores. This may appear to be a
sizeable sum but let me first clarify that of this amount, the sum of Rs.414 crores is
directly accounted for by the additional assistance which I was compelled to make to
the States on account of their deficits. Members will recollect that 1 had drawn attention
to the improvident financial policies of the outgoing Governments in the States. In
addition a number of States which suffered serious damage on account of cyclones
and floods had also to be assisted. As a result there was substantial erosion of resources.
It was my duty to assist the new Governments of the States so as to enable them to
start on a reasonably clean slate. Having done so, I can reasonably expect them to
manage their affairs hereafter in such a way that they do not need to have recourse to
unauthorised overdrafts. I would like to state categorically that it will be my endeavour
to put a stop to this unhealthy practice.
35. Another large sum of Rs.190 crores is accounted for by importation of
fertilizers. We have in fact by this process converted foreign exchange into a valuable
fertilizer stock position and in this process we have not added to the money supply.
Hon’ble Members will appreciate that despite what seemingly appears to be a major
deficit, the Government’s prudent policies of supply management and credit restraint
have controlled any possible adverse effects and indeed we have ended the year with
no inflation at all.
BUDGET ESTIMATES FOR 1978-79
36. The Annual Plan for 1978-79 has been prepared pending the finalisation
of the new National Plan. The Fifth Plan is being terminated at the end of the current
financial year and the new Plan will start from 1st April, 1978. The Planning
Commission is presently engaged in formulating the new strategy of development in
keeping with the changed priorities. It will be finalised after the National Development
Council deliberates upon it next month.
37. Hon’ble Members will appreciate that planning being a continuous process,
at any point of time there is a large number of schemes and programmes under way
which cannot be given up. Besides, many of these projects are in advanced stages of
7
completion and therefore adequate provision is necessary if these are to yield timely
results. These considerations have circumscribed our freedom in reordering Plan
priorities for 1978-79. Nevertheless, I venture to say, the Annual Plan for 1918-79, as
it has emerged, reflects the present Government’s commitment to a new
agriculture-oriented and employment-intensive strategy for development.
38. The total outlay on the Annual Plans of the Centre, States and Union
territories for 1978-79 will be Rs.11649 crores as against Rs.9960 crores in 1977-78.
This represents an increase of 17 per cent. Continuing schemes absorb as much as
Rs.10465 crores of this outlay. Out of the remainder, Rs.150 crores have been allocated
for starts on new power projects and Rs.1034 crores for schemes under other sectors.
As much as 80 per cent of the latter i.e. Rs.828 crores, is accounted for by agricultural
and other schemes subserving the development of rural areas.
39. The Central Budget for 1978-79 contains a provision of Rs.7281 crores
for the Central Plan and for assistance towards the Plans of States and Union territories.
The corresponding figure for 1977-78 was Rs.5790 crores.
40. A provision of Rs.2761 crores has been made for Central assistance for
States’ Plans and for Union territories Plans, the sub-Plans of the Hills and Tribal
areas, North Eastern Council and assistance to the Rural Electrification Corporation.
A provision of Rs.4520 crores has been made in the Budget towards the Central Plan.
Together with the internal and other resources of public sector undertakings, the Central
Plan will be Rs.5664 crores in 1978-79 as against Rs.4939 crores in 1977-78. Inclusive
of their own resources, the Plans of States and Union territories will add up to Rs.5985
crores as compared to Rs.5021 crores in 1977- 78.
41. For the first time in many years, the States’ and Union territories’ Plans
together will be larger than the Central Plan. The step up in the outlay on States’ Plans
as a whole is 19 per cent while the Plans of the Union territories will go up by 27 per
cent. The Central Plan, on the other hand, will increase by 15 per cent. This reflects
a reordering of our Plan priorities In favour of agriculture, irrigation, power and rural
development all of which figure prominently in States’ Plans and in some measure a.
shift towards greater decentralisation in planning. Full provision has been made in
each State’s Plan for meeting the requirements of agriculture, the ongoing major and
medium irrigation projects as well as power projects. Adequate provision has also
been made for essential new schemes in these two sectors.
42. In keeping with our emphasis on agriculture and rural development, the
Plan outlay for agriculture has been raised by Rs.490 crores to Rs.1754 crores for
1978-79. In particular the outlay on Command Area Development has been stepped
up from Rs.49 crores in 1977-78 to Rs.82 crores in 1978-79 and that on Small Farmers’
Development Agency in the Central Plan from Rs.45 crores to Rs.115 crores in 1978-79.
The outlay on the drought prone area programme has been raised from Rs.51 crores in
8
1977-78 to Rs.76 crores for 1978-79. The desert development programme is being
allocated Rs.20 crores for 1978- 79 as against only Rs.6 crores in 1977- 78.
43. In the new planning strategy, block development plans will be a major
instrument for achieving full employment in rural areas in a time bound programme.
The details of this programme are being worked out. In the meanwhile, I have made
a taken provision of Rs.20 crores for this programme. This provision will be enlarged
as the full details of the programme are known.
44. As part of the new strategy for rural development, it is proposed to launch
a massive programme of dairy development Operation Flood II-which will raise the
nutritional standards of the people, generate employment for about 4 million people in
the first phase and augment the Incomes in rural areas through. a viable subsidiary
occupation. The project which is estimated to cost nearly Rs.500 crores is being
processed for implementation but meanwhile action on certain essential pre-programme
elements has already been authorised so that the main work on the programme may
start in time.
45. Having regard to the extensive coastline of our country and the large
numbers of people engaged in fisheries, the outlay on fisheries in the Central Plan is
being raised from Rs.33 crores in 1977-78 to Rs.61 crores in 1978-79. This enhanced
outlay will, apart from strengthening basic infrastructuraI facilities, enable us to enlarge
employment and augment the incomes of fishermen.
46. In may last Budget speech, I had indicated that as part of a comprehensive
programme of rural infrastructure development It was necessary to accelerate the
construction of all-weather approach roads and the provision of drinking water facilities
in problem villages. In 1978-79, the outlay on rural roads in the States’ Plans has been
stepped up to Rs.115 crores as against the current year’s outlay of Rs.85 crores. The
provision for rural water supply in the States, Plans in 1978-79 will be Rs.105 crores
as against Rs.70 crores in the current year. This will be supplemented by a special
provision in the Central Plan to the extent of Rs.60 crores. The promise made last year
that the allocations for rural water supply and rural roads will be enhanced has thus
been redeemed. I will go further and extend an assurance to the States that if these
programmes are implemented effectively I shall be prepared to consider increasing
these allocations.
47. I have already emphasised the need to improve the opportunities for gainful
employment in rural areas through the development of rural and small scale industries.
The total allocation for these in 1978-79 will be Rs.219 crores against Rs.145 crores
in 1977-78.
48. The programmes for welfare of the Scheduled Castes and other backward
classes will receive a special impetus with a step up in the outlay from Rs.86 crores
in 1977-78 to Rs.125 crores in 1978-79. The outlays in the States’ Plans for tribal
9
development will be increased from PS. 258 crores, in 1977-78 to Rs.343 crores in
1978-79. In addition, the special Central assistance for tribal sub-Plans will be stepped
up from Rs.55 crores in 1977-78 to Rs.70 crores in 1978-79.
49. The creation of an additional irrigation potential of 17 million hectares
during the next five years is an ambitious programme which will call for a large
increase in investment and a restructuring, strengthening and streamlining of the
organisational set-up for planning, execution and monitoring. The outlay on major
and medium irrigation projects for 1978-79 will be Rs.1166 crores as against Rs.1032
crores in 1977-78. The Plan outlay for minor irrigation will be Rs.235 crores in 1978-79
as against Rs.206 crores in 1977-78. It will be supplemented to a large extent by loans
from the Agricultural Refinance and Development Corporation. It is expected that an
additional irrigation potential of 3 million hectares will be created during 1978-79 as
against 2.23 million hectares in 1977-78.
50. Inadequate allocations in the past for power and the leisurely pace of
execution of electricity projects have led to a chronic shortage of this basic Infrastructure
facility. Both these need to be corrected if recurrent power shortages are not to hold
up our progress. Therefore the Plan for 1978-79 envisages a massive addition to
generating capacity and the development of the transmission and distribution system.
Works on schemes with a total capacity of about 30000 MW would be in different
stages of execution in the coming year. Of this about 3500 MW will be commissioned
in 1978-79 as against about 2000 MW expected in the current year and the total
generating capacity in the country will then be raised to 29000 MW.
51. In the Central sector, provision is being made for fresh starts on a number
of projects such as the Korba super thermal project, the Ramagundam super thermal
project. the power station including the second mine cut at Neyveli, the Badarpur
thermal station stage Ill, the Bokaro thermal station of DVC, and the pumped storage
plant of Panchet Hill. Provision has also been made for taking up new 400 KV
transmission lines in the Central sector associated with super thermal stations and in
the States. Work on load despatch stations is also being accelerated. This should give
the House an idea of the programme of power generation which we are going to
undertake.
52. A sum of Rs.244 crores has been provided in the Central Plan for power
development. The outlays in States’ and Union territories’ Plans, which account for
bulk of the provision for power, add up to Rs.1953 crores. The provision in 1978-79
for the power sector would be Rs.2217 crores compared to Rs.1925 crores in the
current year. In view of the importance of rural electrification the provision for it has
been raised to Rs.297 crores as compared to Rs.195 crores in the current year. We
shall ensure that these projects are implemented quickly and efficiently so that the
economy derives full benefit from such a large volume of investment.

10
 53. A provision of P s. 6 30 crores is being made for the oil sector in 1978-79
because there can be no slackening of our efforts towards self-sufficiency in crude oil.
This is yet another step forward in the nation’s march towards self-reliance.
54. A Budget provision of Rs.563 crores is being made for steel in 1978-79 as
against Rs.511 crores during 1977-78. The requirements of Bhilai and Bokaro expansion
programmes, the cold rolled grain oriented plant at Rourkela and the Salem steel plant
have been met. The outlay on Kudremukh project is being stepped up from B s. 142
crores in 1977- 78 to R s. 213 crores next year, in order to be able to meet the deadline
set for the completion of the project.
55. An impression has been sought to be created that this Government is
giving less emphasis to family planning. Such an impression is totally unwarranted.
Our commitment to a vigorous and nation-wide programme of family planning is firm
and clear. A provision of Rs.393 crores is being made in 1978-79 for health and family
welfare as against only Rs.284 crores in 1977-78. It is now felt that instead of
concentrating only or. the narrow aspects of family planning a broader concept of
family welfare will lead to a better acceptance of family planning practices. Funds
have also been provided on an adequate scale both in the Central and States’ Plans for
expansion of health cover for rural areas including the Scheme for community health
workers.
56. This Government fully recognises that science and technology have a
valuable contribution to make in the modernisation of our economy and, in the growth
of agriculture and industry. Hon’ble Members will be glad to know that the outlay on
science and technology has been increased from Rs.179 crores in 1977-78 to Rs.220
crores for 1978-79, i.e., an increase of 23 per cent. Similarly the provision for the
Indian Council for Agricultural Research has been increased from Rs.37 crores in
1977-78 to Rs.51 crores for 1978-79. The Indian Satellite Project (INSAT-I) for which
a provision of Rs.23 crores has been made for 1978-79 also needs special mention.
This project is unique in that it combines a package of facilities covering
Telecommunications, meteorology and television.
57. Non-Plan revenue expenditure, other than Defence, is estimated at Rs.5908
crores showing an increase of Rs.354 crores over the Revised Estimates for the current
year. Interest payments and grants to States together account for an increase of Rs.384
crores. If we exclude these two items, the other non-Plan revenue expenditure will be
less than the Revised Estimates for the current year. This has been made possible by
a rigorous scrutiny of non-Plan expenditure, pruning it with a view to achieving, the
utmost economy. The various subsidy payments have also been reviewed in the light
of their continued relevance in the present economic situation and the provisions
therefor have been suitably reduced. Non-Plan budgetary support to public sector
enterprises will also be Rs.127 crores less than in the current year.
11
 58. Defence expenditure next year will be Rs.2945 crores, as against Rs.2752
crores in the current year.
59. Gross tax revenue for 1978-79, at the existing rates of taxation, is expected
to amount to Rs.9636 crores showing an increase of Rs.730 crores over the Revised
Estimates for the current year. Income tax and corporation tax receipts are expected to
go up by Rs.115 crores and Rs. 145 crores respectively. Union excise duties are
estimated to yield Rs.374 crores more. The yield from customs revenue will also be
more by Rs.70 crores. States’ share of taxes and duties, at Rs.1929 crores, will be
higher by Rs.130 crores.
60. Market loans will yield Ps.1650 crores as compared to Rs.1183 crores in
the current year. Net external assistance, after providing for repayments and interest
payments, is estimated at Rs.1138 crores, including disbursements against new credits.
61. Taking other receipts into account, total receipts in 1978-79 are estimated
at Rs.17021 crores. Total expenditure for the coming year will be Rs.18417 crores.
The overall budgetary gap at the existing rates of taxation will thus be Rs.1396 crores.
Hon’ble Members will recollect that Government announced yesterday their decision
to sanction with effect from 1st January, 1978 another instalment of dearness allowance
to Central Government employees. Government’s new policy in regard to sugar industry
was also announced yesterday. These two decisions may cast an additional burden of
the order of Rs.80 crores on the Central exchequer next year. Understandably I have
not taken this into account in my Budget proposals. It is, however, my hope that this
additional burden will be substantially accommodated within the Budget Estimates by
economy measures which are being progressively implemented.
PART B
62. The gap of Rs.1396 crores is clearly a very substantial gap and places on my
shoulders a difficult and challenging responsibility to find ways and means of bridging
the gap. I have already enumerated a number of favourable factors in the national
economy which give us the necessary strength and opportunity to manage the economy
even with a large though reasonable deficit without creating inflationary conditions.
However, prudence would require that the deficit, no matter how reasonable, should
be kept as low as possible and it is, therefore, necessary to mobilise additional resources
to the maximum extent possible. I am sure that the nation will willingly make a
substantial contribution towards the fulfilment of a national Plan of a magnitude which
will enable us to reach our objectives at a faster pace.
63. In making my proposals for resource mobilisation I have borne in mind
the salutary principles of tax policy which have been laid down in the Economic
Policy Resolution of the Janata Party issued in November, 1977. These principles bear
repetition.
12
 “We believe that the taxation policy of the Government must keep in
mind five considerations:
(1) Increased public investment expenditure must necessitate increased public
income. The people of the country, therefore, have to accept the burden of higher
taxation needed for investment in the future.
(2) Taxation policy must simultaneously aim at redistributive justice and must
take into consideration the capacity to pay.
(3) Taxes should be easy to collect and it should be easy for the taxpayer to
know what he has to pay. There is urgent need for the simplification and rationalisation
of the tax administration.
(4) Taxes must have an in-built growth potential and inherent buoyancy.
(5) Taxation policy must aim at stimulating national growth and must
encourage production and savings.”
64. I have had the advantage also of receiving advice from all sections of
society and from all parts of the country. In addition I have received two important
reports - the interim report of the Chokshi Committee on Direct Taxes and the final
report of the Jha Committee on Indirect Taxes. These reports contain a number of
valuable suggestions and I have given them respectful consideration.
65. Before I come to my taxation proposals 1 would like to make some
important policy announcements which have a bearing on the budgetary position.
66. The demonetisation of high denomination bank notes was a step primarily
aimed at controlling illegal transactions. It is a part of a series of measures which
Government has taken and is determined to take against anti-social elements. Despite
the utmost vigilance of the Customs authorities and considerable seizures and
confiscations of smuggled gold, it is an unfortunate and distressing fact that gold
smuggling has to some degree continued. The substantial difference between Indian
gold prices and international gold prices has served as a temptation to smugglers.
Gold smuggling is not only illegal but has helped to sustain black money operations
and foreign exchange racketeering. It is, therefore, necessary for us to think of economic
measures in addition to preventive measures to tackle this evil of gold smuggling. We
have given very careful thought to the question and have decided to commence the
sale of gold from the stocks held by Government. The details of the scheme are being
worked out and will be announced shortly.
67. There is an excellent market for Indian gold jewellery abroad which would
not only enable us to earn a significant amount of foreign exchange but also gainfully
employ the undoubted craftsmanship of Indian jewellers. Hitherto the export of gold
jewellery has been inhibited by the high local price of gold, restrictions placed on
13
such exports and the complex and cumbersome bonding procedures. Government have,
therefore, decided to introduce a simplified scheme for the encouragement of the
export of gold jewellery. Such exports will be facilitated either by allowing importation
of gold or by the sale of Government gold stocks at international prices. The details of
the scheme will be announced very shortly.
68. Members will recollect that the Janata Party manifesto had contained a
promise that the question of removing sales tax and octroi duties would be duly
considered by the Government. I have had a series of discussions with the Chief
Ministers and Finance Ministers of the States to achieve this desirable objective.
The total revenue from sales tax is of the order of Rs.2500 crores, and it is growing
steadily. It constitutes the main source of revenue of the States. The Chief Ministers
of the States have generally showed a lack of enthusiasm for the abolition of the
sales tax. In view of the attitude of the States and since sales tax is a State subject,
the task of persuading the States to give up sales tax calls for persistence and patience.
It certainly cannot be regarded as something which can be accomplished in the
immediate future.
69. The octroi duty, however, stands on a different footing. The revenue from
octroi duty is of the order of Rs.250 crores. There has been a long standing demand
for the removal of this obnoxious levy which causes great inconvenience to trade and
the transport industry. All committees which have gone into the subject have
unanimously proposed its abolition. Studies have also revealed that the cost of collection
of the octroi duty is unduly high. There can be no two opinions that the removal of
octroi duty will be widely welcomed since its abolition will assist the orderly and
healthy growth of the transport system in the country and will considerably reduce
freight costs. I, therefore, propose to request the State Governments to introduce suitable
legislation for the removal of octroi. The octroi revenues are at present going to the
local authorities. Quite understandably they will seek from the State Governments a
reimbursement for the loss of revenue and in turn the State Governments will no
doubt claim a measure of compensation from the Centre. We shall hold discussions
with the State Governments for finding a satisfactory solution.
70. I have now to say a few words on behalf of my colleague the Minister of
Communications. The upward revision of emoluments of employees in the past few
years has resulted in substantial increase in the expenditure of the Postal Branch of
the Posts and Telegraphs Department which is highly labour intensive. The revenues
have not, however, kept pace with the expenditure and the costs of various postal
services exceed the revenues earned. Consequently, the Postal Branch has been incurring
a deficit which is estimated at about Rs.23 crores in the current year. While there is
justification for increasing the tariffs for most of the postal services, it is proposed to
touch only those services which will not affect the common man, particularly in the
rural areas. A memorandum showing the proposed changes in the postal tariffs is
being circulated along with the Budget papers.
14
 71. The tariff revisions, which will be given effect to from a date to be notified
by the Government after the Finance Bill is passed, are estimated to bring in an
additional revenue of Rs.13.73 crores per annum. The yield during 1978-79 is estimated
at Rs.11.44 crores. The results of the tariff revisions have been accounted for in
estimating the internal resources of the Posts and Telegraphs.
72. I shall now deal with my proposals in the sphere of direct taxes.
73. 1 have kept in view the fact that a substantial increase in investment has
necessarily to be backed by increased efforts at mobilisation of savings. My proposals
in the field of direct taxes are accordingly designed to promote larger savings; to
curb extravagant and wasteful expenditure in businesses and professions; and to
channelise funds for stimulating growth and production. I have also sought to provide
some tax relief in selected areas with a view to encouraging larger investment in
desired directions.
74. In order to mobilise additional resources in the form of savings, I propose
to raise the rates of compulsory deposit in the case of income-tax payers. While
taxpayers having current income up to Rs.15,000 will continue to enjoy immunity
from the requirement of making compulsory deposit, in the case of incomes exceeding
Rs.15, 000 and up to Rs.25, 000 the rate will be raised from 4 per cent to 41 per cent.
On the slab of Rs.25, 001 to Rs.70, 000, compulsory deposit is currently made at the
rate of 10 per cent. I propose to split this slab into two. While the rate on the slab of
Rs.25, 001 to Rs.35, 000 will be 11 per cent, the rate on the slab of Rs.35, 001 to
Rs.70, 000 will be 121/2 per cent. On the slab over Rs.70, 000 the rate will be raised
from 12 per cent to 15 per cent. Approximately Rs.25 crores will accrue in 1978-79 as
a result of this measure.
75. I propose to liberalise the concession in respect of long-term savings
through life insurance, provident fund contributions and other approved forms of saving.
At present, 100 per cent of the first Rs.4, 000 of the qualifying savings, 50 per cent of
the next Rs.6,000 and 40 per cent of the balance is allowed as deduction in computing
the taxable income. I propose to allow a deduction equal to 100 per cent of the first
Rs.5,000 of the qualifying savings. The quantum of deduction in respect of the next
Rs.5,000 will continue at the existing rate of 50 per cent and, in respect of the
balance, at the existing rate of 40 per cent. The monetary limit for the savings qualifying
for deduction under this provision is also being raised from Rs.20,000 to Rs.30,000.
These measures will result in a revenue loss of Rs.10 crores in a full year and Rs.7.5
crores in 1978-79.
76. Investors understandably prefer investment which brings them a safe return,
which is provided by fixed deposits in banks or shares of established companies with
a good record for payment of dividends. This results in new companies not attracting
adequate support. In order to stimulate such investment, I propose to give a deduction
in the computation of taxable income of 50 per cent of the amount invested in equity
15
shares of new industrial companies. The maximum investment in a year qualifying for
this deduction will be limited to Rs.10,000. This will entail a loss of Rs.5 crores in a
full year and Rs.3.5 crores in 1978-79. I would cheerfully accept a much larger loss if
it results in stimulating larger investments.
77. Last year, I had introduced a provision to exempt capital gains in cases
where the sale proceeds arising from the transfer of an asset are reinvested within six
months in units of the Unit Trust of India, shares of Indian companies, bank deposits
and other specified assets. In order that this concession leads to the flow of investible
funds into fresh ventures, I propose to provide with immediate effect that investment
in shares of. Indian companies will be taken into account for the purposes of exemption
from capital gains tax only where the investment is made in equity shares of new
industrial companies.
78. Banks allow substantial advances against the security of fixed deposits
with them. Hence, taxpayers who get exemption from capital gains tax by making
such deposits obtain an unduly large tax benefit without commensurate sacrifice. I
have, therefore, decided that fixed deposits with banks made after today will not
qualify as an eligible mode of investment for the purposes of this exemption.
79. The annual letting value of a newly constructed house is reduced for tax
purposes by an amount up to Rs.1,200 in respect of each residential unit for a period
of five years. With a view to providing a stimulus for construction of houses, particularly
for persons in the low and middle income brackets, 1 propose to raise the monetary
limit of Rs.1,200 to Rs.2,400.
80. Initial depreciation allowance is currently granted at the rate of 20 per
cent on the cost of new buildings erected by employers for their low paid
employees. In order to give a greater impetus to the construction of buildings for
workeRs.I propose to Increase the rate of initial depreciation allowance from 20
per cent to 40 per cent.
81. The foreign remuneration of Indian citizens employed outside India is
liable to Indian income-tax if their stay in India exceeds a specified period. As this
results in avoidable hardship and discourages such persons from spending even a
reasonable period on vacation in their home country, I propose to provide that Indian
citizens employed outside India may stay on vacation in the country for 89 days in a
year without attracting such tax liability.
82. In order to ensure that winnings from horse races are effectively brought
within the tax net, I propose to provide for deduction of tax at source at the rate of
34.5 per cent from winnings in excess of Rs,2,500. This measure would yield Rs.4
crores in a full year and Rs.3.5 crores in 1978-79.
83. Extravagant and socially wasteful expenditure is often incurred on
advertisement, publicity and sales promotion. In order to put a curb on such expenditure
16
at the cost of the exchequer, I propose to provide for the disallowance of a part of such
expenditure in the computation of taxable profits. Where the aggregate expenditure on
advertisement, publicity and sales promotion in India does not exceed 114 per cent of
the turnover or gross receipts of the business or profession, 10 per cent of such
expenditure will be disallowed in computing the taxable profits. Where such aggregate
expenditure exceeds 114 per cent but does not exceed 112 per cent of the turnover or
gross receipts, the disallowance will be made at the rate of 121 per cent; and where
such expenditure exceeds 112 per cent of the turnover or gross receipts, the disallowance
will be made at the rate of 15 per cent. These provisions will not apply in cases where
the aggregate expenditure on advertisement, publicity and sales promotion does not
exceed Rs.20, 000 in a year. Newly established industrial concerns will also be exempted
from this provision for an initial period of three years. This measure will yield Rs.31
crores in a full year and about Rs.25 crores in 1978-79.
84. A weighted deduction is currently allowed in the computation of taxable
profits with reference to expenditure incurred by Indian companies and resident
taxpayers, other than companies, on development of export market. The weighted
deduction is allowed at the rate of 150 per cent of the acutal expenditure in the case
of widely-held companies and at the rate of 133.3 per cent in the case of other taxpayers.
While the full deduction of expenditure incurred for development of export markets is
entirely justifiable, and no part of such expenditure will be disallowed under the
proposed provision for disallowance of expenditure on advertisement, publicity and
sales promotion, I do not see adequate justification now for continuing to subsidise
such expenditure by the grant of weighted deduction. I, therefore, propose to discontinue
the grant of weighted deduction in relation to such expenditure incurred after 31st
March, 1978. This measure is likely to yield Rs.10 crores in a full year and Rs.8
crores in 1978-79.
85. In the case of a taxpayer who has previously been assessed to income-tax,
advance tax becomes payable only if a notice in this behalf is issued by the Income-tax
Officer. Hence, if an advance tax notice is not issued in the case of such a taxpayer,
he will have no liability to pay any advance tax. On the other hand, taxpayers who
have not been assessed to income-tax, are required to pay advance tax on their own on
the basis of their estimated current income. To my mind, the existing legal position is
clearly unsatisfactory. I, therefore, propose to provide that advance tax shall be
voluntarily paid by every person if his current income exceeds the specified limit.
86. The Direct Tax Laws Committee under the chairmanship of Shri C.C.
Chokshi submitted its interim report last December. The report contains a number of
valuable suggestions for simplification and rationalisation of tax laws, streamlining
assessment procedures, reducing the area of litigation and accelerating the disposal of
appeals and references In its report on the Central Direct Taxes Administration, the
Administrative Reforms Commission had recommended that amendments to the tax
laws should not be rushed through the annual Finance Bill, which needs to be passed
17
before a prescribed date, but made through separate bins whose provisions can be
considered in detail. Pursuant to this recommendation, I propose to introduce separate
legislation as early as possible to give effect to the main recommendations of the
Chokshi Committee which are acceptable to the Government. In the meanwhile, a few
changes recommended by the committee, such as deduction of tax at source from race
winnings and voluntary payment of advance tax, which could be easily incorporated
in the tax law, have been introduced through the Finance Bill.
87. The exemption limit for estate duty, which is Rs.50,000 was fixed as long
ago as 1958. As this exemption limit is unduly low, I propose to raise it to Rs.1 lakh.
Since, in this matter, we can move only with the concurrence of the State Legislatures,
a Bill for implementing this proposal, and certain other proposals in relation to estate
duty, will be introduced later this year.
88. The total additional revenue from the various measures enumerated by
me will yield Rs.30 crores in a full year and Rs.25.5 crores during 1978-79. Besides,
additional resources of about Rs.25 crores will accrue in the form of compulsory
deposits in the financial year 1978-79.
89. May I now turn to my proposals relating to indirect taxes? Our basic
national problem, and indeed this is a problem facing all developing countries, is that
the base for direct taxes is extremely narrow and the vast funds required for national
development cannot, therefore, be raised, at our present stage of development, from
direct taxes alone. While framing the proposals relating to indirect taxes, however, I
have kept in mind the need to protect small scale industry and to minimise the hardship
to the poor and the middle class consumers.
90. Honourable Members are aware that Government had appointed a
committee, to review the existing structure of the indirect tax system, under the
chairmanship of Shri L.K.Jha. The committee has now submitted its final report.
Amongst the important recommendations made by the committee are restructuring of
the pattern of central excise and customs duties, measures to assist the small scale
sector, the general reorientation of the tariff to make it income-elastic and the desirability
of introducing a value added tax so as to avoid the cascading effect of taxes on raw
materials and components of finished products. The committee has also made some
recommendations regarding indirect taxes levied by State Governments and local
authorities. Government has been examining an these recommendations with the care
which they deserve. In my last Budget, I had in fact accepted and implemented a few
of the recommendations which were available to us in the interim report of the
committee.. The proposals which I am making today incorporate some of the
recommendations made in the final report. Other recommendations which involve a
major restructuring of the system would require further study.
91. In the Plan outlay the topmost priority has been accorded to power. The
Plan provision for power generation and distribution is of the order of Rs.2, 200
18
crores in 1978- 79. 1 feel that with our enormous investments in power, there is ample
justification for claiming a contribution from those who benefit from these investments.
I am, therefore, proposing to levy a duty of 2 paise per kilowatt-hour on electricity
generated. Electricity generated for captive consumption, as well as that used in the
auxiliary plants in the generating stations for the generation of electricity, is being
exempted. I also propose to give a rebate of the duty to the producer in respect of
electricity used for agricultural purposes so that agriculturists are not affected. This
levy is expected to yield a revenue of Rs.145 crores.
92. After the nationalisation of the coal mines, coal production has increased
from about 72 million tonnes in 1971-72 to about 100 million tonnes in 1976-77. This
is the result of enormous investments made by the State after nationalisation -
investments which we will continue to make. Here again, the beneficiaries could, I
think, justifiably be called upon to bear a small levy of central excise duty on coal. I
propose to fix-this at rates varying from Rs.5 to Rs.10 per tonne. The lowest rate of
Rs.5 would cover three-fourth of the coal produced in the country. This measure is
expected to yield a revenue of Rs.58 crores.
93. Under Item 68 of the Central excise tariff, the rate of duty leviable on “all
articles, not elsewhere specified” is at present 2 per cent ad valorem, I propose to raise
this to the level of 5 per cent. ad valorem. While doing so, I propose to exempt some
sensitive categories of goods, namely, pesticides, weedicides, insecticides and fungicides
drugs and medicines other than proprietary or patent drugs and medicines,
pharmaceuticals and drug intermediates, from the whole of the duty leviable under
this item. Newspapers and periodicals are also being exempted completely. The existing
exemption in respect of small manufacturers whose clearance of excisable goods does
not exceed Rs.30 lakhs in the preceding year will continue. These proposals will yield
a revenue of Rs.100 crores.
94. In view of the paramount need for mobilising resources for development
without creating fresh distortions in the tax structure I propose to levy a special duty
at the rate of 1120th of the basic excise duties presently collected on each item in the
Central Excise tariff. In doing so, I propose to exempt coal, electricity and goods
which are assesseed under Item 68 of the tariff. This measure will result in an additional
revenue of Rs.214 crores on indigenous production and a sum of Rs.15 crores by way
of increase in countervailing duties on imports.
95. May I now turn to the relief which I propose to give. First of all, consistent
with the policy of the Government to encourage the small manufacturer and to widen
the entrepreneurial base in the country, I propose to provide sufficient relief to small
manufacturers so as to enable them to compete successfully with larger units. The
duty exemptions at present available to small scale manufacturers are not based on
any one pattern. Over the course of years, a number of ad hoc concessions have been
given and the principles of relief have varied very widely. In defining the small units,
19
a variety of formulae have been adopted, such as, value of clearances per annum,
quantity of clearances per annum, value of capital investment on plant and machinery,
number of workers, use of power, and a combination of two or more of these criteria.
Keeping in view the need for rationalising the pattern of relief to small industries and
bearing in mind the recommendations made by the Jha Committee, I propose to exempt
all small scale units manufacturing specified goods, whose clearances in the preceding
year did not exceed Rs.15 lakhs, from the duty payable on the first clearance of Rs.5
lakhs. The exemption will cover 69 items including, amongst others, medicines, soap
and detergents, paints and varnishes, household electrical goods, steel furniture metal
containers, aerated waters, vegetable non-essential oils, ceramics and other items
notified. This measure will benefit about 24,000 units currently under excise control.
It will reduce considerably the procedural requirements which these units are required
to follow. It will also remove the anomaly, under which relief is presently lost totally
in many cases, the moment the threshold limits of exemption are crossed. This relief
will be effective from the beginning of the next financial year and involve a revenue
sacrifice of Rs.28 crores.
96. I propose to exempt power-driven pumps mainly used in agriculture from
the whole of the excise duty leviable thereon. The measure will involve a loss of
Rs.1.5 crores per annum.
97. I also propose to extend the concession currently available to
motor-vehicles used as taxis to 3-wheeler auto-rickshaws as well, by reducing the rate
of duty leviable on the latter by 21 per cent ad valorem. Whole milk powder is being
exempted from payment of the duty leviable thereon. in an effort to make available
this commodity at a cheaper rate. I also propose to reduce the rate of duty leviable on
small refrigerators of a capacity of 100 litres and less from 40 per cent ad valorem to
30 per cent ad valorem. At present, parts of refrigerating and air-conditioning machinery
required for installation in specified establishments are assessed at a concessional rate
of 20 per cent. This concession is being extended to ready assembled airconditioning
units of the window and package type, generally used by smaller industrial installations.
Last year I had raised the excise duty on films substantially. There have been a number
of representations against the increase and the manner in which it affects the industry.
I have carefully considered the matter and propose to reduce the excise duty leviable
from Rs.7, 500 to Rs.5,000 on the third dozen slab of colour prints, of length 4,000
metres or less. Suitable adjustments are being made in the case of black and white
films as well as longer films. Duty on prints cleared for home consumption after
twelve months from the date of first release of the film for public exhibition is also
being reduced suitably. These proposals together imply a relief of about Rs.3 crores.
98. In pursuance of Government’s decisions on the Oil Prices Committee’s
Report, the tariff structure relating to lubricating oils and greases has also been
rationalised. This measure of rationalisation will yield Rs.6 3 lakhs net in a year.
20
 99. I have also carried out some modifications in respect of coated fabrics,
cigars and cheroots, tea waste, vegetable products for industrial purposes and
non-cellulosic wastes, the details of which are given in the Budget documents. These
proposals will yield a revenue of Rs.6 crores.
100. I have taken note of the significant suggestions in regard to customs duties
made by the Jha Committee. As a measure of relief and particularly with a view to
bringing down capital costs, I propose to reduce the customs duties m specified items
of capital equipment not produced indigenously from the current level of ’40 per cent
to 25 per cent. The revenue loss will be of the order of Rs.9 crores.
101. I also propose to reduce the duty leviable on condenser tissue paper and
polypropylene film used in the manufacture of capacitors, by 111 per cent and 155 per
cent respectively. Use of capacitors will reduce transmission losses and will thus help
the more efficient transmission of power. Duty m electrical insulation paper is also
being reduced. These proposals will involve a revenue sacrifice of about Rs.4 crores.
102. Certain reliefs are also being given in respect of specified items of
cinematograph machinery, electronic components and Imported feature films. These
together will involve a revenue sacrifice of Rs.58 lakhs.
103. I have only one proposal for upward modification of the customs tariff,
not so much as a measure of raising revenue but as a measure of protection to Indian
industry. I propose to increase the import duty on polyester filament yarn from 120
per cent to 200 per cent ad valorem. This will yield about Rs.6.4 crores in a year.
104. My proposals for customs and Central excise duties put together will
yield an additional revenue of Rs.499 crores for 1978-79.
105. The fiscal strategy underlying my proposals seeks to take advantage of
the favourable food and foreign exchange situation for generating fresh expansionary
impulses in our economy. The big step up in public investment is one element of this
strategy. Monetary policy must also be used to reinforce fiscal policy.
106. The House will recollect that Government had imposed a tax in 1974 on
interest income of banks. Honourable Members will agree with me that, now that
prices are reasonably stable and there is urgent need to stimulate productive investment,
-this tax has lost its economic justification. I propose, therefore, to withdraw the
interest-tax with immediate effect. As a sequel to this fiscal concession with a monetary
intent, the Reserve Bank of India will be announcing later in the day the realignment
of the interest rate structure.
107. The Budget Estimates for 1978- 79 have taken credit for an amount of
Rs.130 crores on account of interest-tax. Since the interest-tax for the months of
January and February, 1978 will be payable in the coming year, the actual loss of
revenue will be of the order of Rs.108 crores.
21
 108. To sum up, my efforts at mobilisation of additional resources will yield in
1978-79 Rs.549.5 crores, of which Rs.499 crores will be from Union Excise and
customs duties, Rs.25.5 crores from direct taxes and Rs.25 crores as compulsory
deposits. Out of this, the States’ share will be Rs.95.5 crores and the Centre’s share
Rs.454 crores. With the withdrawal of interest-tax, the net additional resources accruing
to the Centre will be Rs.346 crores.
109. Despite the effort which I have made at raising additional resources, I am
leaving an uncovered budgetary gap of Rs.1, 050 crores. This figure will be reduced
by the receipts from sales of Government gold. For reasons which Honourable Members
will appreciate I shall not attempt to estimate this figure. But I should share with
Honourable Members the view 1 hold that, apart from preventing any resurgence of
gold smuggling, it is also justifiable, in our present circumstances, to utilise a part of
our accumulated gold to reduce the expansionary effect of budgetary transactions. It
is m the same reasoning that we have been anxious to deploy a part of our foreign
exchange reserves to offset the expansionary impact of larger Plan and investment
outlays; and 1 am confident that in the coming year the steps initiated to liberalise
imports and the major investment programme that we now propose to undertake, will
lead to a significant draw down of foreign exchange reserves. These two factors
combined with continued vigilance regarding credit should limit the net increase in
money supply to safe levels.
110. I am satisfied that the resultant monetary expansion will not lead to any
inflationary pressure particularly in view of the large stock of foodgrains and the
much greater ability that we have at present to import essential consumer goods. The
experience we have gained and the instruments we have forged in supply management
through procurement and public distribution and demand management through credit
and monetary policy should also enable us to contain such pressures.
111. In conclusion let me summarise what I seek to achieve through this Budget.
My goal is to set in motion a process of sustained increase in output and employment,
particularly in the rural areas. The programme of government expenditure on investment
is the main instrument I wish to use to attain this goal. Investment expenditure in
infrastructure facilities is being raised steeply so that bottlenecks coming in the way
of further growth are removed and there is an improvement in the general economic
climate. This has made it necessary for me to undertake sizable additional resource
mobilisation. At the same time 1 have not hesitated to offer incentives and tax
concessions where these are called for to promote investment in agriculture and industry.
112. The economic situation of the country is exceptionally favourable at present
for a bold step forward. This Budget is such a step.
(February 28, 1978)

22
 SPEECH OF SHRI H.M.PATEL MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1977-78 (FINAL)

Sir,
1. I rise to present the Budget for 1977-78, the first Budget to be presented
by this the Janata Government.
2. The massive mandate that the people of India gave the Janata Party in
March this year was not just a vote against authoritarianism. It was also a manifestation
of our people’s desire for a reorientation and a reshaping of our economic policies so
as to bring about speedy elimination of poverty and destitution. In the last few weeks,
our Government has taken several steps to dismantle the authoritarian and repressive
structure erected during the dark days of Emergency. It is our firm belief that the open
society we cherish will remain insecure unless we can move forward with courage and
sincerity to banish poverty, ignorance and disease from this ancient land of ours. Our
Party’s election manifesto sets out a coherent economic strategy, laying emphasis on
both bread and liberty. We seek to accelerate the pace of economic progress and to
distribute its fruits equitably in a framework of democracy and individual freedom.
Judging by historical precedents, this is no doubt a highly challenging task. The House
can rest assured that there shall be no weakening of our solemn resolve to work for the
fulfilment of promises we have made to our people.
3. The Budget of the Central Government is a major instrument for shaping
the country’s social and economic policies. Both because of shortage of time as also
because of heavy commitments of expenditure on ongoing projects, it has not been
possible for me to recast the entire fiscal structure in line with our declared priorities.
Also, I did not have the benefit of consultations with the Planning Commission, which
has been reconstituted only recently. Our Party’s social and economic programme lays
heavy emphasis on rural development, improvement of the lots of Harijans, Adivasis
and other downtrodden sections, eradication of unemployment and expansion of social
services including slum clearance. Most of the projects in these areas fall in the State
Plans. For reasons which are well known to this House, it has not been practicable for
me to consult State Governments and to induce them to reorient their development
programmes in accordance with our priorities. Nevertheless, within the framework of
the rather limited options open to me, I have endeavoured so to formulate my budget
proposals that they reflect’ faithfully the philosophy, programmes and priorities of our
election manifesto.
4. Before I outline the broad strategy that has been adopted, I would like to
share with the House my thoughts on the current state and prospects of our economy.
1
The Economic Survey has covered this ground fairly extensively, and I shall therefore
be brief in my remarks on this subject.
5. The most fundamental problem of the Indian economy continues to be its
inadequate rate of economic growth. In 1976-77, the rate of our economic growth was
less than 2 per cent. In the seventies thus far, our growth rate has averaged about 3.5
per cent per annum, far too short of our Plan targets. And yet, while it would be wrong
to assert that our country has not made significant progress since independence, the
fact remains that, even after twenty-five years of planning, we are unable to sustain an
average growth rate of 5 per cent. Clearly, a fresh examination of our planning priorities
and techniques is called for,
6. Another disturbing feature of the economic situation is the uneven
distribution of growth, which has accentuated regional disparities in the level of
development. While a number of States have recorded impressive growth rates during
the last fifteen years, it is also a fact and a matter for serious concern that in this very
period, nearly one-third of districts have recorded virtually no growth, or negative
rates of growth, in output. The poor performance of these districts has both depressed
the national growth rate and also led to a widening of disparities in the level of
development, a phenomenon which has disturbing implications for the successful
functioning. of our federal polity.
7. A significant consequence of low and unevenly distributed growth has
been that the proportion of people living below the poverty line is today higher than
it was in 1960-61. The available data show that this proportion had tended to decline
from 1968-69 to 1973-74, but in all probability the situation had deteriorated since
then. The magnitude of the problem can be assesed from the fact that in 1975-76, the
economy did not have the capacity to absorb the production of even 120 million
tonnes of food grains. The low level of purchasing power is a reflection of the chronic
state of underemployment and unemployment which is faced by large numbers of
landless workers and small and marginal farmers. The fact that the proportion of
people living below the poverty line today is higher than in 1960-61 strengthens me in
my belief that there is need for a fundamental change in our economic policies and
programmes. The status quo has disastrous implications for our future and our people
are rightly clamouring for a redirection of our policies. To this task, this Government
is fully committed.
8. Rising prices have further accentuated the hardships faced by the common
man. As the House knows, the wholesale price Index went up by nearly 12 per cent in
1976-77. This was due, in a large measure, to an excessive increase in money supply
last year, the lagged effects of which are still operating in the economy. Although we
2
have inherited a difficult price situation caused by distortions introduced in 1976-77,
we are determined to bring the situation fully under control. We have both the will as
well as the necessary instruments to stabilise prices at a reasonable level.
9. It is a truism that in a country in which agriculture accounts for nearly 50
per cent of national income, the overall growth rate of the economy is crucially linked
to the performance of the agricultural sector. The poor performance of the economy in
1976-77 was largely because of the decline in our agricultural production.
10. In the late sixties, Indian agriculture did exhibit signs of a new dynamism.
Unfortunately, the modernising impulses made only a limited impact on our agrarian
economy. This is evident from the fact that the rate of growth of agricultural production
in the 1970s was not higher than in the 1960s. Wheat is the only crop in respect of
which there has been a rapid increase in production, but even there, the rate of growth
of productivity has greatly slackened in recent years. In the case of rice, there have
been impressive gains in non-traditional States, but in major ride growing States there
has been no breakthrough in yields. Crops like pulses, vegetable oilseeds and raw
cotton show a stagnant trend. Clearly, we have to introduce some new growth impulses
into our agrarian economy, if we are to succeed in raising the agricultural growth rate
to a minimum level of 4 per cent per annum.
11. Our development plans had hitherto deliberately laid emphasis on
industrialisation. And we have also made significant progress in diversifying our
industrial structure. Yet, judging by the fact that industrial growth rate since 1965 has
averaged only 4 per cent as compared with the average annual growth rate of 8 per
cent from 1956 to 1964, the decade since 1965 can hardly be described as a decade of
progress in industrialisation. That an increasing emphasis on industrialisation should
have coincided with a decline in the rate of industrial growth is a Phenomenon which
calls for careful examination. In 1976-77, industrial growth rate did increase to 10 per
cent. However, there is ample evidence to suggest that this was due to a number of
fortuitous circumstances so that the favourable results of 1976-77 cannot be taken as
indicative of a more cheerful trend.
12. Both because of inadequate growth rate and growing capital intensity of
industry, India’s industrial structure has been unable to provide a fast enough expansion
of employment opportunities. As a result, the number of unemployed people on the
live registers of employment exchanges has risen sharply. A high cost industrial structure
catering to a highly sheltered domestic market must necessarily find it increasingly
difficult to expand in the face of the constraint of a limited home market.
13. In the last two years, while India’s exports have increased rapidly, imports
during 1976-77 were restrained both, on account of the bumper harvest of 1975-76
and increased domestic production of such critical inputs as fertilisers. The rapid
increase in inward remittances has given added strength to India’s balance of payments
and our reserves have gone up considerably. Nevertheless, we would be foolish if
3
we did not take note of the fact that our balance of payment still remains vulnerable
to the effects of sudden shocks, such as harvest fluctuations. The current level of
food stocks and foreign exchange reserves do give us wider options in the
management of the economy than ever before. Foreign exchange reserves will have
to be so deployed as to assist in the maintenance of price stability, as also in
accelerating the process of growth.
14. The task ahead is to devise an effective strategy for dealing with, the
problems of inadequate growth, crushing poverty, unemployment, growing regional
imbalances and rising prices. These are all interrelated problems and have to be
tackled simultaneously, though the emphasis laid at any given period of time may
vary in degree.
15. It goes without saying that in any strategy we devise. the primacy of
agriculture has to be emphasised. In a country in which nearly 80 per cent of the
people live in rural areas, a faster increase in agricultural productivity is almost a
precondition of any successful programme for removal of poverty, for enlarging
employment opportunities, for stabilising prices of essential goods and for expanding
the domestic market for manufactured goods. The primacy of agriculture implies
that investment requirements of agriculture would be given the highest priority. In
spite of the importance of agriculture and the repeated avowal of the need to improve
the condition of rural India, the rural sector has in the past not received a fair share
of total investible resources. This needs to be rectified. Currently, irrigation potential
is growing at an annual rate of about 2 million hectares. We have to evolve a plan
to be able to double this rate in the next few years. Both major and medium and
minor irrigation works must be planned and executed as part of an optimal national
strategy for water use. Similarly, there is an urgent need for stepping up investment
in such crucial elements of rural infrastructure as roads, markets, and supply of pure
drinking water.
16. The programme of agricultural development will have to be conceived
not merely in terms of increase in agricultural productivity but also in terms of
making all the households in the agricultural sector more or less viable. This will
require, simultaneously, plans for development of ancillary activities like poultry
and dairy farming, fisheries, farm forestry, etc. Not only win this involve the provision
of necessary inputs but also the development of organisations which will collect,
store and market the produce, for efficient marketing is vital to the success of all
these varied activities. We must generate large enough employment opportunities in
rural areas so as to slow down migration to urban areas. This can best be achieved
in the framework of an area-centred programme of integrated rural development, in
which the needs of small and marginal farmers and agricultural labourers receive
priority attention.
17. The provision of more resources, howsoever vital, will not alone achieve
4
the objective. The entire apparatus for utilising these resources will have to be
completely revamped in order to improve their effectiveness. It will require changes
in the organisation for both planning and implementation. It will need more intensive
effort at improving agricultural technology and much greater extension effort. It will
need speedier construction of dams, wells and channels, faster and efficient rural
electrification, better water and land management, more timely supply of fertilisers
and pesticides, a more organised supply of seeds and better storage and marketing
facilities. Parts of the country have been able to achieve this. What is needed is the
spreading of such organisation, together with requisite resources, to those lagging
behind. The effort needed would call for a total transformation of the agencies which
are presently connected with agricultural development.
18. Primacy of agriculture does not imply indifference towards, or neglect of,
modern industy. All that it implies is that, in so far as a larger proportion of investible
resources available to the public sector is diverted to agricultural development, resources
for industrial growth will have to be found increasingly by enterprises themselves
generating larger internal resources of their own through more efficient operation as
well as more effective pricing policies. Government will also continue to pay particular
attention to the development of industries such as fertilisers, pesticides, cement, power
and petroleum which have an important bearing on agricultural productivity. In order
to create greater cost consciousness in Indian industry, it is our intention to introduce,
gradually, more competition by way of a more liberal import policy. In addition, ways
and means will be found to make possible optimal use of capacity in existence.
Simultaneously, in executing new projects, we must avoid delays which lead to
escalation of capital costs. It is usually not realised how great is the cost of these
delays. An analysis for cost escalations in 18 projects which had secured the approval
in 1976-77 of the Public Investment Board shows that, in these projects, investment
costs had increased to Rs.555 crores as against the original estimate of Rs.255 crores.
This serves to emphasise the importance of timely execution of projects and the
extremely high social cost of delay.
19. Some of our large industries, such as textiles, are today in serious trouble
and are in particular need of replacement and modernisation. Therefore, adequate
resources will have to be provided for investment in these sectors. The present
arrangements which the Industrial Development Bank of India and the other term
lending, institutions have for this purpose will have to be continued. Also, efforts have
to be made to ensure that these industries generate more internal funds and, thus, do
not face conditions which ultimately make them sick. I believe it might be a good
idea, if the managements of more efficient mills were to be prevailed upon to take
over, as an act of social responsibility, some of the sick units and nurse them back into
sound health under conditions to be laid down by Government.
20. Faster and timely development of power is an essential condition of
accelerated economic progress. I am convinced that much more remains to be done in
5
respect of both power planning and development if we are not to have to face recurring
severe shortages of power. Power is now recognised to be as essential to agriculture
as to industry and shortages of power can disrupt the production of food as much as
of cloth. We shall therefore make every effort to hasten the pace of expansion of
power in the coming years.
21. There is another field, however, in which modern industry needs to be
developed further and that is the field of exports. Experience has now been gained
with regard to marketing a wide variety of manufactured goods, particularly engineering
goods, in foreign markets. Since this is the field in which world trade is growing
fastest, we should push ahead in this area. This means building up more capacity,
acquiring, suitable know-how and adopting even better marketing techniques. While I
do not regard export led growth as a viable proposition in Indian conditions, it is
necessary that exports should continue to increase at the rate they have been growing
in the past two years. Such an increase is essential for acquiring greater manoeuvrability
with regard to economic management. . Government is committed to providing a
stable policy framework conducive to continued expansion of our exports.
Simultaneously, it is our solemn resolve to deal firmly with smugglers and other
antisocial elements indulging in illegal dealings in foreign exchange. Fortunately,
judging by recent data on inward remittances, smuggling does not seem to have revived
on any large scale. We shall, nevertheless, remain vigilant in this matter.
22. Since unemployment is one of our most pressing problems, the greatest
attention needs to be given to its solution. By now, it is obvious that this problem
cannot be solved through exclusive reliance on industrialisation. New strategies have,
therefore, to be evolved to provide painful employment on a large scale in the rural
areas themselves. The accelerated growth of agricultural production will in itself
increase the scope for employment in the rural areas. It is interesting to note that
labour input per acre of land in Japan is four times the corresponding level in India.
This is an indication of the scope for generating new employment opportunities in the
process of modernising our agriculture. More irrigation, better cultural practices, double-
cropping, increased use of fertilisers and weeding will certainly create more jobs, but
it will have to be ensured that premature mechanisation does not affect this process
adversely. Faster agricultural growth will offer greater scope for employment in - such
ancillary activities as repairing. servicing. transportation, etc. Simultaneously greater
attention will have to be paid to the development of rural infrastructure, particularly
the construction of rural roads. Proper marketing of agricultural produce cannot take
place if there is no adequate network of roads connecting our villages to the nearest
marketing centres. Deliberate steps will also have to be taken to facilitate processing
of local produce so as to provide more employment in rural areas. Gandhiji’s idea of
self-reliant rural communities will have to be given concrete shape if an effective
solution is to be found to the problem of unemployment.
23. The development of small-scale industry should also enable us to make
6
a significant dent in the problem of unemployment, Such industry should not be a
scaled-down version of large industry but should be one which used technology
which is appropriate to our conditions of surplus labour and scarce capital. Although
there has been a great deal of talk of appropriate technology, it is surprising how
little effort we have put into its development. For example, the bullock-cart remains
and will remain for many years to come an important means of transport in rural
areas. Yet, it is only very recently that we have started thinking about improving its
effectiveness. Unfortunately, insufficient resources have been devoted to the
development of appropriate technology. We have always gone after the most modern
technology even though it may not necessarily have been the most efficient for us.
This trend needs to be reversed.
24. We do not however have to wait for appropriate technology in order to
make a beginning in this field. The experience of handlooms and powerlooms shows
how modern organisation and marketing methods can breathe life into labour intensive
industry. More work along these lines should be tried with regard to a number of
cottage and village industries in order to combine greater employment with efficiency.
25. The problem of unemployment in urban areas, particularly among the
educated persons, is no less serious. The House will be happy to know that we are
now working on the details of a specific scheme designed to create opportunities for
the educated unemployed. Under this scheme,’ we shall provide through the banking
system. “seed” money and other finance at relatively attractive rates of interest to
enterprising young men considered eligible for assistance.
26. The beneficial effects of a high rate of economic growth can easily be
neutralised by an increase in population. Therefore, population control has to be an
integral Dart of our programme of raising the standard of living of the common man.
Unfortunately, the events of the past two years have given the family planning
programme a severe setback just when it was beginning to be generally accepted even
in backward areas. This programme is so vital to our economic progress and well-
being that all possible efforts must be made in a sustained way to persuade people to
accept the small family norm. Any investment, therefore, that is necessary for this
purpose should be undertaken without any hesitation. And because it is our firm
determination to achieve our objectives through persuasion rather than coercion, the
effort that will have to be put in win have to be greater and more sustained.
27. The success of the programmes I have been talking about depends upon
adequate resources being available. Other countries which have achieved high rates
of growth have been able to invest as much as 30 per cent of national income
because of their high volume of savings. The Indian experience has been otherwise.
Voluntary savings have been inadequate. Attempts to push up the rate of domestic
savings through created money and deficit financing have accentuated inflationary
pressures but have not succeeded in raising the savings rate. Thus, some fresh thinking
7
is necessary regarding the means of enlarging the pool of national savings in a non-
inflationary manner.
28. It is doubtful if taxation alone can achieve such an increase. High direct
tax rates have been found to be counter-productive because of the evasion that ensues,
and, in any case, the number of people who fall in the direct tax net is so small that
revenue realisation cannot match requirements. indirect taxation seems also to have
reached its limit.
29. Resource mobilisation by the Government through taxes has increased
continuously over the years and at present tax revenue as percentage of national income
is as high as 18.9. But public saving has not gone up because non-developmental
expenditure such as interest charges, salaries and wages, dearness allowance to
employees, defence expenditure and subsidies etc., have gone up more than
proportionately. In addition, public sector enterprises have not been earning, until
recently, adequate return chiefly because of deficiencies of management and improper
pricing policies. Some of those shortcomings win have to be removed if public saving
is to increase and contribute to larger investment.
30. Individual saving can be promoted better if austerity is practised much
more effectively. A large part of the increase in consumption arises from the
demonstration effect of the high standard of living of the wealthy and the well-to-do
in our society. To neutralise all this, greater egalitarianism in consumption needs to be
practised. Our tax system has to be so reoriented as to discourage ostentatious living
and promote the habit of savings. However, austerity cannot be ushered in merely
through tax reform. We must arouse public opinion against a life style inconsistent
with the harsh economic realities of a poor country such as ours.
31. Government has been greatly concerned about the price situation ever
since it came into office. The persistence of the rising tendency in prices witnessed
during the last few weeks has been due, partly to the cumulative effect of imbalances
introduced last year, and partly due to the seasonal pressure which is unavoidable
during this part of the year. I cannot hold out the promise that [Government will be
able to stabilise every single price in face of fluctuations in demand or supply which
are inevitable. However, I can assure the House that we have taken steps, and will
continue to do so, to ensure reasonable price stability in respect of basic articles of
mass consumption. We have enough stocks of food grains to meet an genuine
requirements at stable prices. We have inherited a difficult situation regarding vegetable
oils. As the House knows, because of a steep fall in production of groundnuts last
year, prices of vegetable oils have been rising for quite some time. Unfortunately,
groundnut oil cannot be readily imported so that our ability to operate directly on the
supply of this oil is rather limited. However, we have arranged for adequate imports
of other vegetable oils. These should help to stabilise the price of cooking media.
increased availability of vanaspati and refined rapeseed oil meant for direct consumption
8
would indirectly ease pressure on prices of groundnut oil. We have adequate stocks of
sugar to enable us to meet an reasonable demands at stable prices. We are now working
on the details of a new multifibre policy designed to make available quality cloth at
prices within the reach of the common man. Such a policy, if successful, would have
the additional advantage of restoring to health all segments of India’s largest industry.
BUDGET ESTIMATES
32. I now turn to the Budget Estimates. The documents which I em presenting
today repeat the Revised Estimates for 1976-77 as given in the interim Budget, as the
actuals are not yet available in most cases.
33. As regards the Budget Estimates for the current year, gross tax revenues
at existing rates of taxation are estimated at Rs.8879 crores, showing an increase of
Rs.798 crores over the Revised Estimates for 1976-77. Of the increase, Rs.101 crores
will accrue to the States as their share of taxes. While Union Excise Duties are expected
to yield Rs.4550 crores, showing an increase of Rs.373 crores over the Revised
Estimates for last year, receipts from income and Corporation taxes are estimated at
Rs.2258 crores, an increase of Rs.180 crores, Customs receipts at Rs.1734 crores will
be higher by Rs.243 crores as compared to last year.
34. Market loans are expected to yield Rs.1000 crores as compared to Rs.849
crores in the previous year. Besides, Government propose to borrow Rs.800 crores
against drawal of foreign exchange reserves.
35. Net external assistance, after providing for repayments and interest
payments, is estimated at Rs.1052 crores, including disbursements against new credits.
36. Taking other receipts into. account, total receipts in the current- year are
estimated at Rs.15, 366 crores.
37. I may now make a brief mention of the estimates of non-Plan expenditure,
While presenting the interim Budget, I indicated that an Ministries and Departments
of Government and public sector agencies will be asked to observe the utmost economy
in expenditure, keeping in view the present Government’s emphasis on austerity and
avoidance of an forms of ostentation. Detailed instructions have since been issued in
this regard for strict compliance by all Ministries and Departments. The fun impact of
the economy measures will be known only after the detailed exercises have been
completed. Separately, certain areas of non-essential expenditure have already been
identified and the Budget documents reflect a reduction of about Rs.130 crores in
these expenditures as a result of this exercise.
38. The provision for Defence expenditure is Rs.2752 crores, Rs.56 crores
less than the provision made in the interim Budget. The provision for food subsidy
and carrying costs of buffer stocks has been, for the present, retained at Rs.460 crores,
but it will be reviewed on the basis of emerging trends during the course of the year.
9
 39. In its scheme of devolution, the Sixth Finance Commission could not take
into account the net interest liability of States on account of loans raised and disbursed
by them during the Fifth Plan period for want of details. As recommended by that
Commission, the net interest liability of the deficit States has been computed and a
provision of Rs.72 crores has been made in the Budget for disbursement of additional
grants-in-aid to the States concerned on this account, in relation to the three years
ending on 31st March, 1977.
40. I have received requests from Central Government pensioners for increase
in the quantum of relief on their pensions in view of the high cost of living. As the
House is aware, a measure of relief has been afforded from time to time in the past.
I feel it would be only fair at this stage to grant a special relief at graded rates to them;
this will cost the exchequer Rs.10 crores annually.
41. I now turn to the outlays on the Annual Plan for 1977-78. As I have
already indicated, we are firmly of the view that our economic ills can be overcome
only through a comprehensive reordering of Plan priorities. The Plan strategy has to
be reappraised. It should recognise the primacy of agriculture and accord overriding
priority to rural development and eradication of unemployment within a time frame.
These are the tasks to which our reconstituted Planning Commission win no doubt
address itself. That, however, will take some time. In the meanwhile it is necessary for
the Government to move in the desired direction. That is what this Budget seeks to do.
42. Within the short time available to us, we have therefore made a quick
review in consultation with various Ministries of the outlays in the Annual Plan for
1977-78, and tried to impart, to the extent possible, a new direction to our development
programmes in line with the priorities and objectives set out in the Manifesto of the
Janata Party. We are, however, not writing on a clean slate. Schemes in progress
cannot be abandoned, nor even slowed down unduly, without considerable financial
loss. The commitments made to State Governments in regard to Central assistance for
their Plans have also to be honoured subject to the conditions stipulated by &he
Planning Commission at the time of the finalisation of their Plans. These commitments
do impose serious limitations in refashioning the Plan according to our thinking. The
room for manoeuvrability is thus limited. Even so, appreciable savings have been
effected. Schemes of relatively low priority have been suitably rephased.
43. True to the promises made to the people, in the recast Plan, we have now
provided for additional outlays for agriculture, irrigation, power. khadi and village
industries, sericulture, handlooms, postal and telephone facilities in rural areas and
wide ranging rural infrastructure programmes covering, among other things, such
schemes as durable link roads and rural drinking water supply. It is our intention to
step up further the outlays next year on programmes designed to develop rural
infrastructure facilities so that over a period of, say, five years the basic needs of the
entire rural population could be met. It is also our intention to review the programmes
10
of slum clearance and urban renewal in consultation with the States and to provide
additional resources for accelerating -the pace of execution of these programmes.
44. The allocations from the Central Budget in 1977-78 for the Central Plan
and assistance towards Plans of States and Union territories win be Rs.5790 crores.
The corresponding figure for the previous year was Rs.4759 crores. The tempo of
development is thus being maintained.
45. The provision for the Plan in the Central Budget is inclusive of Rs.1812
crores on account of Central assistance for State Plans and provisions for Union
territories Plans, the subplan of the Hills and Tribal Areas, the North-Eastern Council,
and assistance to the Rural Electrification Corporation for power schemes. This
allocation also includes an element of special advance Plan assistance to States to
provide them adequate resources for the required level of investment in important
projects in the core sectors of irrigation and power. A provision of Rs.3978 crores has
been made in the Budget towards Central Plan. inclusive of the internal and other
resources of public undertakings, the Central Plan will be of the order of Rs.4939
crores in 1977-78 as against Rs.4090 crores in 1976-77. The State and Union territories
Plans together will be of the order of Rs.5021 crores, as against Rs.3762 crores in
1976-77. The total outlay on the annual Plans of the Centre, States and Union territories
for 1977-78 will be Rs.9960 crores, as against Rs.7852 crores in 1976-77. This
represents an increase of 27 percent.
46. We feel that for building a forward looking, dynamic and diversified
agricultural economy, it is necessary to aim at integrated development of crop
production, livestock and poultry, fisheries and forestry. Special emphasis will need to
be laid on development of dairy industry on a cooperative basis ‘ with a view to
enabling milk producers to get better and fair prices. Creditable progress has been
made in the first phase of Operation Flood Scheme and we must now get moving to
take the full advantage of Operation Flood Phase II. The production policy should be
based on modernisation of agriculture in which technology should, by far, be the most
crucial input to make a sustained and high growth rate possible. The existing Plan
provisions and priorities have been rephased with a view to locating gaps in
development and identifying the potential areas where increased investments could
bring about further acceleration of the pace of agricultural growth. In this exercise we
have kept in view the need for (a) strengthening rural infrastructure as a basis for
future accelerated development, (b) generation of employment in rural areas, (c) special
attention to the needs of the weaker sections of the society, and (d) giving a fillip to
the production of cotton, oil seeds and pulses so as to correct the supply and demand
imbalances. A pilot project for desert development in Haryana, Gujarat and Rajasthan
is being evolved and provision has been made for this purpose in the Budget Estimates.
47. Irrigation holds the key to increased agricultural production. Though the
Fifth Plan envisages a target of 5. 8 million hectares to be brought under irrigation, the
11
financial outlays do not match the target. Further, the need for initiating action in the
current Plan on new irrigation projects, so as to have an adequate pipeline of projects
has been neglected. Greater emphasis will also have to be laid on modernisation of
irrigation projects so as to conserve water, which is a scarce resource. Keeping all
these ends in view, we propose to provide Rs.100 crores as advance Plan assistance to
States for irrigation projects.
48. The Plan outlays for minor irrigation will be supplemented to the extent
of about Rs.280 crores from the Agricultural Refinance and Development Corporation,
and other lending institutions. Under the programme of rural electrification for
energising the pump sets, we have made a provision of Rs.175 crores which will also
be augmented to a significant extent by institutional finance.
49. The total Plan outlay on agriculture and allied services, major, medium
and minor irrigation projects and fertilisers, together with provisions for cooperatives
and power sectors attributable to rural areas, works out to Rs.3024 crores. The House
will be glad to know that this constitutes 30.4 percent of the aggregate outlay of the
Central. State and Union territories Plans.
50. While the development of National and State highways has received
reasonably adequate attention in successive Plans, the needs of rural areas have been
sadly neglected. I feel that the Centre should take the initiative in promoting the
construction of approach roads which constitute an essential ingredient of any
programme for building up the infrastructure for rural development. We therefore
propose to make a beginning with an outlay of R9.20 crores which, suitably
supplemented with the resources of the State Governments and local bodies. will
accelerate the programme in this vital area. The new scheme of ‘grain for work’ could
also be utilised imaginatively for this purpose.
51. Despite three decades of planning, there are still a large number of villages
which suffer very acute scarcity of drinking water. While the responsibility for finding
resources and execution of the programmes for this purpose is that of the State
Governments, I feel that the Central Government should also intervene actively and
supplement the efforts of the States. Such supplementary assistance should be directed
towards provision of drinking water facilities in problem villages to be identified with
reference to objective criteria. We propose to make an earnest start in the current year
with an additional provision of Rs.40 crores over and above the existing outlays for
this programme. Progressively, the allocations for this programme would be stepped
up so as to carry the benefits of the programme to all the problem villages over a
period of five years. The programme will have to be closely monitored at the Central
as wen as the State level.
52. I would also like to refer here to schemes for the welfare of Harijans,
Adivasis and other less advanced sections of our people. As I have said earlier. these
find a place largely in State Plans. I am not satisfied with the programmes and allocations
12
in respect of them and it is my intention to take up these matters on a priority basis
with State Governments and Central Ministries concerned so as to add to the
effectiveness of these programmes.
53. A sum of Rs.234 crores has been provided in the Central Plan for power
development. This includes Rs.33 crores for Singrauli Super Thermal Station, Rs.1
crore for initiating action on a second Super Thermal Power Station. Rs.17 crores for
inter-State transmission lines, and Ra.52 crores for nuclear power projects. The State
and Union territories Plans, which account for the bulk of the provision for power,
envisage an outlay of Rs.1676 crores. An additional sum of Rs.20 crores is being
provided to the Rural Electrification Corporation for systems improvement and for
providing L.T.Capacitors for rural consumers, both designed to minimise loss of energy.
54. Self-sufficiency in energy has assumed critical importance. The provision
in the Plan for petroleum is being accordingly stepped up from Rs.485 crores in 1976-
77 to Rs.677 crores in 1977-78. Of this Rs.451 crores will be provided to the Oil and
Natural Gas Commission for their on-shore exploration programme and for accelerating
the pace of off-shore exploration. We have recently cleared the scheme for development
of oil and natural gas resources of Bombay High and Bassein field. indigenous
production of crude oil is expected to reach 11.31 million tonnes in 1977-78 as compared
with 8.89 million tonnes in 1976-77.
55. Having regard to the difficult power situation of Tamil Nadu, a special
provision of Rs.5 crores has been made for Neyveli Lignite Corporation for a new
lignite based power plant with a capacity of 200 MW.
56. After taking into account the feasibility of rephasing the expansion
programmes of the Bhilai and Bokaro complexes, a budgetary allocation of Rs.511
crores has been made for steel as compared with Rs.402 crores in 1978-77.
57. The budgetary allocation for transport and communications will be Rs.851
crores, of which Rs.302 crores will be for the Railways which have a Plan outlay of
Rs.480 crores. A provision of Rs.10 crores has been made for metropolitan transport
projects, of which Rs.8.6 crores is for the Mass Rapid Transit Project of Calcutta. A
part of the Sixth Corridor Project for rapid mass transit system in Bombay has also
been sanctioned.
58. The Plan for communications, including Posts and Telegraphs, has been
modified to take into account the priority requirements of rural areas. Accordingly, an
additional outlay of Rs.10 crores has been provided for opening more post offices and
extension of telephone and telegraph facilities in rural areas.
59. It is our belief that khadi and village industries, if they are properly
organised and supported, are capable of generating employment on a large scale. A
provision of Rs.35 crores has been made for these programmes in the Plan, with the
13
understanding that more funds will be allocated, if required. It is expected that the
schemes in view will provide employment for about 25 lakh persons.
60. An outlay of Rs.20 crores is provided for handloom and Rs.4 crores for
sericulture which is a substantial step up over last year. These additional outlays have
been made with a view to giving a fillip to these rural and labour intensive industries.
61. Taking into account the expenditure both on Plan and non-Plan counts
and the estimated receipts at existing levels of taxation, the Budget for the current
year shows a deficit of Rs.202 crores.
PART B
DIRECT TAXES
62. I shall now address myself to the task of formulating proposals for covering
the deficit to the extent feasible.
63. The proposals, in so far as direct taxes are concerned, which I am presenting
before you, are designed to increase corporate savings, channel more funds into
productive investment, accelerate the pace of industrial growth and, at the same time,
strengthen the redistributive role that direct taxes, to my mind, must be made to play.
64. In so far as indirect taxes are concerned, I have endeavoured to ensure
that my proposals do not impinge on the necessities of life. There, I have sought to
raise resources, in the main, from the less essential or luxury items, while giving relief
to some deserving sectors, and simplifying and rationalising the central excise tariff
structure generally.
65. In fulfilment of an assurance in the Janata Party manifesto, I propose to
provide that no income-tax shall be payable by individuals and Hindu undivided families
whose taxable incomes does not exceed Rs.10,000. In order, however, to keep the
sacrifice of revenue to the minimum, the nil rate slab of income is being retained at
Rs.8, 000. Hence, where the taxable income exceeds Rs.10, 000, the excess over Rs.8,
000 will be charged to tax as at present subject to the grant of marginal relief in cases
where the taxable income exceeds Rs.10,000 by a small margin.
66. I do not propose to make any change in the basic rates of income-tax.
However, in view of the imperative need to raise additional resources, I propose to
increase the rate of surcharge on income-tax in the case of all categories of taxpayers,
except companies, from 10 per cent to 15 per cent. With the increase in the rate of
surcharge, the maximum marginal rate of personal income-tax will now be 69 per
cent. , as against 66 per cent at present.
67. It is my feeling that wealth-tax rates were reduced in the Budget of 1976
to an unjustifiable extent. If the essential objective of a wealth-tax is to be achieved,
it must be so devised that while it does not become oppressive and counter-productive,
it does have an effect on excessive accumulation of wealth in individual hands. In
14
this view of the matter, I propose to raise the rates of wealth-tax. The existing rate
of half per cent will continue unchanged on the first Rs.2.5 lakhs of net wealth, but
for the higher slabs there will be an increase of half a per cent over the existing
rates, while in the highest slab of over Rs.15 lakhs, the new rate will be three and a
half per cent, that is, an increase of one per cent over the existing rate. There will be
corresponding changes in the rates applicable to Hindu undivided families having
one or more members with net wealth exceeding Rs.1 lakh. The new rate schedule
will come into force from the current assessment year and will thus supersede the
changes made last year in the rate schedule. These changes win result in an additional
revenue of about Rs.10 crores in 1977-78.
68. As Hon’ble Members are aware, Government have already dispensed with
the Compulsory Deposit Scheme in its application to additional dearness allowance as
from 6th May, 1977. Having regard, however, to the state of the economy and the
inflationary pressures that exist, I propose to continue the Compulsory Deposit Scheme
for income-tax Payers for another two years.
69. With a view to stimulating industrial development and economic growth,
I consider it desirable to widen the scope of the scheme of investment allowance
introduced last year. That scheme has unfortunately not laid down any well-defined
and clear criteria for selecting industries to which the benefit of the concession was to
be extended. This made it difficult to explain to those claiming eligibility why some
industries had been given the benefit, while it was denied to others. Since there is a
need for encouraging generation of internal resources for financing investment, I
consider it best to extend the scope of investment allowance to all industries except
those which are engaged in the manufacture of specified low priority items such as
Cigarettes, cosmetics and alcoholic beverages. This measure will be of great benefit
to the economy.
70. In order to promote scientific and technological self-reliance, I propose
to provide an incentive to the users of technical know-how developed in our country.
It is accordingly proposed to grant investment allowance at the higher rate of 35 per
cent on machinery and plant installed for the manufacture of any article made in
accordance with know-how developed in Government laboratories, public sector
companies and universities.
71. From the point of view of maximising expansion of industry, I can see
little merit in compelling closely-held industrial companies to distribute a high
percentage of their net profits as dividends. I propose, therefore, to exempt such
companies from the requirement of compulsory distribution of dividends. I do not
propose to extend this relief to an other kinds of closely-held companies.
72. It is my belief that the present structure of capital gains taxation stands in
the way of adequate mobility of investible resources, and perpetuates investment in
15
low priority assets. In this view, I am proposing certain changes in our existing scheme
of capital gains taxation.
(a) At present capital gains arising from the transfer of a capital asset held by
a taxpayer for a period exceeding 60 months alone are entitled to concessional tax
treatment. With a view to improving mobility, I propose to reduce the holding period
to 36 months.
(b) In respect of capital assets acquired prior to the 1st January, 1954, a
taxpayer has the option of adopting the fair market value of the asset on 1st January,
1,954 in place of the actual cost of acquisition. Determination of the fair market value
of a capital asset with reference to a date more than 23 years ago presents practical
difficulties. Moreover, capital gain arising from the transfer of assets held over, a
length of time is, in a world of rapid and continuing inflation, to a great extent illusory
in nature. On the whole. therefore, it seems to me desirable to advance the notional
date by 10 years, namely, to 1st of January, 1964.
(c) Capital gains tax is payable on the sale of a residential house. The existing
law provides that if another residential house is either purchased or constructed within
a. specified time, then the capital gains can be wholly or partially exempted depending
upon the amount of capital gains utilised on the new residential house. Similar
concessions are not available in respect of capital gains arising from sale of assets,
such as jewellery or shares. I see no reason for drawing such a distinction. Accordingly,
I propose to exempt the capital gains from tax, if the sale proceeds of any asset are
reinvested within six months in shares, bank deposits, units of the Unit Trust or other
preferred assets. In order to prevent abuse of this concession, it is required that the
assets in which the sale proceeds have been reinvested are held for a period of not less
than three years.
73. Sickness among industrial undertakings is a matter of grave national
concern. Closure of any sizeable manufacturing unit in any industry entails social
costs in terms of loss of production and, employment, and also waste of valuable
capital assets. Experience has shown that taking over of such units by Government is
not always the most satisfactory or the most economical solution. A more effective
course would be to facilitate the voluntary amalgamation of sick industrial units with
sound ones by providing certain incentives and by removing impediments in the way
of such amalgamation. It is accordingly proposed to provide that where an amalgamation
is accepted by the Central Government to be in public interest, the accumulated losses
and unabsorbed depreciation of the amalgamating company will be allowed to be
carried forward and set off in the hands of the amalgamated company.
74. With a view to encouraging companies to involve themselves in the work
of rural welfare and uplift, I propose to provide that expenditure incurred by them on
approved programmes of rural development will be allowed to be deducted in computing
their taxable profits.
16
 75. In order to give a direct stimulus for the setting up of small-scale industrial
undertakings in rural areas, I intend to accord preferential tax treatment to industries
which are set up in such areas, and which begin their manufacturing activity after 30th
June, 1977. Such industrial undertakings will be entitled to a deduction in the
computation of their taxable profits of an amount equal to 20 per cent of the profits.
The concession will be available for each of the ten years commencing from the year
in which the undertaking begins its manufacturing activities.
76. Under a provision made last year, companies were given the option, instead
of paying 5 per cent surcharge on income-tax, to deposit an equivalent amount with
the Industrial Development Bank of India for a period of five years. I propose to
withdraw this option. The Budget accordingly takes credit for an additional tax receipt
of Rs.56 crores on this account.
77. The amount of donations for charitable purposes qualifying for tax
exemption is limited to 10 per cent of the gross total income of the donor, subject
further to a monetary ceiling of Rs.2 lakhs. It is felt that this ceiling is unduly restrictive
and only discourages more liberal donations to deserving charities. I propose
accordingly that the monetary ceiling be raised from Rs.2 lakhs to Rs.5 lakhs.
78. Fifty per cent of the remuneration received by Indian technicians from a
foreign Government or a foreign enterprise for services rendered outside India is
exempt from income-tax. We cannot justifiably deny this concession when the employer
happens to be an Indian concern. I propose accordingly to enlarge the scope of this
concession to cover Indian technicians employed by Indian concerns in any branch or
office outside India.
79. Deduction of tax from small dividends has been a source of considerable
hardship to a large number of small investors in joint stock companies. With a view to
avoiding inconvenience to such investors, and in particular to investors from rural
areas, the requirement of deduction of tax at source from dividends will be waived in
cases where the dividend paid does not exceed Rs.250.
80. Under a provision made by the Taxation Laws (Amendment) Act, 1975,
charitable or religious trusts and institutions are required to invest their funds in certain
forms and modes specified in the Income-tax Act. Any trust or institution which does
not conform to the prescribed pattern of investment in any accounting year commencing
on or after 1st April, 1978, would lose exemption from income-tax. Having regard to
practical difficulties involved and to ensure a more orderly change-over in their pattern
of investment in line with the new provisions, the date for change-over to the new
investment pattern is proposed to be extended by three years, i.e., from Ist Apirl, 1978
to 1st April, 1981.
81. I have taken credit for increasing the surcharge on income-tax and
increasing the rates of wealth-tax. The loss of revenue involved in exempting
17
individuals, Hindu undivided families, etc. with an annual income up to Rs.10, 000
has also been taken note of. The overall effect of all the direct tax proposals would be
a gain to the Centre’s revenue of Rs.92 crores in the current year.
82. As Hon’ble Members are aware, the direct taxes statutes have become
increasingly complicated and incomprehensible over the years. It is, therefore, necessary
to take immediate action for the simplification and rationalisation of these laws with
a view to making them readily intelligible to the taxpayers, reducing litigation, and,
thus, subserving the interest of the national economy. It is also necessary to examine
ways and means of improving the administration of these laws and expediting
assessment, appellate and other proceedings under these laws. It has., therefore, been
decided to appoint a Committee of eminent experts to make recommendations for the
simplification and rationalisation of the direct tax laws. It is my intention to ask the
Committee to submit its report before the end of the year.
INDIRECT TAXES
83. Now I come to my proposals with regard to Indirect taxes. My proposals
concerning central excise fall into three categories, the first relates to proposals for
raising additional resources, the second to reduction or abolition of excise duties, and
the last set of proposals seeks to rationalise and simplify the duty structure.
84. A 10 per cent excise duty Is proposed to be levied on the following five
items; (i) hand tools, and small tools not already excisable, (ii) weighing machines
and weigh bridges, (iii) watches clocks and time-pieces, (iv) electric light fittings and
(v) polishes for footwear, metals, cars, etc. It is also proposed to levy an excise duty
of 12 per cent on acetylene gas. Small scale manufacturers of hand tools and small
tools, electric light fittings and polishes, will, however, be exempted in respect of
their production up to Rs.1 lakh. These levies are expected to yield a revenue of Rs.11
crores in a year.
85. As Hon’ble Members are aware, in 1975, as an experimental measure, a
1 per cent general excise duty was levied on commodities which did not attract excise
duties under any specific heads. The experiment has succeeded in the sense that without
imposing any undue burden or harassment we were able to collect an appreciable sum
of money, namely Rs.37 crores. When we stand in need of additional resources, it
seems eminently suitable to raise this rate to 2 per cent. In order to minimise the
cascading effect, a set off will be given where these goods go into the manufacture of
other goods that are themselves excisable.
86. Realising that under this excise head fall a large number of small units
producing a variety of goods I have provided that no duty will be levied on any unit
whose annual turn over does not exceed Rs.30 lakhs. This will replace the existing
exemption based on the number of workers. I am. also exempting all non-power operated
units from this levy.
18
 87. Further, small newspapers have already been exempted from this levy. It
is now proposed to extend this exemption to medium newspapers also. The big
newspapers will continue to pay duty at the existing rate of 1 per cent.
88. The net additional yield from this group of proposals is expected to be of
the order of Rs.30 crores In a year.
89. I now come to the hardy annual, namely tobacco products. At present the
rate of ad valorem duty on cigarettes increases as the value of cigarettes goes Up. The
progression in the existing, rates is now proposed to be raised. In regard to branded
biris it is proposed to raise the existing duty of rupee one per thousand to rupees two
per thousand. These levies are estimated to yield an additional revenue of Rs.45 crores
in a year.
90. The present system of taxing cinematograph films is based primarily on
the length and the nature of the film, and the number of prints. I intend changing the
basis and adopting the value criterion, the revised duty being 10 per cent ad valorem.
This is a much fairer criterion.
91. The present specific rates of duty on pigments, paints, enamels, varnishes
etc. are proposed to be replaced by ad valorem rates. These are being so adjusted that
the duty on the high cost items such as oil-bound paints, enamels, plastic emulsions
and varnishes will increase by about 5 per cent generally, while that on the cheaper
items like blacks and dry distemper will remain more or less unchanged. These changes
are estimated to yield Rs.4.8 crores in a year.
92. The excise duty on motor vehicles is also being raised. The rate of duty
on motor cars is to go up by 21/2 per cent to 171/2 per cent. Similarly, the rate of duty
on two-wheeler and three-wheeler motor vehicles is proposed to be raised from 9 per
cent to 121/2 per cent. Since I propose simultaneously to exempt from excise duty
tyres, tubes and batteries supplied as original equipment, the net increase in duty for
the two and three wheelers will be about 2A per cent. These changes will yield a net
revenue of Rs.5.1 crores annually.
93. I come now to proposals for reduction or abolition of excise duties. The
first industry to benefit is the handloom. At present only cotton yarn supplied in
straight reel hanks is exempt from excise duty. It is now proposed to exempt also
cotton yarn in cross reel hanks up to 20s counts. It is also proposed to exempt cotton
yarn of higher counts in cross reel hanks to the extent of 30 paise per kilogram.
Further I propose to extend similar concessions in respect of viscose spun yarn, because
the handloom sector is now consuming substantial quantities of that yarn.
94. The next beneficiary is the powerloom sector. I propose to exempt it from
the existing compounded excise levy. This will free about 80,000 powerloom licensees
from excise control.
19
 95. Handloom and powerloom fabrics have to pay excise duty when they are
subjected to various finishing processes, but an exemption is given if bleaching, dyeing
and printing is done without the aid of power. It is now proposed to extend this
concession to all other types of processing such as stentering and mercerising done
without the aid of power.
96. The yarn crimping industry is today suffering from excess capacity and
the difference in price between crimped yarn and base yarn cannot sustain the present
rate of duty. It is, therefore, proposed to reduce the duty on crimped yarn from Rs.10
per kilogram to Rs.5 per kilogram.
97. I propose to reduce the duty on power driven pumps used for pumping
water from 10 per cent to 5 per cent and to exempt power tillers from the general
excise levy. Both these concessions will be of particular value to small farmers.
98. Small paper mills have been passing through difficult times - a few of
them have even closed down. I, therefore, propose to reduce the duty leviable on
paper produced by these mills, the relief varying on a graded basis from 75 per cent
to 50 per cent of the excise duty leviable, dependent upon the installed capacity of the
mill. This concession will be subject to the use of non-conventional raw materials and
waste paper to the extent of at. least 50 per cent. Even larger paper mills if they use
non-conventional raw materials to the extent of at least 50 per cent will get a duty
relief of 33 113 per cent of the excise duty leviable. This concession is designed to
conserve our fast depleting timber resources.
99. In the match industry, small cottage units are finding it difficult to
compete successfully with the bigger units. To help such of these units as are
members of registered cooperative societies or are certified as such by the Khadi
and Village Industries Commission, I propose to double the existing concession
of 55 paise for a gross of match boxes. I need hardly say that these units have a
large employment potential.
100. Mini steel plants are also in difficulties. Their position could be improved
if they were provided with fresh melting scrap from the main steel plants without
payment of excise duty. I, therefore, propose to exempt from excise duty the identifiable
types of fresh melting scrap cleared from the main steel plants as raw material for the
mini steel plants.
101. The revenue from electric insulating tapes and slotted angles is low and
further, has to be collected from a number of small producers. I, therefore, propose to
delete these articles from the list of specific items in the Central Excise Tariff.
102. The production of boiled sweets, toffees, candies, etc. has been going
down. Sugar, which is a basic raw material, is already subjected to a high excise duty
as also are packaging paper and containers used in the confectionery industry. I,
20
therefore, propose to delete these confectionery articles also from the list of specific
items in the Central Excise Tariff.
103. Electronics is one of our growing and promising industries, and offers
great scope for development in the small-scale sector. The various concessions that
are proposed here are designed to help the growth of that sector. At present the duty
on electronic items is on a varying basis, some being specific and others ad valorem.
It is now proposed to make the basis uniformly ad valorem. The large manufacturers
producing radios and transistor sets, tape recorders, tape recorder-cum- radios, stereos
and hi-fi musical systems will. pay duty varying from 15 per cent. to 35 per cent. ad
valorem, depending on the item and the ex-factory price. It is proposed to give small
manufacturers a uniform concession of 15 per cent. ad valorem in the rate of duty, that
is to say, the corresponding rates of duty that they will pay will vary from nil to 20 per
cent. ad valorem.
104. Experience has shown that a judiciously adjusted excise structure acts
as a powerful incentive to manufacturers of electronic goods to reduce their prices.
We propose to continue with this experiment further. In the case of T.V, sets the 5
per cent concessional rate of excise duty will henceforth be available only where the
ex-factory price of a T.V. set with a screen exceeding 36 centimeters is Rs.1600 or
less., instead of the existing limit of Rs.1800. In the case of tape recorders, there will
be a concessinal rate if the ex-factory price does not exceed Rs.500. For electronic
calculators too, there will be a concessional rate for calculators if the ex-factory
price does not exceed Re. 175.
105. 1 shall now expound my proposals concerning rationalisation. We are at
present collecting excise duty on woollen yarn from a number of small spinners. This
has led to evasion and other malpractices. It is, therefore, proposed to replace the
excise duty leviable on woollen yarn by an increase in the customs duty at the stage
of import of raw wool, waste wool and rage. As regards wool tops also, with a view
to minimising evasion, it is proposed to reduce the present rate of excise duty of Rs.10
per kg. to Rs.5 per kg and to make good the loss by increasing the import duty on raw
wool suitably. Both these measures should result in making fabrics using indigenous
wool cheaper.
106. Most steel re-rollers produce bare, rods, angles, etc. which attract an excise
duty of Ra.130 per tonne in. addition to the duty already paid m ingots, it is proposed
to shift this duty of Rs.130 per tonne from the re-rollers to the ingot manufacturers,
namely, the main steel plants or the mini steel plants.
107. The existing scheme of excise duty m cotton yarn is based m a slab system
where several counts are grouped together, and provides for sharp increases in the
rates of duty when the count of yarn increases from one slab to another. This duty
structure encourages underspinning of cotton in order to avoid payment of duty at the
higher rate and leads to wasteful use of cotton. Evasion too is not easy to check. To
21
remove these defects, a new schedule of rates has been proposed where the duty rises
gradually with each unit increase in the count of yarn. The new rates include a duty of
half a paise per count to enable Government to recoup the loss incurred by exempting
powerlooms and hand processors from the excise duty, to which I have referred earlier.
As a further measure of rationalisation, viscose spun yarn is proposed to be subjected
to the same rates of excise duty as cotton yarn.
108. Last year, a system of ad valorem rates for cotton fabrics was introduced.
The rates were, however, dependent on the count of the yam used in the fabric. To
rationalise the structure, I propose to adopt the ad valorem system irrespective of the
count of the yarn and with a high degree of progression built into it. The new duty
structure has been so devised as to yield approximately the same revenue from cotton
fabrics and yarn as is collected at present from these items taken together.
109. As regards the cloth produced by powerlooms. It will be exempt if it is
sold grey or is processed by hand processors, but if it is processed by independent
power-operated processors, the rate of duty will be 50 per cent. of the composite yarn
and fabric rate paid by the mill fabrics.
110. A major reform which is proposed to be introduced relates to the
nomenclature and classification of textile yarns and fabrics. Henceforth, yarn or
fabric would ordinarily be classified on the basis of the fibre which predominates by
weight. The new system will be much simpler and will remove many working
difficulties. Further, the blending of polyester fibre up to one-sixth of the total fibre
content will not change the classification of the yarn. This should enable the textile
industry to use more polyester fibre without attracting higher duty on the yam
produced, and would be in furtherance of a multi-fibre policy which the Government
is in the process of evolving.
111. Pursuant to the Government’s acceptance of the recommendation of the
Sixth Finance Commission, from 1976-77 onwards, auxiliary duties of excise have
become shareable with the States in the same way as basic duties of excise. Thus, the
justification for levying auxiliary duties separately has now disappeared. In order to
simplify the structure and to eliminate unnecessary calculations, I have decided to
merge the auxiliary duties with the basic duties of excise.
112. I have also carried out a number of minor modifications in the Central
Excise Tariff, which 1 do not propose to detail here. Full details of these changes are,
of course, given in the Budget documents.
113. The total of the additional central excise levies is estimated to yield
Rs.106.3 crores in a year. The total concessions given will mean a sacrifice of Rs.15.7
crores in a year. The net yearly increase in central excise levies is thus estimated at
Rs.90.6 crores. However, because of the transfer of the duty on woollen yarn and
wool tops to imports, there will be a transfer of Rs.17 crores from Central Excise head
22
to Customs head, thus giving a net increase of Rs.73.6 crores under the Central Excise
head. Of this, the additional revenue accruing to the Centre in a year will be Rs.53.8
crores, while the States’ share will be Rs.19.8 crores.
114. Finally, I come to customs duties in respect of which I have to submit
only a few proposals. indigenous production of watches does not fully satisfy the
domestic demand. As a result, considerable quantities of foreign watches are known
to be smuggled into the country. Government have accordingly decided to make good
the deficiency still remaining by allowing the import of watches through Hindustan
Machine Tools Ltd. In order that the indigenously manufactured watches and imported
watches are available to the public at reasonable prices I am reducing the import duty
on watch parts and watches from 120 per cent. to 50 per cent. ad valorem.
115. I am proposing also to reduce the import duty on newsprint from 5 per
cent to 21 per cent ad valorem.
116. I would now make certain proposals designed to stimulate industrial growth
and to enhance the competitiveness of our industry. In order to introduce a measure of
competition, it is proposed to allow the import of certain selected items of capital
goods without prior scrutiny from the indigenous angle. At the same time, in order to
enable the Indian capital goods industry to meet foreign competition more effectively,
I propose to bring down the rate of import duty on copper wire bars used for the
manufacture of certain larger sized electrical motors, generators and transformers from
the existing level of 45 per cent plus Rs.5,600 per tonne to 40 per cent ad valorem.
Similarly,, the rate of duty on cold rolled non- grain- oriented sheets, alloy steel, tool
steel, special steel, and high carbon steel is also proposed to be brought down from 75
per cent to 40 per cent. Further, stainless steel plates, sheets and strips of 16 gauge and
thicker which are used in the manufacture of capital goods and which are to-day
charged to 120 per cent or 320 per cent duty depending on the gauge, are proposed in
future to be charged to 40 per cent duty only. Utensil grade stainless steel of 22 gauge
and thinner, which today attracts a duty of 320 per cent, will be charged to import duty
at 120 per cent. Varying rates of duty are proposed to be fixed for the intervening
gauges, taking into account the possibility of re-rolling imported products. It is estimated
that the reduction in duties on these copper and steel items will mean a revenue
sacrifice of the order of Rs.36.25 crores at the existing level of imports.
117. The effect of the increase in Customs duties proposed by me will be an
additional revenue of Rs.15.5 crores in a year. The reliefs total Rs.37.7 crores in a
year thus resulting in a net reduction of Rs.22.2 crores. But taking into account the
transfer of Rs.17 crores from the Central Excise head to the Customs head, the overall
effect of the budget proposal on Customs revenue will be a reduction of Rs.5.2 crores
in a year.
118. Taking Union Excise duties and Customs duties together, the net yield for
23
the Centre in a year will be Rs.48.6 crores. The yield during the remaining part of the
current financial year will be Rs.38. 2 crores.
119. My proposals will yield, in all, Rs.130 crores for the Centre in the current
year. The deficit of Rs.202 crores which I mentioned earlier will, thus. be reduced to
Rs.72 crores. This is a relatively small amount and is unlikely to have any inflationary
effect.
CONCLUSION
120. With this I have come to the end of my labours. My aim in this budget is
to stimulate the economy into achieving a higher rate of growth of output and
employment, and simultaneously to ensure that the fruits of economic progress are as
widespread as possible. The emphasis on investment in agriculture, small and village
industries and rural infrastructure is designed to achieve these objectives. My tax
proposals seek-to enlarge the pool of national savings while strengthening the role of
taxation in reducing disparities of income and wealth. I have taken special care to
widen opportunities for the small man - be he a farmer, an artisan or a technocrat. It
would be futile to pretend that we can achieve at one stroke the full utilization of the
latent energies represented by our vast human resources. But a beginning has to be
made. I venture to think that this Budget marks such a beginning.
121. My party has emphasised liberty. But liberty does not mean freedom to
starve and freedom to feel unwanted. Large-scale poverty and unemployment degrade
those who have to suffer them, and debase those who tolerate them. We owe it to
ourselves to see that these twin scourges are eradicated as quickly as possible. We
have a long and a difficult road ahead of us. But there can be no doubt about our
commitment to our goals and ideals. I believe we are on the right course and this
Budget represents the first step, however small, in that direction.
(June 17, 1977)

24
 SPEECH OF SHRI H.M.PATEL MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1977-78 (INTERIM)

Sir,
I rise to present the Budget to this august House.
The Budget and the demands for grants that are being made available to
Honourable Members were prepared on the basis of the directions given by the previous
Government. I would like to make it clear at the outset that though these have been
circulated, they do not reflect our philosophy, policies, and programmes.
2. There was no time since we assumed office to recast these estimates and
to print the Budget documents afresh. The annual financial statement and the demands
for grants prepared earlier will serve the limited purpose of fulfilling the Constitutional
requirements for taking a Vote on Account before the 31st March, 1977. This will
enable Government to meet essential expenditure during the first four months of the
ensuing financial year.
3. The Budget for the current financial year presented in March, 1976
envisaged an overall deficit of Rs.328 crores. Due to certain increases in expenditure,
partly offset by improvement in receipts, the year is expected to close with a deficit of
Rs.425 crores. It is not necessary for me to take you over the various details of the
budgetary developments during the current year for which the present Government
can obviously assume no responsibility.
4. According to the Budget as prepared, while total receipts are expected to
go up during the year 1977-78 to Rs.14,910 crores as compared with the figure of
Rs.13,759 crores in the Revised Estimates for 1976-77, expenditure for the ensuing
year is estimated at Rs.15,542 crores as against the current year’s Revised Estimate of
Rs.14,184 crores. This position has resulted from an increase in both non-Plan and
Plan expenditure.
5. The Central Sector of the Plan for 1977-78 involves an outlay of Rs.5.053
crores and will make a draft on the Central Budget of Rs.4,096 crores. This compares
with the preceding year’s (1976-77) outlay of Rs.4,090 crores and a budgetary support
of Rs.3,347 crores at the Budget stage. Central assistance to States and Union
Territories, and for various programmes concerning the Hill and Tribal areas, the
North Eastern Council and Rural Electrification Corporation as well as the Andhra
Six Point Formula amounts to Rs.1,692 crores according to these estimates for the
year 1977-78. The corresponding figure for the current year is Rs.1,412 crores.
1
Taking Centre, States and Union Territories together, the Budget envisages a total
Plan outlay for 1977-78 of Rs.9,953 crores as compared with Rs.7,852 crores in the
Budget Estimates of 1976-77.
6. The net effect of the proposals made in the Budget would be an overall
deficit of Rs.1,432 crores. However, the Budget takes credit for special borrowings
of the order of Rs.800 crores against drawal of foreign exchange reserves, the
assumption being that such borrowing would be non-inflationary as it is covered by
increased imports of goods. Accordingly, the Budget document shows a net deficit
of Rs.632 crores.
7. In the context of the rise in the wholesale price index of 12.5 per cent that
has occurred since March, 1976, any deficit financing has to be viewed with concern.
In order to reverse the rising trend of prices, and to usher in a period of reasonable
price stability, the Government are of the firm view that financing of public expenditure
in a manner which would generate inflationary pressures should be eschewed. It is our
firm resolve to review the fifth Plan and to revise the Budget Estimates so that they
reflect our thinking and priorities. We propose to complete this exercise in time for the
regular Budget which will be presented in May, 1977.
8. Meanwhile, I have asked my Ministry to request all Ministries, Departments
and Public Sector Undertakings under the control of the Central Government not to
take up new schemes and not to enter into fresh major commitments till we have
completed our review. The possibility of rephasing and re-scheduling continuing
schemes would also be explored. All Ministries and Departments of Government, and
Public Sector Agencies will be asked to observe the utmost economy in expenditure,
keeping in view the present Government’s emphasis on austerity, and avoidance of all
forms of ostentation.
9. It is the will of the people of India as expressed unequivocally at the
Polls, that there is an urgent need to redirect our economic policies and priorities so
as to ensure that economic growth subserves the objective of speedy eradication of
poverty and unemployment, and a progressive reduction in inequalities of income and
wealth. The House may rest assured that we shall keep our faith with the people. The
task ahead is formidable, but with the willing support and goodwill of the people, we
are confident that we shall achieve our objective.
(March 28, 1977)

2
 SPEECH OF SHRI C.SUBRAMANIAM MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1976-77
Sir,
1.1 It is my privilege, Sir, once again, to present the Budget to this
august House.
1.2 Last year, when I outlined the Budget proposals for 1975-76, the emphasis
was on stabilisation and consolidation. The economy was just then recovering from a
severe bout of inflation; and the agricultural situation was none too secure.
1.3 The outlook has changed in many ways this year, thanks to resolute and
dynamic leadership. The New Economic Programme has generated an unprecedented
sense of discipline and dedication in every facet of our economic life. Taking
advantage of the improved situation, additional investments in important sectors
were authorised during the latter half of 1975-76 and the country is now poised for
a major advance in its path towards progress. I am seizing this opportunity to step
up the tempo of development further and to impart an added dynamism to the
economy. I shall give you the details presently. But Hon’ble Members would, I am
sure, be glad to be told straightaway that the Plan outlay of Rs.7852 crores for 1976-
77 represents an increase of 31.6 per cent over the allocation for 1975-76. This
marks the highest step up in development outlays in any one year since the beginning
of the era of planning in our country.
1.4 The main thrust in this Budget is thus towards accelerated growth. But
considerations of stability will continue to be important, The world around us is still
subject to considerable buffeting, from price inflation in some areas and from recession
in some others. For the first time in post-war history, the volume of world trade
registered a significant decline in 1975. This is associated with the fall in the level of
economic activity in the OECD countries. There are now signs of recovery in some of
the countries, but they appear to be weak. Inflation continues to ravage a number of
countries. All this implies a strain on the balance of payments situation for developing
countries which are not exporters of petroleum. Our economy, though more strongly
placed than some others, is not entirely immune to these pressures. Its sound
management will continue to call for the utmost vigilance from all of us.
1.5 India’s economic performance during the current year has been a source
of satisfaction, indeed pride, to all of us. There has been all-round improvement in
production. Key sectors of the economy-in agriculture, in industry, in mining, power,
transport and the like-have touched new peaks in performance. The country has had
the unique distinction of sustaining a declining trend in prices since October 1974.
1
The wholesale price index for the week ending February 21,1976 declined to 288, and
is about 7.3 per cent lower than a year ago; last year, at this time, prices were 12.5
percent higher than the earlier year. Consumer prices too have shown a declining
trend. The All India Industrial Workers Consumer Price Index was 298 in January
1976 as compared to 326 in January 1975-a decline of 8.6 per cent. I would also, like
to bring to the notice of Hon’ble Members that the 12-monthly moving average of the
consumer price index has come down to 318.6. This success in the struggle against
inflation has helped to dispel the mood of pessimism and doubt which prevailed during
1973-74. The manner, in which this battle was won, despite heavy odds, is living
proof of the basic strength and resilience of the Indian economy.
1.6 Last year, I had invited the attention of Hon’ble Members to the need not,
only of holding, the price line, but also of taking positive steps to stimulate growth in
the economy. It is therefore a matter of particular satisfaction that the favourable turn
in prices during the year has been accompanied by a welcome acceleration in the rate
of growth of the economy. On present indications, national income in real terms will
increase by about 5.5 per cent in 1975-76. This is attributable to the many determined
efforts made by the Government, particularly since the launching, in July, 1975 of the
New Economic Programme, to remove the various obstacles that come in the, way of
increased production in factories and farms. The prospects for agricultural development
have improved greatly on account of the vigorous steps taken to increase the supply of
quality seeds, water and fertilisers. The determined action taken to increase the
production of such vital inputs as power, coal and steel augurs well for the further
growth of industrial production. The country’s external payments will also derive
considerable benefit from measures adopted against smuggling, and preventing leakage
of foreign exchange through unauthorised channels. The fact that at the end of the
current year food stocks with public sector agencies will be as high as about 11 million
tonnes lends considerable strength to the economy. Altogether, the many beneficial
effects of strict enforcement of economic discipline can be easily perceived by any
impartial observer of the Indian economic scene. The highly satisfactory performance
of the economy during 1975-76 now enables us to take further measures to accelerate
the tempo of social and economic development in the coming year.
II
2.1 Adequate investment in key sectors of the economy constitutes a basic
condition for a sustained increase in the rate of economic growth. It was in pursuance
of this objective that the Annual Plan outlay was stepped up by nearly 25 per cent in
1975-76. Fortunately, the present state both of our food economy and our external
reserves is such that we can think in terms of a further major in crease in investment
outlays in 1976-77, without upsetting the stability of prices. Clearly, public sector
investment has to play the leading role in this area. Consequently, it has been my
foremost concern in the Budget for 1976-77 to provide for the maximum possible

2
increase in investment consistent with the available organisational capacities for
physical performance. The Annual Plan for 1976-77 visualises an outlay of Rs.7852
crores, which, as I said earlier, represents an increase of 31.6 per cent over the Plan
outlay for 1975-76.
2.2 I am confident that the contemplated increase in the Plan outlay can be
reconciled with continued stability of prices though this is achievable only on the
basis of the strictest possible economic discipline. The struggle against inflation was
successful only because the country willingly accepted the needed economic discipline.
The fact that prices are currently stable does not warrant the conclusion that enforcement
of economic discipline can be relaxed. Price stability has to be sustained through
deliberate cooperative efforts on the part of all sections of the community. It would be
a grave mistake to take price stability for granted. If we are not vigilant, inflation will
raise its ugly head again. This means that the planned increases in investment must, to
the maximum extent possible, be financed through a genuine increase in savings. It
also means that the community must voluntarily agree to sacrifice current consumption
for the sake of accelerated growth in the future. Our economic policies must assist in
promoting the growth of investment and savings. Later in my speech, I shall describe
the manner in which our tax system is being adapted to facilitate, this outcome. At the
same time, every effort must be made to curb the growth of non-development
expenditure. The general improvement in discipline since the declaration of Emergency
has not only led to increased efficiency in Government administration, but also to
considerable savings on account of overtime payments. We have to sustain this
momentum. In the current year, public sector enterprises have shown encouraging
results with the growth rate of production reaching about 15 per cent. We must
continuously improve upon this performance so that the country gets the maximum
yield from the massive investment outlays of the past. Similarly, the private sector
must also accept the inescapable need for the utmost discipline in the use of both real
and financial resources. Credit policies must of course respond to changing economic
needs. Nevertheless, there can be no getting away from the basic commitment to. a
rational system of credit use in line with national priorities. The lending pattern of
term financing institutions must also be consistent with national priorities. Effective
arrangements for procurement and public distribution of mass consumption goods
must also he an essential component of the national economic scene.
2.3 In my budget speech last year, I had indicated the broad sectoral priorities
underlying the budget proposals for 1975-76. These priorities are still valid. It does
not require much argument to prove that abolition of mass poverty in a country such
as ours can be ensured only through a sustained attack on rural poverty. As Mahatma
Gandhi reminded us so often, India lives in its villages. This means, the foremost
priority must continue to be, given to programmes of agricultural development and
such supporting sectors as power, irrigation, fertilisers and pesticides. In this context,
I would like to emphasise that an effective attack on rural poverty and under-
3
development can only be planned in the framework of an integrated programme of
rural development based on detailed knowledge of local needs, resource endowments
and potentialities. The focus must be on maximum utilisation of locally available
resources, including local manpower, rather than on the introduction of large inputs
from outside. We have to evolve operational district plans which fully take into
account the precise and separate requirements of each area. For this purpose, a
comprehensive survey of natural resources assumes great urgency, We have to make
full use of the potential offered by modern science and technology for the regeneration
of our rural economy.
2.4 The over-all aim of our approach should be to evolve an operational
strategy with the twin objectives of productive employment of the available work-
force and of the scientific utilisation of all our natural resources. It is true that such a
development strategy cannot be pit into operation overnight. Much spade work is
necessary before genuinely operational programmes can be devised. There must be
scope for innovation and adaptation in the light of varying needs and circumstances.
For such efforts in the field of integrated rural development, a sum of Rs.15 crores has
been earmarked in the Central Budget for 1976-77. I hope that on the basis of experience
gained in 1976-77 we shall be able to expand progressively the scope of this programme.
2.5 There is a very close relationship between modern scientific agriculture
and industry. Progress in agriculture depends crucially on the supply of inputs such as
quality seeds, water, power and fertilisers. In the current year, the National Seeds
Project has made satisfactory progress and there is currently no shortage of quality
seeds. The speed with which inter-State river disputes have recently been resolved
will surely facilitate a faster and more rational development of the country’s vast
water resources.
2.6 The experience of the last few years shows the grave risks inherent in
excessive dependence on imported supplies of fertilisers. We,’ therefore, need to push
ahead as fast as we can with our fertiliser programme. I derive considerable satisfaction
from the fact that the utilisation of fertiliser capacity in the country has. improved
considerably during the current year. Today it can be said with confidence that we
have no shortage of fertilisers.
2.7 Government have recently made a review of fertiliser prices, having regard
to. the importance of ensuring that the output-input ratio in agriculture does serve to
stimulate further investment and thus larger production. Hon’ble Members would be
happy to learn that it has been decided to reduce the price of urea from Rs.1850 to
Rs.1750 per tonne. There is also need to promote balanced application of Nitrogen,
Phosphorus and Potash. The consumption of phosphatic and potassic fertilisers has
lagged behind the desired levels. Government have, therefore, decided to effect a
reduction in the prices of all indigenously produced phosphatic fertilisers and some
select categories of imported phosphatic fertilisers by Rs.1250 per tonne of P2 05 . The
4
price of muriate of potash will also be reduced from Rs.1085 to Rs.900 per tonne. I
shall also refer later on to proposals in regard to imported rock phosphate. I am confident
that these price reductions would serve to step up levels of fertiliser consumption.
2.8 Modern agriculture requires vastly increased inputs of credit. Since
nationalisation, commercial banks have expanded greatly their activities in the rural
areas. There is, however, still a vast gap between what is available and what is needed.
This gap is now sought to be filled partially by the newly established regional rural
banks which will lay special emphasis on meeting the credit needs of the more
vulnerable sections of rural community.
2.9 One cannot over emphasise the need for expanding the production of
such critical inputs as power, coal, oil and iron and steel for the development of the
country’s economy, particularly its industrial base. Production of these items has shown
an encouraging trend in 1975-76. Production of coal is expected to reach the record
level of 98 million tonnes in 1975-76. The generation of power will show an
improvement of about 13 per cent. Yet, there is still a pressing need to push ahead at
a faster pace. The establishment of super thermal power stations constitutes an essential
plank of the programme to rid the country of continuing power shortages. The oil
exploration programme has gained considerable momentum both on- shore and off-
shore and, on present indications, the medium-term prospects appear highly favourable.
In order to sustain growing production in the years to come, we must provide all these
industries with adequate investible resources. This to precisely what is being done in
the Budget for 1976-77.
2.10 In planning the national investment strategy, we have also to ensure that
the level and the sectoral composition of private investment are in line with our national
priorities. I recognise that in recent years, investment levels in some major industries
have fallen short of requirements. Government have adopted several measures to
improve the profitability of some priority industries. Pricing policy has been made
more flexible. In some cases prices have been decontrolled while in others a system of
dual prices has been adopted with a view to providing a reasonable return to the
investors consistent with protecting the users in priority sectors against excessive
price increases. It goes without saying that in a fast changing world, our pricing
policies must retain the needed degree of flexibility to ensure a proper balance between
the interests of producers and of consumers,
2.11 I am aware that in recent years there has been a steep escalation in
capital costs which has affected the profitability of new investment. This could not
have been foreseen when the decision to withdraw the development rebate was
taken some years ago. I am convinced that the problems created by escalation in
capital costs are genuine, and means have to be found to tackle them effectively.
This Budget will attempt to do this.
2.12 Under the existing Capital issues (Exemption) Order, the specific consent
5
of the Controller of Capital issues is required only for bonus issues and for issue of
capital by companies registered under the MRTP Act. In the case of other issues,
companies have only to file a statement of proposals with the Controller if the issue
exceeds Ra. 25 lakhs during a twelve-month period. It is now proposed to raise this
limit to Rs.50 lakhs. There will, however, be no change regarding the regulations
covering bonus issues or issues by MRTP concerns.
2.13 It has been a matter of particular concern to us that such important
industries as cotton textiles, jute manufactures and sugar have not devoted enough
resources to modernisation and expansion. These industries process important
agricultural raw materials, and offer direct employment to a large number of workers.
They are also a major source of the country’s foreign exchange receipts. In addition,
cloth and sugar are major articles of mass consumption. The country has, therefore, a
vital stake in the good health of these industries. Certain segments of the engineering
industries are also faced with ‘sickness’ which has to be checked in time. In the
cement industry, a significant improvement in the economy, of production can be
secured by a changeover from wet to dry process. The provision of adequate resources
for modernisation and rehabilitation of these industries is therefore another matter of
high priority. To that end, arrangements are being made to provide the Industrial
Development Bank with enough resources to enable it, in collaboration with other
term-lending institutions, to finance the requirements of modernisation, renovation
and rehabilitation of these industries.
2.14 I would like to emphasise that very often lack of effective management
is a basic cause of the sickness of an industry. Along with provision of financial
assistance, financial institutions should, I feel, devise sound mechanisms to tone up
the management of assisted concerns,. R also needs to be emphasised that sound
development of industries such as sugar is also greatly dependent on the adoption of
a stable long-term policy for the growth of production of sugarcane. Similarly, the
progress of the cotton textiles industry is linked to the evolution of a sound policy
for the development of raw cotton. Additionally, any integrated textile policy must
ensure effective protection for the handloom sector which provides employment to
a very large number of poor weavers.
2.15 It is no doubt true that currently some industries are faced with inadequate
demand. I would hope that the contemplated increase in Plan outlays for 1976-77 will
provide a major stimulus to the greater utilisation of existing industrial capacities. A
number of industries producing consumer durables are experiencing considerable
difficulties. While there may be a case for the sake of preventing unemployment for
helping these industries to tide over transitional problems, their long-term survival is
clearly linked to their ability to diversify their activities and to produce the type of
goods for which there is likely to be an expanding demand in the country.

6
 2.16 An increase in export volume at an annual rate of over 8 per cent is an
essential condition for sustained viability of the country’s external payments.
Government have recently farther simplified procedures and liberalised facilities for
exporters. The procedures for payment of cash assistance and duty drawback have
been made simpler. Rates of cash assistance have been suitably revised in order to
promote the competitiveness of our exports. The country’s success in stabilising
domestic price levels and the emergence of a buyers’ market at home have also enhanced
the competitiveness of our exports. The fact that a year in which the volume of world
trade declined is likely to witness an increase of 7 to 8 per cent in the volume of our
exports is an indication of the growing effectiveness of our export promotion efforts.
The modernisation programme for jute, textiles and sugar, I have mentioned earlier, is
designed to strengthen further the country’s export performance. The recent arrangement
to delink the rupee from the pound and determine the rupee’s exchange rate by reference
to movements in a basket of currencies of India’s major trading partners is designed
to impart greater stability to the effective exchange rate and to our foreign trade in a
world of floating currencies. With its well diversified industrial base, it to possible, as
never before, for India to mount a successful export drive.
2.17 Developments in science and technology have convincingly demonstrated
that mass poverty is not the inevitable lot of the majority of mankind. The country has
an impressive record of achievement in the utilisation of atomic energy, space
exploration, and utilisation of modern science for agricultural development. The time
has, however, come when the movement for technological change needs a fresh impetus.
As part of this process, the Plan allocation for the development of science and
technology will be Rs.156 crores in 1976-77 or an increase of no less than 34 per cent
over the likely expenditure of Rs.116 crores in the current year. Hon’ble Members
would no doubt also welcome Government’s decision to levy an R&D cess to mobilise
resources to finance such ventures. The Ministry of Industry and Civil Supplies would
be introducing legislation in this regard in this session.
2.18 Social justice to not merely a matter of increased production even higher
production is an indispensable condition for securing greater social justice. That to
why our development strategy has always recognised the need for special programmes
catering to the needs of the more vulnerable sections of our society. The 20-point
Economic Programme has created a new awareness of the urgency of orderly
implementation of such programmes. Effective implementation of measures involving
redistribution of surplus land, provision of house sites for the poor and socialisation
of vacant urban lands will have a very favourable impact on the structure of income
distribution. Progress in this field is proceeding apace. The more vigorous emphasis
now being laid on family planning also constitutes an important element of the
programme designed to improve the standard of living and the quality of life of the
less privileged sections of our society. New initiatives are being planned to step up
considerably the a of construction of low income houses as part of programmes of
sound urban development and renewal. However, I would like to emphasise that special
7
programmes of this kind achieve optimum results when they form part of an integrated
strategy of development.
2.19 Government recognise that if the process of development to to be speeded
up and plans and programmes are to be properly implemented. some basic a are also
necessary in the field of financial administration. The existing system under which
accounts are maintained by an agency external to the Ministries and Departments to
not conducive to effective financial management. Accounts and Finance should form
an integral part of overall management and should play a more meaningful and effective
role in selection of projects, allocation of funds, monitoring of expenditure in relation
to physical progress, and evaluation of results. In order to integrate accounts with
administrative Ministries and Departments, it is proposed to separate accounts from
audit and instal a Departmentalised Accounting System. The process of this separation
is scheduled to be completed by 1st October. 1976 for all Central Ministries. Under
the new scheme, administrative Ministries will take full responsibility for arranging
payments, and timely compilation and rendering of accounts. This reform will facilitate
the timely receipt of information on the progress of expenditure, and enable a proper
analysts of expenditure trends to be effected. There can be little doubt that this flow
of information will greatly facilitate the taking of correct decisions, and the adoption
of remedial measures wherever called for. Since these changes are fundamental, and
of a magnitude unprecedented in the annals of Indian administration, care has to be
taken to ensure that during the transitional phase, there to no dislocation either in
payments or in accounting procedures. Hon’ble Members are doubtless aware that the
President has promulgated two Ordinances to achieve these objectives, and to ensure
that the necessary expert manpower to available to the Government for discharging
the newly acquired responsibilities. In doing so, every care will be taken to see that
minimum hardship to caused to the employees, and that the Comptroller and Auditor
General is able to discharge his constitutional responsibilities effectively and without
disruption. He is fully associated with the reforms and all measures have been taken
in close consultation with him.
2.20 Government also attach great importance to the rationalisation and
modernisation of procedures relating to the personal claims of Government servants
and transactions with members of the public. The existing procedures in regard to
pension, gratuity and, drawal of salaries of Government officers have been reviewed
in depth and a number of steps have been taken to eliminate existing delays in the
preparation of pension papers and sanctioning of pension and gratuity. Procedures for
payment of salary and allowances of Gazetted Government servants have also been
simplified. It to proposed to utilise nationalised banks for financial transactions between
Government, its employees and private citizens. The new system will be a considerable
improvement over the exesting system where such transactions can today be made
only at a limited number of treasuries or banks..
8
 2.21 The machinery for tax collection, for checking tax evasion, and for
preventing leakage of foreign exchange to illegal channels has been streamlined. The
improved collection of income tax, despite a reduction in rates, the outstanding success
of the voluntary disclosure scheme, and the sizeable increase in earnings of foreign
exchange on invisible account due to effective action a smuggling, are an indication
of the success of measures to strengthen the tax collection machinery. I would like to
take this opportunity to express my appreciation of the work dons by the staff of the
Central Boards of Direct Taxes and of Excise and me, of the Directorate of Revenue
intelligence and the Directorate of enforcement
2.22 I would like to point out that prevention of such evils as tax evasion and
black money cannot be achieved solely through a tightening of administrative
mechanisms. It is equally essential to ensure that our economic policies, including our
fiscal policies, minimise the incentives for tax evasion and for generation of black
money. As part of this drive, Government have sought to streamline and simplify
controls with a view to removing those which have become obsolete or lost relevance,
without in any way encouraging greater concentration of economic power. The recent
attempts at simplification of procedures and liberalisation of facilities for inward flow
of remittances from non-resident Indians abroad are directed to the same objective.
Such simplification and liberalisation cannot however be a once and for all process.
Some controls will always remain an essential part of our regulatory mechanism for
the public good, and have to be accepted as necessary facts of life. Nevertheless, there
is clearly a need for continuous efforts to make our control mechanisms, where these
are necessary, more effective, to streamline their operations, to identify the broad
objectives behind each control instrument, and to see if those objectives are really
being served or whether an alternative arrangement would not be superior.
2.23 I believe I have said enough to give Hon’ble Members an idea of the
underlying objectives and policies of the Budget for 1976-77. It is now time for me to
describe briefly the Revised Estimates for 1975-76 and the main features of the Budget
Estimates for 1976-77.
REVISED ESTIMATES FOR 1975-76
3.1 The original Budget for 1975-76 envisaged a deficit of its. 247 crores.
However, due to certain unavoidable increases in expenditure, the current year to now
expected to end with a deficit of a higher order. A large part of the additional expenditure
involved represents deliberate action on the part of Government designed to accelerate
the pace of economic growth.
3.2 Because of recessionary conditions prevailing in international markets, it
became necessary to intensify export promotion measures. As a result, expenditure on
export promotion schemes to expected to exceed the original Budget Estimates of
Rs.88 crores by Rs.71 crores.
9
 3.3 Public sector undertakings have greatly improved their working, but some
of them, particularly the National Textile Corporation, could not generate enough
funds to meet all their obligations. As a result, non- Plan budgetary support for these
public sector units had to be increased by Rs.210 crores over the Budget provision of
Rs.170 crores.
3.4 Taking advantage of the increased production of food grains, Government
have decided to build up an adequate level of buffer stocks. Budgetary support of the
order of Rs.130 crores had to be provided to the Food Corporation of India for this
purpose - Rs.100 crores as equity capital and Re. 30 crores as loan. The House will
agree that this is a worthwhile investment.
3.5 The original Budget provided for a net outgo of its. 140 crores on account
of fertiliser transactions. However, as Hon’ble Members are aware. the pool prices of
fertilisers were reduced in July, 1975 and again in December, 1975 in order to boost
consumption. For this reason, as also the slow initial oft-take and consequent lag in
recoveries, the net outgo on this account is now expected to increase by Rs.173 crores.
3.6 Defence expenditure will be higher by Rs.136 crores due mainly to grant
of additional dearness allowance and an upward revision of ration and other
allowances. The additional instalments of dearness allowance sanctioned in
September, 1975, for which no provision was made at the Budget stage, have cast an
extra burden of a considerable magnitude which to reflected in the Revised Estimates
under other heads also.
3.7 In spite of the burden cast on the Budget by these commitments, we did
not allow our developmental efforts to suffer. Investments in the crucial sectors of the
Plan, especially steel, shipping and transport as also mines, fertilisers, coal and power,
were stepped up beyond the level provided in the Budget for 1975-76. The outlay on
health and family planning has also become significantly higher. Additional funds
have been provided to the Railways to enable them to meet the shortfall in their
resources for the Plan which has been stepped up. In this context, I should like to
make special mention of the extra provision of its. 53 crores for purchase of rolling
stock by the Railways, which was also a means of providing stimulus to the engineering
industry. In sum, the budgetary provision for various sectors of the Central Plan will
be about Rs.270 crores more than was provided for in the original Budget.
3.8 Budgetary support for the Plans of States and Union territories was
originally fixed at Rs.1054 crores which included a sum of Rs.100 crores for special
assistance to certain States with gaps in their resources to ensure adequate investment
in important projects in the core sectors of irrigation and power. A subsequent
assessment of the States’ resources revealed that these gaps would be of a higher order
than earlier envisaged. As a result, provision for special assistance had to be raised to
Rs.175 crores. Following the announcement of the New Economic Programme,
additional Central assistance of Rs.85 crores was allocated to the States to enable
10
them to step up the outlays on selected irrigation and power projects. Certain States
like Bihar, Orissa, Uttar Pradesh, Gujarat and Rajasthan have suffered on account of
heavy rains and floods. A sum of Rs.37 crores has had to be provided as advance plan
assistance to enable them to cope with the resulting problems. In all, the Central
assistance to State and Union territories Plans will go up by Rs.198 crores.
3.9 At this stage it is necessary to state that the budgetary deficit, taking into
account all the inescapable additional commitments, would have been much higher
but for a significant increase in resource mobilisation.
3.10 As a result of stringent action taken against tax evasion, an atmosphere
has been created whereby tax-payers have a greater respect for the law, and tax
compliance has improved. The fact must be faced that in the past a considerable part
of income and wealth had escaped taxation. After careful consideration, Government
decided to provide those who had indulged in tax evasion a last chance to mend their
ways. Accordingly, a scheme of voluntary disclosure of income and wealth, was
announced for a limited period. Disclosures, and consequently tax collections, under
this, scheme have surpassed our original expectations. The Exchequer has also benefited
by way of larger collection of taxes as a result both of improved tax collections and
greater buoyancy of the economy. All these factors will result in an improvement of
Rs.660 crores in tax revenues as compared to the Budget Estimates inclusive of the
States’ share. The benefit due to the larger collection of income tax will, however,
accrue mainly to the State Governments, and their share -of taxes will go up by nearly
Rs.226 crores.
3.11 The receipts from market loans, which now include investment of a part
of the voluntarily disclosed income and wealth in specified securities, will be higher
than Budget Estimates by Rs.168 crores.
3.12 Receipts from external assistance are expected to exceed the Budget
Estimates by Rs.554 crores; this figure includes Rs.204 crores of assistance
received during the current year from Iran for the Kudremukh Project and for
economic development.
3.13 In spite of improvements in receipts mentioned above, the current year is
expected to end with a budgetary deficit of Rs.490 crores. I should however add that
the budgetary deficit of Rs.490 crores could have been Rs.100 crores lower had we
taken advantage of the special borrowing to that extent from the Reserve Bank of
India envisaged in the original Budget.
IV
BUDGET ESTIMATES FOR 1976-77
4.1 The most important feature of the Budget for 1976-77 is a further
significant step up in investment so that the country may move forward rapidly towards
the realisation of the objective of accelerated growth with social justice.

11
 4.2 Gross tax revenues at the existing rates of taxation are expected to amount
to Rs.7837 crores, showing an increase of Rs.367 crores as compared to the Revised
Estimates for 1975-76. Of the additional accruals of Rs.367 crores, the share of the
Centre would be Rs.346 crores. Receipts from Customs are likely to go up by Rs.113
crores as imports next year are expected to be larger in view of the step up in Plan
investments, and the need for larger maintenance imports to sustain higher production
levels. Union Excise duties are expected to yield Rs.261 crores more than in the
current year. Income tax receipts will be less by Rs.103 crores, mainly because the
bulk of the receipts under the voluntary disclosure scheme will have been realised in
the current year.
4.3 Market loans are expected to yield Rs.535 crores as compared to Rs.453
crores in the current year. This excludes investments under the voluntary disclosure
scheme. Small savings collections are also expected to yield Rs.40 crores more in the
next year.
4.4 Receipts from external assistance are estimated at Rs.1341 crores which
include assistance both in the pipeline and disbursement against new commitments.
4.5 On the expenditure side, the provision for Defence expenditure is Rs.2544
crores against Rs.2410 crores in Revised Estimates for 1975-76, which is a small
increase. The provision for food subsidy will be Rs.300 crores as against Rs.250
crores In the current year. From 1st March 1976, fertiliser transactions have been put
on a different footing. The Food Corporation of India will pay the Government for the
imported fertiliser and arrange for its distribution. Other non-Plan expenditures are
being restricted to the minimum so as to make available the maximum possible resources
for the Plan.
4.6 Government have been concerned about the difficulties being faced by
pensioners in recent years in the wake of inflation. The last instalment of relief to
them on account of the increase in the cost of living was with effect from 1st April,
1974. Considering the subsequent increase in the cost of living, and keeping in view
the resources available, I propose to allow them an additional ad hoc relief to the
extent of 10 per cent of pension, subject to a minimum of Rs.10 and a maximum of
Rs.50. I also propose to extend to family pensioners the relief earlier granted, as well
as the further relief now proposed to be granted, to pensioners. These benefits will
take effect from 1st October, 1975. A provision of Rs.37 crores is being made in the
next year’s Budget for this purpose.
4.7 I now turn to the Plan outlay for 1976-77. The allocations from the Central
Budget for the Central, State and Union territories Plans will be Rs.4759 crores. This
includes Rs.1412 crores for Central assistance for State Plan and provisions for Union
territories Plan, the sub-Plan of the Hills and Tribal Areas, the requirements of North
Eastern Council, and assistance for power schemes channelled through the Rural
Electrification Corporation. The allocations also include Rs.294 crores of special
12
advance Plan assistance without which some States would be without adequate
resources for the required level of investment in important projects in the core sectors
of irrigation and power. The budgetary provision for the Central Plan will be Rs.3347
crores. The total Central Plan outlay in 1976-77, including internal and other resources
of public sector undertakings, will be Rs.4090 crores, as against Rs.3154 crores in
1975-76. The State and Union territories Plans will be of the order of Rs.3762 crores,
as compared to Rs.2812 crores in 1975-76. The greatest stress has been laid on the
completion of on-going projects in agriculture, irrigation, power, petroleum, coal,
fertilisers, steel, transport and communications. We have had to be rather selective in
proposing new starts, having regard to resources in sight.
4.8 The Central Budget provides Rs.323 crores for agriculture and allied
programmes. Special emphasis is being laid on production programmes with an area
approach such as the Drought Prone Areas Programme, the Command Area
Development Programme, special programmes for small and marginal farmers, and
agricultural labour and schemes to increase generally the availability of inputs and
credit for agriculture. The Central outlays will be supplemented by outlays in the State
and Union territories Plans to the extent of Rs.473 crores, of which about Rs.148
crores will be for minor irrigation schemes. The area covered by minor irrigation is
expected to increase by one million hectares in 1976-77.
4.9 Provision in the Central Budget for irrigation and flood control will be
Rs.20 crores including an outlay of Rs.12 crores for flood control schemes. The State
and Union territories Plans will provide Rs.673 crores for major and medium irrigation
and flood control. As Hon’ble Members are aware, in pursuance of the 20-point
Programme, we have proposed to bring an additional five million hectares under major
and medium irrigation during the Plan period. As against this target, the investment
proposed next year will create additional potential of the order of one million hectares.
4.10 A sum of Rs.129 crores has been provided in the Central Budget for
power development, including Rs.74 crores for Central thermal and hydel power
schemes, and inter- State transmission lines, and Rs.55 crores for nuclear power projects.
There will also be a significant step up in the outlay on power in State and Union
territories Plans from Rs.983 crores in 1975- 76 to Rs.12 90 crores in 1976-77. The
target for additional power generation capacity next year will be of the order of 2500
MW, as against the achievement of about 1800 MW in the current year.
4.11 The need for developing indigenous sources of energy cannot be over-
emphasised. Accordingly, the budgetary support for petroleum and petro-chemicals
has been stepped up from Rs.170 crores in 1975-76 to Rs.274 crores in 1976-77, of
which Rs.73 crores will go to the 011 and Natural Gas Commission to maintain the
tempo of onshore exploration and for stepping up the pace of offshore exploration.
Indigenous production of crude oil is expected to increase to at least 9 million tonnes
in 1976-77 as against 8.2 million tonnes in the current year. The production from
13
off-shore sources by the end of this period will be at a daily rate amounting to 2
million tonnes annually. An additional Rs.65 crores is being provided to the Indian
Oil Corporation for the Koyali Refinery expansion the Salaya Viramgam Koyali
Pipeline, the Mathura Refinery and the Viramgam-Mathura Pipeline. The Indian
Petro-Chemicals Corporation will be provided Rs.81 crores for the petrochemical
complex comprising the Naphtha Cracker and downstream units. The total Plan
outlay in the petroleum sector will be Rs.485 crores in 1976-77 as compared with
Rs.368 crores in the current year.
4.12 It is indeed a matter of great satisfaction that after the nationalisation of
the coal industry and as a result of the concerted steps taken by Government, production
of coal has increased rapidly. Budgetary allocation for coal in 1976-77 will be Rs.277
crores as against Rs.229 crores in 1975-76. It is expected that the production of coal
will go up from 98 million tonnes in 1975-76 to 108 million tonnes in 1976-77.
4.13 Fertilisers being a critical input for agricultural production, budgetary
provision for this sector is being stepped up from Rs.290 crores in 1975-76 to Rs.434
crores in the next year. This includes Rs.171 crores for the Bhatinda and Panipat
projects and Rs.13 crores for the Phulpur fertiliser project which is in the cooperative
sector. Adequate provision has been made to enable on-going projects to be completed
according to schedule. In the current year the public sector fertiliser units have improved
their production in nutrient terms by about 50 per cent as compared to last year and
their production next year may well exceed 1.1 million tonnes.
4.14 The budgetary allocation for the steel sector is being doubled to Rs.402
crores in the next year. Of this, Rs.119 crores will be for the Bhilai Complex etc. and
Rs.150 crores for Bokaro. The Kudremukh Iron Ore Project, which is being financed
wholly with Iranian assistance, has been provided Rs.100 crores for project construction
and the related facilities required in the Mangalore Port. This is a wholly export-
oriented project for supplying iron ore concentrate for the iranian steel industry.
4.15 The allocation for the transport and communications sector will be Rs.597
crores, of which Rs.271 crores will be for Railways which have their own Plan of
Rs.411 crores. The Rallways will also need loan support of Rs.160 crores to enable
them to meet their current obligations to the General Revenues.
4.16 The budgetary allocation for industry includes Rs.36 crores for the
Hindustan Paper Corporation for its Nowgong, Cachar, Nagaland and Kerala projects,
and Rs.20 crores for Cement Corporation projects. Rs.10 crores are being provided
for investment and transport subsidy for promotion of industries in backward areas.
4.17 The allocation for khadi, for village industries, and for small scale industries
is R8.52 crores.

14
 4.18 Outlays on social services also have been increased. Provisions for
education, scientific research, health, family planning and integrated urban development
are all higher than in the current year. In particular, the Central allocation for tribal
sub-Plans has been doubled to Rs.40 crores, and that for Hill Areas development has
been stepped up to Rs.36 crores from Rs.2 0 crores in 1975-76.
4.19 As Hon’ble Members are aware, industrial workers and salaried
employees were the worst hit by rise in prices. It was with a view to protect the real
incomes of these vulnerable groups that several anti- inflationary measures were
implemented in 1974-75. One of these measures was the impounding of half of
dearness allowance increases. It is now necessary to consolidate the gains we have
secured. The large step up in the next year’s Plan outlay would generate new
employment opportunities, and also safeguard existing jobs. At the same time, this
calls for a careful vigil on money supply expansion so that inflationary forces are
kept at bay. In view of this, Government have decided that impounding of half of
dearness allowance increases will continue for one year beyond July, 1976 when the
present statutory provisions in this regard expire. Deposits made during the extended
period will be used for the Plan. The amounts deposited will earn interest at the
same rate as before i.e., 12.5 per cent and will be repaid in five equal annual
instalments, inclusive of interest, into the provident fund of the subscribers
commencing from July, 1978. Necessary legislation for this will be introduced in
this session. Government will, however, abide by its assurance and repay the
instalments of the additional wages and dearness allowances already impounded
and falling due in accordance with the existing scheme. The employees will, therefore,
*have larger disposable incomes to the tune of Rs.270 crores during 1976-77.
4.20 The welfare of industrial workers has always been of special concern to
the Government. A number of social security schemes for industrial workers are in
operation. Hon’ble Members are already familiar with the details of the E.S.I. Scheme,
the E.P.F. Scheme and the more recent Family Pension- cum- Life Assurance Scheme.
I am happy to announce that it has been decided to introduce yet another social security
scheme which will provide insurance to workers without any payment on their part.
The salient features of this scheme are that in the event of the demise of a worker
while in service, his dependents would be entitled to an additional payment equivalent
to the average balance in the provident fund of the worker during the preceding three
years subject to a maximum of Rs.10, 000. This scheme would apply to all subscribers
who have maintained a minimum balance of Rs.1,000 during the preceding three
years. It has been estimated that the average balance of a worker would be around
Rs.3, 500. This would be indicative of the level of relief that will be available. The
burden of financing this scheme will be shared by Government with employers. I am
sure all sections of this House would welcome this new measure. Necessary legislation
will be introduced by the Labour Ministry.

15
 4.21 Taking into account the likely magnitude of expenditure and resources in
sight, the Central Budget for 1976-77 shows a deficit of Rs.368 crores at existing
levels of taxation.
PART B
DIRECT TAXES
1.1 I now turn to direct tax proposals.
1.2 As Hon’ble Members will recall, the rates of income-tax on personal
incomes were reduced in 1974 on the basis of a recommendation of the Direct Taxes
Enquiry Committee. While presenting the Budget for 1974-75, my distinguished
predecessor had expressed the hope that the reduction in rates would lead to better tax
compliance. This expectation has been fulfilled and is reflected in the striking increase
in income-tax collections during the last two years. While some other factors including
the relentless drive against tax evaders and other economic offenders have played a
part in improving collections, it is also obvious that the reduction in tax rates has
played a major role in promoting far better tax compliance. The remarkable response
to the voluntary disclosure scheme, where the maximum rate was 60 per cent, lends
considerable support to the judgement that the majority of Indian tax-payers would
prefer to abide by the law and pay taxes as due, provided the tax burden is reasonable.
I, therefore, propose to reduce the rates of taxes on personal incomes and wealth. The
maximum marginal rate of income-tax including surcharge will be reduced from 77
per cent to 66 per cent and will be applicable on the slab of income over Rs.1,00,000
in the case of individuals and Hindu undivided families, other than those having one
or more members with independent income exceeding the exemption limit. I do not,
however, anticipate any loss of revenue on this account, as the whole logic of the
present exercise in rationalisation of tax rates is that it will evoke better compliance
on the part of the assessees.
1.3 In order to raise resources for financing the Plan and also reduce
inflationary pressures generated by larger disposable incomes in the hands of income-
tax assesses, I, however, propose to continue the compulsory deposit scheme for income-
tax payers for another year. While the rate of compulsory deposit on current incomes
up to Rs.25,000 will remain at the existing level of 4 per cent, the rate on the slab
from Rs.25,001 to Rs.70,000 will be raised from 6 per cent to 10 per cent; on the slab
over Rs.70,000 the rate will be increased from 8 per cent to 12 per cent. Resources to
the tune of Rs.80 crores will accrue in 1976-77 as a result of this measure. The honest
tax-payer who gets some long overdue relief should not grudge this contribution to
national savings.
1.4 It is well known that the prevailing high rates of wealth-tax provided a
powerful incentive for undervaluation and widespread evasion of taxes. In regard to
wealth-tax, in the case of individuals and Hindu undivided families, other than those
having one or more members with independent wealth exceeding Rs.1,00,000, the

16
new rate of wealth- tax on the initial slab of net wealth up to Rs.5,00,000 will now be
1
/2 per cent; 11/2 per cent on the slab from Rs.5,00,001 to Rs.10,00,000; 2 per cent on
the slab from Rs.10,00,001 to Rs.15,00,000 and 2.1/2 per cent on the slab over
Rs.15,00,000. At the same time, I propose to reduce the exemption limit in respect of
wealth-tax in the case of all Hindu undivided families from Rs.2,00,000 to Rs.1,00,000.
The additional wealth-tax currently levied in respect of urban lands and buildings has
lost its rationale in view of the ceiling on urban vacant land and other measures in
regard to urban property, and is proposed to be discontinued.
1.5 At existing rates, the combined incidence of income-tax and wealth-tax
works out to more than 100 per cent of income at certain levels. The present structure
has been found to be unrealistic. These high rates have not led to any significant
reduction of inequality of income and wealth. On the contrary, they have resulted in
large scale tax evasion, generation of black money, and conversion of visible assets
into invisible ones. It is essential to remove these distortions in the economy. The
reduction in wealth-tax rates should not over a period lead to any loss of revenue. This
rationalisation of tax structure is in the nature of an experiment. It is my hope that
with better compliance on the part of the assessees and more efficient administration,
we can raise more resources.
1.6 In order to remove the hardship faced by owners of self-occupied property
who are now required to furnish its fair market value in the return of net wealth every
year, it is proposed to freeze the value of one self-occupied house property at the
value adopted for the year in which the property is constructed or acquired by the
assessee, or for the year 1971-72, whichever is later.
1.7 Hon’ble Members are aware that the Hindu undivided family is often
used as a medium for tax avoidance. I have, therefore, proposed withdrawal of certain
concessions currently available in computing the taxable income of Hindu undivided
families having at least one member with an independent income exceeding the
exemption limit.
1.8 Authors, playwrights, artists, musicians and actors do not earn steady
incomes over the period of their professional career. In order to enable them to moderate
their tax liability during years when they earn high incomes, I propose to increase the
monetary ceiling limit for these categories in respect of qualifying savings through
life insurance, Cumulative Time Deposits, Public Provident Fund, etc., from Rs.25,000
to Rs.50,000 a year,
1.9 I shall now deal with the corporate sector. I have already drawn attention
to the sharp increase in capital costs that has taken place. This has not only prevented
faster expansion of capacity, but has also imposed considerable strain on existing
undertakings which are obliged to replace worn-out and obsolete equipment. Unless
the corporate sector is enabled to provide adequately for renewals and renovation,
employment and industrial growth will be jeopardised. Fiscal policy should therefore
17
be oriented to provide the necessary stimulus for the growth and modernisation of the
corporate sector. I have, therefore, decided to introduce a scheme of investment
allowance for certain priority industries. The present scheme of initial depreciation
allowance will be replaced by a system of investment allowance. The investment
allowance will be allowed at the rate of 25 per cent of the cost of acquisition of new
machinery and plant installed after 31st March 1976 in industries currently qualifying
for initial depreciation. I also propose to extend the list of qualifying industries by
including eight other priority or export-oriented industries, namely, carbon and graphite
products; inorganic heavy chemicals; organic heavy chemicals; synthetic rubber and
rubber chemicals, including carbon black; industrial explosives; basic drugs; industrial
sewing machines and finished leather and leather goods, including footwear made
wholly or substantially of leather. I may, however, draw the attention of the House to
certain basic differences between the investment allowance now proposed and the
earlier development rebate. The investment allowance will be withdrawn and will
become liable to tax if this reserve is not utilised for the purpose of acquiring new
machinery or plant within a period of ten years. No part of it will be available for
distribution as profits. The present scheme of investment allowance will facilitate
investment in priority industries and reduce the dependence of the corporate sector on
public financial institutions.
1.10 As Hon’ble Members are aware, a surcharge of 21/2 per cent on income-
tax was levied on companies in 1971 at the time of the Bangladesh crisis. In 1972, this
surcharge was raised to 5 per cent. I propose to, exempt those companies which will
deposit an equivalent amount with the Industrial Development Bank of India for a
period of five years, from this surcharge. This measure will ensure that the funds
rotate and are available to the corporate sector for investment. I also propose to reduce
the rates of capital gains tax in respect of long-term capital gains derived by companies.
1.11 As a result of increase in the interest rates, the return on safe investments
has gone up considerably in recent years. In order to make risk bearing investment in
shares of companies more remunerative, I propose to raise the threshold for the
determination of chargeable profits under the Companies (Profits) Surtax Act, 1964
from 10 per cent to 15 per cent of the capital employed. The new threshold will,
however, be reckoned with reference to the owned capital of the company and will
exclude long-term borrowings and debentures.
1.12 It has been urged that the present high rates of interest have a dampening
effect on investment and production. The present structure of interest rates is an integral
part of our credit policy which has helped in keeping inflationary pressures under
control. However, taking note of the escalation in costs of industrial projects, I propose
to exempt interest received by scheduled banks on long-term loans granted to industry
for the purchase of capital plant and machinery from interest tax levied under the
Interest-tax Act, 1974. As this House will recall, the tax on interest was conceived
essentially as a regulatory measure.

18
 1.13 The present system of taxation of foreign companies gives rise to several
administrative difficulties and uncertainties. As a measure of simplification, I propose
to levy income-tax at a flat rate of 40 per cent on the gross amount of royalties
received by them from Indian concerns under approved agreements made after 31st
March, 1976. Lump sum payments received by such companies for providing technical
know-how outside India under approved agreements will be charged to tax at a flat
rate of 20 per cent of the gross amount received by them. Royalties and technical
service fees received by foreign companies under existing agreements will continue to
be charged on the existing basis, subject to the modification that the expenditure
incurred for earning such income will be limited to 20 per cent of the gross payments.
1.14 Dividends received by foreign companies will be charged to tax at a flat
rate of 25 per cent on the gross amount of such dividends. Further, head office expenses
allowable as deduction against Indian profits will be subject to specified ceiling limits.
. The deduction on account of such expenses will broadly be limited to 5 per cent of
the Indian income.
1.15 With a view to simplifying the procedure for taxation of the income of the
Life Insurance Corporation of India, I propose to provide that the taxable profits of
life insurance business will be taken at the figure of the annual average of the surplus
disclosed by the actuarial valuation made in accordance with the Insurance Act, 1938.
Such profits will be charged to tax at the rate of 121 per cent.
1.16 There is acute shortage of housing, particularly of the kind required by
the poorer sections of the community. House construction is entitled to be treated as
a major industry in its own right. Apart from fulfilling the basic human need for
shelter, it generates considerable employment, both direct and indirect. increased activity
in this sector will also improve the demand for materials like cement, steel and coal
for making bricks. To attract more resources for this neglected but essential purpose,
I propose to exempt new dwelling units put up after 1st April, 1976, with a plinth area
upto 80 sq. meters from wealth-tax for a period of five years. initial depreciation
allowance of 20 per cent will hereafter be available in respect of houses constructed
by employers for use as residences of low-paid employees having annual salary incomes
up to Rs.10,000 instead of Rs.7,500 as at present.
1.17 As a measure for augmenting foreign exchange resources, I propose to
exempt from income tax, interest payable by industrial undertakings in India on foreign
exchange loans under approved agreements. I also propose to exempt from wealth-
tax, investment by non-resident Indians in equity shares of certain priority and export-
oriented industries. Indians returning from abroad will be exempt for seven years
from wealth-tax in respect of their savings abroad repatriated to India.
1.18 It is our judgment that the various direct tax concessions will be off-set by
better tax compliance and improved administration.

19
 II
INDIRECT TAXES
2.1 I shall now deal with proposals relating to indirect taxes.
2.2 Before framing this year’s Budget, I had the benefit of consultations with
experts drawn from various fields and representatives of industry and commerce. I am
grateful to them for the several valuable suggestions made by them to which I have
given careful consideration. During the course of the year I have had a detailed review
made of the excise duty structure, which has highlighted certain areas for improvement.
In particular, the feasibility of adopting some form of value added tax has been studied.
Since the issues arising from the studies undertaken are highly complex and have far
reaching effects, I propose to appoint a Committee to review the existing structure of
the indirect tax system and advise the Government on the steps to be taken.
2.3 I shall now deal with specific proposals relating to excise duties. At present,
excise duties on cotton fabrics are specific and their incidence does not depend on the
price of the fabric. Though the present rates are highly complex and are graded both
on the basis of average counts, and according to the various processes to which cotton
fabrics can be subjected, the burden of excise duties has not been equitably distributed.
There are also considerable difficulties in administering these tariffs in an industry
with many varietal differences. A reform of this system has, therefore, been long
overdue and I have now decided to switch over to a system of ad valorem duties on
cotton fabrics. This will give relief to the weaker and more vulnerable sections of
society who consume lower priced varieties of cloth and will shift the burden to those
who have the ability to pay the higher prices for superior varieties of cloth. I have also
made changes in the definition of superfine, fine and medium A fabrics to stimulate
the use of long staple cotton, the production of which has risen substantially in recent
years. Certain changes have also been made in the duty rates on cotton yarn, and relief
has been given to the handloom and powerloom sectors. At the same time, handlooms
are facing serious competition from powerlooms resulting in a large accumulation of
unsold handloom cloth. We have to provide a measure of protection to the handloom
industry against the competition from powerlooms. I, therefore, propose to increase
the rates of compounded levy on powerlooms. I have taken care to ensure that small
powerloom owners are not affected. The rate on the first two looms in each unit will
therefore remain unchanged. On the next two looms the rate will be raised from
Rs.100 to Rs.125 per loom per year, and on the remaining looms from Rs.200 to
Rs.250 per loom per year. The net result of the rationalisation scheme will be a marginal
gain in revenue of Rs.2 crores.
2.4 Hon’ble Members are aware that in the textile trade whenever there is a
slight pick up in demand, retail prices are raised without any relation to changes in the
cost of production. The benefit accrues to middlemen at the consumers’ expense.
Cases are also frequent of traders selling at much higher prices than those at which
20
they purchase from the mills. This results in exploitation of the poorer sections of
society who do not have much choice in purchasing their requirements of cloth and
are not well informed about prevailing market prices. In order to do away with these
obvious malpractices, Government have decided to make it obligatory for the
manufacturers to stamp the maximum retail price on every metre of cloth for sale to
consumers in the domestic market. This decision will be implemented expeditiously.
2.5 My next proposal relates to paper and paper board, which have been
assessed at specific duty rates for a long time. As a result of this, certain anomalies
have crept in which have been accentuated after price decontrol. I, therefore, propose
to replace the present specific duties on paper and paper board by ad valorem duties.
Printing and writing paper will be subject to a duty of 25 per cent ad valorem and all
other paper and paper board to a duty of 30 per cent ad valorem. I would, however,
like to make it clear that the concessional duty now available to white printing paper
which is supplied by paper mills at the agreed price for various educational purposes,
such as production of text-books and exercise books, and for Government use, will
continue practically un changed. Unbleached and Badami printing and writing paper
*of substance not exceeding 65 gms. Will also be subject to a concessional rate of 15
per cent duty, while existing concessions for newsprint will be continued. The additional
yield from this measure will be Rs.13 crores.
2.6 The next item on which I propose to step up excise duty is patent and
proprietary medicines. I propose to raise the duty from the existing level of 7.5 per
cent to 12.5 per cent ad valorem. Since this duty will not apply to medicines sold
under pharmacopoeial names and basic drugs, the burden of the increased duty will be
borne only by relatively affluent sections of the society. The additional revenue from
this item will be Rs.18.2 crores. I may also mention that the present lower rate of duty
of 2.5 per cent on life saving drugs and complete exemption admissible to sera, vaccine
and medicinal contraceptives will remain unchanged.
2.7 I have proposed some readjustments in the duty structure on cigarettes.
With a few exceptions, there will be some relief to cheaper brands of cigarettes and
additional imposition on some other costlier brands. I see no justification for the
privilege enjoyed by the smoker of high priced cigars and cheroots sold under brand
names of being exempt from the purview of the excise levy. I propose to tax these at
the same rate as smoking mixtures. The additional revenue derived from these changes
will be Rs.12.2 crores.
2.8 I have raised the duty on aerated waters containing blended flavouring
concentrates. There will be no change in the duty on plain soda or aerated waters
which do not contain such blended flavouring concentrates. This measure will yield a
revenue of Rs.8 crores.
2.9 I am also making some changes in the duty on paints and varnishes, acrylic
fibre and acrylic yarn, certain electronic items and starch. The ad valorem duty on
21
cement is being converted to a specific duty for administrative convenience. The
revenue implications of these are marginal. A few changes are also being made in the
description of certain tariff items which will not yield any significant additional revenue.
All these changes, when taken together, will yield Rs.9.8 crores.
2.10 The auxiliary duty of excise levied under the Finance Act, 1975 was valid
upto 30th June, 1976. It is proposed to continue this up to 30th June, 1977.
2.11 The Finance Minister’s role is not that of a mere tax-gatherer; he has also
to provide relief selectively, when any section of the industry or the consumers is in
serious difficulty. I propose to reduce the duty on non-levy aluminium which is mostly
of the commercial grade by its. 1,200 per tonne. This will, I am confident, improve the
off-take of accumulated stocks by stimulating demand. I also propose to reduce the
duty on artificial and synthetic resins and plastic materials from the present level of
56 per cent to 40 per cent ad valorem. Appropriate relief is also being given to articles
made from these materials. I expect that this step will induce larger production of
these materials. I also propose to reduce the duty on copper by Rs.1,400 per tonne.
This will help to improve the profitability of Hindustan Copper Ltd., a public sector
undertaking, which is the only producer in this field in our country.
2.12 Our effective action against inflation and black money has resulted in
demand recession in some industries, particularly those producing consumer durables.
Some of these units have already laid off workers causing considerable hardship.
Unless we take remedial action, there is risk of more industrial units closing down or
laying off large number of workers. These industries can diversify into new lines of
production or become competitive abroad only over a period of time. In the meanwhile,
it is essential to enable them to survive by effecting some adjustments in excise duties.
Keeping this in view, I propose to reduce the duty on television sets whose unit value
does not exceed Rs.1, 800 from 20 per cent to 5 per cent ad valorem. I also propose
to give relief to the refrigerating and air-conditioning industry. The duty on medium
sized refrigerators of capacity not exceeding 165 litres is being reduced from 50 per
cent to 40 per cent. Refrigerating and air-conditioning machinery used for industrial,
cold storage and certain preferred purposes will be granted a concessional rate of duty
of 20 per cent which is significantly lower than the existing rates. Relief is also being
given in the case of water coolers. I propose to reduce the duty on passenger cars of
less than 16HP (RAC rating) by 5 per cent ad valorem, and also grant exemption from
duty on tyres, tubes and batteries when these are supplied as original equipment with
the cars.. The duty on jeeps, ambulances, pick-up vans and other vehicles of less than
16HP is also being reduced by 5 per cent ad valorem. Hon’ble Members will be happy
to know that motorised cycle rickshaws are being exempted from excise duty.
2.13 I propose to reduce the duty on caprolactum from 50 per cent to 25 per
cent ad valorem and make some reductions on viscose and acetate yarns which go into
the production of relatively cheap fabrics. I propose to give relief by way, of excise

22
duty to a number of common consumer items, viz., house-hold laundry and cheaper
varieties of toilet soap, detergents, and stainless steel blades. With rising living standards
generally, table and pedestal fans of small size are used by almost all sections; so are
dry cells for the ubiquitous transistor and torchlight. I, therefore, propose to give some
relief to these items.
2.14 As an export promotional measure, I propose to abolish the excise duty
on ready-made garments and to make some adjustments in the tea rebate scheme.
Some relief is also being given to tea produced in Zone HI because of the high cost of
production and the low yield.
2.15 It has been decided to introduce a new scheme of excise duty relief to
encourage higher production. The scheme visualises grant of relief in respect of selected
commodities to the extent of 25 per cent of duty payable on goods produced in excess
of production in a selected base year. Details of the scheme are now being worked out
and I expect that it will be introduced for one year in the first instance.
2.16 The effect of changes in excise rates will amount to a net realisation of
only Rs.15.12 crores, after allowing reliefs of the order of Rs.50 crores. Of this, the
additional revenue -ace ruing to the Centre will be Rs.8.’55 crores, while the States’
share will be Re.6.57 crores. I have no doubt that the consumer will welcome the
substantial relief.
2.17 I now deal with Customs duties. Where I have increased the rates of
Customs duties, I have selected those items which will either give an added impetus
to domestic industry or where large premia prevail, the Exchequer being entitled to its
rightful share.
2.18 Imported stainless steel sheets have been commanding high premia in the
Indian market, partly because of scarcity and partly because of a large differential
between the prices of imported and indigenously produced stainless steel sheets. I,
therefore, propose to raise the import duty on this item from the present level of 220
per cent to 320 per cent ad valorem. I also propose to raise the import duty on stainless
steel plates and strips from the present level of 75 per cent to 120 per cent ad valorem.
The proposed increases in the import duty on stainless steel sheets, plates and strips
will together yield an additional revenue of Rs.10.60 crores.
2.19 With a view to encouraging greater production of high carbon and
alloy steel within the country and larger use of indigenously produced iron and
steel, and also as a revenue raising measure, I propose to increase the existing
import duty on high carbon and alloy steel (other than stainless steel) from 35 per
cent to 75 per cent ad valorem. I also propose to modify the existing concession
with regard to countervailing duty on iron and steel and fix countervalling duty
at an amount equal to the basic excise duty. These changes will yield an additional
revenue of Rs.18.40 crores.
2.20 As there is a wide gap between the international price of copper and the
indigenous price, I propose to increase the import duty on copper. The tariff rate on
copper will be raised from 40 per cent to 100 per cent ad valorem. However, for the
23
present, I propose to fix the effective import duty on copper at 6 0 per cent ad valorem.
The effective countervailing duty which is now Rs.5000 per metric tonne is being
stepped up to Rs.5600 per metric tonne. Corresponding changes are also being made
with necessary adjustments in the import duty and countervailing duty on copper
scrap and copper manufactures. The propsed changes on copper and copper
manufactures and copper scrap will yield a revenue of Rs.6.65 crores.
2.21 For similar reasons, I propose to increase the import duty on caprolactum
and Dimethyl terephthalate (D.M.T.) from the present level of 75 per cent to 120 per
cent and to withdraw the exemption from countervailing duty on caprolactum. I also
propose to increase the basic customs duty on acrylic yarn by Rs.20 per kilogram. The
proposed changes in duty on caprolactum, D.M.T. and acrylic yarn will yield an
additional revenue of Rs.12. 85 crores.
2.22 There are a number of items in the First Schedule to the Indian Tariff Act
in respect of which we have international commitments under the General Agreement
on Tariffs and Trade to maintain the duty at points not exceeding certain agreed levels.
Since we have recently enacted the Customs Tariff Act, 1975 which follows broadly
the Brussels Tariff Nomenclature, we have obtained a general waiver from the G.A.T.T.
Council in regard to our commitments under the Agreements, pending renegotiation
with the concerned contracting parties. In view of this waiver I propose to withdraw
the exemption enjoyed by certain articles on this account, which will yield revenue of
Rs.3 crores.
2.23 There are a few areas in which I propose to give some concessions with
regard to customs duties. With a view to encourage new investment in the fertiliser
and newsprint industries, I propose to reduce the duty on machinery and equipment
imported for setting up fertiliser plants and newsprint plants from 40 per cent to 30
per cent ad valorem. The customs duty on imported rock phosphate used for manufacture
of phosphatic and complex fertilisers is also being withdrawn. These measures will
involve a revenue loss of Re. 13.15 crores.
2.24 On computers and computer sub-systems I propose to reduce the basic
import duty from 60 per cent to 40 per cent ad valorem. I also propose to exempt these
from the whole of the auxiliary duty and countervailing duty. Other items which will
get relief in import duty are polyester films imported for the manufacture of magnetic
tapes, metalised plastic films imported for the manufacture of electronic capacitors,
and sports goods imported for use in national or international competitions. The relief
on all these items together will amount to Rs.1. 75 crores.
2.25 The auxiliary duties of customs levied hitherto are being continued upto
the 30th June 1977 and the effective rate of this levy will remain unchanged
2.26 Taking Union Excise duties and Customs duties- together the yield for
1976-77 for the Centre will be Rs.47. 25 crores.

24
 2.27 I am now left with only two proposals designed almost wholly to raise
resources for the benefit of the States.
2.28 The rates of stamp duties levied on instruments such as receipts and bills
of exchange mentioned in the Union List have not been changed for a long time. With
effect from 1st June 1976 I propose to raise the rates of stamp duties on certain items.
The proposed changes in the rates of stamp duties are likely to yield an additional
revenue of about Re. 22.57 crores per annum. However, during the next financial year,
the accrual of additional revenue to the States and to the Union would be of the order
of Rs.18. 44 crores and Rs.37 lakhs respectively, because the new rates of duty would
be effective for only a part of the financial year.
2 29 Another change which I have proposed is the revision in rates of excise
duties on medicinal and toilet preparations containing alcohol, narcotic drugs and
narcotics as also an amendment of the definition of certain terms including narcotic
drugs and narcotics. The State Governments have pointed out that while State excise
duties on alcohol were raised, the duties of excise on the above medicinal and toilet
preparations have not undergone any change since 1964, and this has led to misuse of
these medicinal preparations. I. therefore, propose to raise the rates of excise duties on
medicinal and toilet preparations containing alcohol, narcotic drugs or narcotics so as
to yield an additional revenue of about Ra. 7.5 to 8 crores per annum -Out this amount,
about Rs.50 lakhs per annum will accrue to the Union in respect of Union territories
and the balance to the States.
III
3.1 The net additional mobilisation of taxes as a result of the various measures
I have outlined will be Rs.48 crores for the Centre and Rs.32 crores for the States. The
Budgetary gap of Rs.368 crores indicated earlier will therefore come down to Rs.320
crores. I propose to leave this gap uncovered. it is my considered judgement that this
order of deficit will not accentuate inflationary pressures in the economy. Nevertheless,
there is an inherent element of unpredictability in the course of economic activity and
we shall continue to keep close and vigilant watch over the economy.
3.2 There is a tide in the affairs of nations, as of men, which taken at the
flood leads on to fortune. The nation is at the crest of such a tide. The economy is
poised for a surge forward. The Emergency and the New Economic Programme have
ushered in a qualitative change in the economic environment. We must now take
advantage of the favourable factors and inject a new dynamism to programmes of
economic and social development.
In framing these proposals, I have been guided by our cherished national goal,
enunciated by the Father of the Nation, of ensuring sufficiency for all and superfluity
for none.
Sir, in all humility, I now commend the Budget for the acceptance of this House.
(March 15, 1976)

25
 SPEECH OF SHRI C.SUBRAMANIAM MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1975-76

Sir,
1.1 It is my privilege this year to present the budget to this august House.
1.2 Its formulation has been no easy task; but my burden has been lightened
to some extent by my distinguished predecessor in office who had applied many
correctives earlier in the year; these severe measures had a distinct impact on an
admittedly difficult economic situation that our nation has of late been faced with.
1.3 It is unnecessary for me on this occasion to recount in detail the variety of
factors, both external and internal, which have interfered with the orderly
implementation of our development plans and strategies in recent times. The virulence
with which inflation has been spreading and its devastating impact across national
boundries, continue to impose on developing countries such as India burdens and
hardships which we have been ill-equipped to withstand. The impact on the living
standards of our people and on the pattern of real incomes within the country has been
serious enough. What is even worse is the persistent rise in prices which has eroded
the capacity to save and thus imposed a painful constraint on the flow of investible
resources so urgently needed to sustain our plans for a better future. The ‘Economic
Survey’ sets out in some detail the anatomy of this complex problem and the
characteristic features of the current situation.
1.4 It is against this backdrop that I would like the Honourable Members to
assess and to judge my budget proposals.
1.5 What, one might ask, has been the underlying approach - the basic
philosophy - in framing these proposals? Is it merely an ostrich-like exercise to balance
receipts and expenditure for the exchequer? Or does the budget seek more positively
and purposively, to subserve larger national objectives?
1.6 The answer is, of course, clear and unequivocal. We do look upon the
budget as an important tool for reaching our cherished socio-economic goals.
Development, the security of our country and growth along with social justice continue
to govern our priorities; these objectives determine our decisions on how much to
spend; on what programmes to spend, and in what manner the resources are to be
raised. The pattern of our outlays, as well as the relative weight of particular instruments
in the raising of resources might vary - indeed, may well need to be deliberately
fashioned afresh - from time to time, in response to changing circumstances and
1
requirements. But about the over riding concern and commitment to deliver the masses
from grinding poverty there can, of course, never be any doubt or vacillation. I shall
spell out a little later in my speech, the concrete steps contained in this budget to take
the nation forward in this direction.
1.7 The immediate concern of our fiscal and monetary policies has been
naturally to bring inflationary pressures firmly under cheek. A series of steps had to he
taken - some of them unpalatable and unpopular - to restrain and discipline the demand
pressures operating on the limited availabilities of food and fuel, of clothing and
housing, of transport and power in an economy besieged by rising prices. In the short-
run, there was no equally effective alternative open to the planners and policy-makers
to balance demand and supply of these essential goods and services for containing
inflation. These present a great challenge to our nation and call for courage and fortitude.
1.8 However, only incurable pessimism will, I think, bar us from
acknowledging with some satisfaction, the fact that already there are visible signs of
a downward trend in prices. The ‘Economic Survey’ provides some details of price
trends for important commodities. They give room for some satisfaction, but ordinary
prudence demands that we continue to be conscious of the fact that the fever of
inflation has not been entirely cured; it has as yet only shown signs of some abatement.
1.9 But then, let us also remind ourselves that the problems of poverty in our
country cannot be solved by merely holding the price line. We can meet them only
through growth. A rapidly growing economy is the best insurance against perpetuation
of poverty; indeed, it is the only solution. We have, therefore, to devise ways and
means of stimulating production from the available capacity, and of adding to that
capacity in sectors considered vital for improving income and consumption levels of
the poor. This requires a multi - pronged drive to augment our capital and improve our
technology and management. The budget proposals, which I shall set forth presently,
embody certain specific steps to provide the stimulus to the economy on these lines,
as part of a longer-term strategy for stabilising and on that basis imparting greater
viability and vitality to our economy.
II
2.1 Our ability to meet the minimum basic needs of our people depends
crucially on the trend in agricultural production. It is in this light that I regard the
claims of agricultural growth as the first charge on our developmental resources. Modern
agriculture is interlinked with industry. Fertilisers, pesticides, agricultural implements
and equipment, besides supply of power, determine agricultural productivity, as much
as seeds and water. The sectors of our industry which supply these vital inputs to our
agriculture, therefore, merit the highest priority.
2.2 The continued sluggishness of Indian agriculture since 1971-72 has
contributed significantly to the distortions which have emerged in our economy in the
2
last two or three years. The causes for this sluggishness have been carefully analysed;
we have identified a series of measures directed towards imparting a new momentum
to this vital sector. The prospects for the forthcoming rabi crop are encouraging. This
should not, however, make us complacent in our drive for higher productivity from
the land and labour employed in agriculture. A sustained increase in productivity will
call for action on many fronts.
2.3 The first priority is, of course, the supply of good quality seeds of the
high-yielding varieties. A major National Seeds Project for large-scale production of
quality seeds has been launched. This project will cover production, processing,
marketing and quality control of seeds. Regional and State-level Seed Corporations,
with a time-bound programme of self-sufficiency in meeting in full the demand for
high quality seeds, are being established. Agricultural Universities will be involved in
the work to ensure quality. The research and teaching staff as well as the students are
to be involved in solving the practical problems of seed production and supply.
Arrangements are also being made for an effective seed certification programme, and
for the build up of national and local buffer-stocks to meet emergency needs. The
financial and other requirements of this programme will be fully met.
2.4 Secondly, fertiliser production programmes are being pushed through,
notwithstanding the escalation in project costs of the new units. The public, the
cooperative, as well as the private sectors have been given a role in bringing to fruition
additional fertiliser capacity during the Fifth Plan period so that dependence on imports
- which is costly and unreliable at best - could be mitigated if not done away with
altogether.
2.5 Thirdly, programmes designed to ensure optimum utilisation of surface
and ground water to aid agricultural production will be pushed through. Command
area programmes under major irrigation projects will be supported by sufficient inputs
of men and materials so that the new potential is taken advantage of by farmers with
the least delay and for maximum social benefit. Inter- State river disputes, which
unfortunately have been dragging on without solution for a number of reasons in the
past, are now being looked into with a special sense of urgency. As a result, the
progress in some of the cases has been quite appreciable. Failure to settle these disputes
is leading to waste of water and sacrifice of additional agricultural production that the
country so desperately needs.
2.6 Fourthly, special efforts are being made to organise Farmers’ Service
Societies to provide credit to the farmers in time, to arrange for inputs and to help in
processing and marketing of the produce. A high-powered group which examined this
problem has formulated a scheme for the formation of viable multi-purpose societies
linked to Central Cooperative Banks or commercial banks as the case may be. The
recommendations have been accepted by the Government and the Departments
concerned are working out a programme of action in order that the objective of timely
3
and adequate supply of credit, backed by physical inputs and covering processing and
marketing, is realised, particularly for the benefit of the small and medium farmers.
2.7 Next only in importance to the agricultural sector is the energy sector.
The nationalisation of coal is beginning to yield results. Daring the current year the
production of coal is expected to go up by about 10 million tonnes to a record level of
88 million tonnes. I would like to say a special word of appreciation and thanks to the
workers in the coal mines; without their enthusiastic cooperation we could not have
achieved the increase in production. Re-organisation in the management of mines and
supply of much needed equipment, spares and technical expertise have laid the
foundations for an expanding trend in coal output. Two of the major constraints on
coal production, namely, shortage of rail transport and power, especially in the eastern
sector have now been largely removed. With the present trend, it is expected that
during the next year, coal production will go up by another 10 million tonnes, that is,
to 98 million tonnes. At this level of production, it should be possible to meet the
domestic demand in full (including partial substitution of coal for furnace oil); we
might also perhaps export some quantity for earning much-needed foreign exchange.
2.8 The immediate impact of the steep increase in the prices of crude oil, and
the petroleum products, was, no doubt, to strain the country’s balance of payments
severely. At the same time, this has given a new sense of urgency and momentum to
our efforts to increase production of indigenous crude. The anticipated increase within
as brief a period as one year, between 1974-75 and 1975-76, is from 7.5 million
tonnes to 8.4 million tonnes, an increase of about 12 percent. What is more important
is the progress achieved and the potential that is opening up for a major break-through
in the indigenous production within the next 5 to 10 years. The discovery of oil
deposits in the structures known as Bombay High is already known. The Oil and
Natural Gas Commission is expected to establish the first stage of production from
Bombay High in the second half of 1976 with a yield of about one million tonnes per
year. By 1980 production from this source might well reach the level of 10 million
tonnes, though one may have to wait a little before making firm estimates. The Bengal
and Kutch off-shore basins are also being intensively surveyed and the preliminary
results so far obtained appear encouraging. The dynamism exhibited by the Oil and
Natural Gas Commission merits our appreciation.
2.9 After a period of stagnation and shortage with widespread consequences
to both industry and agriculture, recent trends in the production and distribution of
electricity also show a welcome improvement. The entire electricity industry is being
restructured with accent on professionalism, efficiency, competence and precisely
defined responsibility for the staff. As a result of these measures, there has been
distinct improvement in the levels of power generation in the eastern region. The
Central Electricity Authority is being reactivised and the State Electricity Boards are
being helped to professionalise their management, to arrange for maintenance services
and to improve staff skills. These programmes as well as recent achievements portend
4
an easier power supply situation than has been the case in recent years. Government
are also actively examining the possibilities of setting up at the pit heads of major coal
fields in the country a number of super thermal power stations. These Centrally owned
power stations would enable the Union Government to even out to some extent, the
regional imbalances in power availability, augment the power supply substantially,
and to bring about a more rational approach to the problem of generation and distribution
of power in terms of real needs.
2.10 I wish to submit that the important feature of this Budget is a clear-cut
identification of these twin priorities - food and energy with the supporting facilities
- and the ear-marking of adequate funds for the development of these two sectors in
the first instance before taking up the claims of other sectors. This is the kind of
inescapable and often cruel choice which planners and policy-makers in developing
countries are called upon to make, beset as they are with scarce resources and multiple
needs. I have no doubt that Hon’ble Members will endorse the over-riding priority
that is being accorded in the Budget to the food and energy sectors of the economy,
even at the risk of depriving some of the other sectors. I should, perhaps, add that in
so doing we are observing the basic investment strategy underlying the draft Fifth
Five Year Plan.
2.11 Nor would this clear-cut adherence to priorities be confined to the Central
Budget only. In the course of the discussions with the State Governments for fixing
the magnitude and pattern of the State Plans for 1975-76, it has been ensured that the
requirements of agriculture, irrigation and power are met as a matter of first priority
and only the balance of scarce resources distributed among other sectors. I would here
like to express my gratitude to the Chief Ministers of State Governments and Union
Territories for their willing support and cooperation in agreeing to frame their plans
within this broad pattern of national priorities.
2.12 In striving to stimulate production in areas of high priority we have not
lost sight of two other equally important considerations - one relating to the human
and geographical aspects of production, and the other, to the proper distribution of the
goods produced. The needs of relatively weak producers and backward regions will
continue to receive special attention and support. The problems of production, of
diffusion of income and employment, of reduction of inequalities, and of ensuring
minimum consumption standards for all have to be looked at in their entirety. The
specific programmes under these heads should not only be mutually consistent with
each other, but should be so designed that they facilitate and reinforce each other. The
increase in agricultural output that we are aiming at is thus not a matter of mechanically
reaching a magic number. Considerations of balance between classes of farmers and
of regions, and of ensuring a pattern of production that is in consonance with our
socioeconomic objectives are equally important.

5
 2.13 If the fruits of economic development are to be equitably distributed,
adequate attention will have to be paid to the problems of relatively backward regions
and districts. To that end, development plans have to be drawn up on the basis of a
careful analysis of local needs, potentialities and resources. In this connection, I would
lay great emphasis on a comprehensive survey of natural resources in all districts of
India. This would enable us to work out operationally meaningful plans and programmes
to make optimum use of locally available resources along the lines of the now
wellknown Karimnagar project in Telangana.
III
3.1 In spite of the various prophecies of doom one hears these days, I am
definitely optimistic that the pace of economic development will be considerably
accelerated in the coming years. I must, however, point out that the full realisation of
our growth potential will require sustained hard work and the utmost discipline on the
part of all sections of the community. We are currently faced with an acute scarcity of
domestic financial resources. Our balance of payments position is also under strain. In
order to deal effectively with the tasks that lie ahead, we must do everything in our
power to increase our exports, and economise in the use of scarce imported inputs.
Higher investment in the key sectors is essential, but it must be financed in a non-
inflationary manner. This means we must increase the rate of savings. As part of the
strategy of discouraging excessive current consumption, we need to evolve a more
rational wage and salary structure, which should be more equitable than the present
structure, and also in conformity with the changing demands for skills in a dynamic
economy.
3.2 In our quest for accelerated growth combined with stability I place the
highest importance on protecting the more vulnerable sections of the population against
shortages and the high prices of essential commodities. For this we must have a well-
functioning public distribution system. for certain basic essential commodities. There
must be greater certainty of supply, and the system must in fact serve those whom it
is meant to benefit. I, therefore, seek an expansion of the public distribution system,
and this pre- supposes efficient arrangements for the procurement of the needed
commodities. I am glad that procurement of kharif cereals during the current year has
proceeded satisfactorily. This, combined with adequate imports, will certainly be of
considerable help in the operation of an effective public distribution system of
foodgrains in the coming year.
3.3 Cloth is another commodity that must be provided. With the recent
enactment of the Sick Textile Undertakings (Nationalisation) Act, Government have
acquired 103 textile mills whose management had earlier been taken over by the
Government. The acquisition of these mills provides Government with another very
useful instrument to regulate the production and distribution of cloth. Government are
now considering further steps to ensure that the production of controlled cloth is in
6
line with the agreed target and that this cloth reaches those sections of the community
for whom it is meant.
3.4 Since resources are scarce, the utmost emphasis has to be laid on increasing
productivity. This is a task which requires all round improvement both in public
administration and the management of enterprises. I have every hope that recent
innovations such as the system of internal financial advisers, performance budgeting,
and greater emphasis on monitoring and information, will help to tone up the quality
of public administration. I am happy to note the emphasis being laid on promoting
higher productivity in all manufacturing public sector enterprises by applying more
scientific policies in the fields of personnel administration, management development,
materials management and management information systems and above all, through
the introduction of modern productivity techniques. The improved performance of a
large number of public sector enterprises is a testimony to growing productivity
consciousness in the public sector.
3. 5 I believe this House will concede that as a result of rigorous measures
adopted by the Government, we have succeeded in combating what seemed to be a
run- away inflationary situation. To achieve this, Government non-developmental
spending was curtailed, increase in wages and a part of additional dearness allowance
had to be temporarily frozen, the increase in the rate of money supply drastically
brought down, and severe action taken against hoarders and smugglers. As a result of
these efforts, for the last few months prices have been slowly but steadily coming
down. This is no mean achievement when we consider that in most other countries
around the world prices continue to rise. While continuing this policy of rigorous
control on spending, there is also need, as I have mentioned earlier, for increased
investment, both by the Central and State Governments, and the private sector, in
important priority areas. It is one of the objects of this Budget to help achieve this.
While the rate of spending in other areas must remain low, this is also the time to
prepare the ground and do the necessary investigations to prepare for higher investment
in later years. This we are engaged in. It is our purpose to invest now in projects in
important areas that will yield quick results, and complete those, in an advanced stage
of implementation. Also important is the need to promote domestic savings and to
stimulate investment. These various objectives we seek to achieve through the present
Budget.
3.6 I have just mentioned the need to stimulate investment. The capital market
has been depressed of late, particularly after the Restrictions on Distribution of
Dividends Act. The Unit Trust of India had to face a situation in which repurchases
were much higher than the sale of units. The Government, therefore, issued an
Ordinance providing for certain tax relief and other remedial measures which have
greatly improved the situation. For improving the capital market, I intend to introduce
soon an amendment to the Restriction of Dividends Act which will provide that while
dividends in excess of the various limitations laid down in the Act may not be paid,
7
higher dividends can be declared, the deferred dividend being payable in two annual
installments, but without interest, when the present Act expires. These measures will
improve the climate for investment, particularly in respect of new issues.
3.7 I am also conscious of the fact that in recent years, there have been steep
escalations in capital costs which have acted as an inhibiting factor to new investment
in certain capital intensive industries which are vital for our future growth. Government
have appointed a high-level committee to go into this question. When the report of
this Committee is received, we shall quickly examine the need for suitable fiscal
concessions, and new pricing policies as a means of stimulating fresh investment in
these areas.
3.8 The experience of the last two years amply demonstrates that effective
steps to eliminate the black money economy must constitute an essential component
of our strategy to impart a measure of stability to the economy, and to divert the
available pool of national savings for high priority investments. I wish to reaffirm that
Government is firmly committed to root out the evil practices of smuggling, hoarding,
black marketing and tax evasion and have given evidence of their determination in
this regard. In this context a separate law for dealing more severely with various
economic offences seems to be a necessity.
3.9 Having thus outlined our approach, I will now give some details of the
revised estimates for 1974-75 and the budget estimates for 1975-76.
IV
REVISED ESTIMATES 1974-75
4.1 The original budget for the current year envisaged a deficit of Rs.126
crores. It has not been possible to adhere to this figure because many of the assumptions
on which the original budget was framed have been affected by adverse trends in the
economy, most particularly the phenomenal price rise this year. The various reasons
for this I shall explain.
4.2 The provision in the budget for food subsidy was Rs.100 crores. In view
of the difficult food situation and the need to maintain the public distribution system
at the level of 11 million tonnes, in 1974, we had to arrange for the import of as much
as 5.5 million tonnes of food grains. The cost of imported food grains also went up
greatly. Food subsidy during the year is now expected to amount to Rs.295 crores.
4.3 The provisions for salaries of Central Government employees included in
the budget for 1974-75 were based on the price level reached upto December 1973,
and a lump sum provision of Rs.120 crores was made to meet the cost of additional
dearness allowance. On the basis of the price increase upto April 1974, three instalments
of dearness allowance were sanctioned. Prices, however, continued to rise till September
1974, and three further instalments of dearness allowance fell due on the basis of the
dearness allowance formula accepted by the Government. In view of the likely unsettling
8
effects of further dearness allowance payments on the economy, it was considered
necessary to review these arrangements. Subsequently, in consultation with Government
employees, it was decided to sanction instalments which fell due on the basis of the
average price index upto 272. It was also agreed that arrears on this account upto
December 1974, payable in cash, would be deposited in the provident fund accounts
for a short period. I must express my gratitude to the employees for their understanding
and cooperation in meeting the present difficult situation. This has enabled us to
restrict the draft on the Budget on account of six instalments of dearness allowance to
about Rs.230 crores in the current year. This is still Rs.110 crores more than the
provision of Rs.120 crores made in the Budget.
4.4 Defence expenditure for the current year will be Rs.2157 crores as against
Rs.1915 crores in the original Budget. Apart from a liability of about Rs.95 crores on
account of dearness allowance, the increase is mainly due to revision of pay scales,
rise in prices of petroleum products and the higher cost of provisions and transport.
4.5 Another reason for increase in the deficit has been the drought and floods
with which many parts of the country have been affected. As Honourable Members
are aware, Central assistance for drought and floods is being made available now
only by way of advance release of Plan assistance, or assistance under the Drought
Prone Areas Programme, Tribal Development Plans, etc. so that plan priorities are
not disturbed or distorted and that productive and durable assets are created through
this assistance. Such advance assistance will be adjusted against the normal Plan
assistance due to the States in the ensuing years. In accordance with this policy,
advance Plan assistance of Rs.55 crores has been allocated to the States for drought
and flood relief measures in the current financial year. Apart from this, additional
assistance has been made available to the States concerned under the Brahmaputra
Flood Control Works and Drought Prone Areas Programme also. With these and
certain other inescapable commitments towards the States, including release of loans
against small savings collections in 1973-74, the additional assistance to the States
will amount to Rs.161 crores.
4.6 Other causes for the higher deficit relate to public sector enterprises,
fertilizer imports and additional spending on core sector projects. A few of the
enterprises did not have an adequate surplus to repay loans taken from Government.
It, therefore, became necessary to provide additional assistance of Rs.126 crores to a
number of undertakings mainly because of increases in wages and dearness allowance
and higher cost of fuel which had not been foreseen in the Budget.
4.7 The Budget for 1974-75 did not envisage any net outgo on fertilizer
transactions. The issue price from the pool was raised only from June 1974.
Subsequently, in order to meet the urgent demand for fertilizers, an additional quantity
of nearly 1 million tonnes had to be imported at considerably higher international
prices. There is usually a time lag of about four months between the payment for
9
purchases abroad and the cash recovery from State Governments of the cost of
fertilizers issued to them. Because of this time lag, large fertilizer imports have been
paid for by the Central Government, but their cost will not have been recovered
from the States by the end of this year. The Central Budget, therefore, has to bear
this burden. As of now, the estimate of cash outgo on account of fertilizer transactions
is about Rs.290 crores.
4.8 As the House is aware, a series of economy exercises were effected in
August 1974, locating considerable savings in expenditure. However, additional
allocations of Rs.190 crores had to be made for Plan schemes in the core sectors like
fertilizers, power, coal, petroleum, steel, ports and paper to maintain their schedules,
and provide for escalation in costs. Economies anticipated in other sectors could not
be realised in full due to steep rise in costs. As a result, the net expenditure on Central
Plan will go up by Rs.74 crores.
4.9 All these adverse factors would have raised budgetary deficit to a very
high level, but for the fact that the position has been retrieved to a large extent by the
buoyancy in tax receipts.
4.10 Receipts from Customs are expected to yield Rs.1300 crores against the
Budget estimates of Rs.936 crores - the improvement being mainly on account of
larger import of fertilizers, iron and steel, and a large increase in the prices of items
like fertilizers, machinery and equipment.
4.11 Income and Corporation Taxes are now expected to yield Rs.1460 crores
as against the original Budget estimate of Rs.1370 crores.
4.12 There is not likely to be any appreciable increase in the collection of
Union Excise duties over the Budget estimate, as adjusted by levies imposed in the
Second Finance Act, 1974.
4.13 The strategy of concentration on higher income groups and a general
tightening of the tax machinery in all branches has yielded good results. I would like
to commend the devotion to duty and the zeal shown by the officers and staff of the
revenue collecting agencies.
4.14 External receipts on account of loans, show an increase of nearly 43 crores
mainly on account of larger receipts against debt relief from the members of the India
Consortium, and larger nonproject loans from IDA. Grants from external sources in
the revised estimates in terms of actual receipts show an increase of about Rs.60
crores mainly on account of assistance which India has received from EEC and the
UN Fund for Emergency Relief for countries most seriously affected by the oil crisis,
and additional assistance from some other countries.
4.15 Even at the risk of rendering the supply position in the domestic market a
little difficult, the Government took the hard decision of allowing the export of nearly
10
half a million tonnes of sugar. While improving our balance of payments position, this
has also benefited the Budget to the extent of Rs.125 crores by way of profits.
4.16 Even with these various improvements, the year may end with a deficit of
Rs.625 crores. However, nearly Rs.330 crores of this is on account of payments for
stocks on hand of imported food and fertilizers, which will soon be recovered. As both
these commodities have been purchased abroad, by drawing down our foreign exchange
reserves, there is no resultant increase in money supply and the deficit to the extent of
Rs.330 crores is, therefore, non-inflationary in character.
V
BUDGET ESTIMATES 1975-76
5.1 In the context of continuing shortages in the economy, and the impact of
the price rise, framing the budget for the next year has not been an easy task. While
developmental requirements must receive the highest priority, the draft on the budget
for essential non- Plan requirements like Defence, the food subsidy, and the maintenance
of social services cannot be ignored, and are substantial. I have endeavoured to balance
two paramount but somewhat conflicting needs in this Budget - the short-term need to
keep in check inflationary pressures, and the equally important requirement to sustain
the tempo of development, which, in the ultimate analysis, is the real solution to the
problem of inflation. I am only too well aware that any slackening of our development
effort will compound our problem in the future.
5.2 The projections of receipts for next year at the existing rates of taxation
take into account the satisfactory trends witnessed in the current year. Income and
Corporation Taxes are expected to yield Rs.1570 crores and Union Excise duties
Rs.3500 crores. Receipts from interest tax are expected to be Rs.60 crores. Customs
receipts will, however, be less by Rs.50 crores next year because of lower imports of
steel, and the bunching of fertiliser imports towards the end of the current year.
5.3 The Budget also assumes a credit of Rs.125 crores towards profits on
export of sugar on the assumption that exports next year will at least be of the same
order as this year.
5.4 Receipts from external loans are estimated at the same level as this year’s
revised estimates. The steep rise in the prices of petroleum products has greatly strained
our balance of payments. The position would have been worse but for generous gestures
by Iran, Iraq and Abu Dhabi. We hope to, secure oil credits from these countries which
will provide a support of Rs.230 crores to the Budget during 1975-76.
5.5 In view of the pressing need to save maximum resources for the Plan,
utmost care has been taken to contain non-Plan expenditure. But we have to provide
for minimum needs in certain areas which are important for security, the maintenance
of development work, and for safeguarding the interests of the weaker sections of
society. Apart from debt servicing and other obligatory items of expenditure next year,
11
Defence expenditure would be Rs.2274 crores as against Rs.2157 crores in the current
year. Food subsidy for 1975-76 is estimated at Rs.295 crores. As the performance of
public sector undertakings is expected to improve, non-Plan assistance to these
undertakings will be less next year by Rs.78 crores than the provision in the current
year of Rs.217 crores. The outgo on fertiliser transactions next year is estimated at
Rs.140 crores.
5.6 The entire question of dearness allowance increases to Central Government
employees is to be discussed with their representatives in the next few weeks. It is
now widely recognised that evolving effective measures for remedying the causes of
inflation, though unpleasant and hard, should be preferred to frequent adjustment of
prices, incomes and wages, which greatly hampers the process of planned growth. In
a country where there is considerable unemployment and underemployment, an
excessive preoccupation with the current consumption of those who are fully employed
erodes investible resources and seriously affects the pace at which new employment
opportunities can be created to alleviate the sufferings of those who are unemployed.
Additionally an increase in monetary rewards, not justified by an increase in the
country’s productive capacity, accentuates inflationary pressures in the economy; this
may also threaten the security currently enjoyed by those who are fully employed.
While I am, therefore, aware of the hardship caused to Government employees by
price rises, I earnestly hope that in our forthcoming discussions the dearness allowance
question will be considered in this larger perspective.
5.7 After a careful and detailed sectoral review of the Plan requirements for
next year, it was felt that the allocation in the Central Budget for the Central, State and
Union Territory Plans should be at least Rs.3612 crores, if our long-term objectives
and urgent priorities are to be adequately fulfilled. This budgetary support of Rs.3612
crores includes Rs.1054 crores for States and Union Territories Plans, including the
hill and tribal areas sub-Plans, the requirements of the North-Eastern Council and
assistance for power schemes channelled through the Rural Electrification Corporation.
It also includes Rs.100 crores of special advance Plan assistance to certain States
which may have gaps in resources on the basis of Central assistance at the current
year’s level, to ensure adequate investment in important projects in the core sectors of
irrigation and power. Budgetary support for the Central Plan will be Rs.2558 crores.
The total Central Plan outlay next year inclusive of extra budgetary resources will be
Rs.3154 crores. The States and Union Territories Plans will be of the order of Rs.2806
crores. Thus, the total Plan size for 1975-76 will be Rs.5960 crores which in financial
terms represents an increase of 23 per cent over the 1974-75 Plan of Rs.4844 crores.
5.8 Budgetary provision for the Central Plan of Rs.2558 crores represents a
step up of Rs.429 crores over the revised estimate of Rs.2129 crores in the current
year. I am conscious that a more substantial step up in the Plan investment to provide
for achievement of draft Fifth Plan targets in all sectors would have been desirable
from the long-term perspective of the economy. But we cannot forget that large scale
12
deficit financing leading to further price increases will substantially erode the real
content of the Plan and cause more damage to the programme of planned development.
We have, therefore, as I stressed earlier, adopted a selective approach and given priority
to key sectors of the economy like agriculture, power, fertilizers, coal, petroleum,
essential industries like cement, paper and ship-building, and transport over all other
sectors, and even over long gestation projects in the core Sectors.
5.9 As agriculture is the backbone of the economy, special care has been
taken to step up the investment in this Sector substantially - from Rs.193 crores in the
Revised Estimates to Rs.270 crores. The allocations include Rs.50 crores for the
Agricultural Refinance Corporation, Rs.25 crores for drought prone areas programme,
Rs.22 crores for small farmers and marginal farmers development, Rs.16 crores for
command area development, Rs.23 crores for agricultural research and education, and
Rs.43 crores for the cooperative sector, including the cooperative fertiliser factories.
5.10 There will be an increase of Rs.84 crores in investment in fertiliser
production over the current year’s level of Rs.192 crores. Adequate funds are being
provided for Nangal Expansion, Ramagundam, Talcher, Haldia and Cochin Phase-II,
and for several new plants such as Trombay IV and V, Bhatinda and Panipat and a
new project at Sindri.
5.11 The Budget support for the power sector including support for Rural
Electrification Corporation will be Rs.140 crores in the next year. Substantial provision
has been made for continuing projects like Badarpur extension, Loktak, Baira Slul
and Inter-State Transmission Lines. Further, there will be an aggregate provision of
the order of Rs.900 crores in the State Plans for power.
5.12 Budget provision for coal represents a substantial increase from Rs.141
crores in this year’s Revised Budget to Rs.229 crores. Coal Mines Authority and
Bliarat Coking Coal Ltd., have been allowed larger provisions to enable the
achievement of the target of production of 135 million tonnes by the end of the Fifth
Plan. Provision has also been made for stabilising the production of lignite at Neyvell
at 4.5 million tonnes.
5.13 Budget provision for petroleum and petro- chemicals has also been greatly
stepped up to Rs.170 crores in 1975-76 as against Rs.60 crores in 1974-75 Revised
Estimates. There will be a considerable increase in the provision for the Oil and
Natural Gas Commission, Oil India and Indian Petro-Chemicals Corporation. As the
House is aware, a cess was levied in the current year for the development of the oil
industry, and the 011 Industry Development Board was set up to coordinate the various
development projects to be undertaken for oil development. A sum of Rs.61 crores
from this cess over and above the budgetary support will accrue to this Board next
year to be used for oil development.

13
 5.14 The provisions in the steel sector, particularly for Bokaro and Bhilai
expansion, have been fixed taking into account the likely demand for steel. Full
provision has been made for completion of the Korba Aluminium Project.
5.15 Next year’s Plan makes adequate provision for continuing projects for
cement production and also for 3 new projects. The Paper Mill in Nagaland is being
given high priority. Modernisation of textile mills taken over by the National Textile
Corporation has also received special attention.
5.16 In the Transport and Communications sector, all continuing major ports,
shipping, ship-building and aviation projects have been adequately catered for.
5.17 Social Services have not been neglected. Increased provision over the
revised estimates for this year has been allowed for village and small scale industries,
education, health, family planning, housing and urban development, and welfare of
backward classes.
5.18 As Honourable Members are aware, two schemes, one for compulsory
deposit of increases in wages, and 50 per cent of the additional dearness allowance,
and another for compulsory deposit of a per centage of the income of income-tax
payers, were introduced in July last. These were necessary to counter the serious
imbalances created in the economy by the large increases in money supply. We are
happy that these measures, along with other steps taken to curb inflation, have had a
stabilising effect on prices. While it is the continuing concern of the Government to
curb inflationary trends, it is equally important that development efforts should be
sustained and adequate resources provided for investment in the vital areas of the
economy. In view of this, it has been decided to take credit for a borrowing of about
Rs.100 crores from the Reserve Bank against the likely addition to blocked deposits
which takes place in 1975-76.
5.19 Taking credit for this amount, the budgetary support of Rs.3612 crores for
the 1975-76 Plan will entail a resource gap of Rs.464 crores. Honourable Members
will be keen to know how I propose to deal with this deficit.
PART B
DIRECT TAXES
1.1 Sir, let me present first my proposals in the field of direct taxes. Honourable
Members will recall that the rates of income-tax on personal incomes were reduced
last year on the basis of a recommendation of the Direct Taxes Enquiry Committee. It
was expected that this would lead to better tax compliance. I think the policy adopted
last year should be given a fair trial. I, accordingly, propose not to make any change
in the rates of income-tax in the case of non-corporate taxpayers.
1.2 At present, the basic rate of income-tax in the case of closely-held industrial
companies stands at 55 per cent on the first Rs.2 lakhs of taxable income, and 60 per
cent on the balance. On the analogy of the rate structure applicable to the widely-held
14
companies, I propose to modify this provision so as to apply the higher rate of 60 per
cent on the entire income of such closely-held companies in cases where the taxable
income exceeds Re. 2 lakhs, subject, however, to the usual marginal relief. This measure
will yield Rs.4 crores in a full year and Rs.3 crores in 1975-76. There will be no
change in the rates of income-tax in the case of other categories of companies.
1.3 The levy of a tax under the interest -tax Act, 1974 on interest received by
scheduled banks has had, the effect of increasing, on an average, the cost of borrowings
from scheduled banks by about one per cent. The levy of this tax has, therefore, made
the acceptance of deposits by non-banking non-financial companies from the public
all the more attractive, specially in the context of the selective credit control measures
adopted by the Reserve Bank. Some corrective by way of a disincentive to borrowings
from the public by these companies seems to be indicated so that credit planning
according to the priorities laid down by the Government is not defeated. I propose,
therefore, that in computing the taxable income of non-banking non-financial
companies, only 85 per cent of the interest paid by them on public deposits will be
allowed as expenditure for tax purposes. This measure will yield Rs.10 crores in a full
year and Rs.7.5 crores in 1975-76.
1.4 The tax holiday concession is at present available in respect of industrial
undertakings that go into production before 1st April, 1976 and ships which are brought
into use before that date. I propose to extend the concession in these cases for a
further period of five years. This concession is at present available to approved hotels
irrespective of the date by which they may start functioning. I find no justification for
giving preferential treatment to approved hotels over industrial undertakings and ships.
I therefore propose to restrict the concession in the case of approved hotels to cases
where these hotels start functioning before 1st April, 1981.
1.5 At present, dividends declared by companies out of their tax holiday profits
dividends exempt in the hands of shareholders. Experience has shown that this provision
is difficult to administer, since any change in the quantum of income of the company
distributing dividends requires modification of the assessments of all its shareholders,
who may be residing in different parts of the country. I, therefore, propose to withdraw
the exemption in respect of dividends paid by companies out of their tax holiday
profits attributable to the extended period. Shareholders will, however, not stand to
lose, since 1 propose to increase the quantum of tax holiday profits in the case of
companies from 6 per cent to 7.5 per cent per annum of the capital employed in new
industrial undertakings, ships or hotels.
1.6 In order to channelise corporate savings into high priority industries, I
propose to exempt from income-tax, inter-corporate dividends derived by domestic
companies from new companies engaged in the manufacture of fertilisers, pesticides,
paper and cement.
1.7 As Honourable Members are aware, initial depreciation allowance at the
15
rate of 20 per cent of the cost of machinery and plant is allowed in respect of the
priority industries listed in the Ninth Schedule to the income-tax Act. Having regard
to the importance of pesticides to our economy for increasing agricultural production,
I propose to extend the benefit of initial depreciation allowance to the Pesticides
industry also.
1.8 As another measure for promoting investment in desired areas, I propose
to exempt from wealth-tax for a period of five years investment in equity shares of
new companies engaged in priority industries listed in the Ninth Schedule to the
income-tax Act.
1.9 Under a provision made in the Finance Act, 1974, development rebate is
admissible in respect of ships which were ordered before 1st December, 1973 if
such ships are acquired before 1st June, 1975. In view of the time lag involved in
acquiring ships, I propose to extend this concession to ships which will be acquired
before 1st January, 1977, provided orders for their acquisition were placed before
1st December, 1973.
1.10 Under the existing law, a deduction equal to 20 per cent of the profits and
gains derived from the business of publication of books is allowed in computing
taxable income. This concession is available for a period of five years ending with the
assessment year 1975-76. I propose to extend this concession for another five years.
1.11 Our development efforts can be sustained only through promotion of
savings. I have, therefore, decided to liberalise the concession currently available
under the income-tax Act in respect of long-term savings through provident funds, life
insurance, etc. so as to allow a deduction in respect of 100 per cent of the first Rs.4,
000 of the qualifying savings plus 50 per cent of the next Rs.6, 000 of such savings
plus 40 per cent of the balance. This measure will result in a revenue loss of Rs.8
crores in a full year and Rs.6 crores in 1975-76.
1.12 Frequent withdrawals are made from Government Provident Funds. I have,
therefore, decided to introduce an incentive bonus scheme to benefit those Government
employees who do not withdraw any amount from their provident fund accounts during
the year. The bonus will be allowed on the subscriptions made during that year and
will be calculated at the rate of 3 per cent for employees drawing pay up to Rs.500 per
month and 1 per cent for employees drawing pay above Rs.500 per month.
1.13 Honourable Members will notice that a package of measures has been
proposed for improving the investment climate, namely, extension of tax holiday,
exemption of inter-corporate dividends derived from new companies engaged in high
priority industries, exemption from wealth-tax of equity shares in new companies
engaged in certain priority industries, and incentives to greater savings. Despite the
severe constraint of resources, I have thought it advisable to propose these fiscal
incentives as, in my view, investment in priority sectors has to be encouraged now if
16
we are not to compound our difficulties in the future. These fiscal measures will
reinforce the other measures that the Government have taken for encouraging greater
production in certain vital sectors.
1.14 In order to give some relief to middle class families who have to bear the
burden of providing higher education to their children, I propose to allow a deduction
in respect of expenses incurred by individuals in this regard. In respect of children
attending degree or post-graduate courses in medicine, engineering or other technical
subjects, the amount of deduction will be Rs.1, 000 per child and in respect of children
attending degree or post-graduate courses in other subjects or diploma courses in
medicine, engineering or other technical subjects, the amount of deduction will be
Rs.500 per child. The new concession will be available in the case of individuals
whose gross total income does not exceed Rs.12, 000 per annum and restricted to two
children in any case. This measure will result in a reduction of revenue of Rs.7 crores
in a full year and a little over Rs.4 crores in 1975 -76.
1.15 At present, income from live-stock breeding and poultry and dairy farming
is exempt from income-tax. This exemption is prone to abuse by showing income
which would otherwise be chargeable to tax as exempt income. I, accordingly, propose
to restrict the exemption to Rs.10, 000 in a year. This will mean an additional revenue
of Rs.2 crores in a full year and Rs.1.2 crores in the financial year 1975-76.
1.16 I propose to exempt from income-tax retrenchment compensation paid
to workmen under the Industrial Disputes Act or other similar laws up to a maximum
of Rs.20,000.
1.17 There are at present certain income-tax exemption limits applying to
salaried assessees relating to house rent allowance and leave travel concessions. These
are being liberalised. Indian technicians employed abroad are also proposed to be
given some tax relief.
1.18 In order to simplify and rationalise the procedure for assessment of foreign
shipping enterprises, the accounts of which are not easily accessible, I propose to
provide that the income of such enterprises shall be taken at 7.5 per cent of the
aggregate of their gross earnings from traffic originating in India and other earnings
received in India. This change is also in line with the practice in some other countries.
1.19 At present, contributions made to an approved gratuity fund are allowed
as deduction in computing the taxable income. A doubt has been expressed that, under
the relevant provisions as presently worded, provisions made in the books of account
by taxpayers would also qualify for deduction. This is clearly not the intention. Since
the employer continues to have control over these funds, I propose to provide
specifically that no deduction for tax purposes will be allowed in respect of such
provisions made to provide for future gratuities.
17
 1. 2 0With a view to curtailing ostentatious expenditure in business and
professions, I propose to deny depreciation in respect of imported cars which are
acquired after 28th February, 1975. Simultaneously, I propose to allow full depreciation
in respect of indigenous cars, irrespective of their cost.
1.21 At present, trees standing on agricultural land do not qualify for exemption
from wealth-tax. In order to encourage planting and conservation of trees, I propose to
exempt the value of trees standing on agricultural land from wealth-tax, except in
respect of orchards and plantations.
1. 22 Under Corporation Tax, the full year effect of the proposals is Rs.14.0
crores and the yield for 1975-76 will be Rs.10.5 crores. As a result of the concessions
given, there will be a net reduction of Rs.13.0 crores under income-tax in a full year
and Rs.9.0 crores in 1975-76. The impact of this reduction in 1975-76 on the Central
revenues will be Rs.2. 26 crores.
II
INDIRECT TAXES
2.1 I now come to my proposals relating to Indirect Taxes.
2.2 While I have had to impose levies covering a wide range of commodities,
I have done my best to reduce to the minimum the burden that would fall on lie more
vulnerable sections of the community. It has also been my endeavour to select items
which largely figure in the pattern of consumption of the more affluent sections of
society. I have also attempted to select those commodities which are significant in our
export efforts so that consumption is thereby reduced in the home market releasing an
export surplus which would earn us valuable foreign exchange.
EXCISE DUTIES
2.3 The recent spurt in the price of sugar in the international market provides
us an excellent opportunity to increase our exports of this commodity, even at some
sacrifice. With a view to reducing consumption of sugar for less essential uses and
releasing more quantities for export, I propose that the Basic excise duty on free sale
sugar may be stepped up from 30 per cent ad valorem to 37-1/2 per cent ad valorem.
I do not propose to make any change in the present effective rate of duty an levy
sugar, which now accounts for 65 per cent of the total internal releases, so that the
average citizen is assured of his quota of sugar at a reasonable price. The proposed
increase in duty on free sale sugar will yield an additional revenue of Rs.30.25 crores.
2.4 Khandsarl Sugar is at present chargeable to a duty of 17.5 per cent ad
valorem. However, there is a scheme of compounded levy under which Khandsari
sugar units opting for the scheme pay a fixed sum by way of duty for every week of
working, depending on the number and size of the centrifuges used by them. As the
compounded levy results in a disproportionately low duty incidence on these Khandsari
18
units in comparison with the incidence on regular vacuum pan sugar mills, I propose
to withdraw the compounded levy scheme. All the Khandsari units will, hereafter,
work under the normal Central Excise procedure and pay duty at 17.5 per cent ad
valorem. From this proposal I expect to raise an additional revenue of Rs.19.60 crores.
2.5 The duty on tea produced in the various Zones has remained unchanged
for the last five years. Tea prices both in the Indian and London auctions have
substantially risen during this period. I, therefore, propose to increase the existing
basic duty m loose tea produced in Zones 1, 11, IV and V by 10 to 15 paise per kg. Tea
of Zone III at present bears the highest rate of duty and there is need for giving some
relief because of the low yield and the high cost of cultivation. As more than 90 per
cent of the Tea produced in this Zone is exported and since the price increases in
respect of these teas have been the least, I propose to reduce the present basic duty for
this Zone by 10 paise per Kg. Apart from bringing in revenue, the proposed increase
in duty on Teas of Zones I, II, IV and V will help in making more -tea available for
export. With a view to ensure that the increase in excise duty on tea does not hit
exports, I also propose to raise the ceiling limit on the quantum of rebate admissible
for exported teas under the present scheme from the existing level of 75 paise per
kilogram to 85 paise per kilogram. The net effect of the proposed changes will bean
additional revenue of Rs.3.40 crores.
2.6 Cement is another potential foreign exchange earner, and for similar
reasons, I propose to step up the basic duty m cement from 30 per cent ad valorem
to 35 per cent ad valorem. This proposal will yield an additional revenue of
Rs.15.95 crores.
2.7 The import of crude petroleum and petroleum products continues to
demand a large share of the total available foreign exchange resources. I feel that so
long as energy shortages persist, there is a case for making petroleum products more
expensive so as to promote greater economy and efficiency in their use. Against this
background, the duty on motor spirit is proposed to be raised by 10 paise per litre.
I also propose to increase the duty on furnace oil to induce replacement of oilfired
equipment by coal-fired equipment. Such a duty will be an added reason to replace
obsolescent equipment with modern efficient units, even in installations which
continue to use oil. However, taking into consideration its use by various industries,
the increase proposed is modest - a little less than 3 paise per litre. Low Sulphur
Heavy Stock used for electricity generation will, however, continue to be exempt as
at present. These levies on petroleum products will together yield an additional
revenue of Rs.26. 00 crores.
2.8 There has been a fall in the proportion of aluminium of electrical
conductor grade produced in recent years compared to the commercial grade. Since
it is of paramount importance that there should be no shortage of aluminium of
electrical conductor grade required by various power systems, I propose to increase
19
by Rs.2 000 per tonne the excise, duty on commercial grade aluminium thereby
providing encouragement for greater production of electrical conductor grade
aluminium. The proposed increase in duty on aluminium will yield an additional
revenue of Rs.15. 00 crores.
2.9 I shall now turn to a product on which all Finance Ministers have had to
rely heavily namely, tobacco and its products. The Tobacco Excise Tariff Committee
has recommended a uniform tariff rate for all forms of non-flue-cured unmanufactured
tobacco, other than that used for the manufacture of cigarettes, supplemented by a low
rate of excise duty on certain specified tobacco products namely, biris and chewing
tobacco sold under a brand name, and snuff. Following the Committee’s
recommendation, I propose to levy a uniform total excise duty of Rs. 3 per kilogram
on non-flue-cured unmanufactured tobacco other than that used for the manufacture
of cigarettes. This will mean A reduction of Rs.1. 60 per kg. in the total duty for biri
tobacco, and of Re. 0. 25 per kg. for hookah, chewing and snuff tobacco. However, in
the case of stalks I propose to fix the duty at Rs.2 per kg. against the present rate of
Rs.0.65 per kg. There is already a duty of Rs.3.60 per thousand on biris manufactured
with the aid of machines. I now propose to levy a duty of Re.1 per thousand on
handmade biris also p of which 80 paise will be in the form of Basic duty and 20 paise
in the form of Additional excise duty in lieu of sales-tax. For the sake of administrative
convenience, this levy will be restricted to biris sold under brand names. The duty on
machine made biris will be correspondingly stepped up from Rs.3.60 to Rs.4.60 per
thousand. It will be noticed that those smokers who are not unduly discriminating and
are content with unbranded handmade biris which bear no excise duty should benefit
from the reduction in duty on biri tobacco. I also propose to levy a duty of 10 per cent
ad valorem on chewing, tobacco sold under brand names and on snuff. An exemption
to the extent of 5 per cent will, however, be provided in respect of chewing tobacco
whose value does not exceed Rs.10 per kg. If the smokers of branded biris are called
upon to pay more, equity requires that those smoking pipes and cigarettes should not
be denied the privilege of helping the developmental effort. Accordingly, I propose to
raise the effective duty on cigarettes also. The effective Basic duty on cigarettes is
now 85 per cent ad valorem, if the value of the cigarettes does not exceed Rs.10 per
thousand, and increases by 3 per cent ad valorem for every additional rupee or part
thereof in excess of Rs.10 per thousand. This duty will be increased by 5 per cent ad
valorem at all price levels except that the ceiling level of Basic duty will continue to
remain at 250 per dent ad valorem, Similarly I also propose to raise the Basic effective
duty on smoking mixtures by 5 per cent ad valorem. On account of the rationalisation
of duty on unmanufactured tobacco there will be a reduction of revenue to the extent
of Rs.8. 25 crores. But the net additional revenue from tobacco and tobacco products
will be Rs.26. 88 crores.
2.10 Both for raising revenues and as a measure of rationalisation I propose to
readjust the rates of duty on rayon and synthetic yarns (including blended yarns), and
20
on rayon or artifical silk fabrics. I propose to shift partially the burden of excise duty
on artsilk fabrics from the fabric stage to the yarn stage, since collection of revenue at
the yarn stage is administratively easier and Provides fewer loopholes. The additional
excise duty levied on artsilk fabrics in lieu of sales-tax, and the handloom cess, will
continue to be levied at the fabric stage; but there will be no basic excise duty on
artsilk fabrics except in the case of those fabrics whose value exceeds Rs.15 per sq.
metre. This will result in a loss of revenue of Rs.22 crores; to neutralise this loss, and
to earn additional revenue, I propose to increase the duty on rayon and synthetic yarns
suitably. I also propose to levy a new duty of Rs.20 per kg. on textured yarns in
addition to the duty leviable on base yarn used in their manufacture, and to withdraw
the existing concessions on knitted fabrics. No increase is proposed on tyre cord yarn
and on glass yarn which go into industrial production, and on wastes.
2.11 I, propose to raise the existing duties on superfine and fine cotton yarns
which are used by the composite mills, by powerlooms, and in the hosiery and sewing
thread sectors of the cotton textile industry. As a sequel to increase in the rates of duty
on cotton yarn I also propose to raise suitably the rates of compounded levy paid by
composite mills on cotton yarn and mixed yarn used by them. In order that the increases
in yarn duty may not hit the handlooms, the duty on yarn cleared from the mills in the
form of straight reel hanks used mostly by the handloom sector is being kept unchanged.
2.12 In 1973 Government appointed a High Powered Study Team to examine
in depth the problems of the Handloom Industry. This body has observed in its report
that powerlooms are in a Position to undercut handlooms in their legitimate market,
and has recommended that the compounded levy on powerlooms may be fixed at
Rs.300 per powerloom per annum irrespective of the number of looms in a unit. The
matter has been carefuly examined by Government and I now propose to increase the
compounded levy an powerlooms to Rs.2 00 per loom per annum on all those units
with less than 50 powerlooms each.
2.13 There are reports that some mills take undue advantage of existing
concessional rates of duty prescribed for clearance of fents and rags. With a view to
eliminate this abuse, a two-tier duty structure is proposed to be introduced for cotton
fents and rags, the lower level applying to fents and rags cleared up to a prescribed
limit, and the higher level, to clearances above that limit. The various proposals m
textiles will yield an additional revenue of Rs.49.10 crores.
2.14 Although air conditioners already carry a duty of 75 per cent ad valorem,
I propose to raise this level to 100 per cent ad valorem. I similarly propose to raise the
duty on parts of refrigerating and air conditioning plants and machinery from 100 per
cent ad valorem to 125 per cent ad valorem. Duty on refrigerators, and refrigerating
machinery and appliances, as well as Air coolers, is however being kept unchanged.
Parts of refrigerating machinery for cold storage plants, hospitals and factories also
will continue to pay the present concessional duty# I further propose to raise the Basic

21
duty on Cosmetics and Toilet preparations from the present rate of 3 0 per cent ad
valorem to 40 per cent ad valorem. Since this item also carries an Auxiliary duty of 50
per cent of the effective Basic duty there will be a total increase of 15 per cent ad
valorem in the duty. Shampoos will also henceforth pay a Basic duty of 40 per cent.
2.15 Those blessed by fortune to have enough cash and other valuables with
them to necessitate the purchase of safes and strong boxes cannot legitimately complain
against my next proposal which is to raise the duty on safes, strong boxes and similar
articles from 10 per cent ad valorem to 20 per cent ad valorem. The combined revenue
effect of my proposals for increase in duty on air conditioners and parts, cosmetic and
toilet requisites and safes, strong boxes and the like will be Rs.7.65 crores.
2.16 As a revenue measure, I propose to increase by 5 per cent the effective
duties on synthetic organic dye-stuffs and synthetic organic derivatives, chinaware
and porcelainware, and glass and glassware, except laboratory glassware. I also propose
to make some changes in the existing basis for grant of duty concession to small scale
manufacturers of chinaware and porcelainware, but these changes will be made effective
only from 1st April, 1975. My proposals regarding synthetic organic dyestuffs, glass
and glassware and chinaware and porcelainware will yield an additional revenue of
Rs.10. 20 crores.
2.17 I propose to increase the duty on packing and wrapping paper, pulp boards
and duplex and triplex boards from 80 paise per kilogram to Rs.1.20 per kilogram.
This will yield an additional revenue of Rs.9.80 crores.
2.18 I propose to increase the present effective duty on electric wires and.
cables, excluding those used for telecommunication and high voltage transmission
lines, by varying rates ranging between 2-1/2 and 5 per cent ad valorem. I also propose
to raise the duty on electric fans marginally, but there will be no increase in the duty
on industrial fans. The proposed increases in the duty on electric wires and cables and
fans will yield an additional revenue of Rs.4.30 crores.
2.19 Rationalisation of the tariff entries and exemption notifications relating to
gramophones, record players, tape-recorders, permanent magnets, vehicular tyres,
components of motor vehicles, wool tops, concessions for the use of rice bran oil and
minor oils in the manufacture of soap, and of cotton-seed oil in the manufacture of
vegetable products has been proposed. I also propose to rationalise the tariff for exposed
cinematograph films, and to increase the differential between coloured films on the
one hand and black and white films on the other. All these measures will yield an
additional revenue of Rs.6.84 crores.
2. 20 To remove doubts about the meaning of the expression “skelp % I propose
to add an explanation at the end of Tariff item 26AA and to validate past levies,
assessments and collections of duty in accordance with this explanation.
2.21 As there is a substantial difference between the imported cost of graphite
electrodes and anodes and the indigenous cost of production, I propose to levy an
22
excise duty of 15% ad valorem on graphite electrodes and anodes. This will yield a
revenue of Rs.1.50 crores.
2.22 I now come to a new concept in Central Excise taxation, Hitherto the
Central Excise tariff covered only certain specified goods. With a view to widen the
coverage of taxable goods and to provide a more dependable, information base for
future revenue raising exercises, I propose to introduce a new item in the Central
Excise Tariff Schedule which,, with a few exceptions, will cover all do produced for
sale or other commercial purpose not elsewhere specified in the Schedule. Goods
covered under this new item will be chargeable to a nominal duty at the rate of 1 per
cent ad valorem. While the tariff item will cover the production of all factories as
defined. in the Factories Act, 1948 I propose for the sake of administrative convenience
to exempt the production of those factories which employ not more than 49 workers
in the case of power-operated factories, and not more than 99 workers in the case of
non-power operated factories. To further simplify the levy, I also propose to exempt
from duty intermediate products and component parts falling within this item produced
in a factory and consumed within the. same factory for the manufacture of finished
goods. No countervailing duty will be levied on imported goods corresponding to this
new item. This levy is admittedly an experimental measure. I expect that this measure
will yield a revenue of Rs.24. 00 crores per annum.
2.23 The auxiliary duty of excise levied under the Finance Act of 1974 valid
up to 31st of March, 1975 is being continued up to 30th of June, 1976. Mainly on
account of the increase in the basic duty proposed on some items there will be additional
accrual of auxiliary duty also, estimated at Rs.5.34 crores. This amount, however , has
been included in the Revenue Estimates under the respective items already mentioned.
2.24 The total effect of all the above proposals relating to Central Excise will
be an additional revenue of Rs.250.47 crores. Of this the Union Government’s share
will be Rs.194.81 crores and the States’ share Rs.55.66 crores.
IMPORT DUTIES
2.25 I do not propose any revision of the Customs Tariff rates. But considering
the trend of international prices of non-ferrous metals I propose to increase the
countervailing duty on copper by Re.3500 per tonne and on zinc by Rs.2125 per
tonne. These changes will yield an additional revenue of Rs.24.50 crores.
2.26 The increase in Central Excise duty on certain items which I have proposed
earlier will lead to a consequential. increase of Rs.9.55 crores in the collection of -
countervailing duty on imports.
2.27 The auxiliary duty of Customs levied under the Finance Act of 1974
is being continued up to 30th of June, 1976 and the effective rates of this levy
remain unchanged.
2.28 The various proposals which I have made will yield an increase of Rs.34.05
crores in Customs revenue.

23
 2.29 The yield for 1975-76 for the Centre, taking Union Excise Duties and
Customs Duties together will be Rs.228.86 crores.
CENTRAL SALES TAX
2.30 Before 1 conclude 1 should mention a proposal which I am making to
raise resources for the benefit of the States and Union Territories. The rate of Central
Sales-tax on inter-State sales of goods is being raised from 3 per cent to 4 per cent
with a corresponding change in the ceiling prescribed in respect of local Sales-tax on
goods declared to be of special importance in inter-State trade or commerce. As a
result of this proposal being made effective from 1st July, 1975, the additional
collections for those Union Territories whose revenues form part of the Consolidated
Fund of India will amount to Rs.1.75 crores in the year 1975-76. The States will
benefit to the extent of Rs.38.25 crores in 1975-76 through this measure.
III
3.1 To sum up, so far as the Union Budget is concerned, the various
proposals imply, for 1975-76, additional revenue aggregating Rs.239 crores. The
budgetary gap of Rs.464 crores, as indicated earlier, will accordingly be scaled
down to Rs.225 crores.
3.2 The budgetary deficit has thus been kept at a modest level. With the
improving prospects for the availability of food, power and fuel, this order of deficit
is not likely to accentuate inflationary pressures in the economy.
3.3 My major concern in the formulation of this budget has been to stimulate
production by stepping up the pace of investment in areas crucial to the healthy
growth of the economy. The effectiveness of the measures proposed in achieving the
goals that we have set for ourselves will, however, depend in large measure m the
willingness of the different sections of the community to contribute their utmost to
the common endeavour.
3.4 Let us all then, in Government, the Legislature and outside, rededicate
ourselves to this national cause at this juncture and conduct ourselves with that
discipline and determination which the occasion demands.
(February 28, 1975)

24
SPEECH OF SHRI Y.B.CHAVAN MINISTER OF FINANCE INTRODUCING
THE BUDGET FOR THE YEAR 1974-75

Sir.
I rise to present the revised estimates for 1973-74 and the budget estimates for
1974-75.
2. This As the fourth regular budget of the Union Government which I have
been privileged to present to this House. The principal concern of every Central budget
has to be to strike a proper balance between the requirements of accelerated growth,
stability, greater social justice and self-reliance. In the long run, these objectives are
self-reinforcing. In the short run, however, a reconciliation of these objectives is not
an easy task even under favourable conditions. During the last three years conditions
have not been favourable; in fact they have been far from normal in many ways. In
each of these years, we had to face new challenges of extraordinary dimensions. We
have tried to meet those challenges to the best of our ability. I shall, however, readily
admit that, because of unusually severe strains caused by a combination of certain
national and international factors beyond our control, progress in achieving our
objectives has fallen short of expectations.
3. I would like to state frankly that in the coming financial year the economy
will be faced with even greater challenges. lts strength and adaptability will be severely
tested. The steep rise in the price of crude oil and also some other commodities has
turned the terms of trade sharply against us and has rendered our tasks exceptionally
difficult. Recent developments must, however, be viewed in a wider historical
perspective. Nowhere in the world has the process of social and economic change
been smooth or free from ups and downs. I find no reason, therefore, to lose heart or
to start questioning our basic goals and objectives. Our socio-economic objectives
remain as relevant as before. Our commitment to our goals is as resolute as ever. We
cannot give up the war against poverty, ignorance and disease because the going is
more difficult than anticipated, though our tactics may need to be readjusted to changing
circumstances.
THE STATE OF THE ECONOMY
4. As the House is aware, the Government has been deeply concerned about
the acute inflationary pressures that have prevailed in the economy during the last two
years. The measures that have been adopted to deal with these inflationary pressures
are well known to the Honourable Members. It is a matter of deep regret to me that
despite these measures prices have continued to rise. The House will appreciate that
1
the pressure on prices was inevitable as a result of the unsatisfactory performance in
the field of agricultural production in two successive years, 1971-72 and 1972-73. The
steep fall of 9.5 per cent in agricultural output in 1972-73 was bound to upset the
delicate balance between demand and supply. Because of a much sharper increase in
international prices, the substantial imports of food grains that we arranged were also
unable to exercise a stabilising influence on domestic prices. Even with a more normal
kharif crop in 1973, the pressure on prices has not abated in view of other inflationary
forces at work in the economy.
5. It appears certain that the national income in 1973-74 will record a
significant growth; this will help to neutralise the unsatisfactory behaviour of national
income in the two previous years. It is, however, a matter of deep concern to us that
in the Fourth Plan our overall rate of growth has been much lower than the Plan target.
It is also a matter of deep regret that the upsurge in industrial production that was
evident in 1972 was not sustained in 1973. The available indicators suggest that there
was hardly any increase in the rate of growth of industrial production in 1973. It will
be a major objective of our economic policy to revive the tempo of industrial activity
in 1974. To secure an adequate rate of growth is the challenge that we face in the Fifth
Five Year Plan.
6. As the House is aware, in order to supplement domestic supplies,
Government imported significant quantities of food grains and vegetable oil from
abroad during 1973-74. These imports were necessary for the well-being of the nation,
but have naturally greatly inflated our import bin. Fortunately, our exports have grown
at a satisfactory rate and, as a result, the deterioration in our balance of payments has
been contained within manageable proportions, However, it is no use minimising the
likely adverse effect on our balance of payments which will inevitably arise as a result
of the steep increase in the prices of crude oil and of commodities like fertilizer and
non-ferrous metals. In the long run, among the most important steps by which our
economy can adjust to this massive structural shift in our terms of trade, without
affecting our growth prospects, is by replacing oil, wherever possible by other
domestically available sources of energy, and by intensifying the programme for oil
exploration. In this context, the highest priority attaches to securing a significant
increase in the production of coal in the shortest possible time. Even so, a large
increase in our import bill is inevitable, and this will necessitate a significant increase
in our export earnings. The oil crisis, while no doubt adding to our difficulties, has
already created new export opportunities in respect of products such as jute textiles,
cotton textiles and leather goods. We must grasp this opportunity and do everything in
our power to maximise our export earnings. A comprehensive review of our export
prospects has been undertaken. This review will enable us to launch a well articulated
programme for exploiting fully our export potential.
7. In my budget speech last year, I had listed control of inflation, promotion
of higher levels of savings and investment, greater viability of our external payments,
2
and generation of new employment opportunities as the most pressing immediate
tasks before the nation. The steep increase in prices in the last one year, the severe
pressure on the balance of payments that will inevitably arise in the wake of higher
prices of oil and other international commodities, and the stagnation of industrial
production in 1973 have lent an added urgency to these tasks. The relatively poor
performance of the economy last year should not give rise to a growing feeling of
doubt, uncertainty and cynicism. We must combat these attitudes and preserve the
people’s faith in our democratic polity as an effective vehicle of social change.
REVISED ESTIMATES 1973-74
8. The House will recall that the budget estimates for 1973-74 had envisaged
a deficit of Rs.87 crores. This excluded provision for expenditure arising out of the
recommendations of the Third Pay Commission, since the Commission’s report was
not available at the time of formulation of the budget proposals. It was anticipated that
the acceptance of these recommendations would raise the budget deficit to a level
substantially higher than Rs.87 crores. However, subsequent events, largely an
outgrowth of the steep fall in agricultural output in 1972-73, have led to a much
greater deterioration in the budgetary position than was originally anticipated.
9. As Honourable Members are aware, extensive drought relief operations,
started on account of the widespread and unprecedented drought in 1972-73, had to be
continued to a large extent in 1973-74 also. At the peak of these operations 1,43,740
relief works were opened over the entire country, and 93 lakhs of people were employed.
It was hoped that with the onset of the monsoon in 1973-74, and increasing involvement
of the labour force in agricultural operations, the number of people employed on relief
works would diminish appreciably. Unfortunately this did not happen. Consequently
the Central Government had to continue massive assistance to State Governments on
this account. Honourable Members will recall that a sum of Rs.100 crores was provided
in the current year’s budget for this purpose. This provision proved to be wholly
inadequate and had to be stepped up by another Rs.220 crores.
10. In this connection I would invite the attention of Honourable Members to
the observations of the Finance Commission regarding expenditure on relief for natural
calamities. The Commission has urged that instead of incurring expenditure on relief
on an ad hoe basis, provision should be made on a much larger scale for development
of drought and flood-prone areas in the Fifth Plan, both in the State and Central
sectors. Following these recommendations it has been decided to integrate these
programmes with development plans to the extent possible.
11. Apart from larger assistance provided to State Governments for expenditure
on natural cab- amities relief, provision for special assistance to States to meet gaps in
their resources and for specified projects, had also to be increased. The budget provided
an amount of Rs.198 crores for this purpose, and this will have to be stepped up by
nearly Rs.91 crores.

3
 12. The Central exchequer had to bear other burdens as well. The expenditure
on food subsidy will be higher than the provision of Rs.130 crores by Rs.121 crores
despite some revision in the issue prices of food grains. This is essentially due to the
high cost of imported food grains.
13. The direct impact of the price rise on Government spending arises from
the increased quantum of dearness allowance provided to Government employees this
year. Honourable Members will recall that in accepting the recommendations of the
Third Pay Commission we had agreed to a liberalised formula for dearness allowance
to enable low paid Government employees to get adequate compensation for the rise
in the cost of living. On this basis, the four installments of dearness allowance we
have sanctioned will cost the exchequer nearly Rs.100 crores.
14. The impact of the recommendations of the Third Pay Commission was
estimated at Rs.150 crores. This was a large commitment, particularly in the context
of the difficult economic situation prevailing in the country, and was based on the
expectation that we would accept most of the Commission’s recommendations. We
have in fact agreed to make some significant improvement’s in the Pay Commission’s
recommendations regarding the pay structure of Government employees; these
improvements alone are likely to cost the exchequer Rs.61 crores a year on a recurring,
and Rs.25 crores on non-recurring basis. The Government has stretched its resources
to the utmost in order to meet the demands of its employees. I sincerely hope that they
will appreciate this, and do their best to improve their efficiency and productivity.
15. On the receipts side, there have been shortfalls. The stagnation in
production in a number of major sectors of industry, caused by shortage of raw materials
and power cuts, has adversely affected receipts from excise duties. Shortfall on this
account is estimated to be Rs.107 crores.
16. As the Railway Minister stated yesterday, the finances of the Railways in
1973-74 have been under considerable strain for reasons dealt with at length in his
speech. The net additional impact of the financial working of the Railways on the
general budget in the current year is expected to be around Rs.109 crores
17. In order to meet the additional and inescapable demands on the Central
Budget, and to contain the deficit to the minimum, Government had made serious
efforts both to tap additional resources and to restrict expenditures. The net market
borrowing by the Centre this, year will amount to Rs.472 crores, as against the Budget
provision of Rs.326 crores. The expenditure requirements of the various Ministries
were carefully reviewed and savings were located in their administrative and other
non-developmental expenditure. In view of the difficult resource position, a review of
the Plan outlays was also undertaken, particularly in regard to schemes which were
not vital to the core of the Plan.

4
 18. Despite all these efforts, the year-end deficit will be of the order of Rs.650
crores. We are deeply concerned about the deleterious effects of deficit financing. But
no Government can overlook its obligation to alleviate the hardships and sufferings of
large sections of the people. It is this obligation that has rendered a larger deficit
inescapable.
BUDGET ESTIMATES 1974-75
19. The next financial year is the first year of the Fifth Plan. A significant
step-up in the rate of investment is clearly an essential condition for the realisation of
basic objectives of the Plan. At the same time, the general economic situation renders
the task of raising the needed financial resources more difficult. The sharp rise in
prices in the last two years has greatly increased non-developmental expenditure,
particularly on pay and allowances, thereby reducing the surpluses for development.
In addition, the continued sluggishness of industrial production has affected the growth
of revenues. In framing the budget for 1974-75, we also have to take into account the
likely impact of the oil crisis and very high prices of many imported commodities on
the country’s balance of payments, the pattern of imports, and the growth of agricultural
and industrial output on government revenues. I would be the last to deny that there
are many sources of uncertainty and anxiety in the present situation. Nevertheless, I
am convinced that a legitimate concern with our immediate problems must not lead to
a neglect of our long-term growth objectives. That would be a self-defeating exercise.
In my view, recent events have only further vindicated the soundness of a development
strategy which must succeed in strengthening the country’s industrial and energy base.
20. The Budget for 1974-75 provides for a total outlay of Rs.2966 crores for
the Plan. Out of this Rs.911 crores have been provided as assistance to State and
Union Territories Plan, while the provision for the Central Plan is Rs.2055 crores.
This provision represents a difficult compromise between two conflicting
considerations, namely to keep deficit financing to the minimum and to keep the
wheels of production moving. Particular care has been taken to make adequate provision
for such industrial and agricultural schemes and projects as are essential for the future
growth of the economy, and are likely to be completed in the first two years of the
Fifth Plan, so that the economy derives the benefits from investments early enough in
the Plan period.
21. The role of coal as the most important source of commercial energy has
been underlined by the current shortage of oil and the resultant energy crisis. The
development of coal has, therefore, been accorded very high priority in the budget for
1974-75. Rs.97 crores have been earmarked for this purpose. In other words the outlay
on coal has been increased four times as compared to the provision of Re. 24 crores
last year. Later in my speech, I shall outline certain fiscal measures which are designed
to encourage industry to switch over, as early as possible, from the use of oil to coal
as a source of energy.

5
 22. No less critical is the role of steel in our economic development. The
availability of steel has a major influence not only on the pace of industrial development,
bit also on the viability of our international payments. For all these reasons, the
budgetary provision for steel production has been fixed at Rs.162 crores. If one adds
to this figure the internal resources available the total figure amounts to Rs.276 crores,
which is Rs.75 crores more than the total of Rs.201 crores available this year.
23. In order to reduce the country’s acute dependence on imported supplies of
non-ferrous metals it is also necessary to push ahead with the development of domestic
resources as fast as we can. Accordingly, a provision of Rs.75 crores is being made in
the budget for 1974-75 for the development of this vital sector. This is against Rs.56
crores provided this year.
24. In view of the predominant role the railways play in our transport economy
we have ensured that adequate finances are provided for the development of railways.
As Honourable members are aware, the railways have run into serious financial
difficulties and their own resources may not be sufficient to finance a Plan of an order
which will meet the requirements of our economy. I have, therefore, considerably
stepped -up the budgetary support for the Railways to Rs.342 crores next year, as
against Rs.181 crores in the current year.
25. Power is a vital input for both industry and agriculture. The power shortages
that developed during recent years have had a crippling effect on the economy and
have highlighted the urgent need for augmenting our generating capacity and improving
the operational performance of existing plants. The Fifth Plan envisages that installed
capacity of power generation will be stepped up to 33 million k.w. by the end of the
Plan. The strategy is to expedite the completion of projects which are already under
construction, and to go in for new thermal schemes which have short gestation periods.
The importance of rural electrification in developing the rural economy can hardly be
over-emphasised. Though many of the rural electrification schemes fall in the State
Plan sector, as a special case, I am providing Rs.40 crores for the Rural Electrification
Corporation over and above Rs.790 crores of assistance provided ‘to States for their
Plan. The total budgetary provision for power in the Central Budget during 1974-75
will be Rs.121 crores.
26. Considering the current shortage of fertilizers and difficulties in procuring
these from abroad, the thrust of next year’s Plan will be to maximise production from
installed capacity and to speed up the implementation of projects already under way.
The budget provides Rs.163 crores for this sector as against Rs.94 crores in the current
year which is a substantial increase.
27. While every effort has been ‘made to provide resources to stimulate
industrial production, the requirements of the agricultural sector have not been ignored.
We are providing Rs.246 crores as budgetary support for agricultural programmes.
The behaviour of agriculture has a crucial impact on the growth of national income,
6
prices, industrial production, balance of payments and the distribution of income.
Accordingly~ shall not allow paucity of resources to stand in the way of maximising
our agricultural output. Honourable Members will be happy to note that various
agricultural schemes which we have undertaken in the last few years such as schemes
for small and marginal farmers, tribal development, development of hill areas, provision
of institutional credits, drought-prone areas programmes, and the applied nutrition
programme are making satisfactory progress.
28. Within the overall constraints of resources, and after meeting the minimum
needs of the core sectors of development I have attempted to provide as large funds as
possible for social services like education, health, family planning, social welfare and
housing. The provisions made in earlier Plans for meeting minimum essential needs
for social consumption did not achieve the desired results, mainly because related
programmes were not given due priority, and an effective integration of facilities was
not attempted. Honourable Members are aware that the draft Fifth Plan has provided
for a National Programme of Minimum Needs to achieve a certain minimum level of
social consumption in the form of elementary education, rural health, drinking water,
provision for slum clearance, rural roads and rural electrification. I hope that the State
Governments will be able to ensure effective utilisation of the resources allocated for
this programme.
29. The total provision for the Central Plan in the Budget inclusive of Union
Territory Plan of Rs.81 crores will amount to Rs.2136 crores excluding Central
assistance of Rs.830 crores for the Plans of the States. In addition, extra budgetary
resources for financing the Central Plan will amount to Rs.574 crores. The resources
for State Plans for 1974-75 will be of the order of Rs.2059 crores. Thus, the total
Plan outlay during 1974-75 will amount to Rs.4769 crores as against Rs.4364 crores
in 1973 -74.
30. We have decided in favour of a larger Plan outlay to enable us to move
faster towards the twin objectives of removal of poverty and attainment of economic
self-reliance. I am however convinced that Plan investments can yield benefits on the
scale anticipated only if the Plan is implemented efficiently and all the participants in
the productive process-management and labour-accept the larger obligations they owe
to the community. Maintenance of satisfactory industrial relations particularly in key
sectors is absolutely essential if the Plan targets are to be achieved. Monetary and
fiscal policies should also be directed towards the achievement of Plan objectives.
These policies will have to be supplemented by the adoption of effective management
techniques in the allocation of resources, proper selection and phasing of projects and
programmes and close monitoring of programmes. The productivity of public
expenditure programmes can be enhanced considerably if continuous attention is paid
to the flow of expenditure so that appropriate corrective action is taken well in time to
ensure that the benefits expected are fully realised. This can be achieved only if
financial control and management accounting functions are, dovetailed with the-
7
responsibility for execution of programmes. We are, therefore, contemplating some
structural changes in the financial management system so as to match the authority for
taking decisions with the responsibility for producing results.
31. The new accounting classification prescribed by the Comptroller and
Auditor General relfects more meaningfully the functions, programmes and activities
of the Government. The Budget is framed on the basis of this new classification. With
this, Performance Budgeting, which is already in vogue, will, I believe, receive a
further impetus and it will be made an effective instrument to measure the efficacy of
the allocation of resources and the returns there from.
32. The outlay on Defence has been provided at Rs.1915 crores which includes
the provision for additional funds required on account of the acceptance of the
recommendations of the Third Pay Commission. Keeping in view the large requirements
of national defence and security, the provision for Defence could not possibly be kept
at any lower level.
33. On the side of resources, we have to reckon with the likely adverse impact
of the energy crisis on revenues, though it is difficult to estimate the impact at this
stage with any degree of certainly. As an allowance for this factor, we have assumed
some deceleration in the growth of revenues from excise and customs. Together, these
two sources are expected to yield Rs.3769 crores in 1974-75 as compared to Rs.3608
crores in 1973-74 according to the revised estimates. The estimated yield from direct
taxes is Rs.1423 crores as against Rs.1354 crores in 1973-74 revised estimates.
34. The progress in small savings collections is gratifying and estimates for
1974-75 are placed at Rs.360 crores. The estimated net receipts from market borrowings
at Rs.498 crores also show a marginal improvement over 1973-74.
35. Taking into account all the provisions for expenditure and the estimates
of resources, the budgetary gap at existing rates of taxes will amount to Rs.311 crores.
The House will naturally be anxious to know as to how I propose to meet this gap. I
now turn to this task.

PART B
DIRECT TAXES
36. I come first to the proposals in the field of direct taxes. As Honourable
Members are aware, the Direct Taxes Enquiry Committee has made a number of
recommendations in regard to direct taxes. Several of these recommendations have
already been implemented. Provisions to give effect to some other recommendations
are included in the Taxation Laws (Amendment) Bill, 1973 which is at present before
8
a Select Committee of this House. One of the important recommendations of the
Committee relates to reduction in the rates of taxes. The Committee has expressed the
view that prevalence of high rates is the first and foremost reason for tax evasion,
because this is what makes the evasion, in spite of attendant risks, profitable and
attractive. The Committee has, accordingly, recommended that the maximum marginal
rate of income-tax, including surcharge, should be brought down from its present
level of 97.75 per cent to 75 per cent. Simultaneously, there should be a reduction in
tax rates at the middle and lower levels. This recommendation of the Committee has
been accepted by Government with minor modifications. I, accordingly propose to
lower taxes at all levels of personal incomes. Under the proposed rate schedules, no
income-tax will be payable by individuals or Hindu undivided families having income
not exceeding Rs.6,000. The marginal rate of basic income-tax will stand at 70 per
cent on the income in the slab over Rs.70,000. In the case of Hindu undivided families
having at least one member with an independent total income exceeding the minimum
exemption limit, the marginal rate of 70 per cent will be attracted at income levels
over Rs.50,000. The rate of surcharge will be reduced to a uniform level of 10 per cent
in the case of all categories of non-corporate taxpayers. The combined incidence of
income-tax and surcharge, in the case of individuals and Hindu undivided families,
will stand at 77 per cent of the taxable income in the highest slab.
37. In view of the reduction in taxes on personal incomes, I do not think it is
necessary to continue the preferential tax treatment in respect of incomes derived by
non-corporate taxpayers through providing technical ‘know-how’ and technical services
to Indian or foreign enterprises. I, accordingly, propose to withdraw the existing
concession in this regard.
38. In order to ensure that the effectiveness of the fiscal instrument for reducing
disparities in incomes and wealth is not impaired, I propose to increase the rates of
wealth-tax on the slabs of net wealth over R8.5,00,000 in the case of individuals and
Hindu undivided families, where no member has net wealth exceeding Rs.1,00,000.
The rate of wealth-tax on the slab of Rs.5,00,001 to Rs.10,00,000 will be increased
from 2 per cent to 3 per cent, and on the slab of Rs.10,00,001 to Rs.15,00,000 from 3
per cent to 4 per cent. In the case of Hindu undivided families having at least one
member with net wealth exceeding Rs.1,00,000, the rate of wealth-tax on the first slab
of Rs.5,00,000 will be raised from 2 per cent to 3 per cent and on the slab of Rs.5,00,001
to Rs.10,00,000 from 3 per cent to 4 per cent.
39. I also propose to rationalise some of the exemptions available at present
under the Wealth tax Act. I propose to withdraw the separate exemption in respect of
farm houses. Tax payers will, however, have the option to claim exemption in respect
of one farm house, or one other house property within the existing limit of Rs.1, 00,
000. Exemption in respect of agricultural land will be linked with the exemption in
respect of specified financial assets, so that the total exemption in respect of agricultural
land and specified financial assets will be limited to Rs.1,50,000. At present, the value
9
of the taxpayer’s interest in insurance policies before their maturity is completely
exempt from wealth-tax. A similar exemption is also available in respect of the
taxpayer’s right in any annuity which is not commutable into a lump sum grant. These
exemptions have been exploited by certain individuals by taking out single premium
policies of very large amounts. I propose to modify these provisions so that complete
exemption will be available in respect of insurance monies only where premia have
been paid over a period of 10 years or more. As regards annuities, I propose to withdraw
the exemption in respect of non-commutable annuities if such annuities have been
purchased by the taxpayer himself, or by any other person in pursuance of a contract
with him.
40. The changes in the Wealth-tax Act will yield about Rs.9.5 crores in a full
year, which will accrue in the financial year 1975-76. The reduction in the rates of
income-tax on personal incomes would ordinarily have resulted in a loss of about
Rs.60 crores in a full year and Rs.36 crores in the financial year 1974-75. I am,
however, not taking any loss into account for budgetary purposes as I expect that the
reduction in the rates of taxes will lead to better tax compliance, and full disclosures
of incomes by all taxpayers.
41. In the case of registered firms, two surcharges are presently levied. I
propose to merge the ordinary surcharge payable by such firms with the basic income-
tax, and specify only one surcharge at the uniform rate of 10 per cent. In order to
retain the liability in respect of basic income tax in the case of professional firms as
well as other firms at more or less the existing levels, I propose to prescribe two
separate rate schedules in the case of such firms.
42. In my budget speech for 1971-72, I gave notice of Government’s intention
to withdraw the development rebate in respect of ships acquired or machinery and
plant installed after May 31, 1974. It now appears that industry has in some cases not
been able to secure timely delivery of plant and machinery both from foreign and
indigenous manufacturers which has caused a setback to the timely completion of
some of the industrial projects which would in the normal course have been completed
before May 31, 1974. Several unforeseen factors are responsible for this, such as
uncertainty prevailing in the international market, dependence of indigenous
manufacturers on imports in respect of critical parts or raw materials, difficulties in
the availability of shipping space, power shortage, etc. Relief is deserved in such
cases, and I propose to extend the operation of the development rebate by one year in
cases where there is conclusive evidence to show that contracts for purchase of
machinery and plant were finalized before December 1, 1973. This extension will also
be available in respect of ships acquired up to May 31, 1975, if the contracts for
purchase were made before December 1, 1973.
43. The critical shortage of petroleum products has resulted in an unexpected
crisis as a result of which industry has to be encouraged to switch over to other
sources of energy. I, accordingly, propose to allow development rebate in respect of
10
coal-fired boilers or any machinery or plant for converting oil-fired boilers to coal-
fired boilers where these are installed before June 1, 1975.
44. In order to simplify the assessment procedure in the case of salaried
taxpayers, I propose to substitute the separate deductions in respect of traveling,
books, taxes on professions and expenditure incurred in the performance of duties
by a standard deduction up to a maximum of Rs.3, 500. Simultaneously I propose to
place the valuation of perquisites of employees on a more realistic basis, I also
propose to liberalise the tax treatment of retirement benefits in certain directions.
The retiring gratuities payable under the Payment of Gratuities Act, 1972 will be
completely exempt from income-tax. In the case of employees not covered by that
Act, the alternative ceiling limits on the exempted amount of gratuities will be
raised from Rs.24, 000 to Rs.30, 000 and from 15 months’ salary to 20 months’
salary.
45. In order to enable State Financial Corporations to build up reserves at an
accelerated pace, I propose to raise the ceiling limit in respect of amounts transferred
to tax exempt reserves to 40 per cent of the current profits.
46. There are a large number of public charitable trusts and -registered societies
engaged in the development of khadi and village industries. These trusts and societies
are doing commendable work under the direct supervision of the Khadi and Village
Industries Commission. I propose to exempt all such Institutions from income-tax
provided they are approved by the Khadi and Village Industries Commission.
47. As a result of the change in pricing policies, some of the industrial
companies are making windfall profits. I feel that the exchequer should also secure a
larger share of these profits. I, accordingly, propose to increase the rate of surtax from
30 per cent to 40 per cent in respect of chargeable profits of companies exceeding 15
per cent of the capital. This measure will yield Rs.5 crores in a full year and this will
accrue in 1975-76.
48. To sum up, in the field of direct taxes no effect is expected on tax revenues
during the next financial year as a result of the proposals outlined by me. In the
financial year 1975-76, there will be an addition of Rs.14.5 crores as a result of these
changes.
INDIRECT TAXES
49. Sir, I will now move on to the proposals relating to indirect taxes.
50. As in the past, I have necessarily to rely more heavily on indirect taxes,
particularly excise duties. The scope for raising resources from other measures having
become severely limited, the choice before me has really been between raising indirect
taxes and resorting to deficit financing and the former, I feel, is the better alternative.

11
EXCISE DUTIES
51. Taking up Central Excises, I shall first deal with some important measures
for raising resources exclusively for the Centre. Honourable Members are aware that
a new provision was made last year for levying auxiliary duties of excise on all
excisable goods at an amount equal to 20 per cent of the value of the goods. These
levies were restricted to certain selected items at a level needed to meet the demands
of the Centre then. I propose to continue this provision for another year. While the
effective levies on the items chosen last year will remain unchanged, I propose to add
selectively some more to the list.
52. Briefly, my proposal is to levy auxiliary duties at the rate of ten per cent
of the effective basic duty on un-manufactured tobacco, cigarettes, smoking mixtures,
plywood and cement; at the rate of twenty per cent of the effective basic duty on
dyestuffs, optical bleaching agents, gases, rubber products and plastics; at the rate of
thirty-three and one-third per cent of the effective basic duty on paints and varnishes;
and at the rate of fifty per cent of the effective basic duty on aerated waters, glycerine,
cosmetics and toilet preparations. Through these proposals and as a result of the
modifications of the basic excise duties I am proposing on the existing items, I expect
to raise Rs.62.38 crores in a year, by way of auxiliary duties.
53. In the case of steel as well as other metals, the auxiliary duties are proposed
to be applied only to indigenous production and will not be attracted by way of
countervailing duty on imports, as hithereto. I propose to extend a similar exemption
in the case of plastics.
54. In the sphere of basic excise duties, my proposals naturally cover a wider
range and have been made with the multiple objects of rationalisation, curbing
consumption, mopping up fortuitous gains and, not the least important, I must confess,
raising revenue. In November, 1973, following successive increases in crude oil prices
and cuts in crude oil supplies, and as one of a series of measures, the basic excise duty
on motor spirit was raised from Rs.1000 per kilolitre to Rs.2000 per kilolitre. In view
of the continuing need for exercising restraint and economy in the consumption of a
number of other petroleum products, and to prevent their misuse, I propose to increase
substantially the basic excise duties in respect of “special boiling point” spirits, raw
naphtha intended for methanol and petro-chemicals, benzene etc. used for a variety of
purposes, asphalt and bitumen, mineral turpentine oil, waxes and blended or
compounded lubricating oils and greases. Through these proposals, I expect to raise
an additional revenue of Rs.22.48 crores from the petroleum group.
55. The rates of excise duty on various types of motor vehicles have remained
unchanged for some years now. I, therefore, propose to rationalise the rates of duty
by replacing the existing alternative rates by ad valorem rates. I intend imposing a
uniform rate of 9 per cent ad valorem on vehicles like scooters, motor-cycles, mopeds,
auto-rickshaws and other three-wheelers. Motor vehicles of not more than 16 H.P.

12
by R.A.C. rating, which cover passenger-cars, jeeps, etc., are at present assessable
at a rate of duty of 13.33% ad valorem. I propose to increase this rate to 20% ad
valorem in respect of vehicles with body and to 25% ad valorem in respect of
others, including those cleared as drive-away chassis. Big-sized cars will pay a
higher duty at 40% ad valorem.
56. Commercial Vehicles have had the benefit of concessional ‘specific’ rates
fixed some years ago. I propose to discontinue these and impose a uniform ad valorem
rate of 121/2 per cent. In that process, certain extra-heavy vehicles, which are at present
paying duty at the tariff rate, will get an incidental benefit of 21/2 per cent. I do not,
however, propose to change the existing rates on tractors and trailers.
57. The proposals relating to motor vehicles are estimated to net an additional
revenue of Rs.16.25 crores.
58. As part of the socio-economic objectives of the Government, I have some
proposals to restrain consumption by the more affluent section of the community. The
existing rates of duty on refrigerators, air-conditioners, refrigerating and air-conditioning
machinery, appliances, and parts, are being stepped up, with certain modifications in
respect of a few existing exemptions. The present concessional rates in favour of
public-run hospitals, cold-storage plants and factory establishments are not, however,
being disturbed. These changes are expected to bring in additional revenue of Re.5
crores in a year.
59. Some of the manufacturers of T.V. sets have been regaling us with
advertisements exhorting the public to “budget for a T.V. set to forestall the Central
Government Budget. As a compliment to these soothsayers on the accuracy of their
prediction, I propose to increase the duty on T.V. sets from 10 per cent ad valorem to
20 per cent ad valorem. Extended play records are also being brought within the
dutiable category. While these proposals will make entertainment costlier for the
wealthy, I am anxious that music, entertainment and knowledge should reach the less
privileged in wider measure at lesser cost. To this end, I propose to exempt totally all
radio-sets produced in the small scale sector and sold to the consumer at a price of not
more than Rs.225 per set. These measures are estimated to bring in a net revenue of
Rs.1.20 crores.
60. I have been avoiding major changes in the rates of duties on various
cotton textiles, including cotton yarn, except to the limited extent of raising resources
for the States. The rates of duty are ‘specific’ and were fixed in 1969 at a time when
the industry was beset with difficulties. There is, therefore, a clear need for revision,
especially as the industry has since recovered. Cotton textiles being an item of mass
consumption, I am quite alive to the need for forbearance in increasing the rates of
duty on certain categories of yarn and fabrics. My proposals, therefore, cover only
superfine, fine and medium-A fabrics, which are subjected to sophisticated processes,
such as, mercerising/shrink-proofing/sanforizing. In the case of cotton yarn, the
13
escalations are confined to higher count groups. I have, however, not disturbed the
existing exemptions and concessional rates in respect of yam in straight- reeled hanks
mostly consumed by the handloom sector. I have also rationalised certain exemptions
and compounded levy rates. These measures relating to cotton yarn and cotton fabrics
are estimated to yield an additional revenue of Rs.22.05 crores.
61. As a measure of rationalisation, which will also earn revenue, I propose
to increase the existing two rates of duty on polyester fibre to a uniform rate of Rs.40
per kilogram. Suitable in creases in the existing rates applicable to different denier
groups of polyester filament yarn, sympathetic revisions in the rates of duty on staple
fibre spun yam, certain categories of blended yam, and an increase in the rate of duty
on resin-bonded slagwool, are also being proposed. These proposals would bring in an
additional revenue yield of Rs.13.99 crores.
62. In regard to iron or steel, I propose to rationalise certain exemptions relating
to pig iron. steel ingots and products produced with the aid of electric furnace, and to
products made out of duty paid cut-pieces of steel ingots, which will result in an
additional revenue of Rs.7.20 crores.
63. The rates of duty for various categories of paper and board are ‘specific’
and require review from time to time. I propose to make suitable upward revisions in
the existing rates on paper and paper board, apart from rationalising certain exemptions
and classifications. The concessional rate of 15 paise per kilogram applicable to the
commoner varieties of printing and writing paper falling within the grammage limit
not exceeding 65 grammes per square metre, the total exemption in favour of newsprint,
hand-made paper and board, as well as existing concessions for smaller paper mills
and newly established units, will, however, continue. These measures will result in an
additional revenue of Rs.10 crores.
64. As straight revenue-raising measures, I propose to increase by 5 per cent
ad valorem the existing rates of duty an surface active agents, office machines, metal
containers, rolling bearings, welding electrodes, coated abrasives and grinding wheels,
dry batteries, certain categories of glass and glassware, chinaware and porcelainware
and thereby raise an additional revenue of Rs.20.17 crores.
65. As a part of our efforts to mobilise resources, I propose to levy for the
first time excise duties at varying rates an tooth-paste (including dental cream), electrical
stampings and laminations, specified cutting tools, tape and cassette recorders, cast-
alloy permanent magnets and sensitised photographic paper and board. In the matter
of new levies, Members will be reassured to know that suitable exemptions for smaller
manufacturers have been provided wherever necessary. These new levies would bring
in an-additional revenue of Rs.8.20 crores.
66. Some minor proposals for changes in excise duty will yield an additional
Rs.3.05 crores. The proposals relating to excise duties account for a net gain in revenue
14
of Rs.191.97 crores in 1974-75, of which Rs.25.92 crores will accrue to the States and
Rs.166.05 crores to the Centre.
Customs Duties
67. In the matter of customs duties, in view of the mounting world-wide
shortages and unprecedented rise in international prices of a wide array of imported
goods, my proposals in regard to import duties are no more than marginal. Briefly, I
propose to continue for another year the auxiliary duties of customs and the exemptions
relating to them, with a slight modification. At present, these duties are levied at three
differential rates of 20%, 10% and 5%. I propose to raise the rate applicable to the
middle slab from 10% to 15%. This modification will yield an additional revenue of
Rs.16 crores in a full year.
68. The only other proposal I have to make concerns whisky, brandy, gin and
certain other spirits by way of an increase in the basic duty from Rs.60 per litre to
Rs.80 per litre. While society at higher levels may, as a result, have to pay a little more
for their’ spirituous relaxation, it will help me in getting some revenue for the exchequer.
69. Inclusive of additional duties, consequential to the changes in excise duties,
the additional revenue from import duties will amount to Rs.20.05 crores annually.
70. Taking Customs and Central Excise duties together and exclusive of States’
share, the additional revenue accruing to the Centre will be of the order of Rs.186. 10
crores in a full year.
Posts and Telegraphs
71. I need now to say a word on behalf of my colleague the Minister Of
Communications. As the House is aware, postal rates have not kept pace with rising
costs. The frequent increases in Dearness Allowance and the heavy additional
expenditure incurred on account of implementation of the Pay Commission’s
recommendations have further pushed up the establishment cost in the Postal Branch
which is highly labour oriented. On the Telecommunications side, also, the operational
costs as well as the cost of equipment required for various projects have been going
up steadily. The Department’s developmental programme to improve the Trunk
Telephone Service by provision of high grade media like Microwave and Co-axial
systems, to install new Exchanges and expand existing ones for meeting the fast growing
demand for telephone connections and to expand the Trunk Dialling and Teleprinter
facilities all entail heavy investments. These various factors necessitate an upward
revision of tariffs in the Postal, Telegraph and Telephone Branches of the Department.
A Memorandum showing the proposed changes in the Posts and Telegraphs Tariffs is
being circulated along with Budget papers. I shall therefore mention only the more
important changes.

15
 72. The tariff for Postcards is proposed to be increased from 10 Paise to 15
Paise. Even after this revision, the Department will be incurring a loss of Rs.2.43
crores per annurn in running this service. It is proposed to raise the rate of Letter cards
from 15 Paise to 20 Paise and that of Letters weighing upto 15 grams from 20 Paise
to 25 Paise. The Registration Fee is being increased from Re.1/- to Rs.1.25 and the
Parcel rate from Re.1/- for every 400 grams to Rs.1.50 for every 500 grams. The
Posting Fee for Value Payable Post and the tariff for Business Reply Permits are being
revised. The minimum charge for a Non-Press Telegram of ‘Ordinary’ category with
eight words or less is being increased from Rs.1. 20 to Rs.1.50 and for the `Express’
category from Rs.2.40 to Rs.3.00. The charge for each additional word will, however,
remain the same. It is also proposed to increase the rental for telephone connection
both in the ‘measured rate systems’ and the ‘flat rate systems’. As against this, the
number of free calls allowed during a quarter will be raised from 250 to 300. The rate
for each additional call after 300 will be increased from 20 paise to 25 Paise. The
Trunk Call rate structure is being rationalized. While this will involve increase in
Trunk Call charges for distances between 100 and 1300 kilometers, in respect of calls
between stations within 20 kilometers, only the unit fee of 25 Paise will be charged
for an ‘ordinary’ call as against the present 50 Paise for such calls.
73. These tariff revisions are estimated to bring in additional revenue of
Rs.57.08 crores per annum. The changes would be given effect to from dates to be
notified after the Finance Bill is passed by Parliament. The yield during the financial
year 1974-75 will be of the order of Rs.42.80 crores.
74. The results of these changes have been accounted for in reckoning the
internal resources of Posts and Telegraphs Department.
75. So far as the Union Budget is concerned, the various proposals would
imply, for 1974-75 additional revenue aggregating Rs.186 crores. The budgetary
gap of Rs.311 crores I had indicated earlier will accordingly be now scaled down to
Rs.125 crores.
76. In conclusion, I would like once again to draw the attention of the House
to the developments of last two years which have shown how certain events can
greatly upset the original budgetary calculations. In the year ahead lie more sources of
uncertainty than ever before, which must be tackled speedily and with flexibility. I
would, however, like to say that we do not propose to allow these uncertainties to blur
our vision of the future. The social and economic problems that we currently face can
be resolved in the long run only in the frame-work of a rapidly expanding economy
with socialist objectives. I trust this budget is one more step in that direction.
(February 28, 1974)

16
 STATEMENT OF SHRI Y.B.CHAVAN, MINISTER OF FINANCE ON NEW
TAXATION PROPOSALS
Sir,
The presentation of fresh taxation proposals only five mouths after I presented
the regular annual budget for 1974-75 has not been an easy decision for the Government.
It is an event of unusual significance and derives its justification from the fact that we
are faced with a difficult economic situation. A am, however, convinced that not to act
in the present situation would amount to fiscal irresponsibility, with serious
consequences for the economic health of the country. Thus the decision to come forward
with these proposals is not only an indication of the seriousness of the economic
situation. bit also a measure of the Government’s determination to grapple with it
effectively.
2. It is self-evident that controlling inflation is today the single most important
task facing the country. The measures adopted so far by the Government to curb
inflation have had a limited impact and the upward pressure on prices has persisted.
There is a general expectation of continued price increases, which itself has constituted
an inflationary factor.
3. The thrust of the Central Budget for 1974-75 was to restrain the growth of
Government expenditure, mobilise additional resources on a substantial scale, and to
reduce reliance on deficit financing. This was part of the overall anti-inflationary
strategy, However, judging by price trends in the last four or five months, there has
been no visible reduction in the strength of inflationary forces operating in the economy.
Over the three months April to June, 1974, the rise in the general price level. was of
the order of 7.8 per cent, yielding an average monthly increase of about 2.6 per cent,
as compared to an average monthly increase of 2,7 per cent during the three months
January to March, 1974. This continuing deterioration on the price front has been a
source of the greatest concern to Government.
4 I do not wish to dwell at length on the causes for the persistence of
inflationary pressures. I have talked about these often enough in this House. I would
venture to say that these are basically rooted in the sluggishness of agricultural
production. The recent wheat crop has not been up to original expectations. As a
result, the tendency on the part of producers to hold back supplies seems to have
strengthened. Despite a very sizable increase in procurement prices, procurement so
far has fallen short of expectations. The production of oilseeds in the rabi season has
also been inadequate, and this has strengthened bullish sentiment in the markets in
regard to vegetable oilseeds and oils. Industrial production which remained virtually
stagnant in 1973 continues to be inhibited by shortages of power.
1
 5. All these factors point to the persistence of a sizable imbalance between
aggregate demand and supply. As a result, Government have considered it necessary
to come forward with a fresh package of measures designed to reduce the imbalance.
The basic objective of the three recent Ordinances, involving temporarily restrictions
on declaration of dividends, immobilisation of 50 per cent of additional Dearness
Allowances and of increase in wages and salaries, and compulsory deposits by income
tax payers in higher income groups, is to reduce the pressure of demand and decelerate
the rate of growth of money supply. In any appraisal of these measures, we must not
lose sight of the narrow options open to the Government. In the present situation, the
only other feasible course of action would be a drastic cut in all developmental
expenditure. This would entail severe adverse effects on the future growth of the
economy.
6. A large expansion in bank credit in recent months has led the Reserve
Bank to tighten further its credit controls. Instructions have been issued to each
commercial bank to scrutinise-the top 50 accounts in order to ensure that bank credit
is not used for excessive accumulation of inventories or diverted for non-productive
purposes. More recently, an increase of 2 per cent in the Bank rate, accompanied by
an increase in both the minimum lending rate and in deposit rates of commercial
banks, announced on July 22, 1974, will help to reduce further the incentive to
accumulate inventories with the help of bank credit; it will also facilitate mobilisation
of deposits.
7. The measures that we have recently adopted are steps in the right direction.
Let me be clear: by themselves they cannot stabilise prices. Fundamentally, the
imbalances that now exist in our economy can be removed only through a sustained
increase in agricultural production, though this is not going to be an easy task because
of inadequate indigenous production of fertilizer and steep increases in their import
prices. We are purchasing as much fertilizer abroad as we can inspite of the formidable
nature of the import bill which is likely to be over Rs.450 crores. The ample provision
that we have made for the core sector in the annual plan for 1974-75 should also
enable us to secure a significant increase in the production of coal and steel.
Improvements in the production and transport of coal are already visible. Mainly
because of power shortages and transport difficulties, the overall outlook for industrial
production is however uncertain.
8. Fortunately, our foreign exchange reserves have held up fairly well. This
is due mainly to borrowings from the International Monetary Fund, continuity of
external assistance, and particularly to a rapid growth in our export earnings during
1973-74. As a result we have been able to finance sizable imports of food grains
though at very considerable cost. The export outlook for 1974-75 is however not
equally encouraging. The prices of some of our export products have declined in
recent months. In addition, the high current rate of inflation constitutes a serious
threat to the maintenance of the competitiveness of our exports, which may threaten
2
the viability of our balance of payments. This only underlines the pressing need to
control our rate of inflation.
9. Against this background, the need for further measures to reduce the
pressure of demand in our economy is self-evident. In the present inflationary
environment, it is essential to contain the size of the budgetary deficit. This we are
determined to do. However, a number of factors have upset our original calculations
and are threatening to push up the Central Government’s budgetary deficit well beyond
the original budgeted figure of Rs.126 crores. Let me mention some of these.
10. As the House is aware, Government have recently increased the issue
prices of wheat in order to scale down the burden of the food subsidy. Currently, there
is only a small element of subsidy in the procurement of indigenous wheat and coarse
grains. However, on account of unsatisfactory production and inadequate procurement
of wheat during the last rabi season, the Government is having to import, as I mentioned
earlier, sizable quantities of food grains in order to maintain the public distribution
system. As imported wheat costs much more than indigenous wheat but has to be sold
at the same price, the burden of the food subsidy will be much higher than the original
provision of Rs.100 crores.
11. The weak financial position of the railways is well known to the
Honourable MembeRs.Because of the higher burden of pay and allowances of the
staff and the disruption of traffic caused by the recent railway strike, the deficit in the
railway budget will increase substantially beyond the original provision of Rs.52 crores.
12. Additionally, we, must reckon with the fact that by reason of the continuing
increase in prices, the budgetary provision for additional dearness allowance will
have to be substantially increased. There is also likely to be some increase in expenditure
on defence because of rising costs and further improvements in the emoluments of
defence personnel.
13. On the Plan side, the continued increase in prices has led to an escalation
of project costs accompanied by a further erosion in the internal resources of some of
our public sector enterprises.
14. Taking both Plan and non-Plan outlays together, it seems clear for reasons
I have just mentioned that unless a number of remedial steps are taken, the gap between
aggregate expenditure and the total resources in sight in the current year will be very
much larger than the deficit of Rs.126 crores which was estimated when presenting
this year is budget. While expenditures have been going up sharply, the trend of
yields, from taxes at their present levels does not suggest that there will be any
substantial excess over the estimate of revenue made in the budget. It is in this context
that I have come before this House with proposals for mobilising additional resources
by way of taxation.
15. I should like to say, however, that the potential deficit can by no means be

3
covered by fresh taxation only, and that there is clearly need to take other
complementary steps to reduce the deficit.
16. We have undertaken a comprehensive review of all Government
expenditure, in a search for possible economies. This is not an easy task because this
year’s budget was framed after eliminating many Plan schemes which were considered
postponable. Moreover, it would be a self-defeating exercise if a reduction in current
outlays were to result in key projects in the core sector being refused the funds necessary
for their early completion. To the maximum extent possible, we have to maintain the
rate of investment in such core sectors of the economy as power and fertilizeRs.At the
same time, we are seeking to effect economics not only in all non-developmental
expenditure, but also on development schemes which have a somewhat lower priority..
We are also exploring the possibilities of increasing the profitability of our public
sector enterprises and departmental undertakings. An exercise to cut expenditure
drastically is now under way. Until this has been completed and the results of other
measures taken by us are known, it would be difficult to indicate precisely what the
final position would be. In view of the acute inflationary situation prevailing we fully
intend to contain the Central Government’s budget deficit to the level indicated in this
year’s Budget and Government will take all necessary steps to this end.
17. Before I unfold my specific proposals, I would like to explain to the
House the rationale underlying these proposals. In the background of the great hardships
being endured by the common man, there is clearly no case for imposing fresh levies
on articles of mass consumption. Accordingly, in my choice of commodities for taxation,
I have avoided imposition of new taxes on the basic necessities of life. At the same
time, the need to discourage conspicuous consumption and to effect maximum economy
in the use of scarce materials is implicit in my proposals. In addition, I have made an
attempt to mop up the windfall gains currently being made by producers and middlemen
in certain sensitive commodities, often in the form of undeclared and untaxed profits.
I am sure the House will agree with me that in the present inflationary situation,
accumulation of inventories far in excess of normal requirements of production, must
be discouraged. Some of the recent measures announced by the Reserve Bank of India
seek to achieve this objective by raising the cost of bank credit, and by restricting
credit only for the genuine needs of essential production. One of the fiscal proposals
I shall outline in a few moments seeks to complement the action already taken by the
Reserve Bank on the monetary front, while at the same time helping in raising resources
needed by the Government.
18. I would like to take this opportunity to impress upon State Governments
that they have no less a vital role then the Central Government in contributing to
greater fiscal discipline. In order to reduce their deficits without affecting the pace of
development, they ought to exploit fully the potential offered by agricultural taxation.
At the same time, there is urgent need for a more realistic pricing of services like
irrigation and electricity. I would strongly urge them to take steps in these directions.
4
 DIRECT TAXES
19. I shall now explain my tax proposals, dealing first with proposals in the
field of direct taxes. As a part of the anti-inflationary package, I propose to levy a tax
on the gross amount of interest received by scheduled banks on loans and advances
made in India. The banks would be expected to adjust their functioning to this tax and
reimburse themselves to the extent necessary by making appropriate adjustments in
interest rates charged from borrowers.The proposed tax will have both a monetary and
a fiscal impact in that it will serve the purpose both of raising the cost of borrowed
funds and of supplementing Government revenues. The proposed tax will be levied at
the rate of 7 per cent of the gross amount of interest earned by the banks. This would
imply on an average an increase of about 1 per cent in the cost of borrowings from the
banks. Interest on Government securities, as also debentures and other securities issued
by local authorities, companies, and statutory corporations will not be included in the
tax base. Interest received on transactions between scheduled banks will likewise be
exempted from the proposed levy. Interest accruing to scheduled banks before 1st
August, 1974 will be outside the ambit of the proposed measure. The proposed tax
will be allowed as a deduction in computing taxable income under the Income-tax
Act. I propose to introduce a separate Bill shortly to give effect to the proposal. The
yield from this measure will be of the order of As. 60 crores in a full year. For the
remaining part of the current year, however, the revenue will be about Rs.25 crores.
20. In view of large unearned incomes accruing as a result of the inflationary
situation, I propose to increase the tax on capital gains. The deduction from long-term
capital gains allowed in computing the taxable income of non-corporate taxpayers is
being reduced from 35 per cent to 25 per cent where such gains relate to lands and
buildings. In respect of gains arising from transfer of other assets, the deduction is
being reduced from 50 per cent to 40 per cent.
21. The incidence of tax on long-term capital gains is also being increased in
the case of companies. This increase is being brought about by raising the rate of tax
from 45 per cent to 55 per cent in respect of gains relating to lands and buildings. A
lower rate of 47 per cent will be applied in the case of widely-held companies whose
taxable income, excluding long-term capital gains, does not exceed Rs.1 lakh. The
rate of tax applicable on capital gains arising from the transfer of other assets is being
raised from 35 per cent to 45 per cent in the case of all companies. These alterations
in the provisions relating to the capital gains tax will yield about Rs.5 crores in a full
year.
INDIRECT TAXES
22. I now come to my proposals relating to indirect taxes. In order to raise the
needed resources, I have no option but to increase Central Excise duties selectively. In
doing so, it has been my endeavour to keep to the minimum the impact on the poorer
sections of the community. I have also tried to raise duties on those items where the
5
middleman is today retaining a large margin, to the detriment of both the consumer
and the primary producer. These duties will help to mop up unintended gains accruing
to the trade.
23. At present copper and copper alloys in crude form, and wire bars, wire
rods, etc., carry a basic excise duty of Rs.1500. 00 per metric tonne. Specified
manufactures of these carry a rate of Rs.2000.00 per metric tonne, while pipes and
tubes are assessable at 10 per cent ad valorem. The international prices of copper have
been soaring. Even now the bulk of our requirements have to be imported. The
indigenous producers of copper have also been selling their products at prices on par
with the prices of imported goods, and thus enjoy a substantial benefit as their own
cost of production is lower. To siphon off a part of this fortuitous profit, I propose to
increase the basic excise duty on copper in crude form and on wire bars, wire rods,
etc., to Rs.4000. 00 per metric tonne; on specified manufactures of these to Rs.4500.00
per metric tonne; and on pipes and tubes to 20 per cent ad valorem. The existing
provisions for collection of duty at the rate of Rs.500.00 per metric tonne on plates,
sheets, circles, strips and foils made out of duty-paid metal, or metal made out of
specified types of scrap will continue. A lower rate has also been fixed for sheets and
circles cleared in untrimmed condition. The provisions for set-off of duty paid on
copper in crude form if used for the manufacture of copper pipes and tubes will also
continue. Through these proposals, I expect to secure additional revenue to the extent
of Rs.8.40 crores, inclusive of the consequential accrual of increased auxiliary duty,
which is determined as a percentage of the effective basic duty.
24. On similar considerations. I propose to increase the basic duty on
unwrought zinc from Rs. 500.00 to Rs.1500.00 per metric tonne; on specified
manufactures of this from Rs.800.00 to Rs.1800.00 per metric tonne, and on pipes and
tubes from 10 per cent to 20 per cent ad valorem. Zinc plates, sheets, circles, strips
and foils made out of duty-paid unwrought zinc, or specified types of scrap, or their
combination, will continue to pay duty at Rs.300.00 per tonne. The additional revenue
accrual from. this will be Rs.5.07 crores, inclusive of the auxiliary duty component.
Imports of copper and zinc will not, however, be liable to any additional countervalling
duty as a result of the increases now proposed on the basic excise duties.
25. With the rise in prices of rayon and synthetic fibres and yarn, the incidence
of duty, based on specific rates, has gone down. I, therefore, propose to step up suitably
the specific rates in respect of nylon filament yarn and staple fibre and filament yarn
of cellulosic origin. This will provide an additional revenue of Rs.11.38 crores. The
concessional rate available to nylon yarn for use in the manufacture of fishing nets
and parachute cords will, however, continue. I am also not bringing acetate yarn within
the purview of these increases.
26. With the objective of reducing the gap in the incidence of the duty at the
yarn stage on fabrics manufactured by the composite mills and the powerloom units,
6
I propose to raise the specific rates of duty on cotton yarn normally going into the
manufacture of superfine, fine and medium-A fabrics manufactured by powerlooms.
The increased rates will also apply to yarn of corresponding counts used in the
manufacture of hosiery, sewing thread etc. Hank yarn in straight reels used by
handlooms will remain unaffected. These changes will thus provide some stimulus to
the handloom industry. These increases will yield an additional revenue of Rs.9.70
crores. Honourable Members will be happy to know that yarn of lower count groups
normally used in the manufacture of medium-B and coarse fabrics is being left
untouched.
27. Due to production constraints, shortages have developed in the availability
of tyres, and on certain categories high premia are being charged by the middleman.
As a mopping-up measure, and to raise revenue, I propose to step up by 5 percent the
ad valorem duty on tyres, other than those meant for scooters, motor cycles and mopeds,
which will continue to carry the present concessional rate. This will yield an additional
revenue of Rs.8.8 crores. Tyres and tubes for cycles, and tyres specially designed for
use in animal-drawn vehicles will, however, continue to be wholly exempt.
28. Honourable Members are aware of the general scarcity of cement, and the
windfall gains being reaped by the dealers.To absorb at least a part of these gains, and
to raise additional revenue, I propose to increase the basic duty on cement from 25 per
cent to 30 per cent ad valorem. Inclusive of the consequential increase in accruals
from the auxiliary duty, this proposal will add Rs.29.37 crores to the revenues.
29. The present tariff rate of basic excise duty on cigarettes is 200 per cent ad
valorem. By a notification, basic duty has been prescribed at 75 per cent ad valorem,
if the value of the cigarettes does not exceed Rs.10.00 per thousand. In respect of
cigarettes having a value higher than Rs.10.00 per thousand, this duty is increased by
3 per cent ad valorem for every additional rupee or part thereof in excess of Rs.10.00
per thousand. As a revenue measure. I propose to raise the rate of basic duty at the
base point (i.e. cigarettes of which the value does not exceed Rs.10.00 per thousand)
from 75 per cent ad valorem to 85 per cent ad valorem. The incremental rate of 3 per
cent ad valorem for every additional rupee or part thereof in excess of the value of
Rs.10.00 per thousand will, however, continue.
30. As the ceiling of 200 per cent ad valorem restricts the duty on the more
expensive brands, I also propose to raise this to 250 per cent ad valorem. I would hope
those fortunate enough to afford the more costly brands will feel more virtuous in the
knowledge that they will now be contributing in larger measure to the exchequer. The
additional revenue from my proposals relating to cigarettes will amount to Rs.16.45
crores, inclusive of the increased accrual by way of auxiliary duty.
31. I also propose to raise the basic duties in respect of pig iron, latex foam
sponge, asbestos cement products and electric lighting bulbs and fluorescent lighting
tubes. These will together yield an additional revenue of Rs.8. 14 crores.
7
 32. As a measure for raising additional revenue exclusively for the Centre. I
propose to step up the rates of auxiliary duty on steel ingots, and iron or steel products,
from 75 per cent to 106 per cent of the effective basic duty, and that on skelp, tin
plates and tinned sheets from 50 per cent to 70 per cent of the effective basic duty.
Rails and sleeper bars used for railway track will not, however, attract the increase.
These proposals, while bringing the indigenous prices more in tune with the imported
prices of comparable products, will also help to raise an additional revenue of Rs.26.85
crores. These revised auxiliary duties will as hitherto apply only to indigenous
production, and not result in higher countervailing duty on imports.
33. On certain varieties of cotton fabrics like suiting, gaberdine, furnishing,
blended, embroidered, and impregnated or coated fabrics, I propose for the first time
an effective levy of an auxiliary duty of excise at the rate of 33-1/3 per cent of the
effective basic duty; this will yield an additional revenue of Rs.6. 0 crores.
34. The specific rates of duties on various categories of paper and paper board
were reviewed and stepped up as a part of my budget proposals presented in February,
1974. Since then the steep increases in the prices of most varieties of paper and board
effected by the industry have brought down considerably, in percentage terms, the ad
valorem incidence of the existing specific duties. I am, therefore, constrained to step
up the duty on various categories of paper and paper board for the second time this
year. I accordingly propose to levy an auxiliary duty at the rate of 33-1/3 per cent of
the effective basic duty on all varieties of paper and paper board. Commoner varieties
of printing and writing paper, not exceeding 65 grammes per square metre, used for
exercise books, text books, etc. and assessed at present at a concessional rate of 15
paise per kilogram are being specifically exempted from the proposed auxiliary duty.
Newsprint and hand-made paper and board will also not be affected. This measure
will result in an additional revenue of Rs.13.20 crores.
35. In an effort to narrow the gap between the indigenous and imported prices
of plastics, I propose to increase the auxiliary duty of excise from 20 per cent to 40
per cent of the effective basic duty, and thus raise an additional revenue of Rs.9
crores. However, plastics when imported will as hitherto continue to be exempt from
the countervailing duty, equal to the auxiliary duty of excise.
36. I also propose to increase the auxiliary duty on paints and varnishes from
33-1/3 per cent to 50 per cent of the effective basic excise duty, which will bring an
additional revenue of Rs.1. 80 crores.
37. Till recently DMT and caprolactam were being imported at high
international prices. The indigenous production of DMT has since started while the
caprolactam unit is expected to go into production shortly. Having regard to the prices
at which these products were imported and as a revenue measure, I propose to levy a
duty for the first time at the rate of 50 per cent ad valorem on caprolactam and 25 per
cent ad valorem on DMT. This is expected to yield a revenue of Rs.12.40 crores. The
8
proposed levies will not result in countervailing duties on the imported caprolactam
and DMT.
38. The proposals relating to excise duties will lead to a gain in revenue of
about Rs.166 crores in a full year, of which about Rs.20 crores will accrue to the
States and Rs.146 crores to the Centre.
CUSTOMS DUTIES
39. The inflationary trends in international prices to which I had referred in
my budget speech in February, 1974 continue. In these circumstances, I have decided
to leave unchanged customs duties proper, though additional revenue to the extent of
Rs.1 crore is expected from countervailing duties consequent on the changes proposed
in Central excise duties.
40. Where changes are proposed to be effected by issue of notifications
effective from the 1st August, 1974, I shall in due course lay copies of such notifications
on the Table of the House.
41. Taking Customs and Central Excise duties together and exclusive of States’
share, the additional revenue accruing to the Centre will be of the order of Rs.147
crores in a full year or Rs.98 crores approximately for the rest of the. current financial
year.
42. The various tax proposals that I have outlined will yield a revenue of
approximately Rs.210 crores in a full year and Rs.123 crores in 1974-75 for the Centre.
The States will also receive Rs.22 crores approximately in a full year and Rs.13 crores
approximately during the current year, as a result of these proposals.
43. As I stated earlier, the presentation of fresh taxation proposals is not an
ordinary event. The economic compulsions of the current situation do not leave us
with any really viable alternatives. It is in this perspective I would wish the House to
view and to judge these proposals.
(July 31, 1974)

9
SPEECH OF SHRI Y.B.CHAVAN MINISTER OF FINANCE INTRODUCING
THE BUDGET FOR THE YEAR 1973-74

Sir,
I rise to present the Revised Estimates for 1972-73 and the Budget Estimates for
1973-74.
2. The budget of the Central Government is not merely an exercise in
balancing revenue and expenditure. Its primary role today is to be a major instrument
for the realisation of our basic social and economic objectives. This Government is
firmly committed to accelerated economic growth in a framework of greater social
justice and self-reliance. The budget proposals which I shall present later in my speech
are aimed at achieving these basic objectives. For a proper appreciation of these budget
proposals in the broad context of the strategy for realising these objectives, it is
necessary to bear in mind, as background, the state of the economy in 1972-73 and the
economic prospects for 1973-74. The Economic Survey which was presented to
Parliament a few days ago covers this territory fairly extensively. I shall, therefore, be
brief in describing the salient features of the current economic situation.
ECONOMIC CONDITIONS
3. With the return of refugees to their homeland and the emergence of
Bangladesh as a friendly independent sovereign country, we had hoped that 1972-73
would be a year in which we would devote our entire energy and resources to the
unfinished task of economic and social reconstruction and development. We did
certainly recognise from the beginning that 1972-73 was not going to be an easy year
for the economy. In the course of my budget speech last year, I had pointed out that
while the resilience and the strength displayed by the economy in 1971-72 could give
us confidence, there was little room for complacency. I had at that time warned that
the events of 1971-72 would continue to cast their shadow in 1972-73. The strains and
stresses through which the economy has had to pass in the current year could not,
however, be wholly foreseen at that time.
4. Once again there was a failure of the monsoon in the summer of 1972
which created severe drought and scarcity conditions in several parts of the country.
This has led to extensive loss of crops, shortage of fodder, and paucity of drinking
water, creating conditions of grave hardship and suffering in parts of the country. The
Government has been deeply concerned over the human suffering resulting from these
unprecedented adverse conditions, in order to meet this challenge a large effort has
been made to provide the maximum resources possible for the relief of those living in
1
the affected areas, and we will have to continue these efforts so long as they are
required. Unfortunately, this is the second year in succession that the production of
food grains during the kharif season suffered a serious set-back. This has adversely
affected the procurement of grain for distribution by Government. The drought has
also adversely affected the production of important commercial crops, such as oil
seeds and raw jute. As a result, imbalances in certain strategic sectors of the economy
producing the basic necessities of life have been magnified.
5. The abnormal increase in prices that took place in the current year is
basically a reflection of these imbalances. The wholesale prices index during the
period April 1972 to the end of January 1973 registered an increase of 9.1 per cent, as
compared to an increase of 3.7 per cent during the corresponding period of 1971-72.
The rise in the prices of food articles was the crucial factor contributing to the increase
in the index of wholesale prices. I am very conscious of the fact that movements in
prices during the current year have added greatly to the hardships suffered by the
weaker and more vulnerable sections of our society. A major thrust of the policy of
this Government is to reduce these hardships.
6. I do not intend to describe in detail the measures adopted by the
Government to arrest the price rise and to relieve the distress caused by the drought.
Honourable Members are aware of the determined efforts made by the Central and
State Governments to stand by the people affected by the drought. Whatever resources
in terms of money are required are being made available. The public distribution
system has been strengthened. A country-wise emergency programme was launched to
increase agricultural production in the current rabi season to offset the loss of kharif
output for which Rs.190 crores were made available to the States. On present indications
the production of food grains during the rabi season will register a significant increase,
and I am confident this will result in a reduction of the pressure on prices. As a
precautionary measure the Government has arranged to import about two million tonnes
of food grains during the early part of 1973 at a cost of about Rs.160 crores in foreign
exchange. But there is no scope for complacency. The emerging price trends will have
to be kept under continuous watch. Arrangements for procurement and public
distribution will have to be further strengthened and steamlined.
7. The events of the current year have brought into sharp focus the continued
heavy dependence of Indian agriculture on the rains. This is a pointed reminder of the
urgent need to expand the area under irrigation and to evolve suitable techniques of
dry farming as essential elements of an agricultural strategy designed to reduce the
instability of crop production. The large scale distress in the drought affected areas
has served to emphasise once again the pressing need for better regional balance, and
evenness in the level of development.
8. Against this background the sharp acceleration in the rate of growth of
industrial production during the current year is heartening. On present indications the

2
index of industrial production will register an increase of close to 7 per cent over the
year, against an increase of 4.5 per cent in the previous year. But for a continuing
shortage of power, the outcome would have been still more favourable. While a large
number of industries have contributed to industrial recovery, the rapid growth of textiles,
after a decline in the preceding year, was the most important favourable factor. Sustained
growth in industrial production in the coming year will require a more broad based
effort than in the past.
9. I am glad to say that the export front looks encouraging. Exports increased
by 23 per cent during the first eight months of 1972-73. This is a good performance,
particularly when allowance is made for the uncertainties that have prevailed in
exchange markets during the greater part of the current year. It would be well to
remember, however, that our exports were helped by certain factors whose continuation
cannot be taken for granted. The exports of engineering goods on which we had
Placed high hopes have lost some of their earlier momentum. Some of the principal
factors, like lesser utilisation of external assistance and large payments for imports of
food grains and industrial inputs like iron and steel, oil, and fertilizer, are likely to
exert greater pressure on our foreign exchange reserves. Clearly, foreign exchange is
still a major constraint on our development. If self-reliance is to become a living
reality, there must be a massive increase in our exports, coupled with adequate expansion
in the domestic production of such vital import substitutes as iron and steel and
fertilizers, and increased efforts in exploring indigenous sources of supply of oil. The
behaviour of agricultural production, both of food grains and commercial crops, will
also be a major determinant of the state of our balance of payments.
10. Despite a rapid growth of industrial production and of exports, the growth
of real national income in the current year is likely to be small due mainly to lack of
adequate growth in the agricultural sector. In order to retain a proper perspective of
the situation, it must not be forgotten that fluctuations in national income are not an
uncommon. phenomenon in countries heavily dependent on agriculture. Such
fluctuations must not lead us to draw pessimistic conclusions about the country’s
basic economic health, or its development potential and prospects, which are sound.
11. As the Honourable Members know, the Government, after a careful
assessment of all relevant factors, has fixed the growth target for the Fifth Plan at 5.5
per cent per annum. The criticism is made that this target is too ambitious considering
past trends. I am, however, entirely unable to accept that the target is unrealistic.
Purposeful planning, after all, is not simply an extrapolation of past trends. The political
and economic development of India since independence has belted the gloomy
prophecies of many a distinguished commentator. More than once it has been
demonstrated that the economy and polity of India have the resilence to bear hard
shocks and emerge even stronger. The events of 1971 are an impressive indication of
what can be achieved by collective will properly channelised. The task now before the
nation is to bring a similar sense of discipline, determination, and hard work to bear
on its quest for a better quality of life for the common man and a self-reliant economy.
3
 12. The immediate tasks for the economy may be summarised as follows:
Firstly, inflationary pressures have to be contained through a judicious combination of
demand management, increased production of basic wage goods, and the strengthening
of the public distribution system. Secondly, in order to improve growth prospects,
vigorous efforts have to be made to increase the rate of savings and investment. The
third most important task is to achieve greater viability on the external front, which
can only be achieved through higher exports and restraint on imports. Fourthly, there
must be a rapid increase, in employment opportunities, both in rural and urban areas,
to make an adequate dent on the problem of unemployment. Determined efforts are
necessary to reduce disparities in income and consumption. Finally, to secure greater
social justice, programmes designed to provide minimum basic amenities to all citizens
must be expanded in scope and coverage. These are the principal tasks which I have
kept in mind in framing the budget proposals for 1973-74.
REVISED ESTIMATES: 1972-73
13. The set back in the agricultural sector due to the failure of the monsoons
had its inevitable impact on the budgetary position of the Government during the
current year. A sum of Rs.150 crores had to be provided for assistance to States
chiefly for the development of minor irrigation under the emergency agricultural
production programmes. In addition, the provision for short-term loans for seeds,
fertilizers, and pesticides, was raised from Rs.60 crores to Rs.100 crores. Relief
operations had to be organised on a massive scale in all the areas affected by natural
calamities. The provision for assistance to States for relief of natural calamities had to
be stepped up from Rs.75 crores to Rs.220 crores. I feel it will be useful to draw up
more effective plans for dealing with drought and natural calamities which unfortunately
are at present a feature of the Indian economic scene.
14. The Budget made a provision of Rs.720 crores for Central assistance to
States for State Plans. To accelerate the work on certain irrigation and power projects,
and with a view to bridge the gap in Plan resources, it has been decided to step up this
assistance by another Rs.55 crores. In addition, special accommodation by way of
loans continued to be provided to certain States to meet inescapable deficits in their
non-Plan accounts and for specified projects. The Additional burden on the Central
Budget on this account in the current year is likely to be Rs.153 crores. It was necessary
to make this enhanced special accommodation as, otherwise, the resources available
to such States for implementing their Plan would have been reduced.
15. I had mentioned in my budget speech last year that a scheme for liquidation
of overdrafts taken by the States had been evolved in consultation with the Reserve
Bank of India to ensure that overdrafts were not used by States as a mode of financing
their expenditure. The scheme was put into operation with effect from 1st May, 1972
and has worked effectively during the year. I wish to say that we could not have
solved the problem of States’ overdrafts but for the cooperation extended by the State
Governments in this matter. However, this was not achieved without paying a price.
4
The overdrafts to States, amounting to Rs.642 crores at the end of April, 1972, were
cleared by providing ways and means advances and advance release of payments due
to States. A small portion of these ways and means advances has been recovered in the
course of the year and the recovery of the balance amount of Rs.421 crores will be
spread over the next few years. This arrangement really represents the taking over of
the past deficits of State Governments on to the books of the Central Government with
a corresponding adjustment in the books of the State Governments, thus increasing,
though notionally, the deficit in the Central Budget by this same Rs.421 crores.
16. The Defence Expenditure for the current year, now estimated at Rs.1600
crores, shows an increase of Rs.192 crores as compared to the original Budget provision
of Rs.1408 crores. Other commitments contributing to expenditure higher than estimated
in the budget proposals this year are - additional food subsidy to the extent of about
Rs.17 crores, payments on account of the take over of general insurance, coking and
non-coking coal mines and the indian Copper Corporation to the extent of Rs.56
crores, and, Rs.18 crores for rehabilitation assistance to about 8 lakhs people on the
Western front affected by December 1971 war with Pakistan.
17. Honourable Members will, however, be glad to know that we have not
allowed these unforeseen and heavy commitments on account of drought relief and
emergency production programmes to come in the way of Plan expenditure. The Budget
for 1972-73 had provided for a big step-up in the Plan outlay. Taking Central and
Union Territories Plans and assistance to State Plans together, the provision was Rs.2624
crores, which represented an increase of nearly Rs.500 crores over the 1971-72 Plan
provision. I am glad to be able to say that there will not be any material shortfall in
Plan expenditure this year. On the other hand, the Railways’ Plan expenditure for the
year will register an increase of Rs.34 crores over the budget estimates.
18. Special Nutrition Schemes started in 1970-71 for providing supplemental
nutrition to vulnerable sections of the population have gained momentum, and currently
32 lakhs pre-school children and expectant and nursing mothers in urban slums, tribal
areas and rural areas are deriving benefit from them.
19. The scheme for provision of home-sites to workers in rural areas is also
gathering momentum. Central assistance for providing over 2 lakhs house-sites has
already been sanctioned. States are also assured of assistance for Basti, improvement
schemes on the analogy of the Calcutta improvement Scheme.
20. Receipts under income and Corporation taxes are now estimated at Rs.83
crores more than the Budget Estimates. Customs revenue may exceed the Budget
Estimates, by Rs.90 crores. Union Excise duties may, however, show a decline of
Rs.37 crores as compared to the Budget Estimates because production may be affected
on account of prevailing drought conditions and the power shortage.
21. In order to meet the heavy commitments to the States and to mop up the
surplus investible funds of the banks and other financial institutions, we have taken
5
recourse to three additional floatations of market loans during the current year. As a
result, there will be an improvement in the receipts under this head by Rs.263 crores
the realisation being Rs.478 crores, against the provision of Rs.215 crores made in the
original Budget proposals. Collections under the various Small Savings Schemes are
now expected to reach Rs.300 crores, as against Rs.230 crores assumed in the Budget.
22. After taking all these changes into account, the overall budgetary deficit
will still be Rs.550 crores. This figures excludes Rs.421 crores of loans to States for
clearance of their overdrafts till the end of last year. A deficit of this order, despite
large scale additional resource mobilisation, was inescapable due to the extremely
difficult situation caused by the drought and the resultant shortfall in food grains
production involving unexpectedly heavy spending on drought relief and on the
emergency agricultural production programmes.
BUDGET ESTIMATES: 1973-74
23. Let me now turn from a narration of the past to the future. As we leave
behind 1972-73 and turn to 1973-74, our main objective is to fulfil the remaining
commitments of the Fourth Plan and to provide a firm base for the launching of the
Fifth Five Year Plan in 1974-75.
24. In the background of the strong inflationary pressures prevailing in the
economy, it is not easy to reconcile the requirements of growth with the requirements
of stability. However, my general approach has been that the stability to be aimed at
must be the stability of a growing economy. I believe that a solution which seeks
stability by cutting down expenditure which adds to the productive capacity of the
economy is in the long run self-defeating. In an economy where there is considerable
unemployment such an approach would aggravate the inequitable distribution of income
between those who are fully employed and the unemployed. For these reasons the
provisions for development expenditure have been stepped up in the last three years
notwithstanding the severe stresses through which the economy has had to pass in this
period.
25. In 1973-74 a provision of Rs.1924 crores for the Central Plan is being
made which will be Rs.137 crores larger than the 1972-73 Budget provision. In
addition to this, a provision of Rs.810 crores for Central assistance to State Plans is
being made which represents an increase of Rs.35 crores over the 1972-73 provision.
With a Plan provision of Rs.110 crores for Union Territories, the original estimated
requirement for Union Territories for the Fourth Plan will also be fulfilled. The Plan
provision in the Budget next year taking together Central and Union Territories
Plans, as well as Central assistance to State Plans will be Rs.2844 crores as against
Rs.2624 crores in 1972-73.
26. As Honourable Members are aware, a number of significant initiatives
have been taken in the past three years to reorient our approach to the Plan so as to
combine the objective of promoting rapid economic growth with the ideal of securing

6
greater social justice and the well being of the needy and the poor. For this purpose,
in continuation of earlier measures like the nutrition programme for children, rural
water supply schemes, social security benefits for industrial workers, and schemes for
rural employment, an amount of Rs.125 crores was earmarked for a new package of
welfare measures in 1972-73 Budget. Important schemes introduced during 1972-73
were special employment programmes for both educated and uneducated unemployed
- Rs.60 crores, expansion of primary education - Rs.30 crores, slum improvement and
rural home sites - Rs.20 crores, and rural water supply - Rs.15 crores. These schemes
are an essential component of our development strategy of growth, subserving the
cause of social justice. They have now gathered momentum and are yielding beneficial
results. We have, therefore, decided to provide in the 1973-74 Budget the same amount
of Rs.125 crores for continuation of these schemes in the Central Plan.
27. There are a number of ongoing schemes which form the core of the Plan
and provide the necessary infrastructure for our industry and commerce. We have to
find resources for these. The Plan provision for power is being increased from Rs.88
crores this year to Rs.115 crores next year. Provision for increasing production capacity
in the field of fertilizers and chemicals is being fixed at Rs.134 crores, as against
Rs.95 crores in the 1972-73 Plan. Honourable Members will agree with me that an
increased supply of power and of such critical inputs as fertilizers will have a highly
favourable effect on the growth in agriculture and industry.
28. A word would be appropriate here about the Differential interest Rates
Scheme. Honourable Members will recall that on the 25th March last year I made a
policy statement in this House in regard to public sector banks starting a scheme of
lending at a concessional rate of interest for helping certain categories of persons in
the low income brackets in their productive endeavours. The Reserve Bank issued the
guidelines for the scheme in June 1972, and thereafter banks started operating a pilot
scheme. Later, when progress was reviewed it was felt there was need for making
some adjustments in the scheme. After considering all aspects I have decided to
announce the following changes in the scheme.
29. The pilot scheme was confined to 163 industrially backward districts,
excluding those which were covered by the Small Farmers Development Agency and
the Marginal Farmers and Agricultural Labour Schemes. The scheme will now be
applicable to Small Farmers Development Agency/Marginal Farmers and Agricultural
Labour Schemes districts also, and in an will be operated in 265 districts covering
three-fourths of all districts in the country. Institutions for physically handicapped
persons, and orphanages and women’s homes, irrespective of their place of location,
will hereafter be eligible to borrow at the concessional rate, provided the funds thus
obtained by them are used purely for productive schemes, and not for meeting their
normal expenses. In the pilot schemes, the income limit for eligibility had been fixed
at not more than Rs.2,000 per annum per family in urban and semi-urban areas, and
Rs.1,200 per annum per family in the rural areas. I am increasing this limit to Rs.3,000
7
for urban and semi-urban areas, and Rs.2.000 for rural areas. I have also decided to
make a change in regard to the ceilings for loans under the scheme. The ceiling for
working capital loans, which was earlier Rs.500, is now being raised to Rs.1,500, and
for term loans from Rs.2,500 to Rs.5,000. With these liberalisations I hope the scheme
will be able to make a better impact.
30. Despite the progress made by the schemes already initiated for providing
employment, and the efforts made both by Central and State Governments, what has
been done so far has not been commensurate with the magnitude of the problem.
Clearly, this is a field for fresh initiatives and greater concerted effort in the years to
come. Government is particularly concerned about the growing unemployment among
educated persons. In order to make a further dent on this problem it is proposed to
undertake new programmes which will generate employment opportunities for an
additional half a million educated persons in various fields and will at the same time
help in the creation of durable assets, collection and compilation of valuable data, and
training of an adequate number of persons to help in implementing the new programmes
and projects that will be introduced in the Fifth Plan. For this purpose, a provision of
Rs.100 crores has been set apart in 1973-74 Budget. But for the constraint of resources,
I would have been happier to allocate a much larger sum for this purpose.
31. Another significant step which to being taken is the provision of Rs.150
crores for ‘advance action’ on the Fifth Plan. This will ensure that when the Plan is
launched we are in a position to get the benefits of Plan programmes within the Plan
period itself. The next Plan envisages a much larger investment both in agriculture
and key and basic industries, as well as industries producing goods for mass
consumption. If the projected growth rate is to be achieved within the policy framework
of self-reliance it is essential that projects of critical importance to the economy are
completed according to schedule and attain full capacity output within the shortest
possible time. The advance action on the Fifth Plan proposed in the 1973-74 Budget
is designed to facilitate this outcome.
32. In addition to the provisions made in the Budget, resources will also be
available from the internal resources of the public sector enterprises, and by way of
contributions from financial institutions. Such resources are estimated to yield an
additional Rs.518 crores to the Central Plan for next year, thereby raising resources
for the total Central Plan to Rs.2442 crores.
33. The State Plans have made satisfactory progress and for this purpose
wherever necessary the Central Government has been providing help over and above
the Central assistance for State Plans. With the provision of Rs.119 crores in 1973-74
Budget, the total expenditure on special accommodation to States during the Fourth
Plan will be in excess of Rs.800 crores which was the estimate in the original Plan.
The total State and Union Territories Plan outlay as worked out after discussions
between the States, Planning Commission and Finance Ministry will be of the order of
Rs.1914 crores as against Rs.1704 crores during the current year.
8
 34. Taking the Central Plan with its internal resources as well as the State and
Union Territories Plans, the total Plan outlay in 1973-74 will be Rs.4356 crores as
against Rs.4011 crores during the current year.
35. On the non-Plan side due care has been taken to restrict the growth of
expenditure to the minimum level. Defence expenditure is retained at the same level
as in current year, namely, Rs.1600 crores. Special accommodation to the States will
be of the order of Rs.119 crores and this should enable them to fulfil their Plan targets.
In addition to this, a sum of Rs.79 crores will be given as loans to States for financing
certain specific projects outside the State Plans. As a precautionary measure I am also
providing Rs.100 crores for assistance to States for meeting expenditure on natural
calamities relief. I shall be a happy man if it is not needed.
36. The report of the Third Pay Commission is yet to be received. Government
share the anxiety of the Honourable Members and of Central Government employees
that the report, when received, should be considered and acted upon expeditiously. In
the absence of the report, it has not been possible to make any specific provision for
meeting the expenditure arising out of recommendations yet to be made. On receipt of
the report, and subsequent to whatever decisions may be taken on its recommendations,
Supplementary Grants to the extent necessary will be taken for the additional
requirements.
37. On the resources side, income-tax and corporation tax at current levels of
taxation, are expected to show an improvement of Rs.80 crores, and Union Excise
Duties Rs.196 crores. Small Savings are continuing to show progress in collections
and are expected to yield Rs.325 crores next year, as compared to Rs.300 crores this
year. Repayments of loans by the States next year will also be higher in view of the
massive loan assistance extended to them this year.
38. I am glad to confirm that the Refugee Relief Levies will be withdrawn
with effect from 1st April, 1973. Necessary legislation for this purpose will be
introduced separately before the end of this financial year.
39. After taking into account the improvement in revenue, the increased outlays
on the Plan, and other commitments, the year 1973-74 will, at the existing levels of
taxation, show a deficit of Rs.335 crores. This figure makes no allowance for
requirements arising out of the coming report of the Pay Commission.
40. Honourable Members, I am sure, will agree with me that in the present
inflationary situation which the economy faces, the size of the deficit must be kept to
a low level. In order to accomplish that, it becomes necessary for me to make proposals
for increased taxation which will reduce this deficit. Now I shall deal with these
proposals.

9
 PART B
41. Before describing the tax proposals in detail, I would like to share With
Honourable Members the general considerations underlying these proposals. As I have
already mentioned, in the prevailing inflationary conditions in the country it would
not be prudent to have a large deficit in the Budget. Moreover, there are the inevitable
commitments arising out of the resource requirements for the Fifth Plan. If adequate
resources are to be raised for financing the Fifth Plan, action has to begin in this very
year. I have therefore no alternative but to propose some additions to the tax burden.
42. Both direct taxes and indirect taxes have to contribute to raising resources
for our development. As Honourable Members are aware, the Direct Taxes Enquiry
Committe, under the chairmanship of Shri K. N. Wanchoo, ex- Chief Justice of India,
has made a number of proposals in the field of direct taxation. I have carefully examined
these proposals and am submitting a separate Bill to give effect to such of these
recommendations as are acceptable to the Government. Some of the recommendations
which have a bearing on the raising of resources are being implemented through the
present Budget proposals. In making these proposals I have also taken account of the
Report of the Committee on Taxation of Agricultural Wealth and income headed by
Dr. K. N. Raj.
43. In the present circumstances, there is no escape from using indirect taxes
also to raise additional resources. However, I have taken care that in the process
articles of mass consumption are left untouched. This will become evident as I unfold
my proposals.
DIRECT TAXATION
44. As Honourable Members are no doubt aware, the Committee- on Taxation
of Agricultural Wealth and income has suggested several measures for mobilisation of
resources from the agricultural sector. One of their principal recommendations is that
agricultural income should be taken into account in determining the rate of tax
applicable to non- agricultural income. This will help to reduce sharp disparities in the
tax burden on persons with similar incomes. I consider this recommendation of the
Committee to be well-conceived, and am accepting it. I am therefore making provision
in the budget for aggregation of both the agricultural and non- agricultural components
of a taxpayer’s income for purposes of determining the rates of income-tax that will
apply to the non-agricultural portion in cases where the taxpayer has non- agricultural
income exceeding the exemption limit. For the purpose of determining the rate of
income tax applicable to the non~ agricultural portion of a taxpayer’s income, the first
5,000 rupees of his non-agricultural income will be appropriated to the lowest slab,
which is exempt from tax. The agricultural income will be appropriated to the middle
slabs, and the balance of the non- agricultural income will be appropriated to the
upper slabs of the aggregate income. This scheme of partial integration will apply to
the case of individuals, Hindu undivided families, unregistered firms, association of
persons, bodies of individuals, and artificial juridical persons.
10
 45. It is generally recognised that the present system of tax treatment of Hindu
undivided families has encouraged tax avoidance. It is my view that the unintended
tax benefits currently available to Hindu undivided families should, to the extent
possible, be neutralised. I therefore propose to provide separate rate schedules, in
respect of both income-tax and wealth tax, with higher rates applicable to Hindu
undivided families having one or more members with independent income or wealth
exceeding the exemption limit. This is one of the recommendations of the Direct
Taxes Enquiry Committee. It is also proposed to bring the minimum exemption limit
in the case of all Hindu undivided families to the uniform level of Rs.5, 000 applicable
in the case of individuals.
46. Capital gains tax can become a means of avoiding or reducing the burden
of payment of income-tax. At present capital gains arising from the sale or transfer of
capital assets held by a taxpayer for a period exceeding 24 months are entitled to
concessional tax treatment. I propose to extend this period to 60 months. As a result,
only capital assets held by a taxpayer for a period exceeding 60 months will qualify
for concessional tax treatment applicable in relation to long-term capital assets.
47. Where industrial undertakings are required to shift as a result of compulsory
acquisition of land and buildings, I propose to exempt, as a measure of relief, capital
gains arising from the payment of compensation in such cases if the gains are reinvested
for the acquisition of land and buildings for re-establishing the undertakings or starting
new industrial ventures within a period of three years of the acquisition.
48. I also wish to encourage long-term savings through life insurance, and
provident fund contributions. At present, 100 per cent of the first Rs.1,000 of qualifying
savings, plus 50 per cent of the next Rs.4,000, and 40 per cent of the balance is
allowed as deduction in computing taxable income. I propose to allow a deduction
equal to 100 per cent of the first Rs.2,000 of the qualifying savings. The quantum of
deduction in respect of next Rs.3, 000 will continue at the existing rate of 50 per cent
and in respect of the balance at the rate of 49 per cent.
Sports lovers will be glad that donations to approved sports institutions will
qualify for tax-relief in the same manner as donations to charities. I shall be happy if
this leads to improvement in the facilities provided to young, sportsmen.
49. It has been a basic policy of the Government to encourage small and
medium entrepreneurs with comparatively small resources to form public companies.
Towards this objective, I propose to raise the limit up to which a concessional rate of
income tax is applicable in the case of widely-held companies from Rs.50,000 at
present to Rs.1 lakh. Under the existing schedule of rates, closely held companies in
the corporate sector pay income-tax at a concessional rate on the first Rs.10 lakhs of
their industrial profits. I propose to reduce the slab on which the concessional rate is
applicable from Rs.10 lakhs to Rs.3 lakhs. It is hoped that this. measure will encourage
conversion of these companies into widely-held companies, and thereby broaden the
base of the ownership of industry.
11
 50. At present there is some doubt whether management compensation in
respect of business undertakings or other property the management of which is taken
over by the Government is liable to tax. To set this matter beyond doubt, I intend to
introduce a provision to treat such management compensation as income from business
liable to tax. This will apply retrospectively from the assessment year 1972-73.
51. Under the existing law, income tax is deductible at source from the
payments made by Government, statutory corporations, local authorities and companies,
to contractors in respect of works or labour contracts. I propose to include cooperative
societies also in the category of taxpayers required to deduct tax at source from
payments made by them to contractors.
52. The Credit Guarantee Corporation of India has been formed for the
purposes of guaranteeing advances made by banking companies to the hitherto neglected
sectors of the economy. This is a laudable purpose and I propose to exempt the income
of this Corporation from tax for a period of five years.
53. In my budget speech for 1971-72, I gave notice of Government’s intention
to withdraw the development rebate in respect of ships acquired, or plant and machinery
installed after May 31,1974. In response to the demand that this should be substituted
by other fiscal concessions to impart a continuing momentum to industrial growth in
the country, I had indicated that I would come up with some specific proposals for
encouraging industries in selected sectors and those in backward areas. In pursurance
of this undertaking, I am giving an indication of certain measures which Government
has in mind for this purpose, as also for promotion of research and development, and
exports. I propose to bring necessary legislation in the course of the year to give effect
to these proposals.
54. It is my intention to provide an initial depreciation allowance of 20 per
cent of the cost of machinery and plant installed in selected industries after May 31,
1974. This would provide additional resources to the concerned enterprises in the
early years of their development. A list of the industries to which this will apply is
under consideration.
55. In order to provide a stimulus to investment in backward areas I intend to
accord preferential tax treatment to industries to be set up in such areas after March
31, 1973. Specifically, the intention is to allow a deduction equal to 20 per cent of the
profits derived by an industrial undertaking set up in the backward areas in computing
its taxable profits. This concession will be available for a period of 10 years from the
establishment of the industry. The ceiling on investment eligible for subsidy will also
be raised from Rs.50 lakhs to Rs.1 crore, and the percentage of subsidy will be raised
from 10 per cent to 15 per cent of the investment.
56. I feel it is important to enlarge the area of fiscal incentives for promoting
research and development, particularly in the field of industry. I also feel that inadequate
12
attention to this aspect is retarding the development of indigenous technology and
therefore of self-reliance in industry. At the moment capital expenditure in regard to
scientific research related to the business activity of the taxpayer during three years
immediately preceding the commencement of business is allowed to be written off
against the profits of the year in which the business is commenced. I propose to
extend this concession, covering revenue expenditure, in regard to payment of salaries
to research personnel, and on material inputs, during the pre-investment period. I also
propose to allow a weighted deduction equal to one and one-third the amount paid for
sponsored research and development work, in approved laboratories.
57. Honourable Members will agree with me that it will be a paying proposition
for sizeable development expenditure to be incurred in developing exports, particularly
of non-traditional products. At present expenditure on export market development is
deductible for tax purposes to the extent of 133.3 per cent of actual costs. In view of
the great importance of promoting our exports, I propose to increase the weighted
deduction to 150 per cent in the case of widely held companies.
58. I am very conscious of the need to encourage the increase of employment
in industry so that its growth may be oriented towards labour rather than capital
intensive techniques. We are considering schemes which may serve this purpose.
59. The total additional revenue from the various measures in the field of
direct taxes enumerated by me will be Rs.31 crores in a full year and Rs.18.6 crores
in the year 1973-74, of which the share of the Central Government will be approximately
Rs.14 crores.
INDIRECT TAXATION
60. Sir, in turning to indirect taxes next, I intend to take up Central excises
ahead of customs, in reversal of the normal order of precedence in deference to the
former being the major contributor to our revenues.
EXCISE DUTIES
61. In doing so, I would like first, to refer to the effort I propose to make for
raising revenue on behalf of the States through additional duties of excise. Honourable
Members will recall that this is the third and final year for the fulfilment of our
commitment to the States to raise these duties in lieu of sales tax leviable on three
commodities, namely, sugar, tobacco and textiles, so as to achieve an overall incidence
of 10.8 per cent of the value of their clearances by the end of 1973-74. To reach this
target, I shall have to raise about Rs.25 crores in this Budget. In carrying out this
exercise, I have been faced with considerable difficulty because one of the commodities,
sugar, is at the moment a somewhat sensitive item, and, another namely textiles, does
not seem to offer much scope. That leaves me with no choice but to fall back on the
“old faithful”, cigarettes, to help me out of the predicament. Tobacco has been a much
maligned commodity almost from the days of its discovery. While I would certainly
refrain from adopting any attitude of castigation towards the numerous devotes of the
13
tobacco leaf, I shall be content if those who take pleasure from the use of this weed
will contribute in some higher measure to the national Exchequer.
62. Experience has shown that the existing slab system whereby cigarettes
pay fixed percentages of ad valorem duties depending on the ranges or slabs of value
in which they fall, has been leading to the creation of dead areas in which no brands
of cigarettes can flourish. By the very nature of the scheme there is also an in-built
temptation towards the artificial depression of the values of certain brands which, I
feel, will not only affect their quality but also, in the long run, the revenue from
cigarettes. I, therefore, propose to resort to a more progressive system by adopting the
simple principle that the better a cigarette, the more it pays. Starting with an aggregate
base of 100 per cent ad valorem (for both basic and additional duties) at a value of ten
rupees per thousand, the levy will rise at a steady rate of 5 per cent for every additional
rupee or part thereof in value, till it reaches the present aggregate statutory ceiling of
300 per cent, which, if this. is any consolation to smokers, I do not intend to revise
upward. By suitable inter se adjustments in the basic and additional duties I hope to
raise Rs.32 crores in a full year, of which the major share of Rs.24 crores will go to
the States by way of additional excise duties.
63. I am afraid I cannot, while coming down on the cigarette smoker make
things easier for the pipe smoker or the person who rolls his own cigarettes. I therefore
propose to levy a duty on manufactured smoking mixtures for pipes and cigarettes,
which will yield about Rs.80 lakhs, of which Rs.22 lakhs will accrue to the. States.
64. I have been concerned over the tendency of certain textile manufacturers
to avoid payment of the legitimate duties on cotton and art silk fabrics by cutting up
good fabrics into smaller pieces of fents and, into pieces of cloth which are euphemistic
ally called rags. I have, as the first step towards curbing this tendency, already revised
the definitions of fents and rags by reducing their length criterion. As the second step
I now propose to increase suitably the duties on fents and, for the first time, prescribe
duties for rags. If these measures do not have the desired effect, it might become
necessary to consider more drastic steps.
65. There have been complaints that the duty incidence on certain blended
fabrics manufactured with an ingredient of cotton is lower than on similar fabrics in
which viscose is used in place of cotton. I propose to remove this disparity.
66. A situation has been created where, because of the total exemption enjoyed
by artificial silk fabrics processed without the aid of power or steam, there is a growing
tendency on the part of some art silk units to resort more and more to processing their
fabrics with non-power operated machines. This cannot be allowed to continue. In
making such fabrics also liable to duty now, I have, however, ensured, in the interests
of equity, that the incidence on them is kept 40 per cent lower than it would be had
power been used.
14
 67. The above measures on textiles are expected to yield Rs.3.65 crores of
which about Rs.1 crore will accrue to the States by way of additional excise duties.
68. The combined effect of the proposals detailed so far will net for the States
a total revenue of Rs.25 crores in a full year.
69. With my commitment to the States by way of additional duties thus
fulfilled, I must now, in my continuing search for extra resources, turn to another
commodity that has often come to the help of the Finance Minister in the past. I am
referring to motor spirit. Honourable Members will recall that I had increased steeply
the duty on motor spirit in 1971 with a view to curbing its consumption. Since then,
and as though to give me adequate justification for resorting again to the curbing
mechanism, there has been a pronounced$ spurt in the use of petrol. I propose therefore
to apply the curb and also raise some revenue by increasing the duty on motor spirit
by Rs.80 per kilolitre so as to yield Rs.19.20 crores per year.
70. I also intend to take this opportunity for making a few modifications in
regard to certain petroleum fractions which are classifiable as motor spirit, particularly
raw naphtha, where there is need for economy in its consumption. However, in doing
so, the existing concessions for the use of naphtha in the manufacture of fertilisers, as
also fuel in the manufacture of steel, will be left untouched. These minor modifications
will net an additional revenue of Rs.1.60 crores.
71. When the levy was first imposed on compounded and blended lubricating
oils and greases I had granted relief to the smaller manufacturers by exempting such
products manufactured without the aid of power from duty. I, however, find that
even some of the bigger manufacturers have stepped into a territory not really meant
for them, by changing their production to methods where power is not used so as to
avoid paying duty. Honourable Members will appreciate that I cannot allow such
avoidance to go unquestioned. I, therefore, propose to withdraw the existing criterion
and effectively confine the concession to the smaller manufacturers by prescribing
it on a quantity-slab basis. I also propose to increase the effective rate of duty on
such oils and greases from 13 per cent to 15 per cent. These measures will yield
Rs.2.35 crores.
72. While on this subject of the ingenuity of manufacturers I would like to
mention the parallel instance of nylon yarn spinners who have started adjusting the
denierage of their yarn in a way that will enable them to pay lower duties taking
advantage of the denierage grouping system on the basis of which the rates of duty are
levied. To cite an instance, in the first group where the cut-off point is 30 deniers,
production has shifted to yarn of 31 and 32 deniers, which therefore pays only a lower
duty. I propose to rectify the situation by suitably re-adjusting the existing denier
groups.

15
 73. The next measure I propose is meant to facilitate the collection of duty on
synthetic fibres and yarn. This I intend doing by exempting the raw materials, such as
polymer chips, used in such manufacture, from duty and suitably readjusting the duties
on the finished nylon, acetate and polyester yarn and fibres. However, in doing so, I
have ensured that the existing incidence of duty on nylon yarn used in the manufacture
of fishing nets and parachute cords remains unaffected.
74. These measures relating to synthetic yarn and fibres will result in an
additional revenue of Rs.7.85 crores.
75. Keeping in view the need for a higher degree of taxation on luxury articles
used by the more affluent, I propose to increase the duties on a few selected items.
Refrigerators and air-conditioners will pay 60 per cent and their parts, including parts
of their machinery, will pay 75 per cent. The proposed increase on refrigerators will
not, however, affect those of a capacity not exceeding 165 litres which are used by the
middle class consumer. Refrigerating and air-conditioning machinery for industrial
undertakings and public-run hospitals are not being touched. The duty on domestic
electrical appliances, as also on decorative plywood, will be raised to 25 per cent.
However, commercial plywood will pay lower rates of 29 per cent and 15 per cent
depending on the square area of such plywood. Plywood for tea-chests also remains
unaffected. The rest of this list of items consists of motor vehicle parts, instant coffee,
shaving cream and long playing records. The proposed duty on gramophone records
will apply to the more expensive long-playing variety only.
76. These various measures in the aggregate will yield Rs.8.33 crores.
77. My next proposal is for the addition of a few items to those already in the
excise net, namely caustic potash, carbon black, carbide tool tips, wire ropes, and
certain rubber chemicals. All these, (except carbide tool tips which will pay 20 per
cent), will bear a duty at the normal general rate of 10 per cent that is levied on raw
materials in the Central Excise tariff. Glycerine which has so long been paying specific
duty will also join their number. These levies are expected to yield Rs.3.60 crores.
78. I also propose to modify., enlarge, or rescind a number of concessions
that exist at present. Without cataloguing them in detail, I shall mention a few of each
variety. Some of the existing concessions given for paper mills some years back have
been found to be out-dated. I propose to replace them with certain others aimed at
benefiting future expansions of smaller paper mills and also attracting new capital
investment to the industry. The scope of exemption fixed on a quantitative basis for
paper mills having no bamboo plants attached to them will also be enlarged. The use
of unconventional raw materials like bagasse, and cereal straw, will be further
encouraged by liberalising the existing concession. Among the list of concessions that
are being withdrawn are those relating to certain producers of rayon yarn and to low-
voltage electric motors, sheet glass and plate glass. and glass fibre and yarn. Acrylic
sheets produced out of duty paid plastic materials, and p.v.c. films of specified thickness
16
and layflat tubings produced by the small-scale sector, will be exempted. These diverse
measures will result in an additional revenue of Rs.3.60 crores.
79. Before I go on to deal with customs duties, I would like to make a reference
to a matter which concerns both kinds of duties. Honourable Members are aware that
Parliament has been sanctioning enabling provisions for levy of regulatory duties of
excise and customs on a year to year basis from 1963. Regulatory duties were intended
as special fiscal measures to be resorted to only for certain purposes. I propose to
replace them by new straightforward revenue raising provisions. For certain reasons it
is not possible to incorporate the provisions in rate tariffs, or make them part of
taxation statutes and they would therefore have to be revived from year to year for the
present. The new provisions now proposed levy auxiliary duties both on excisable
goods and imported goods at an amount equal to 20 per cent of the value of such
goods. These levies have however been limited to a level needed to raise resources for
the Centre by granting exemptions wherever and to the extent warranted, for which
suitable provisions have been made in the relevant clauses of the Finance Bill.
80. I shall wind up my catalogue of excise proposals by referring to how I
intend to resort to this provision m the excise side. In the case of aluminium, jute yarn
and jute manufactures, other than hessian, copper and zinc, the auxiliary levies will
continue at the same levels at which they were hitherto charged by way of regulatory
duties. In the case of steel ingots and iron and steel products (other than skelp), however,
the rate will be 75 per cent of the effective basic duty as against 50 per cent hitherto
levied as regulatory duty. This measure in the case of iron and steel is necessary in
order to bring about a further reduction in the gap between imported and indigenous
prices.
81. In the case of steel as well as all other metals, the auxiliary duties will
apply, however, only to indigenous production, and will not be attracted by way of
countervailing duty on imports.
82. While on this subject I would also like to mention a modification I propose
to make in the exemption on steel products produced by electric furnaces. These
secondary steel producing units which are scrap-based are at present enjoying an
exemption of the ingot stage duty on the products made by them. The extent of such
benefit, which was only 75 rupees per metric tonne prior to December 1971, has
nearly doubled since then, and is likely to increase further with the modification now
being made on iron and steel. In the circumstances I propose to impose on furnace
steel a levy of Rs.50 per metric tonne at the ingot stage. This will, of course, be
subject to 75 per cent of this basic duty as auxiliary duty, in the same way as other
steel. I would not consider this impost in any way inequitable, for it still leaves a
considerable advantage in favour of furnace, steel as compared to what the major steel
plants have to pay at the ingot stage.

17
 83. These proposals after setting off the revenue that will be foregone by
dropping regulatory duties, will yield Rs.34.60 crores of which Rs.29 crores will
accrue to the Centre.
IMPORT DUTIES
84. It is time now to turn to customs duties where my proposals can be broadly
categorised under three main heads.
85. The first relates to auxiliary duties, which I propose to apply on the Customs
side by means of three differential rates of 20 per cent, 10 per cent and 5 per cent of
the value of imported goods, All those paying an effective customs duty of 100 per
cent ad valorem or more, will pay 29 per cent as auxiliary duties; those paying 60 per
cent ad valorem and more, but less than 100 per cent, will pay 10 per cent; and the rest
of the goods will pay 5 per cent. However, food rains, books, family planning appliances
and a few other selected categories of goods, as well as three other items to which I
shall presently refer, will be totally exempt from auxiliary duties of customs.
86. After making allowance for the revenue that will be foregone by
dropping regulatory duties this measure is expected to bring in an additional revenue
of Rs.36.50 crores.
87. The second proposal is regarding the modification of the rates of duties
presently bound under the General Agreement on Tariffs and Trade. Pending re-
negotiations with the concerned contracting parties we have been permitted to modify
the bound rates under the Agreement to the extent necessary for the rationalisation of
the tariff rate structure. Consequent on this I have decided to revise the rates of duty
on a number of items which among them will include wood pulp, tallow and a few
plastic materials. These revisions of rates are expected to yield an additional Rs.18.70
crores in a full year.
88. My last proposal relating to customs is a selective revision of the existing
rates of duty on a few items.
89. It is necessary to give a further impetus to import substitution and encourage
more extensive manufacture of machinery in our country. I feel that a fiscal incentive
is needed for this purpose which I propose to administer by making an across-the-
board increase in the rate of duty on all machinery from the existing level of 30 per
cent to 40 per cent. This will be applied also to certain allied items.
90. Raw cotton has been enjoying a privileged position for a long time with
only a nominal concessional duty of 10 paise per kilogram. Since imported cotton is
used mainly for the production of fine and superfine fabrics and comparatively
expensive varieties of blended fabrics which, in the nature of things, are expected to
be used by the more affluent sections of society, I propose to withdraw this concessional
rate and make raw cotton liable to its 40 per cent statutory rate, which is the normal
level of taxation for raw materials in the Customs Tariff.
18
 91. However, raw cotton along with two other items, amely, tallow and
machinery, will not be subjected to auxiliary duties of customs.
92. Copper which has been paying a rate of duty at 30 per cent will pay 40
per cent which is the normal rate applicable to nonferrous metals.
93. Since the margin of profit on stainless steel sheets is considerable, I propose
to raise the rate of duty on them from 100 per cent to 200 per cent. However, the duty
on stainless steel plates and strips will be fixed at a lower rate of 60 per cent.
94. As a measure of assistance to indigenous industry, the concessional rate
of 60 per cent so far applicable to nylon yarn used in tyre manufacture is proposed to
be withdrawn.
95. I also propose to raise the rate of duty on unexposed cinematograph films
from 15 paise to 50 paise per linear metre.
96. These various measures relating. to revisions of rates of customs duties
are expected to yield Rs.97.30 crores in a full year.
97. In addition to this, countervailing duties of customs which will
automatically accrue because of the proposed changes in excise duties will account
for an additional Rs.3.50 crores.
98. To sum up, all the proposals regarding excise and customs duties that I
have listed so far will yield about Rs.274 crores. The measures relating to customs
duties will yield about RS.156 crores. From the excise duties, which will be of the
order of Rs.118 crores, Rs.38 crores will accrue to the States.
99. I may now briefly summarise the revenue implications of the various
proposals that I have outlined earlier in my speech. The additional yield from direct
taxes in 1973-74 will be Rs.18.6 crores. Of this, Rs.4.7 crores will accrue to the
States, leaving Rs.13.9 crores for the Centre. The excise duty proposals will yield
additional revenue worth Rs.118 crores in 1973-74. Of this amount, nearly Rs.38
crores will go to the States and the balance of Rs.80 crores will accrue to the Centre.
The additional revenue from customs duties will amount to Rs.156 crores. In all, the
Central revenues will benefit from the total package of my proposals to the extent of
Rs.250 crores. As a result, the initial deficit of Rs.335 crores estimated at 1972-73 tax
rates will be reduced to Rs.85 crores. This however will be increased by the provision
which will have to be made in connection with the report of the Pay Commission.
100. Sir, before concluding I would like to point out that this is the third regular
budget that I have been privileged to present to this august House. During each of
these budgets, I have had to come forward with proposals for significant amounts of
additional taxation. This was not a pleasant task. It was however inevitable in the light

19
of resources required to meet our basic commitments to the people and the
unprecedented challenges of the difficult times we have lived through. The poverty
and the associated inequalities in income and wealth that prevail in this country cannot
be abolished over night. But there can never be any doubt about the direction in which
the Government is determined to move to sustain people’s faith in our democratic
polity as an effective vehicle of rapid social change. It is in this context of our firm
commitment to socialism, rapid economic growth and a self-reliant economy that the
budget proposals must be appraised. The building-up of a socialist society requires a
sustained multi- dimensional effort to transform our social and economic structure. In
an economy where a large number of people are ill-fed and ill-clothed we cannot
afford the luxury of maintaining the status quo. Fiscal policy must assist in this
process. This is the vision I have kept in mind in formulating this year’s budget.
101. The increased provisions for employment programmes and the continuing
emphasis on selected schemes of social welfare are part of an attempt to reduce the
existing inequalities of income and consumption. The partial integration of agricultural
and non-agricultural income, and the imposition of higher income-tax rates on Hindu
undivided families, are designed to make our tax system more equitable and progressive.
The pattern of proposed additions to indirect taxes will also serve the same purpose.
I have made every effort to ensure that additional levies do not impose an undue
burden on the common man. On the other hand, small savers will benefit positively by
the proposed liberalisation of tax exemptions for contributions to provident funds and
life insurance. The introduction of initial depreciation allowances for selected high
priority industries after 31st May 1974 will strengthen this country’s industrial structure
and thereby help in the realisation of the goal of self-reliance. Concessions for research
and development will further stimulate the growth of indigenous technology and
contribute to self-reliance. The enhancement of the weighted deduction presently
allowed in respect of export market development must also be seen in the con~ of the
nation’s determination to move speedily towards self-reliance. Incentives for
industrialisation of backward areas that I have indicated will help to reduce the existing
regional inequalities in the level of development which are clearly inconsistent with
the ideals of a socialist society. As I see it the budget for 1973-74 represents another
major effort on the part of this Government to get the country moving towards the
goal of an expanding self-reliant economy based on social justice.
(February 28,1973)

20
 SPEECH OF SHRI Y.B.CHAVAN MINISTER OF FINANCE,
INTRODUCING THE BUDGET FOR THE YEAR 1972-73

Sir,
I rise to present the Revised Estimates for the current year and the Budget
Estimates for 1972-73.
ECONOMIC CONDITIONS: 1971-72
2. In many ways, the year that is now drawing to a close has been the most
eventful in our recent history. It began in the wake of a clear expression of the will of
our people in favour of 9 bold and radical programme to promote growth with social
justice. But the beginning of the year also witnessed a reign of terror and repression
in East Bengal. By November 1971, some 10 million refugees had sought shelter in
our midst; and we stinted no effort or resources in looking after these hepless and
heroic people. Despite this massive influx and the cost of a war, which was not of our
seeking, we decided not to delay or postpone in any way the equally urgent task of
development and social welfare. Instead, we sought to meet the additional burdens by
two supplementary instalments of fresh taxation, by greater mobilization of voluntary
savings and by a renewed drive for economics in non-Plan expenditure and speedier
tax collections.
3. Above all, we met the challenge by drawing on the strength of a united
people; and it is possible new to look back on the events of the post year with a degree
of confidence in the economic sphere As well. Despite the extraordinary stresses and
strains which were compounded by natural calamities ever many parts of the country,
it should be possible to end the current fiscal year with our foreign exchange reserves
mere than intact, Government stocks of food grains of nearly 8 million tonnes, the
general price level reasonably stable and a deficit in the Central Budget significantly
lower than what one might have Apprehended.
4. To some extent, the events of the past year will continue to cast their
shadow over the coming months as well. Honourable Members would appreciate that
we have to assist the friendly people and Government of Bangladesh in their immediate
task of reconstruction and rehabilitation. To the extent that we have drawn upon the
accumulated stocks in the economy and there has been unusual wear and tear of our
productive assets, these will have to be mode good. But above all, now that the refugees
have been able to return to their homes, we have to redirect our energies increasingly
to satisfy the aspirations of our own people. While the resilience and strength displayed
by the Indian economy can give us confidence, there is little room for complacency.
1
 5. Economic conditions in the recent past contain many pointers to the areas
where further sustained effort is necessary. These have been dealt with at some length
in the Economic Survey. The rate of growth of the economy has slackened in 1971-72.
To some extent, this to understandable as the high rate of growth in the production of
major cereals in earlier years cannot-and indeed need not-be continued year after year.
But this trend should be counter -balanced by an increase in the growth rate of pulses,
commercial crops and industry at large. This has not happened so far. Many of our
baste industries, notably steel And fertilizers, are operating well below capacity.
Shortage of agricultural raw materials has affected important consumer goods industries
such as textiles, sugar and vegetable oils. There are encouraging signs that many
capital goods industries and those producing important intermediate products have
their order books full and are maintaining a satisfactory rate of growth in production.
But here again, progress is by no means uniformly good. Quite apart from tackling the
immediate problems of better management, greater capacity utilization, improved raw
material supply and industrial relation and a general environment of more active-
demand, we have to expedite the creation of additional capacity in a number of vital
areas, including the generation of electricity and fertilizers and steel where better
utilization of existing capacity alone will not sustain demand for long.
6. There are also other trends which we cannot overlook. While imports,
other than those of food grains, have increased rapidly, this cannot be said of experts.
As a result, the trade gap 10 likely to Widen appreciably in the current fiscal year. The
various Programmes for promoting social welfare which have been taken in hand over
the past two years have yet to gather momentum. Again, despite some signs of
improvement, the level of savings and investment in both the public and the private
sectors is inadequate to sustain a satisfactory rate of growth.
7. This situation must be rapidly transformed if the objective of growth with
social justice and self-reliance is to be realised soon. Nor is a reasonable degree of
price stability possible without a rapid increase in the production of the basic necessities
of the people. Up to a point, and indeed to a much greater extent than is commonly
realised, growth, social justice, self reliance, investment and mobilization of resources
are all mutually reinforcing processes. We have, however, also to quicken the pace by
appropriate changes in budgetary and other policies. it is precisely in order to bring
about such a coordinated and concerted approach to our economic problems that a
Cabinet Committee on Economic Policy has been recently set up.
REVISED ESTIMATES: 1971-72
8. Coming to budgetary developments during the current year, 1971-72,
Honourable Members would recall that the provision of Rs.60 crores for refugee
relief made in the Budget last May had to be increased subsequently on two occasions
making a total of Rs.360 crores for the year as a whole. Against this provision, actual
expenditure is now estimated at Rs.325 crores. At this stage, it is difficult to render

2
any precise account of the aid pledged from abroad which will ultimately compensate
us for the expenditure we ourselves have incurred. A significant part of the refugee
assistance received earlier or in the pipeline is already being diverted to Bangladesh.
But on a rough basis, the budgetary outlay of Rs.325 crores may be offset to the extent
of Rs.120 crores by assistance received from abroad.
9. We have already made a sizeable beginning with assistance to the
Bangladesh Government in the current year itself. Inclusive of a cash payment of
about Rs.20 crores which is being charged to the rehabilitation Budget, the commitments
so far made for assistance to Bangaladesh amount to roughly Rs.130 crores. It is our
intention to provide for a total commitment in this regard of Rs.200 crores of which
Rs.82 crores might be disbursed during 1971-72 and the balance during 1972-73.
10. Defence expenditure for 1971-72 is now estimated at Rs.1411 crores as
against the Budget provision of Rs.1241 crores, i.e. an increase of Rs.170 crores. The
expenditure on natural calamities relief at Rs.90 crores would also be higher than the
Budget Estimate of Rs.50 crores.
11. The actual trend in expenditure on Plan schemes during the current year
is a mixed one and some shortfall in Plan expenditure cannot be ruled out. But there
is reason to believe that the shortfall would not be as great as in the first two years of
the Plan. The implementation of important projects in the steel, fertilizer, petro-
chemicals and atomic energy field has picked up momentum. This is also true of the
programmes with an accent on social welfare which were started in the 1970-71 Budget.
But the two major programmes for employment in the rural areas and for the educated
unemployed which were introduced in the last Budget could not be given proper
shape for some time; and actual expenditure is likely to fall short of the Budget
provision of Rs.75 crores. Once again, our experience in the current year highlights
the fact that the momentum of progress cannot be kept up merely by provision of
finance. Timely preparation and selection of projects and speedy implementation are
equally important.
12. Receipts under income and Corporation tax are now estimated at Rs.83
crores more than the Budget Estimate reflecting in the main the efforts made towards
speedier tax collection. Union Excise duties will show only a moderate increase of
Rs.31 crores. On the other hand, Customs revenue will exceed Budget estimate by
Rs.118 crores reflecting primarily the spurt in imports.
13. Receipts from market loans also show, a substantial increase over the
Budget Estimates the actual realisation being Rs.294 crores against the expectation of
Rs.168 crores last May. The nationalised banks have continued to make excellent
progress in deposit mobilization; and the Life Insurance Corporation and the Provident
Funds have also been able to mobilise more funds than was expected earlier. This has

3
greatly facilitated market borrowings by the Centre in the current year. Collections
under small savings should amount to. Rs.210 crores against Rs.180 crores
assumed earlier.
14. The overall deficit is now expected to be restricted to Rs.385 crores. This
represents an increase of Rs.153 crores over the Budget Estimate. An increase in
deficit of this order cannot be contemplated with equanimity in a normal year; and its
monetary impact even in the current year was held in cheek by the policy of restraint
followed by the Reserve Bank. But Honourable Members would, I am sure, appreciate
that it has to be judged against the additional liability on account of defence, refugee
relief, assistance to Bangladesh and natural calamities. Expenditure on these four
items alone is now expected to be Rs.1888 crores as against Rs.1351 crores envisaged
last May. Even allowing for additional external assistance for refugee relief, this
represents an increase of Rs.437 crores over the Budget Estimates.
PLAN OUTLAY - 1972-73
15. Sir, I come now to the Budget provisions for 1972-73. In keeping with the
imperative need to accelerate the pace of growth and social welfare, I propose to
increase the budgetary provision for the Central and centrally-sponsored Plan schemes
from Rs.1455 crores in 1971-72 to Rs.1787 crores in 1972-73. This increase of Rs.332
crores or by nearly one-fourth in a single year represents the sharpest step-up that we
have attempted in the Central sphere over the past so many years. The increase in Plan
outlay is spread over virtually all the sectors of the economy. Agriculture, Community
Development and Cooperation account for an increase of Rs.23 crores; irrigation &
Power, Rs.18 crores; mines and Metals, Rs.23. crores; industry including Petroleum,
Chemicals, Steel and Heavy Engineering, Rs.44 crores; Shipping & Transport, Rs.56
crores; Posts & Telegraphs, Rs.14 crores; Railways, Rs.8 crores and Atomic Energy,
Rs.30 crores.
16. By far the largest increase is being made in the provisions for these schemes
which combine an element of social welfare with future growth potential. Taking all
such schemes together, the Budget provision in 1972-73 would be Rs.240 crores as
compared to Rs.130 crores in 1971-72. An important innovation relates to a new
lump-sum provision of Rs.125 crores to cover the requirements of rural water supply,
rural home sites, slum clearance and improvement, primary education and schemes
for the educated unemployed. Since there are wide differences in the requirements of
different States for these essential amenities, it is felt that a lump-sum provision of the
nature would make it caster for us to make an impact in each State in the field where
such impact is most urgently needed.
17. There are large disparities among the States in terms of enrolment of
children in schools in the age group 6-11. lump-sum of primary education facilities,
particularly in the backward areas, will help correct regional imbalance and will also
4
provide scope for larger employment. Of our 560,000 villages, some 130,000-or almost
25 per cent-are cholera-endemic and guinea-worm infected areas. By tackling the
problems of rural water supply in these disadvantaged areas, it should be possible to
contribute substantially to the well-being of the rural people. The provision for rural
home sites should help particularly landless labour. In some States the need would be
to concentrate mainly on slum clearance and improvement in congested urban areas or
on schemes designed primarily to provide employment to the educated.
18. Among other schemes, the budgetary provision for the small farmers
development agency is being doubled from Rs.6 crores this year to Rs.12 crores next
year and for marginal farmers and agricultural labourers from Rs.3 crores to Rs.6
crores. Similarly, the provision for special nutritional programmes for children is being
increased from Rs.11 crores to Rs.21.5 crores. Programmes for dry farming
development, rural works in drought-prone areas and the crash programme for rural
employment are being continued with a total provision next year of Rs.72 crores. It is
our hope that in the light of the experience already gained and the assessments recently
made in consultation with the State Governments, it would be possible next year to
utilise in full the provision that is now be” made.
19. In addition to the provision made in the Budget, resources are also available
for the Central Plan from the internal surpluses of public sector enterprises and by
way of contribution from financial institutions. The internal resources of public sector
enterprises which would be available for the Plan are expected to increase from Rs.233
crores in 1971-72 (Budget Estimates) to Rs.275 crores in 1972-73. Other resources
available for the Central Plan including borrowings ‘from financial institutions and
contributions by the Reserve Bank from retained profits etc. are expected to increase
from Rs.135 crores in the current year to Rs.245 crores in 1972-73. Inclusive of
Budgetary provision as well as internal resources of public enterprises and other extra-
budgetary resources, the total Plan outlay on Central Plan schemes is thus expected to
increase from Rs.1823 crores in 1971-72 to Rs.2307 crores, i.e. by Rs.484 crores or by
about 27 per cent.
STATE PLANS
20. I am happy to say that there will also be a substantial step up in the Plan
outlays of the States. In the light of the discussions that the Planning Commission has
already had with the State Governments, the annual plan outlay of the States and
Union Territories for 1972-73 is expected to be Rs.1666 crores as compared to Rs.1440
crores in 1971-72. This includes a provision of Rs.782 crores by way of Plan assistance
from the Centre to the States and Union Territories. Honourable Members would also
note that substantial part of the increase in the Central Plan outlay is really on schemes
which are initiated and executed by the State Governments themselves.
21. In addition to Plan assistance, the scheme of special accommodation by
way of loans to those States which have substantial non-Plan gaps will be continued;
5
the provision under this head for next year is Rs.130 crores. But the State Governments
on their own will also have to mobilize resources on a substantial scale if the Plan
outlays now proposed for them are to be implemented without recourse to overdrafts
from the Reserve Bank. As the house is aware, the Minister of Planning and I have
been in close touch with the States in this regard. I am well aware that there are
genuine difficulties in some States in liquidating past overdrafts over a short period.
in recognition of these difficulties we have arranged, in consultation with the Planning
Commission, that such States would not be called upon to liquidate their existing
overdrafts immediately but would be asked to repay next year only 15 per cent of the
estimated overdrafts at the end of 1971-72. The State Governments have agreed to
take steps to reduce the overdrafts progressively; and we propose to adopt a new set
of procedures to ensure that overdrafts are not used in future as a continuing mode of
financing State expenditures.
22. I may also mention in this connection that we propose g to announce soon
the composition and terms of the Sixth Finance Commission. In our federal system,
the evolution of satisfactory financial relations between the Centre and the States has
a vital bearing on progress and harmony in the country at large; and the next Finance
Commission will have a very important role to play in laying the base for the Fifth
Five Year Plan which will be launched two years from now.
OTHER EXPENDITURE AND RECEIPTS: 1972-73
23. Outside the Plan, every effort is being made to restrict expenditure to the
minimum. The provision for defence next year is being kept at Rs.1408 crores, i.e.,
about the same as the Revised Estimates for the current year. Honourable Members, I
am sure, would appreciate that apart from providing for normal increases in costs,
salaries and dearness allowances, we have also to make adequate provision for
recouping the losses suffered during the war and for looking after the families of those
who have made the supreme sacrifice for the defence of the motherland. It is our
earnest hope and endeavour that out of the anguish and agony of the recent past will
emerge a new spirit of peace and harmony in this great sub-continent so that all its
700 million inhabitants can devote their entire energies against their common enemies
of hunger, want, disease and exploitation of man by man.
24. I expect the yield from income tax and corporation tax to increase from
Rs.985 crores (Revised Estimates) in the current year to Rs.1060 crores in 1972-73.
Revenues from Excise duties should increase from Rs.2103 crores to Rs.2330 crores
and from Customs duties from Rs.652 crores to Rs.700 crores. The continuance of
special levies which, I am afraid, is unavoidable in the present circumstances, would
bring in Rs.70 crores next year as against Rs.20 crores in the current year.
25. Unfortunately, a significant part of the additional revenues will be offset
by an increase in food subsidy from Rs.30 crores in the Budget Estimates for the
6
current year to Rs.100 crores in the Budget Estimates next year. On the basis of
present procurement and issue prices, the burden of food subsidy next year would
amount in fact to Rs.120 crores. I have made a somewhat lower provision of Rs.100
crores as it is our intention not to let this burden grow without appropriate remedial
measures to keep it in cheek.
26. The welcome increase in food grains production has added to the fiscal
burden in another way. During 1972-73, the additional financial requirements of the
Food Corporation of India for carrying the buffer -stock of food grains are estimated
at Rs.12 0 crores. I am making a budgetary provision in this regard of Rs.25 crores
only so that the balance of Rs.95 crores will have to be found by the Corporation by
additional borrowing from the banking system. At the end of February 1972, the
Corporation’ s borrowings from the banking system had already reached the high
level of Rs.350 crores. A further addition of Rs.95 crores during the coming year will
naturally strain the resources of the banking system unduly unless the demand’s on it
from other sectors are correspondingly moderated. That is why net receipts from market
loans next year are assumed at the level of Rs.215 crores only. Thus, directly or
indirectly,, the procurement of food grains is now having a substantial repercussion on
the Central Exchequer as also on the distribution of income within the country.
27. Net receipts from external loans next year are also expected to show a
substantial decline from Rs.469 crores this year to Rs.374 crores in 1972-73. Recent
events have once again served as a reminder that even as we strive for greater growth
and social welfare, we cannot neglect the urgent need for reducing the dependence on
external assistance. Our policy to be progressively independent of external assistance
is not directed at anyone other than ourselves. Its thrust is towards invigorating our
own internal efforts. There are a few major areas, such as cotton, oil-seeds, fertilizers,
steel, petroleum products and spare parts for equipment installed in the past where our
dependence on imports is still high. Similarly, our export earnings can be increased
rapidly by creaing additional facilities for mining, fishing and manufacture of a large
variety of engineering and consumer goods. We are making detailed plans in each of
these sectors to increase production rapidly so that our growing requirements can be
met without undue dependence on imports and surpluses created for augmenting
exports. No effort whether by way of provision of finance or otherwise will be spared
to accelerate this process of self-reliance through import substitution and export
promotion.
28. At existing rates of taxation, the overall budgetary deficit next year will
be Rs.375 crores. There will be a surplus on revenue account of Rs.219 crores, but
this would be more than offset by the deficit on capital account of Rs.594 crores.
IN SUM
29. To sum up, the main feature of the Budget for 1972-73 which I am now
presenting is the substantial increase in the outlay on the Plan. The budgetary provision
7
for the Central Plan proper is being increased by Rs.332 crores or nearly 23 per cent.
Inclusive of internal surplus and other extra-budgetary resources, the increase in the
Central Plan works out to Rs.484 crores, or 27 per cent. Taking the Centre, the States
and the Union Territories together, the total provision for the Plan for the next year, as
now envisaged, comes to Rs.3973 crores as against Rs.3263 crores in the current year,
i.e., an increase of Rs.710 crores, or 22 per cent. A substantial increase in Plan outlay
of this order would be a major factor contributing to economic growth over the coming
months. It has been our experience that an increase in Plan outlay in the public sector
is a prerequisite for revival of industrial production whether in the public or in the
private sector. It is our expectation, therefore, that the increase in Plan outlay next
year will serve as a catalyst for the revival of growth particularly in the industrial
sector where recent trends leave much to be desired.
30. Within the total Budget provision for the Plan at the Centre, as much as
Rs.240 crores is being earmarked for schemes with an accent on social justice as well
as economic growth. I am well aware that even this provision of Rs.240 crores is
modest as compared to the magnitude of the problem. But I am sure, Honourable
Members would agree that it represents a sincere effort towards meeting the basic
minimum needs of the most disadvantaged sections of our society.
31. It is a matter of some satisfaction that despite the substantial increase in
Plan outlay and without any credit for mobilization of additional resources, the overall
deficit in the Central Budget for 1972-73 is now expected to be limited to Rs.375
crores. This satisfactory outcome is the result mainly of the fact that during the past
critical year, we were able to introduce what amounts virtually to three different budgets
with substantial measures for additional resource mobilization. The total receipts on
account of the taxation measures introduced last year will be of the order of Rs.500
crores in a full year.
32. Important as the Central Budget is as an instrument for furthering our
social and economic objectives, it has to be supplemented by basic changes in our
economic institutions and policies. During the last year, Government has taken a number
of steps in this direction. The taking over of the management of general insurance, the
guidelines given to financial institutions is regard to convertibility of leans into equity
and participation in the management of the enterprises assisted by them, continued
effort to direct the new vitality of the nationalised banking system towards improvement
in the economic conditions of the small and new entrepreneurs in industry and
agriculture and the policy of differential interest rates-these are all various facets of
the same thrust forward towards the goal of economic progress with social justice.
Honourable Members may rest assured that we shall continue our. efforts in the same
spirit and over a broad front over the coming months so that the mandate for creating
a socialist society is carried out with speed and vigour.

8
 PART B
33. Sir, without taxing the patience of Honourable Members any further, I
should proceed now to the business of taxation proper. Having introduced virtually
three budgets in the past 12 months, I might well be expected to declare a holiday
from further taxation for at least one year. But I am afraid I cannot allow myself such
unique distinction. A deficit of Rs.375 crores cannot be left wholly uncovered without
danger to price stability. We have also certain commitments to the State Governments
to raise revenue on their behalf. Fiscal policy must serve the larger objectives of self-
reliance and equity. Nor should I fight shy of making a few concessions. The
introduction of a new Budget is also an opportunity for a certain amount of spring
cleaning.
34. The Direct Taxes Enquiry Committee under the chairmanship of Shri K.N.
Wanchoo, ExChief Justice of India, submitted their Report last December. It contains
a number of valuable and far-reaching suggestions for unearthing black-money,
preventing evasion and avoidance of taxes and reducing tax arrears. Copies-of the
Report will Boon be made available to Honourable Members. It has often been said in
this House that basic changes in the tax system should be introduced by means of a
Taxation Amendment Bill rather than through the annual Finance Bill so as to give
Honourable Members more time for a detailed consideration in the light of discussion
both within and outside the House. Accordingly, I propose to bring forth a separate
legislation as early as possible to give effect to those recommendations of the Committee
which Are acceptable to the Government and which require a major change in the
present tax laws.
35. There has been a feeling for some time in the country that a family
consisting of husband, wife and minor children which constitutes a common unit of
consumption and as such a common focal point for the incidence of indirect taxation,
is also a more appropriate and equitable basis for purposes of direct taxation subject
to certain safeguards for wives at work. The present tax treatment of Hindu undivided
families has also encouraged tax avoidance. On these two related questions, the
members of the Wanchoo Committee have made several alternative suggestions.
Government will examine these suggestions carefully and sponsor separate legislation
in due course for restructuring the Income Tax Act and the Wealth Tax Act to the
extent necessary.
36. In the meanwhile, I propose to introduce through the Finance Bill a few
changes in the Direct Tax structure which are designed either to produce some additional
revenue in a difficult year or to give effect to such recommendations of the Wanchoo
Committee as can be easily incorporated in the present tax laws.
9
DIRECT TAXATION
37. On the assumption that no news in good news, I propose to make no
change in the rates of income tax as also of surcharge on income tax in the case of tax-
payers other than. companies.
38. In order to remove any temptation that people may feel for neglecting
their regular duties in favour of any casual or ephemeral or even imaginary pastime,
I propose to withdraw the present exemption in respect of casual and non-recurring
income when it exceeds Rs.1000 in a year. However, a Finance Minister in particular
should not frown upon those who are specially favoured by the goddess of good lack.
Accordingly, winnings from Sates or other lotteries will be taxed on a concesoional
basis. Those who win a prize in a lottery are perhaps in the same happy position an
people who enjoy a capital gala when their property appreciates in value without any
effort on their part. On this principle, in computing incomes from such winnings a
deduction of Rs.5, 000 plus 50 per cent of the balance will be allowed. However, even
those who are favoured by Fortune should make their offering first at the alter of the
Exchequer - I propose, therefore, to provide for deduction of tax at source at the rate
of 34.5 per cent from crossword puzzles and lotteries. Casual losses will be allowed
to be set off only against the same type of income.
39. I propose to provide for deduction of tax at source at the rate of 2 per cent
of the payments made to contractors by the Government, local authorities, statutory
corporations and companies. Payments made in turn by contractors, other than
individuals and Hindu undivided families, to subcontractors will attract a deduction at
the rate of 1 per cent. I hope this alliance between the revenue department and
contractors will lead to prompter payments all round.
40. With effect from 1st April, 1972 Government will pay a rate of interest of
12 per cent per annum on the amount of refund the payment of which is delayed.
Honourable Members will recall that at present the rate of interest we pay is only 9
per cent per annum. h is only fair that the interest charged when there is delay in the
payment. of direct taxes to the Government is also similarly increased from 9 per cent
to 12 per cent per annum.
41. Capital gains arising from the transfer of jewellery held for personal use
are not so far chargeable to the capital gains tax. This has given rise to fictitious
transactions in jewellery in order to regularise incomes which have escaped taxation.
I propose. therefore, to repair this omission.
42. Dividends received from cooperative societies are at present completely
exempt from income taxation. I see no justification for this exemption and propose to
withdraw it. Such dividends, however, will be included in the categories of income
which qualify for exemption from income tax upto R a. 3, 000 in a year.
10
 43. These measures are likely to yield Rs.6 crores in a full year and Rs.3
crores in 1972-73 of which some Rs.2 crores will be the share of the States.
44. Coming to corporate taxation, I propose to do away altogether with the
special deduction of 5 per cent of profits in the case of domestic companies engaged
in priority industries. This will yield Rs.6 crores in a full year and Rs.4.5 crores in
19,72 -73.
45. Some months ago when we levied special surcharges, many Honourable
Members had asked why the surcharge on company taxation was fixed at 21/2 per cent
when a surcharge of 5 per cent was levied on many other items including railway
passenger fares. I propose now to remove this discrimination. For the assessment year
1972-73, the surcharge will continue to be 21/2 per cent of the income tax payable by
all companies. However, on income tax payable in advance during the financial year
1972-73, the surcharge would be at the rate of 5 per cent. This change will yield Rs.12
crores over a full year and Rs.9 crores in 1972-73.
46. There are a number of other changes that are proposed in the Finance Bill
for preventing evasion or avoidance taxes and for rationalising the incentives available
for promoting saying and investment. A few changes are proposed, for example, in
relation to taxation of charitable and religious trusts in the light of recommendations
made by the Wanchoo Committee. Voluntary contributions received by such institutions
will qualify for exemption from income tax only if these are applied to charitable or-
religious purposes or are accumulated for such purposes in the specified manner. The
other important changes relate to audit by a Chartered Accountant and compulsory
registration for a trust to qualify for tax exemption, extension of the definition of
relatives for judging whether the income or property of the trust is being used in a
manner which would constitute disqualification from tax exemption and making the
trust liable to pay wealth tax when any part of the corpus or income of the trust is used
for the benefit of the author of the trust, a substantial contributor to the trust or the
trustees and their relatives, etc.
47. Regarding incentives for investment and saving, investment in industrial
proprietory concerns or partnership firms will now be included among assets which
qualify for exemption from wealth tax upto Rs.11/2 lakhs. When one category of exempt
assets is changed to another category of such assets, the requirement of minimum
holding for a period of six months will be reckoned with reference to the period of
holding of both the assets. This would remove the difficulty that has been experienced
by many recipients of accumulated Provident Fund contributions. Contributions made
towards the unit-linked- insurance plan of the Unit Trust of India will qualify for
deduction in computing the taxable income of an individual in the same manner as life
insurance premia and contributions to Provident Funds.
11
 48. The income of approved Gratuity Funds will be exempted from income
tax prospectively from the assessment year 1973-74. The amount of gratuity that will
be exempt from income tax in the case of employees other than Government employees
and employees of local authorities will be subject to a uniform ceiling of half a month’s
salary for each year of completed service or 15 month’s salary or Rs.24,000 - whichever
is the least.
49. I have come to the conclusion that the small but select class of income-tax
payers in the country deserves some special recognition from the Government.
Accordingly, I propose soon to award to each assessee a distinct and permanent account
number of his own. I am afraid, there is no mark of distinction which does not lead to
easy detection; and I cannot help it if individual account numbers make it difficult to
avoid taxes.
50. Finally, I come to the demand which has been made by industry that while
the development rebate may be withdrawn, Government should introduce some other
fiscal concessions and announce them in advance so as to impart a continuing
momentum to industrial growth in the country. Government is not averse to the grant
of fiscal concessions. It is, however, felt that fiscal concessions for promoting
industrialisation should not be general or across-the-board in character but should
relate specifically to our social and economic objectives. Again, as far as possible, it
would be desirable to provide incentives which encourage the use of those resources,
such as labour, which are in abundant supply rather than of resources, such as capital,
which will continue to be scarce for a long time to come. The Wanchoo Committee
has made a number of recommendations with different objectives in view. After
examining all these suggestions carefully, we propose to come up with specific
provisions in the Taxation Amendment Bill which is proposed to be introduced later
in the year. These provisions would be designed primarily to promote industrialisation
in the backward regions of the country.
51. The total yield of all the changes indirect taxation will be Rs.24 crores in
a full year and Rs.16 crores in 1972-73 of which the share of the Centre would be
approximately Rs.14 crores. I could also have taken credit for improvement in tax-
collections as a result of the many changes designed to reduce tax evasion. But I have
decided not to credit myself with any such gains in advance.
52. Sir, may I now turn to what are perhaps euphemistically called indirect
taxes?
CUSTOMS DUTIES
53. I have only one main proposal in regard to customs duties. It will be recalled
that in December last, we had imposed a regulatory duty at the rate of 2.5 per cent ad
valorem on most imported products and a higher duty of 10 per cent on a few selected
items. The need to exercise a general restraint on imports remains as great as ever. It is
12
also necessary in imposing regulatory duties to ensure that the simplification of the
import tariff which was introduced last year is not unduly disturbed. Accordingly, I
propose to apply the 10 per cent ad valorem rate to all items which pay a duty of 100 per
cent or more as well as to the few selected items which were included in the 10 per cent
list last December. A new rate of 5 per cent ad valorem will apply to all items on which
a duty of 60 per cent or more but less than 100 per cent in payable. The remaining items
will continue to bear the regulatory duty of 2.5 per cent. However, those items which
were totally exempted last December will continue to remain so. These changes will
result in an additional revenue of Re. 8. 60 crores in a full year.
54. I also propose to continue the provisions which enable us to levy a
regulatory duty of customs. However, in keeping with the provisions relating to
regulatory duty of excise, power is being taken to levy regulatory duty of customs also
upto a rate of 15 per cent of the value of the imports.
EXCISE DUTIES
55. Coming now to Excise Duties, I propose to make no addition to the list of
commodities which can be subject to such duties. But Honourable Members would
appreciate that even without exploring fresh fields or pastures new, it is possible to
increase the yield by more intensive cultivation; and this is a responsibility which I
cannot, escape.
56. Pursuant to the decision to continue the scheme of levying additional
excise duties in lieu of sales-tax on sugar, textiles and tobacco, we are committed to
raise the overall incidence of these additional excise duties to 10.8 per cent of the
value of clearances by the end of the Fourth Plan period.
57. To this end, I propose to transfer to the States the entire proceeds of the
regulatory duty of 15 per cent of the effective basic duty on unmanufactured tobacco
which was levied last December by converting it into an additional excise duty which
is itself being rounded upwards on different varieties. As a result, the States will gain
to the extent of Rs.11.56 crores by way of additional duties whereas the Centre will
lose Rs.9.70 crores by way of regulatory duty. At the same time, the basic and special
duties on different varieties of unmanufactured tobacco are being merged in keeping
with a general scheme to which I would soon refer. In the process, I have also taken
the opportunity of rounding upwards the rates on different varieties to make up, in
part, for the loss of revenue to the Centre. The yield of the combined duty, exclusive
of the additional duties for the States, will go up by Rs.9.31 crores.
58. In the case of cigarettes, a similar rationalisation and rounding off would
result in a gain of Rs.7.63 crores to the State Governments by way of additional excise
duties and a loss of revenue of Rs.4.64 crores under other duties which would now be
combined and shared with the States.

13
 59. In the field of textiles, I propose to raise some additional revenue for the
States from art silk fabrics. At present, taking all the duties into account and depending
on the price per square metre, there are four different rates that apply to art silk fabrics
namely, 3 per cent, 5.7 per cent, 8 per cent and 10 per cent. I propose to reduce the 5.7
per cent rate to 5 per cent and increase the rate of 10 per cent which applies to fabrics
worth more than Rs.5 per square metre to 15 per cent. Of the additional revenue of
Rs.8.59 crores, the share of the States by way of additional duties will be Rs.5.80
crores and the rest will accrue to the shareable pool between the Centre and the States.
60. In short, the revenue by way of additional excise duties will increase by
Rs.25 crores and this entire increase will go to the States. Honourable Members would
note that I have left sugar entirely untouched in this exercise.
61. The Fifth Finance Commission had recommened that from 1972-73, the
special excise duties which have been levied in the past exclusively for the benefit of
the Centre should also be included in the divisible pool. In keeping with this principle,
I have decided to merge the special excise duties with basic excise duties and to round
off the combined rates so as to introduce a certain measure of simplicity in the rate
structure. As a result, with just half a dozen exceptions, all the ad valorem rates of
excise duties will fall under 6 different slabs, namely, 10 per cent, 15 per cent 20 per
cent, 25 per cent, 30 per cent and 50 per cent. To mention a few examples, in the case
of cement, the basic duty of 20 per cent and the special duty of 4 per cent will now be
replaced by a combined duty of 25 per cent. Similarly, items which carry a basic duty
of 15 per cent and a special duty of 3 per cent will now have a rate of 20 per cent
applied to them. There are only four items, viz., latex foam sponge, polyurethane
foam, and articles made from that foam, and tyres for motor vehicles where there is a
basic duty of 40 per cent and a special duty of 8 per cent. The new combined rate for
these items will be 50 per cent. In case Honourable Members feel that the laws of
rounding off always favour the Exchequer, I hasten to inform them that in the case of
coffee, the aggregate rate which works out to Rs.102 per quintal would be rounded
downwards to Rs.100 per quintal. In the case of vegetable non-essential oils, also, the
rate is being reduced from Rs.110.25 per metric tonne to Rs.100 per metric tonne.
62. In the case of wireless receiving sets, the present system of taxing certain
component parts, i.e., transistors and diodes, has given an impetus to large-scale
smuggling. I propose, therefore, to remove the duty on such parts and replace it by
suitable changes in the duty on wireless receiving sets in such a way that the incidence
of duty will increase with the price of the set. The present exemption from duty for
sets of a value not exceeding Rs.165 and manufactured by the small-scale sector is
being continued.
63. The combined result of the rationalisation measures would be a gain in
revenue of Rs.10.70 crores.

14
 64. There are a few items where the opportunity of merging the special duty
with basic duty is also being taken to raise additional revenue. In the case of paints
and varnishes, the additional revenue will be Rs.2 crores and in the case of paper, it
will be Rs.5 crores. The higher rates of duty on paper, however, will apply only to the
more expensive varieties of paper and board. Printing and writing paper used for
exercise note-books and text books will not be affected. Newsprint would also continue
to be exempt from duty and there would be no change either in the case of mill-board
and straw-board where the smaller manufacturer is involved.
65. Similar increases are being made in the case of rayon and synthetic fibres
and yarn. The more expensive varieties of artificial synthetic fibres and yarn such as
polyester fibre and yarn will bear higher duties. However, rayon filament yarn which
is a comparatively cheap item will remain unaffected. The additional revenue from
these changes is expected to be Rs.6.50 crores.
66. I now come to a few major proposals which are intended to raise revenue
for the Centre in a manner which serves at the same time some. of our larger social or
economic objectives. It will be recalled that last December a regulatory duty at 50 per
cent of the effective basic excise duty was imposed on steel ingots, iron and steel
products and tin plates so as to bridge the substantial gap between the prices of imported
and indigenous steel. Even after these changes, a considerable gap remains between
imported steel and indigenous steel prices. It is necessary to economise on the use of
steel in the country by charging for it a price which bears a reasonable relationship
with international prices. The basic duty on steel products, therefore, is being raised
by about 30 percent and the regulatory duty of 50 per cent will apply to these higher
basic rates. The total additional revenue from steel products is expected to be Rs.36.20
crores of which Rs.11.80 crores would be by way of regulatory duties.
67. For similar reasons, the regulatory duty of 25 per cent on aluminium and
its products is being raised to 331/3 per cent of the basic duty. This measure will yield
Rs.4.18 crores.
68. Honourable Members are also aware of our substantial dependence on
imports in regard to petroleum products. The duty on motor spirit has been raised
substantially in the recent past and this has had the salutary effect of curbing the
growth of demand. As a token of appreciation, I propose, therefore, to leave the motoring
community untouched this year. I am afraid, I have, however, to make up for the
omission last year in the case of kerosene where our reliance on imports is even
greater. In addition, the comparatively low rate of duty on kerosene encourages its
adulteration with other products, particularly with high speed diesel oil. I am well
aware that kerosene is an item of common consumption both in the rural and the
urban areas. But in view of the circumstances I have mentioned, some additional
taxation of kerosene could not be avoided. I propose, therefore, to increase the duty

15
on kerosene by Rs.59.75 per kilo litre or roughly by about 6 paise per litre. This will
result in an additional revenue of Rs.29.80 crores in a full year.
69. In the Budget last May, we had introduced a duty on compounded
lubricating oils and greases. Lubricating oils are also manufactured and marketed to
some extent by a mere Blending of two oils without any added ingredient. There is no
reason why these marketable oils should not be made liable to duty. I propose, therefore,
to amend suitably the definition of the existing tariff item which will yield an additional
revenue of Rs.5 crores. The duties on asphalt and bitumen as also on petroleum waxes
are also being suitably revised to yield -an additional revenue of Rs.3.30 crores.
70. It has often been said that the agricultural sector which has been witnessing
significant growth in income over recent years should also make, an appropriate
contribution to the overall needs of the country. We have appointed a Committee
under the Chairmanship of Professor K. N. Raj to examine the whole question of
taxation of agricultural incomes and wealth. Steps have also been taken to raise
additional revenue from this sector by levying a-duty on tractors and on fertilizers. I
propose now to raise the duty on fertilizers from 10 per cent to 15 per cent. This will
result in additional revenue of Rs.12.50 crores. Duty at the rate of 10 per cent will also
now be levied on power-driven pumps which are designed primarily for handling
water. This measure is expected to yield a revenue of Rs.2 crores.
71. There are a few other minor items such as synthetic organic dyestuffs and
optical bleaching agents where the rate of duty is being changed from 15 per cent to 20
per cent with an additional yield of Rs.2.63 crores. The duty on aerated waters with
blended concentrates is being increased from 10 per cent to 20 per cent with an additional
yield of Rs.1.65 crores. Pistons will now he added to the list of motor-vehicle parts for
the purposes of duty. The revenue yield from this would be Rs.50 lakhs.
72. The merger of special duty with basic duty results in a rate of Rs.605 per
metric tonne on hessian and of Rs.385 per metric tonne in the case of other jute
products which relate mainly to sacking. I propose to round off these rates to Rs.600
and Rs.400 per metric tonne respectively. The regulatory duty will remain unchanged
at 50 per cent. The not gain to the Exchequer would be Rs.1.76 crores of which
Rs.1.20 crores would be by way of regulatory duties.
73. Throughout ages, our spinners and weavers have produced an infinite and
ever-changing variety of colour, texture and design to beguile our fancy; and the
Central Board of Excise and Customs has had a difficult task in evolving a textile
tariff which can keep pace with all the subtle nuances of our textile products. I propose
to make one more effort and introduce an extensive rationalisation of the textile tariff
which has been worked out after a great deal of detailed examination. Honourable
Members would, I am sure, be happy to note that the overall revenue effect of this
rationalisation, at any rate, would be insignificant.
16
 74. Finally, I would like to round off by a few concessions in excise duties. In
the case of some items, duty-free clearance upto a value of Rs.50,000 is allowed
subject to the proviso that the total clearances from the unit do not exceed Rs.2 lakhs
in a year. In some other cases, clearances upto a value of Rs.1 lakh are exempted. I
propose now to raise the exemption limit in all cases where the lower limit of Rs.50,000
is allowed today to Rs.1 lakh subject to the upper ceiling remaining unchanged at Rs.2
lakhs. This measure which is intended to help the smaller units will cost the Exchequer
Rs.1.40 crores in a full year.
75. Some concessions were introduced in the last Budget to encourage the
use of minor oils in the manufacture of soap. In view of the urgent need to reduce our
dependence on imports in regard to vegetable oils in general, I propose to increase the
incentive by reducing the minimum percentage of use of minor oils from 5 per cent to
3 per cent and by introducing a rate of rebate of Rs.4.50 per metric tonne on the duty
leviable on soap as long as the reduced minimum use of minor oils obtains. This
rebate will increase progressively by Rs.1.50 per tonne for every additional percentage
point increase in the utilization of these oils. A similar concession in relation to rice
bran oil used in the manufacture of soap at the rate of Rs.150 per tonne for every
additional percentage point of use of rice bran oil beyond a minimum level of 15 per
cent will also be given.
76. To encourage the use of rice bran oil in the manufacture of vanaspati, the
minimum percentage use of 7 per cent which was prescribed last year is being reduced
to 1 per cent without any change in the rate of rebate which would remain Rs.100 per
metric tonne on the duty payable on vanaspati produced from such oil. Similarly, the
incentive for greater use of ootton-seed oil in the manufacture of vanaspati is also
being increased on a graded basis. The present general concession of Rs.100 per tonne
of vanaspati produced from cotton-seed oil will be withdrawn and a minimum
compulsory usage of 10 per cent prescribed. Beyond this percentage, however, the
rebate would be Rs.200 per metric, tonne upto 20 per cent of usage, Rs.250 per metric
tonne from 20 to 30 per cent of usage and again Rs.200 per metric tonne beyond 30
per cent of usage. These concessions on oils would cost the exchequer about Rs.60
lakhs.
77. Honourable Members would be happy to know that I have no proposals
this year in regard to postal and telegraph rates. The Finance Bill, however, provides
for some changes in the sales-tax law applicable to Delhi to remove certain lacunae
which act to the detriment of sales tax revenue accruing to the Delhi Administration.
TO SUM UP
78. Taking all the proposals together, the total additional revenue from Excise
duties would be of the order of Rs.145 crores in 1972-73 of which Rs.97 crores will
accrue to the Centre and roughly Rs.48 crores to the States. In addition, countervailing
17
import duties which will apply in respect of all changes in excise duties other than
those relating to iron and steel and aluminium are expected to yield an additional
revenue of Rs.13.40 crores. Other changes in Customs duties win yield. as already
mentioned, an additional revenue of Rs 8.60 crores for the Centre. The additional
yield from direct taxes for 1972-73 would be Rs.14 crores for the Centre and Rs.2
crores for the States. All in all, the additional revenue at the Centre next year will he
of the order of Rs.133 crores and for the States, Rs.50 crores. The initial deficit of
Rs.375 crore will thus stand reduced to Rs.242 crores which I think is a reasonably
safe level.
79. Sir, in conclusion, may I express the hope that the Budget proposals I
have just presented will be judged in their entirety and against the background of the
formidable challenge we continue to face as a nation. The level of investment in the
economy needs to be raised substantially at the present juncture. This is necessary not
only in the interest of growth, particularly industrial growth, but also for making a
tangible impression on the well-being of the most disadvantaged sections of society.
We have also to assist Bangladesh in her immediate task of restoring a measure of
stability and viability to the economy. Nor can we let down our guard in regard to the
security and integrity of the nation. At the same time, deficit financing must be kept
within reasonable proportions.
80. Fortunately, the bulk of the unavoidable and indeed necessary increase in
outlay next year will be financed by the normal growth in revenues. If I have not been
able to avoid additional taxation altogether, I hope Honourable Members would
remember that I have not been unduly cautious either in providing a stimulus to growth
and social welfare by a substantial increase in Plan outlay. Some of my tax proposals
will also serve other objectives such as self-reliance. It is in this sense that I spoke at
the outset of quickening the mutually reinforcing process of growth, social justice,
self-reliance, investment and resource mobilization. I can only hope that taken in their
entirety, the Budget proposals will take the economy one stage forward in its march
towards our cherished goals.
I thank you.
(March 16, 1972)

18
 STATEMENT BY SHRI Y.B. CHAVAN MINISTER OF FINANCE PROPOSING
ADDITIONAL MEASURES FOR MAXIMUM MOBILISATION OF
RESOURCES FOR DEFENCE EFFORT

Sir,
I rise to take the Honourable House into confidence regarding the additional measures we propose
to adopt for ensuring the maximum mobilisation of resources for the defence effort. But before I do
so, I would like to review briefly the developments since the presentation of the Budget in May.

2. Honourable Members will remember that the regular Budget for the current year as it was
finally passed had envisaged a substantial increase in the outlay on the Plan and on social welfare as
also a modest provision of Rs. 60 crores for providing relief to refugees from Bangla Desh. The last provision
had to be increased by Rs.200 crores in August and another demand for Rs.100 crores is before the
Parliament.

3, In addition to this staggering burden of refugee relief which has been mitigated only in part by
assistance from the international community, we have had to reckon with natural calamities in a number
of States including the devastating cyclone that hit the coast of Orissa; and these have necessitated
much larger assistance from the Centre to the States concerned. Defence expenditure is also likely to
exceed the provision envisaged in the Budget. We have not stinted and will not stint in ensuring that
our armed forces are well equipped to carry out their heroic responsibility to safe-guard the integrity
and honour of the motherland.

4. Against this background, it has been our endeavour for the past several months to keep the
fiscal position under constant review. Our first endeavour has been to ensure the utmost economy in
non-Plan expenditure. Guidelines have been issued to the Central Ministries to curtail their non-
contractual non-Plan expenditure to the extent of at least 5 per cent and we expect this to result in a
sav-ing of Rs.50 to 60 crores. We have also urged the State Governments and public sector enterprises
to attempt similar economies. In the matter of Plan expenditure too, the Planning Commission, in
consultation with the Ministries and the States, has been currently engaged in an exercise to explore
the scope of effecting economies in Plan projects without affecting the progress of continuing schemes.
We have also held a series of meetings with the Chief Ministers with a view to bringing about an
orderly reduction in the size of the States’ overdrafts with the Reserve Bank of India.

5. Alongside with these steps to restrain fiscal expenditure, the Government have been endeavouring
to augment resouces. The Board of Direct Taxes has been asked to expedite the collection of income
and corporation tax arrears; and total collections under direct taxes this year may well exceed the
Budget Estimates by Rs. 70 crores. Owing to the liberalisation of import licences, I also expect from
collection from Customs to be higher by about Rs. 80 crores than what was earlier thought of. An
improvement in the realisation from small savings over what was indicated in the Budget is also ex-
pected; and the net yield from market loans has already been better than what I envisaged at the time
of the Budget. Apart from improved collections from existing taxes and other revenue heads,
Honourable Members are aware that I have also initiated some steps in recent weeks to raise resources
through fresh imposts. I am grateful for the most understanding cooperation extended by the States in
this matter. These measures have had a salutary effect in curbing the overall deficit that was threatening
to emerge. But even so, during the first eight months of the current year. i.e. from end March to end
November, the Centre had already incurred a deficit of Rs. 340 crores as against the provision in the
Budget, as finally passed by the Parliament, Rs. 233 crores for the year as a whole.

6. The desperate attack launched by Pakistan has now added a further dimension to our eco-
nomic and fiscal tasks. As I have already said there is no question of our stinting on the defence
effort, Honourable Members may rest assured that whatever extra outlay will be necessary to back up
the heroic deeds of our forces will be provided for. In addition, the suspension of economic aid on the
part of some foreign countries may call for a fresh look at our overall resource position; whatever has
 2

to be done on this score too will be done. Honourable Members are aware that in addition to the
greatly increased capability of our industry and agriculture, we have improved our foreign exchange
reserves considerably over recent years. As long as we remain united and determined in our purpose, there
is no need for any apprehension whatsoever that we can be deflected from our just course by any threats or
pressures, economic or otherwise.

7. All this calls for a careful husbanding of resources in the economy, and the adoption of fiscal and
other measures appropriate for promoting economies, including economies in the use of foreign exchange.
In this task, the entire people have to cooperate with the Government. For, what the nation abstains from
utilising is what is available for the defence effort. On the other hand, it is all the more incumbent upon
us at the present juncture to ensure that prices are kept stable and essential supplies are made regularly
available particularly to the weaker sections.

8. The Defence of India Rules now permit us to deal effectively with the pricing and distribution of
essential goods. I would however hope that on their own, the responsible sections of the community,
including industrialists and traders, would take such measures as would make it unnecessary to have recourse
to the Defence of India Rules. While I am aware that trade union leaders and others are doing their utmost
towards strengthening the defence effort, I hope they would also exert their influ-ence towards restraining
such demands as could lead to an added strain either on the exchequer or on prices. Similarly, companies
too, I hope, would follow a policy of restraint regarding the distribution of dividends.

9. 1 have little doubt that, irrespective of creed or class, each member of the community will contribute
his or her mite to the defence effort. Honourable Members are aware of the important role of the National
Defence Fund. On two occasions during the past decade, when we were similarly attacked, namely, 1962
and 1965 we had a most encouraging response from the public to this Fund. The response on the present
occasion, I am sure, would be no less. In contributing to the national effort, we should not also overlook
the needs of other agencies such as the Red Cross or the Prime Minister’s Relief Fund on which also much
greater responsibility— will devolve at the present juncture.

10. There are in addition several other special schemes in operation for the mobilisation of savings,
including the large array of national savings certificates; and I would urge that the people contribute
generously to these schemes too. In this connection, I wish to express my appreciation to representatives
of Central Government employees who have shown the utmost sense of responsi-bility and patriotism in
offering, as 1 will have occasion to elaborate in another statement which I propose to make shortly, that a
part of their emoluments may be credited to their provident fund accounts or to the National Defence Fund.
I hope and trust their example will be followed by all sections of society who will save additionally at least
one day’s income in a month and contribute it to the National Defence or to the various savings schemes.

11. We are proposing to float soon a new series of National Defence Loans to which banks and other
institutions should be in a position to contribute substantially. It is my hope that the response to these
National Defence Loans will not be less than Rs. 100 crores.

12. But Honourable Members will appreciate that we have to be prepared for all eventualities. We
must take measures whereby a general restraint would be exercised on the demand for imports. We have
also to take particular care to restrain the use of strategic commodities, such as steel and steel products, as
well as of non-ferrous metals such as zinc, aluminium and copper. Whatever fiscal measures would bring
about a reduced level of utilisation of imported goods and, in general, would lower consumption of scarce
commodities have to be enforced in the present circumstance

13. Powers are already available under Section 4 of the Finance Act, 1971 to impose a levy by way
of a regulatory duty on customs to exercise restraint on imports. I propose to avail of thin power in the
 3

present context and impose a general levy of 2.5 per cent of the value of all imports with the exception of
foodgrains, books and a few other special categories. In addition, the same regulatory provision is also
proposed to be invoked to impose on a few specified items a higher rate of duty of 10 per cent.

14. A corresponding provision exists in Section 7 of the Finance Act, 1971 giving the Central
Government powers to impose regulatory duties of excise to achieve a similar purpose in relation to
domestically produced goods. It is proposed to invoke this provision in relation to a few com-modities,
such as iron and steel products, copper, zinc, aluminium and unmanufactured tobacco. The additional duty
on iron and other metals will apply only to domestic production without any corresponding countervailing
duty on imports and will thus narrow the difference between domestic and import prices. The duties on the
three non-ferrous metals are so graded as to promote general economy in their use as well as to encourage
greater use of aluminium. The duty on unmanufactured tobacco, which was not touched in the last Budget,
will yield a significant revenue of about Rs. 9 lifts in a full year.

15. There is one further proposal in relation to the jute industry where profitability has increased
greatly as a result of buoyancy in the market for jute products both at home and abroad. I propose to take
advantage of this situation and increase the export duty on carpet backing and hessian by Rs.400 per tonne.
I also propose to increase the excise duty on sacking by Rs. 175 per metric tonne.

16. Notifications giving effect to all the above proposals are being issued and these will come into
effect immediately. Copies of these Notifications are being laid on the table of the House.

17. It Is also proposed to levy a surcharge of 2.5 per cent on income-tax payable by all companies,
including foreign companies. The new surcharge will be applicable with reference to current incomes
which will fall due for assessment in the assessment year 1972-73. It will not be possible to collect the new
levy through the existing scheme of advance tax payments in the Innome-tax Act. It will, therefore, be
necessary to sponsor a Bill to achieve the object. The bill will, inter alia, provide that an amount equal to
2.5 per cent of the advance tax otherwise payable for the financial year 1971-72 should be paid before
15.3.1972. Credit in respect of the surcharge thus collected will be allowed against the income-tax liability
for the assessment year 1972-73. The yield from this measure in a full year will be of the order of Rs. 10
crores out of which Rs, 7. 5 crores is expected to be realised this year. I am bringing forward a separate bill
to give effect to these proposals.

18. The combined revenue effect of all the measures proposed will be Rs.135 crores in a full year
of which Rs.60 crores will be under Customs and Rs.65 crores under Central Excise. In the remainder of
the current fiscal year, the yield will be roughly Rs.40 crores.

19. Honourable Members, I am sure, would agree that the measures I have proposed will strengthen
the economy in meeting the present challenge. The heroism and valour of our men in the Army, Navy and
the Air Force and in other para-military forces demand a similar dedica-tion on the part of all of us to
contribute our utmost to the defence effort. Sir, it is in that endeavour that I have claimed the indulgence
of this Honourable House to make this statement.

(December 13, 1971)

SPEECH OF SHRI Y.B.CHAVAN MINISTER OF FINANCE INTRODUCING
THE BUDGET FOR THE YEAR 1971-72 (FINAL)

Sir,
On the 24th of March this year, I had presented to the Honourable House an
interim Budget for 1971-72. I had then assured Honourable Members that the Budget
proper to be presented in the current Session will provide for a significant increase in
the outlays on development and social welfare over and beyond what the interim
Budget had indicated. It is in fulfilment of this commitment that I rise before you
today.
ECONOMIC CONDITIONS
2. Earlier this week, the Government have laid on the floor of the Honourable
House the Economic Survey for 1970-71. The Survey shows that the economy presents
in general a promising picture indeed and that it is now better poised to tackle the
tasks ahead than at any other time in recent years. We have once more been able to
fulfil during 1970-71 the target set in the Fourth Plan with respect to the overall rate
of economic growth. In agriculture, progress has been maintained; food grains
production has continued to expand at a most satisfactory rate. In the industrial sector,
lack of certain essential raw materials has hampered production in some areas and
there is still under-utilisation of capacity in a few other areas. But new grounds have
been broken in our import substitution efforts, and recovery from the years of recession
in the middle 1960’s is considerable. Besides, the growth in the small-scale sector is
most encouraging. Enough symptoms abound which indicate that once a significant
improvement occurs in the scale of public investments, industry as a whole will surge
forward. After a few initial set-backs, there has been a remarkable spurt in exports
towards the later months of the year. Better organisation is, however, still the major
outstanding task for both industry and exports. Apart from raw material shortages and
procedural delays, we have also to face problems of low scales of operations and high
unit cost in some industries. Cost reduction and improvement in efficiency are thus
vital for imparting a new dynamism to industrial growth and exports.
3. In agriculture too, there is yet no occasion to relent on our efforts. We
must continue the search for high-yielding varieties of paddy which will prove durable
in our varying agro-climatic conditions. Irrigation facilities will have to be expanded
to ensure the extensive propagation of double cropping. Our search for better pest-
resistant qualities of seeds for millets must go on. The greatest area of responsibility
will lie in improving the productivity per hectare of pulses and the cash crops, including
cotton, oilseeds and jute. During 1970-71, there was a marked stability occasionally
1
even a certain fall-in food grain prices. In fact, but for the Government’s price support
operations intended to protect the farmers, there would have been a steeper order of
decline in these prices. Despite this, there was an overall increase in the general price
level largely induced by the shortage in the availability of commercial crops. Against
this background, we cannot accelerate our rate of growth with price stability unless
we raise the output of commercial crops.
4. On the external side, while we can take credit for repaying our outstanding
obligations to the International Monetary Fund, our balance of payments is not as
satisfying as it was at the end of 1969-70. Exports have shown a remarkable
improvement. At the same time, with the rising tempo of industrial activity, imports
have been going up. Outstanding import licences suggest that there will be a further
increase in imports during the current year. Because of shortage in steel, cotton, oils
and oilseeds, we have had to plan for much larger imports than originally envisaged.
Fresh aid allocations have declined during the past year even as the burden of debt
servicing has continued to mount. Net aid available to finance imports has, therefore,
shrunk. Thus we can scarcely afford to relax in the matter of a prudent management
of our balance of payments.
REORIENTATION OF POLICIES
5. The massive mandate which this Government received from the people
three months ago was a mandate for socialism, a mandate for rapid economic growth
matched by increased social justice. There can be little doubt that social justice
must begin with increasing the opportunities of job and work for every one. A good
deal has been done in the course of the past year to initiate measures for creating
gainful work for the urban unemployed as well as the rural under-employed. During
the past year, the nationalised banks have expanded their scale of operations so as
to provide more credit to the hitherto neglected sectors and for purposes of self-
employment. They intend to do much more in future. A crash programme for rural
employment has been announced and the Government’s broad objective is to ensure
employment to at least one person in each family in all parts of the country. At the
same time, the Government is determined that such schemes for creating employment
do not take the form of ad hoe measures but contribute to the accretion of additional
physical assets in the countryside in the form of new roads, land reclamation, land
development, drainage, etc.
6. Honourable Members will also remember that special works programmes
were introduced last year to improve job opportunities in the countryside, particularly
for the small farmers and in the backward areas. These schemes will continue. In
addition, as I shall describe presently, we propose to make a special budgetary provision
for assisting the educated unemployed in their search for a constructive opportunity to
serve the nation.

2
 7. The largest stimulus to employment can, however, come only by increasing
the tempo of economic activity all round. It is therefore essential that expenditure
under the Plan is maintained on projected levels and that no shortfalls occur. I am
afraid that our performance in 1970-71 in this respect leaves much to be desired.
While I am proposing to increase significantly the Plan outlays over what was allocated
last year, the emphasis has to be even more on the timely implementation of Plan
projects for which budgetary provision is being made.
8. Faster growth and greater social justice will be elusive goals unless pursued
in a milieu of relative price stability. We can scarcely ignore the adverse effects of
unabated price increases on both investment and income distribution. Inflation also
dislocates attempts to increase the efficiency of production and to lower unit cost,
which in turn affects exports. There is therefore need for continuous vigilance. The
drive for a faster rate of growth in this sense, therefore, blends with the parallel goal
of achieving Price stability. In this task, we must also keep under examination the
operation of the monetary forces.
9. Our procedure for formulating annual Plans is itself in the nature of a
reassessment of Plan priorities and objectives. At the present juncture, when we have
just received a new mandate, it is also necessary to make a fresh appraisal of the Plan
as a whole. The emphasis from now on has to be on measures which will speed up the
process of implementation of projects, foster the expansion of employment opportunities
and reduce disparities, including regional disparities. Honourable Members are aware
of the various steps taken in recent years for encouraging growth, including growth of
industry in the backward areas through allocation of Plan assistance and similar fiscal
and other means. The same objective has to be kept in mind in the allocation of our
foreign exchange resources including those mobilised through external assistance.
Schemes intended for backward areas have to be given due consideration at the stage
of the formulation of the Plan itself, so that in the general allotment of internal and
external resources under the Plan, the different parts of the country, and particularly
the retarded regions, get their due share.
10. Our public sector enterprises have deepened and widened the industrial
base of the economy and achieved certain basic social objectives. Efficient performance
on the part of these enterprises is crucial for the Government’s overall development
effort. The extent of buoyancy that can be added to the economy each year will be
largely related to the ability of the - public sector to implement the Plan proposals.
Administrative and procedural delays which hold back progress of these enterprises
are thus matters of considerable concern. Similarly, the public sector has to yield a
sizeable sun- plus, since this surplus is a key source of future growth. During the past
year, a number of steps have been taken to raise the general efficiency of public
enterprises. Increasing attention is being devoted for the proper maintenance of
inventories as well as of plant and machinery in each public sector unit, and towards
3
tackling the problem of personnel management and industrial relations. In regard to
the latter, we would certainly like to have the advice and counsel of trade unions.
They have an equal stake in the efficiency of the public sector. I hope that, with their
cooperation, it will be possible to initiate a new chapter of industrial relations in our
public enterprises.
11. A large segment of the commercial banks is also now a part of the public
sector. Here too, I would seek the cooperation of the trade union leaders to improve
the efficiency of the banking system. A beginning was made recently when I initiated
a dialogue with the employees and the management of the banks; our discussions
covered such areas as credit planning and deposit mobilisation. I propose to continue
this practice. The new Boards of Directors, the composition of which will be announced
soon and which will include representatives of the Award staff and officers, will, I
hope, carry forward the task of improving the procedures and policies, of the banks
along intended lines.
12. Each of the nationalised banks has been urged to have an annual credit
plan which could ensure that the credit apportioned to the different sectors, and
particularly the sectors neglected hitherto, is in conformity with their needs and at the
same time within the norms of monetary expansion. The Committee appointed by the
Reserve Bank of India to suggest credit schemes for promoting self-employment has
made a number of valuable suggestions which are being given shape to by the
commercial banks. Another committee which was asked to recommend a scheme of
differential lending rates for helping the smaller borrowers and the weaker sections of
the community has just submitted its report. A Credit Guarantee Corporation has been
set up with effect from first April to underwrite the advances offered by banks to
small borrowers. Honourable Members are also aware that the Government have
recently framed the guidelines for the conversion into equity of loans offered by
public financial institutions. These guidelines should go a long way to promote the
establishment of a joint sector to which we attach considerable significance.
13. Honourable Members, I am sure, are happy with our decision to take over
the business of general insurance in the country. This decision marks a culmination of
the process which was started when we nationalised the Imperial Bank of India and
the life insurance business and to which we gave a major thrust less than two years
ago through nationalisation of major commercial banks. With these measures, virtually
all the savings of the people mobilised by financial institutions can now be deployed
in accordance with national priorities.
REVISED ESTIMATES, 1970-71
14. In the Interim Budget, I had indicated that the year 1970-71 will close
with an overall deficit of Rs.230 crores. The Budget documents I am presenting today
repeat from the Interim Budget the Revised Estimates for 1970-71, since actuals are
4
not yet available in most cases. According to the latest indications, however, the overall
deficit for 1970-71, I am afraid, may be of the order of 270 crores.
15. While presenting the Interim Budget, I had occasion to express concern
over the fact that a number of States were overdrawing their accounts with the Reserve
Bank of India. I regret to say that despite the increased special assistance of Rs.195
crores to the States during 1970-7 1, there has been no abatement in the States’ recourse
to overdrafts from the Reserve Bank as will be evident from the fact that, at the end
of last March, as many as 14 States had overdrafts aggregating to Rs.260 crores. The
special assistance to States, which was designed to help them to fulfil their targets of
Plan outlays, is to taper off in the coming years. In this context, the problem of
overdrafts assumes an additional gravity. I would appeal to the States to maximise
their efforts for raising additional resources and to enforce the strictest discipline on
the growth of non-Plan expenditure.
BUDGET ESTIMATES, 1971-72
16. Honourable Members will recall that in the Interim Budget I had provided
a sum of Rs.1, 195 crores for the Central Plan for 1971-72, that is, at the same level
as in the Budget for 1970-71. I had then stated that the provision for the Central Plan
for the current year was to be augmented following a review of requirements and
resources. I propose to raise the outlay under the Central Plan by Rs.155 crores, that
is, to Rs.1,350 crores. This represents an increase of more than Rs.300 crores over the
likely actual level of expenditure in 1970-71. The more important areas where the
budgetary provisions have been significantly raised over what was provided in the
Interim Budget include shipping (Rs.16 crores), ports (Rs.13 crores), roads (Rs.10
crores). mines and metals (Rs.9 crores), health and family planning (Rs.12 crores),
Posts & Telegraphs (Rs.11 crores), agriculture (Rs.32 crores) and food procurement
(Rs.18 crores). I had already provided in full in the Interim Budget the sum of Rs.785
crores towards Central assistance for the Plans of the States and the Union Territories,
as against a provision of Rs.711 crores in the Budget for 1970-71.
17. For creating immediate employment opportunities, even a larger Plan outlay
may not be enough in the short period. I have therefore decided to add a further trust to
the public sector outlay which could both generate additional employment and provide
relief to the weaker sections of the community. For the crash programme for rural
employment a provision of Rs.50 crores was already made in the March Budget. BM the
problem of unemployment is equally acute among our educated young men and women.
We are determined not to permit them to be a lost and frustrated generation. We propose
to assist them actively so that they might set themselves up in gainful creative endeavours
which would at the same time accelerate the pace of economic progress of the country.
To this end, in the Budget I am now presenting, we propose to allot a further sum of
Rs.25 crores for schemes specially designed to suit the educated unemployed including
engineers and technicians. The details of these schemes are being worked out in
consultation with the Planning Commission and the Ministries concerned.
5
 18. Honourable Members will be glad to know that the provision of Rs.4
crores made in the Interim Budget for a nutrition programme for children is now being
raised to Rs.10 crores, and included in the Plan. I have no illusion that even this larger
provision will mean much more than a beginning in the task of protecting and nurturing
the health and welfare of the poor children. I do hope that, in this matter, we will be
in a position to do substantially more in the coming years. I might also mention here
that we propose to reserve 25 per cent of fresh admissions to public schools for
meritorious candidates, who will be offered Government scholarships.
19. The special provisions made last year for improvement of slums are being
maintained. The work of the Calcutta Metropolitan Development Authority will be
pursued with vigour. I would also like to state here that the Government would consider
sympathetically proposals for a similar improvement in living conditions for slum
dwellers in other metropolitan cities and towns; if State Governments and municipal
bodies could initiate viable schemes for this purpose, we will consider the question of
financial accommodation.
20. Finally, I have to refer to the tragedy that has been enacted over the past
two months in East Bengal representing some of the darkest episodes in human history.
Already, some three million evacuees have crossed over the borders. It is our hope and
endeavour that all these unfortunate people will be able soon to return to their homes
and hearths in dignity and honour. Meanwhile, we shall do our utmost to offer succour
and relief to all those who have taken temporary shelter with us. It will clearly be
beyond our capability to meet on our own the financial burden involved we regard it
as the responsibility of the international community to share with us this burden. In
the Budget, I have tentatively made a provision of Rs.60 crores for providing relief to
the evacuees from East Bengal. For the present we have taken credit on the revenue
side to the extent of Rs.20 crores which we expect will accrue to the Budget by way
of external assistance for the relief of the evacuees. In addition, it is our hope that
substantial supplies from abroad will be available for providing relief without being
routed through the Budget. Honourable Members will note that the provision we have
made will suffice only for a limited period and that a considerably higher order of
assistance from the international community will be necessary.
21. Let me now sum up the overall budgetary picture as it emerges following
the increase in the Plan outlay, the provision for employment assistance, and certain
inescapable additions to the non-Plan items of expenditure since the presentation of
the Interim Budget in March. Apart from the provision for evacuee relief, I might
mention in particular the addition in the expenditure on account of food subsidy,
which is now placed at Rs.30 crores instead of Rs.10 crores as indicated in the Interim
Budget. On present reckoning, the revenue receipts in 1971-72 are likely to be of the
order of Rs.3, 562 crores. Expenditure to be met from revenue will amount to Rs.3,587
crores. Thus the revenue surplus, placed in the Interim Budget at Rs.114 crores, will

6
now turn into a deficit of R s. 25 crores. On the capital side, collections under the
various small savings schemes are now expected to be Rs.180 crores as against Rs.155
crores indicated in the Interim Budget; correspondingly, however, loans to the States
will also go up by Rs.16 crores, so that the net increase under this head will be only
Rs.9 crores. I have also taken credit for an additional accrual of Rs.40 crores under PL
480 receipts representing largely the spill-over from 197 0-7 1. Total capital receipts,
inclusive of loans and advances and transactions under various debt deposit heads- are
now placed at Rs.2, 024 crores and total capital expenditure, including loans and
advances, is estimated at Rs.2,396 crores. The capital budget will, therefore, show a
deficit of Rs.372 crores as against Rs.354 crores in the Interim Budget. The over-all
budgetary gap, taking revenue and capital accounts together, will now be of the order
of Rs.397 crores. This takes into account the effect on the Central Budget -of the
changes in Railway fares and freight rates announced a few days ago and of changes
in the Post and Telegraph tariff to which I will refer a little later.
22. Honourable Members, I am sure, would not like me to leave uncovered a
deficit of this magnitude in the Budget. I will, therefore, seek their indulgence if I
have now to turn to what all of you, I am sure, are waiting for, namely, proposals to
bring down the deficit to a more tolerable order.

PART ‘B’
23. The task of raising additional resources through fresh imposts on the people
is the least enviable of a Finance Minister’s responsibility. If I still have to approach
this House with proposals to raise additional resources, it is because of the imperatives
of the situation, including the need to augment the Plan outlay, to create additional
employment opportunities and to offer succour to the evacuees from East Bengal.
GENERAL PRINCIPLES
24. In framing these proposals, I have endeavoured to follow certain broad
principles. These are:
(a) The tax structure must be simplified and rationalised in such a way that
the burden of assessment for the assessee as well as the tax collector and
the opportunities for evasion are minimised;
(b) The overall burden of taxation must be distributed amongst the different
sections of the community in such a manner that, in the process, there is
an appreciable scaling down of the concentration of economic power and
reduction in the inequalities in income and wealth; and
(c) The incidence of the fresh imposts should not, as far as possible, disturb
the general level of prices of essential goods.
7
 25. Accordingly, the concentration of the additional tax effort, to the extent
feasible, should be on direct taxes, particularly on the affluent groups, and on such
categories of indirect taxes as affect the luxury and near-luxury commodities. In so far
as we succeed in limiting the burden of indirect levies on the ‘ latter group of
commodities, we are also able to achieve in part the other objective of improving the
structure of income distribution in society.
TAX ADMINISTRATION
26. The tightening and streamlining of tax administration has two facets. First,
it helps to garner additional yield from the existing tax sources and thus makes it less
necessary to look for fresh tax heads every year. Second, since it is generally the well-
to-do and the rich who avoid and evade taxes, a tightening of tax administration,
including closing of loopholes, would compel them to part with a larger proportion of
their incomes and assets and would therefore further one of the overriding objectives
of fiscal policy.
27. Under valuation of property has been one of the means to evade wealth
tax, capital gains tax and stamp duties. It has also been an important avenue for the
circulation of black money. This practice could be greatly discouraged if Government
had the power to acquire properties at prices that correspond to what is recorded in
sale deeds. Accordingly, we propose to move a Bill during the current session to
acquire this power. I hope it would not be considered dishonourable to take a dishonest
man at his word.
28. In pursuance of the Administrative Reforms Commission’s
recommendations, it is also proposed to sponsor legislation in the current session to
discourage benami holding of property. If, at the time of assessment, a person fails to
declare income from a piece of property or the property itself so as to evade payment
of income and wealth taxes, the intended legislation will debar him from enforcing his
claim to such property in a court of law.
29. Pursuant to the recommendations of Administrative Reforms Commission,
we further propose to transfer the work of recovery of arrears of estate duty from the
State Governments to the Income Tax Department at the Centre. Since, in this matter,
we can move only with the concurrence of the State Legislatures, a Bill is being
drafted for circulation among the States.
30. It is proposed to strengthen the Valuation Cell located in the Central Board
of Direct Taxes for making valuation of buildings in order to enable it to extend its
activities and speed up valuations in cases involving the assessment of wealth tax. For
assessment of income tax, under the new procedure which has come into effect from
the current year, summary assessments will be completed in most cases which do not
involve substantial points of dispute, and only a small proportion of the cases will be
subjected to a sample scrutiny subsequently. This will enable the Income Tax Officers
to devote correspondingly more time for cases involving substantial revenue.
8
 31. In the field of excise duties, I propose to set up a Committee to review the
Self Removal Procedure scheme, which has been in operation for the last two to three
years, with a view to suggesting improvements which could reduce leakage of revenue.
A Study Team, which considered the issues relating to over and under- invoicing, have
made a number of suggestions for checking the leakage of foreign exchange through
manipulation of invoice values. The Government will give early consideration to
implement its recommendations. With a similar purpose, a comprehensive review is
being undertaken of the Foreign Exchange Regulation Act; and we propose to introduce
soon a Bill to amend several provisions of this Act.
CONSULTATION WITH STATES
32. In the past, at the Centre, we have taken several fiscal steps to discourage
the growth and concentration of excessive income and wealth in a few hands in the
urban areas. The constitutional prerogative of the Union Government to initiate
measures for similar reforms in the countryside is however severely restricted. But
this does not mean that some of the present anomalies must continue, or that we can
be oblivious of growing inequalities in rural areas. Ultimately, the basis of tax has to
be the size of income or wealth irrespective of whether it is derived from agricultural
or non-agricultural sources.
33. Similarly, there are constitutional limitations on the powers of the Centre
to tax services even when these are of a luxury or semi-luxury character. As the States
and the Centre have to share the responsibility of raising resources for economic
development, it is the duty and obligation of the Centre to point out to the States
untapped resources for mobilisation where the Union Government itself is precluded
by the constitutional provisions to impose any levy. It is my intention to consult and
seek the advice of the State Finance Ministers on the entire range of these issues and
to remain in continuous touch with them so that a concerted view is taken.
DIRECT TAXATION
34. I now come to the new proposals in respect of direct taxation. If we are
going to make an effective dent on the problem of income inequalities in our society,
we cannot possibly flinch from deploying increasingly the instrument of direct
taxation. The proposals that I am outlining will have only a limited yield of revenue
in the current year. Over a number of years, however, the cumulative effect of these
proposals will be to raise revenue of a considerable order; what is much more
significant, they will bring about a significant change in the distribution of disposable
income and wealth.
(a) TAXATION ON INCOME AND WEALTH
35. In the field of personal income taxation, the rate of surcharge in the case
of individuals as well as Hindu undivided families is being increased from 10 per cent
to 15 per cent provided the total income exceeds Rs.15, 000 per annum. In a full year,
9
the impact of the proposal will be to provide an additional Rs.20 crores to the exchequer;
for 1971-72, the revenue yield is expected to be around Rs.12 crores.
36. I also want to take this opportunity to increase the tax on capital gains,
which are a species of unearned income. The deduction from long-term capital gains
allowed in computing the taxable income of non-corporate assessees is being reduced
from 45 per cent to 35 per cent where such gains relate to lands and buildings and
from 65 per cent to 50 per cent in respect of other capital gains.
37. The incidence of tax on long-term capital gains will be increased in the
case of companies as well. This increase is being brought about by raising the rates of
tax from 40 per cent to 45 per cent in respect of gains relating to lands and buildings
and from 30 per cent to 35 per cent in respect of other gains.
38. I have some fairly stiff proposals regarding wealth tax. If a significant
reduction in the concentration of wealth is to be brought about, it is essential that the
taxation of wealth is made more rigorous. Honourable Members will recollect that last
year’s Budget made a beginning in this direction by raising the rates of additional wealth
tax on urban property. This year, I propose to raise drastically taxation on slabs of net
wealth above Rs.15 lakhs, where the rate of tax will now be uniformly 8 per cent as
against the current rates of 4 per cent on net wealth between Rs.15 lakhs and Rs.20 lakhs
and 5 per cent on net wealth above Rs.20 lakhs. I also propose to include in net wealth
for purposes of taxation the first Rs.1 lakh of wealth in the case of all individual assessees
and the first Rs.2 lakhs for Hindu undivided families. Thus, while no wealth tax will be
leviable unless the net wealth exceeds Rs.1 lakh in the case of individuals and Rs.2
lakhs in the case of Hindu undivided families, once they are liable to tax, it will apply
to their entire wealth. However, the exemptions in respect of approved financial
investments, owner-occupied house and agricultural assets will continue.
39. To tighten the incidence, the exemption from wealth tax currently available
for household or personal jewellery and for shares forming part of initial capital issues
is being withdrawn. In the case of conveyances, the exemption will now be limited to
Rs.25, 000 in the aggregate. The existing provision in the Wealth Tax Act excluding
from aggregation the assets transferred by an individual to the spouse or minor children
to being done away with. A similar provision to being made in respect of conversion
of assets of individuals into those of Hindu undivided families. While all these changes
will not naturally yield any revenue this year, in future, the annual additional yield
from these measures affecting wealth tax could be around Rs.14.5 crores. What is
more important, they will impose a virtual ceiling on individual wealth at a much
lower level than at present.
40. As a further measure to discourage evasion of tax, conversion of the
separate property of an individual into property belonging to a Hindu undivided family
will be brought within the ambit of the gift tax.
10
(b) TAXATION OF COMPANIES
41. I am proposing several structural changes affecting the incidence of
company taxation. While the rates of taxation on the ordinary income of companies
are being maintained at existing levels, except for the rates on capital gains, the rate
of surtax on company profits will be increased from 25 per cent to 30 per cent in the
case of chargeable profits in excess of 15 per cent of the capital.
42. The practice of offering a development rebate in respect of new investment
has had, I feel, a full play. I am accordingly serving the required notice that no
development rebate will be allowed on ships acquired or machinery or plant installed
after May 31, 1974. Whatever the revenue implications of this step-and they are
sizeable- will be fully revealed only after 1974-75, i.e., from the Fifth Plan onwards.
But I shall consider myself amply rewarded if advance notice of this change quickens
the pace of investment in the remaining years of the Fourth Plan.
43. At present, in the case of new industrial undertakings, ships and approved
hotels. profits upto 6 per cent of the -capital employed are entitled to tax exemption
for a period of five years. Since debentures and long-term borrowings do not in any
manner represent risk capital and interest thereon is in any case deducted, it was
generosity on the part of the Government to extend the tax holiday provision even
to such constituents of capital. I now propose that in calculating the limit of 6 per
cent of the capital for purposes of tax- exemption,’ debentures and long-term
borrowings will be excluded. This single measure will provide the exchequer with
Rs.10 crores during the current year; the yield for a full year will be of the order of
Rs.14 crores.
44. Priority industries currently enjoy a special tax exemption upto 8 per cent
of their profits. I am proposing that the special exemption be reduced to 5 per cent of
such profits. In addition, we have also decided to shorten the list of priority industries
by excluding aluminium, motor trucks and buses, cement and refractories, soda ash,
petro-chemicals and automobile ancillaries. The general economic conditions are now
such that it is not necessary that these industries should continue to enjoy special
benefits which were accruing to them hitherto. The two ‘measures in relation to priority
industries should yield Rs.8 crores in future years; in 1971-72, the yield is likely to be
about Rs.6 crores.
45. The deduction of income upto Rs.3, 000 in the aggregate from investments
in specified financial assets which was provided for last year will from now on be
admissible only to individuals and Hindu undivided families.
46. The concessional tax treatment of dividends received by foreign companies
from a closely held Indian company engaged in a priority industry will be discontinued;
the foreign companies will be subjected to tax on such dividends at the usual rate of
24.5 per cent.
11
 47. I am firmly of the view that the fiscal instrument must be deployed to
discourage payment of high salaries and remunerations which go ill with norms of
egalitarian society. I accordingly propose to impose a ceiling on the remuneration of
company employees which would be deductible in the computation of taxable profits.
The ceiling is being set at Rs.5, 000 per month. Together with the existing ceiling of
As. 1, 000 per month in the case of perquisites,, the allowable overall ceiling on
remuneration and perquisites, for purposes of taxation, will be at Rs.6, 000 per month.
In addition, I am proposing to reduce the tax deductible limits of daily allowance to
employees while on tour.
(c) MISCELLANEOUS CONCESSIONS
48. Having already delivered the rough tidings, let me now detail some of the
smoother ones. I propose to raise the standard deduction currently allowed for the
computation of taxable income of employees who own a motor-cycle, a scooter or a
moped from Rs.60 to Rs.75 per month; for others, who do not possess any of these,
the standard deduction win be raised from Rs.35 to Rs.50 per month.
49. The quantum of deduction in respect of long-term savings through life
insurance, provident fund contributions, etc., is being substantially modified. At present,
60 per cent of the first Rs.5,000 together with 50 per cent of the balance of such long-
term savings are tax exempt. I am now proposing that for the first Re. 1,000 of such
savings, the quantum of deduction should be 100 per cent. On the next Rs.4.000 of the
qualifying savings, the proposed deduction will be 50 per cent, and on the balance 40
per cent. The limit for the savings qualifying for deduction will be raised from Rs.15,000
to Rs.20,000 in the case of individuals.
50. As a result of the changes in the standard deductions allowable for
conveyance and long-term savings, an employee with an annual income of Rs.6,000
will be exempt from income taxation provided he saves at least Rs.400 in the approved
form.
51. The tax concessions for promoting development and export of technical
know-how and technical services, which have been available only to companies, will
from now on also apply to individuals, Hindu undivided families and partnership
firms. Certain further tax concessions are also at present available for expenditure on
research and development. A Committee has recently been set up by the Government
to review the position and make recommendations regarding further fiscal incentives
that could be offered to encourage industrial research. The recommendations of the
Committee will be given due weight.
52. The special deduction of income upto Rs.3, 000 from investments in
specified financial assets available to individuals and Hindu undivided families would
henceforth also cover interest on deposits with a cooperative society made by its
members. Moreover, the interest paid by a cooperative society to its members on
12
deposits made by them will be exempted from the requirement of deduction of tax at
source. Shares of, and member-deposits with, a cooperative society will be regarded
as approved investments which are exempt from wealth tax upto Rs.1.5 lakhs. But I
propose to withdraw the exemption in respect of such investment in the case of
discretionary trusts which are subject to taxation on their net wealth at the flat rate of
1.5 per cent, or at the rate applicable in the case of an individual, whichever is higher.
53. There are certain minor concessions which I would now mention together.
Cooperative societies of workers or those engaged in fishing and allied activities
will be exempted from tax on their entire business income. Local authorities deriving
income from the supply of water or electricity to villages outside their jurisdiction
will be exempted from tax on such incomes. A member of a cooperative housing
society, to whom a building or a flat has been allotted under a house-building scheme
of the society, will be regarded as the owner of that piece of property for purposes
of wealth tax.
54. The Housing and Urban Development Finance Corporation will be
exempted from tax on its income for a period of ten years; the tax-exempt status of the
Deposit Insurance Corporation will be extended by a further period of five years.
55. This brings me to the close of the various proposals relating to direct
taxation. After taking into amount the concessions, the net yield from the new direct
tax measures from 1972-73 will be of the order of Rs.57 crores. For 1971-72, however,
the realisation is unlikely-to exceed Rs.27 crores.
INDIRECT TAXATION
56. I now turn to indirect taxes. My proposals regarding customs duties belong
broadly to two categories. The first set of proposals is aimed at rationalising the rates
structure of import duties. The other group of proposals is related to, and consequent
on, the arrangements reached with a number of foreign countries who have agreed to
release us from the bindings under the General Agreement on Tariffs and Trade in the
matter of import levy on certain commodities.
(a) IMPORT DUTIES
57. The existing rates structure of import duties, I confess, forms a complicated
pattern. As of now, there are seven ad valorem rates of duty in force: 15 per cent, 271/
2
per cent, 35 per cent, 40 per cent and, finally, 100 per cent. in order to introduce an
across-the per cent, 50 per cent, 60 board simplification and to remove existing
anomalies, I propose to have only four effective rates of import duty, namely, 30 per
cent, 40 per cent, 60 per cent and 100 per cent.
58. I propose to bring in all items of machinery within the orbit of 39 per cent
import levy. While this would imply a marginal increase of 211/2 percentage points in
the rate of duty in respect of project imports, the decrease of duty by 5 percentage
points in respect of machinery in general would provide relief to smaller industrial
13
units and units manufacturing equipment who import a part of the components and to
all those who need to import small items of machinery by way of spares or balancing
equipment. The equalisation of rates for all kinds of machinery would also simplify
assessment and, I hope, speed up assessment work. Items such as agricultural machinery
and implements, dairy and poultry farming appliances would also now attract duty at
the rate of 30 per cent instead of 15 per cent.
59. Certain basic raw materials and non-ferrous metals will from now on be
liable to duty at the uniform rate of 40 per cent iron and steel and unwrought copper
will, however, attract the lower duty of 30 per cent.
60. It is proposed to eliminate the present rate of duty of 50 per cent and levy
instead a higher rate of 60 per cent on most items. A similar upward revision has
already been made in the course of the past two years with respect to the duty on
chemicals, drugs, medicines, electrical and non- electrical appliances. What I am
proposing now, therefore, is to bring all similar items together under the umbrella of
the same rate of duty
61. Till now, certain items used by the more affluent sections of the community,
such as automobile components and dry fruits, were liable to a duty of 60 per cent
instead of 100 per cent which is the standard rate for most imported consumer goods.
This anomaly is now being removed. In addition, in view of the increase in the c.i.f.
price as well as the high margin of profit, the specific rate applicable to cloves is
being increased from Rs.18 per kilogram to Rs.60 per kilogram.
62. As a result of the release from the GATT bindings, we are now in a
position to either impose a duty, or raise the existing rates of duty, on a number of
items, including agricultural tractors, earth-shifting machinery, staple fibre excluding
yarn, raw wool, unwrought copper, zinc and pig lead. I propose to avail of the
opportunity. In view of the high margin of profit on imported staple fibre.. I am
proposing that the duty on it be fixed at 100 per cent. On unwrought zinc, pig lead and
raw wool. the duty will be 40 per cent, and on copper, 30 per cent. Given the large
disparity between the prices of imported and indigenous tractors, I have also decided
on a levy of 30 per cent on imported agricultural tractors. The same rate of duty will
apply on earth-shifting machinery.
63. Taking into account Vie affect of the rationalisation of import duties as
well as the adjustments following from the release from the GATT bindings and the
countervailing levies related to changes in excise duties to which I would soon turn,
we should be able to get additional revenue to the extent of nearly Rs.54 crores during
the remaining part of the year.
(b) EXCISE DUTIES
64. I now come to the proposals with respect to excise duties. Pursuant to the
decision to continue the scheme of levying additional excise duties in lieu of sales tax
14
on sugar, textiles and tobacco, we are committed to raise the over-all incidence of
these additional duties to 10.8 per cent on the value of clearances by the end of the
Fourth Plan period. Since this target has to be attained by 1973-74, it has become
necessary to make a substantial beginning in the current year itself. For the present, I
have decided to concentrate on cigarettes and, to some extent, on textiles.
65. There comes perhaps a time in the life of every smoker when the concern
for his own health begins to outweigh the loyalty to an old and faithful companion.
For those who cannot shake off their consuming passion, there is at least the consolation
that the more taxes they pay, the more they serve the common cause. I am, therefore,
fortified in my decision to increase once again the taxation on cigarettes by the thought
that whichever way my smoking friends react, there would be a net gain to national
welfare. In place of the existing three slabs of duty on cigarettes, I propose to have
five. By suitable adjustments of the basic and additional duties on these slabs, I hope
to raise during the current year Rs.33.20 crores of which Rs.16.40 crores would go to
the States by way of additional excise in lieu of sales tax. The effect of the proposals
would be a marginal increase in the price of the cheaper varieties of cigarettes, but a
much sharper increase for the more expensive varieties.
66. Textiles, particularly coarse and medium varieties of cloth, are a basic
necessity, and their prices rose rather inordinately in 1970-71. Despite other constraints,
I have therefore decided that the impost on textiles should be modest this year. I
propose to step up slightly the additional excise duties on medium A and medium B
varieties of cotton textiles from 4.8 paise to 6 paise per square metre and also to round
off the additional duty leviable on coarse cloth from 3.6 paise to 4 paise per square
metre. With respect to superfine and fine cloth, however, I propose to go much further,
and raise the rates of the additional excise duty to 25 paise and 15 paise respectively
per square metre. These several measures should fetch an additional revenue of Rs.4.90
crores which will accrue entirely to the States.
67. My other major proposal in regard to excises is in the area of motor spirit,
solvents and a number of other minor lubricants. In view of the rise in international oil
prices, there is need for the maximum economy in the utilisation of petroleum and
petroleum products if we are to conserve our scarce foreign exchange resources. No
doubt, there will be a certain hardship involved in this, but I am afraid it has to be
borne by our people. To curb consumption, I, therefore, propose to increase the duty
on motor spirit by Rs.200 per kilo litre or 20 paise per litre. This measure will fetch
an additional revenue of Rs.36. 30 crores in the current year.
68. There is extensive misuse of certain special boiling point spirits, otherwise
known as solvent oils, as adulterants for motor spirit. To discourage this practice, I
propose to raise the duty on solvents from the present rate of Rs.45 per kilo litre to
Rs.845 per kilo litre. This measure will yield Rs.4. 25 crores during the current year.
15
 69. Similarly, to prevent the adulteration of mineral turpentine oil with superior
kerosene, an extra duty of Rs.100 per metric tonne is being imposed on the former. In
the case of liquid petroleum gas, I am proposing to abolish the ad valorem duty of 20
per cent and, instead, impose a specific duty of 25 paise per kilogram. The rate of duty
which at present obtains on lubricating stock oils and greases directly derived from
refined petroleum would also from now on apply to blended lubricating oils, greases
and calcined petroleum coke. However, the base petroleum products used in the
manufacture of the latter items would be given a credit for the duty that might already
have been paid. I expect these measures to yield an additional revenue of Rs.9 crores
during 1971-72.
70. At present, carbon dioxide is liable to duty, but other gases, such as oxygen,
chlorine, ammonia and refrigerant gases are exempt; these exemptions are being
withdrawn. However oxygen for medicinal use and ammonia used in the manufacture
of fertilizers would continue to be exempted from duty. This measure is expected to
yield Rs.1.60 crores.
71. I also propose to raise the basic duty on glassware to 20 per cent and on
sheet and plate glass to 15 per cent. Glass shells, glass globes and laboratory glassware
would be left untouched. While the duty on sanitary and glazed wares was revised last
year, tableware and china were left undisturbed. This deficiency I propose to make
good this year; both these items will now attract a uniform duty of 20 per cent. These
two changes are estimated to provide us this year with additional revenue of around
Rs.3.15 crores.
72. While air-conditioners pay a duty at the rate of 53.3 per cent, till now, the
evaporative type of coolers have been exempt from duty. This discrimination deserves
to be removed. However, I am proposing a duty of only 25 per cent on them and, at
the same time, exempting them from the payment of the special excise duty. Vacuum
flasks, similarly exempt till now, will also have to bear a levy of 15 per cent ad
valorem.The gain to revenue would be Rs.54 lakhs in the current year.
73. It is proposed to revise the duty on soap from the present effective rate of
11.4 per cent to 15 per cent. This would result in only a marginal increase in the price
of toilet soaps. Household and laundry soaps are being left untouched. Because of
partial exemption, the effective rate of duty on surface active agents works out to even
less than that on ordinary household and laundry soaps. It is therefore proposed to
abolish the partial exemption and restore the full statutory rate of duty on these products.
These two revisions- relating to soap and surface active agents-are likely to yield a
revenue of Rs.2.55 crores for the rest of the year.
74. It is also proposed to tax certain other luxury items. Latex foam sponge,
used extensively in the manufacture of foam mattresses, bears at present a relatively
low basic rate of duty of 20 per cent ad valorem; I propose to double this rate of duty.

16
A similar levy will be imposed on polyurethane foam as well as certain products made
out of this particular foam. The basic rate of duty on plates, sheets and strips of rubber
is also being stepped up from 20 per cent to 25 per cent ad valorem. These measures
would bring in Rs.2.60 crores of additional revenue in 1971-72.
75. The duty on crown corks and pilfer-proof caps is proposed to be raised
from 1 paise to 2 paise each. This measure is expected to yield Rs.1.90 crores.
76. A few other changes are being proposed by way of rationalisation. These
include an excise levy on dehydrated canned and bottled vegetables and on preparations
of glucose and dextrose, the removal of the special concession of 50 paise per kg. on
the basic excise duty for certain varieties of staple fibre, the rounding off of the duty
on cement from 23,76 per cent to 24 per cant, revising the duty upwards on woollen
yarn and shifting a portion of the incidence to wool tops, revising the rates of duty on
electric lighting bulbs other than those of 60 Watts and less, revising the rates for
flourescent tubes as well as for electric fans and industrial fans other than those of a
diameter not exceeding 16 inches, and removal of the concession of Rs.500 per tonne
on copper used in the manufacture of wires and cables. These assorted measures
would yield a combined revenue of over Rs.6 crores.
77. I have talked earlier about the need for the rapid reduction of income
inequalities not only in the urban areas but also in the countryside. One way in which
this could be brought about is through levying selectively indirect taxes on products
and equipment used in agricultural operations by the richer sections of the peasantry.
I propose, therefore, to tax agricultural tractors by charging a duty of 10 per cent ad
valorem; this levy is likely to fetch a revenue of Rs.3.40 crores in the current year.
78. To augment revenue, several new items are being introduced into the
orbit of Central excise taxation. The commodities and the rates of duty are being so
chosen that the net effect of these, imposts on the price level will be negligible. The
items I propose to bring in include perfumed hair oil, shampoos, lipsticks, pressure
cookers, playing cards, zip fastners, photographic cameras, cinematographic projectors
and linoleum. Very few of us perhaps would like to venture an opinion on the
contribution made by perfumed hair oil, lipsticks or playing cards to the style, pace
and quality of living in modern India. But Honourable Members will, I am sure, agree
with me that most of these commodities constitute the appurtenances of high living;
excise levies on them will have little effect on the level of living of the overwhelming
mass of the community.
79. For the same reason, I am proposing a levy on certain ready-made garments
which are mostly purchased by the well-to-do. However, in order to protect the small
manufacturers, this levy will be confined to ready-made garments manufactured with
the use of power and sold under registered trade marks or brand names. As a further
concession to the small producers, clearances upto a specified value would be excluded

17
from the excise provided the aggregate annual output in the unit concerned does not
exceed a ceiling,
80. I also propose to introduce, an excise levy on a number of producer goods
such as ball and roller bearings, bolts, nuts and screws, electric insulation and non-
medical adhesive tapes, welding electrodes, grinding wheels and motor starters, as it
is difficult to tax the end-products of these items and we are currently losing some
potential revenue. The rate of -duty will be 10 per cent. it is also proposed to charge
a duty of 10 per cent on electric supply meters, typewriter ribbons, mosaic tiles, fork
lift and platform trucks and certain motor vehicle parts and accessories. Wherever
necessary, the interests of the small producers will be protected by a. concession
similar to the one I have mentioned in the context of ready-made garments.
81. Four more chemicals are being added to the list of excisable chemicals,
and will be liable to duty at 10 per cent. A similar levy will also be imposed on
camphor and menthol.
82. These various measures of new excise levies together are likely to yield
Rs.15 crores.
83. I, now want to announce an important new measure intended to meet the
cost of the programme for children health and nutrition. I propose to levy a duty of 10
paise per kg on Maida processed by roller flour mills in the organised sector. This
particular flour is usually consumed by the richer sections of the population and
otherwise used in the manufacture of sweets; the consumption of bread, another item
in the manufacture of which Maida is used, is again mostly confined among the higher
income am sure the slight additional expenditure which this levy would imply would
be cheerfully borne by these consumers since the resultant revenue of Rs.7.4 crores
which will accrue to the Centre will be earmarked for being spent on the welfare of
children. in addition, the States also will receive nearly Rs.1.8 crores from this measure.
84. I will now refer to a few excise concessions which I have considered
desirable. To promote the use of minor oils in the manufacture of soap and thereby
reduce our dependence on imported tallow and oils, I propose to reduce the incidence
of the duty on soap where-ever there is certain minimum use of minor oils like neem
and sal. The rate of duty on sodium silicate will be reduced to encourage the output of
cheaper varieties of soap in the small-scale sector. in order to foster the greater utilisation
of cottonseed oil, the existing excise rebate for using this oil in the manufacture of
vanaspati will be increased. A similar concession is also proposed to be accorded to
rice-bran oil.
85. With a view to providing some relief to the small and marginal units
using powerlooms for manufacturing cotton fabrics, I propose to reduce the rate of
compounded levy on units where not more than 4 powerlooms are installed from

18
Rs.50 to Rs.10 per loom per annum. in the case of units employing more than 4
powerlooms, the compounded levy will be half of the existing rates. The concession
at present available to independent processors, will be rationalised. There are also a
couple of marginal concessions for the manufacturers of embroidery and leather cloth.
86. All these relief’s and concessions together would cost the exchequer around
Rs.1.50 crores for the remaining part of the year.
87. This brings me to the end of the rather long enumeration of the proposed
changes with regard to excise duties. Taking all the proposals for excise duties together,
the total yield for the rest of the current financial year will be roughly Rs.8 9 crores
for the Centre and Rs.43 crores for the States.
(c) OTHER MEASURES
88. I am afraid, having dealt with direct taxes, customs and excises, I am not
quite through as I have yet to propose to the Honourable Members a new measure
which is not quite in the nature of an excise levy. This is a tax which I propose to
impose on foreign travel. The levy will be at the rate of 20 per cent ad valorem on all
tickets purchased in rupees; tickets paid for in foreign exchange will be exempt. The
only other major exemption would be for students and scientists. The estimated revenue
from this measure which would come into effect from a date to be notified later,
would be about Rs.7. 0 crores. In case any Honourable Member feels that I am taking
away what many airlines have graciously offered by way of concessional fares, I wish
to assure them that with the proposed ad valorem tax, the value of the concession in
absolute terms would in fact be enhanced.
89. And now I come to the final set of proposals I have to announce on behalf
of my colleague, the Minister for. Communications. Honourable Members are aware
that Posts and Telegraphs branches have incurred heavy losses in the past and are
anticipated to show a loss of as much as Rs.15 crores during the current year. Both the
Tariff inquiry Committee which was set up to examine the rates structure of the Posts
and Telegraphs Department and the Administrative Reforms Commission have
recommended the need for financial viability and the desirability of surplus being
generated from the operation of Posts and Telegraphs. A certain upward revision in
tariffs is therefore inescapable. While proposing this revision, we have kept in view
the problems faced by the less affluent sections of society; items like postcards, letter
cards, and letters have thus been kept completely out of the purview of the upward
adjustment of rates. Most of the proposed increases relate to registration fees for
postal articles, and telegraph and telephone tariffs. The registration and parcel fees are
being raised by 5 paise and 10 paise respectively for 400 grams. There are also minor
adjustments in the charges for telegrams consisting of more than 8 words as well as in
the rentals for telephones, teleprinters and telex services. The Memorandum detailing
the proposed changes is being circulated along with the Budget papers.

19
 90. So far as the Union Budget is concerned, the various proposals outlined
would imply, for 1971-72, additional revenue aggregating to Rs.177 crores. The
budgetary gap of Rs.397 crores, I had indicated earlier will accordingly be now scaled
down to Rs.220 crores.
91. I have now come to the end of my labours. Quite candidly, it has been for
me a difficult Budget to frame. There are a wide range of fiscal proposals and, in
some directions, the impact of the new levies cannot but be considerable. Let me
remind Honourable Members, however, that the price rise in the economy has been
sufficiently disquieting last year, and the budgetary deficit must therefore be kept
within reasonable limits. In addition to the obligation that we owe to the community
to increase substantially the size of the Plan and to provide for greater employment
opportunities, there is, at this stage, still the imponderable factor of the developments
in East Bengal and the rising flood of evacuees.
92. Fiscal policy, however, is not a matter simply, or even primarily, of raising
resources to meet the inescapable demands on the national exchequer. It must serve
larger objectives as well and guide the economy in desired directions. It must, in
particular, make a significant impact on existing inequalities in income, wealth and
economic power and reduce ostentatious consumption. It is for this reason that, in the
field of direct taxation, I have introduced a number of measures whose significance to
revenue in the short run may not be so great but which are vital for the achievement
of a just society. In the field of indirect taxation also, objectives such as those of
reducing pressures on our balance of payments have been kept in mind; and care has
been taken to ensure that only a small proportion of the additional burden is borne by
the common man.
93. It is hardly possible to claim that a new social and economic order can be
ushered in through budgetary policy alone, much less through a single Budget. In a
Budget of this magnitude it is also difficult to reconcile all the objectives we have set
before ourselves. But I hope I have not flinched from the duty of trying to meet the
immediate and urgent requirements while furthering our accepted objective of a truly
socialist society.
(May 28, 1971)

20
 SPEECH OF SHRI Y.B.CHAVAN MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1971-72 (INTERIM)
Sir,
I rise to present the interim Budget for the year 1971-72. The, people of India
through their representatives in this Honourable House have reposed their overwhelming
confidence in the Government led by Shrimati Indira Gandhi. Those of us who are
privileged to belong to this Government and the Party it represents know well that we
shall vindicate the verdict of the people only to the extent that we redeem our promise
to promote the well-being of the poor and the unemployed in this land.
INTRODUCTORY
2. Economic policies in the country have already been given a new and bold
orientation towards growth with social justice in the recent past. Our task now is to
reassess the entire range of our policies so as to give them a sharp focus of effectiveness,
to translate these policies into concrete programmes of action and to implement these
programmes with speed and determination. Only so can we accelerate the process of
growth, reduce disparities in income, wealth and economic power, generate employment
on a massive scale and avoid pressures on prices or balance of payments of the kind
which generate internal tensions and increase our dependence on external credits.
3. The Budget of the Central Government is a powerful instrument for
achieving our basic objectives. Within the few days that the new Government has
been in power, it has obviously not been possible to subject our budgetary position
and policies to a searching and comprehensive review. We propose, therefore, to present
the Budget proper for 1971-72 in the next session of the Parliament so that Government
and the Honourable Members have adequate time to review and assess the full
implications of what is required at this crucial juncture in our economic history.
4. My purpose today is a limited one, viz., to propose a vote on account
which can be passed before the 31st March so that Government can carry on its
business during the early months of the next financial year. The Finance Bill I shall
introduce later today contains no new tax proposals.
5. On the expenditure side, we have taken care to provide for Defence, normal
administration, assistance to the States and the Central Plan on a scale which would
permit all necessary and worthwhile activities to go forward during the initial period
of the vote on account. Even at this stage we propose to provide for some new and
significant initiatives such as a country-wide programme of employment-oriented
productive works so that their implementation can begin in right earnest. Before the

1
presentation of the Budget proper next May, we shall review the entire position,
including the scope for additional mobilisation of resources, with a view to provide
for a sizeable increase in outlays on development and social welfare. The estimates of
Plan expenditure, which I shall be presenting today, are tentative; and it will be our
endeavour to ensure that the momentum of planned development is accelerated
significantly from year to year.
ECONOMIC CONDITIONS
6. Economic conditions in the country have been, on the whole favourable
during the past 12 months. A detailed survey of the economic situation will be presented
to the next session of the Parliament. Honourable Members would, however, permit
me to outline briefly the strength and the weaknesses of the Indian economy during
the past year.
7. For the second year in succession, the overall rate of growth of the economy
is expected to measure up fully to the targets set in the Fourth Plan. National income
in real-terms which had increased by about 5.5 per cent in 1969-70 is expected to
register a further increase of a similar order in 1970-71.
AGRICULTURE
8. Agricultural growth has been an important contributory factor to the overall
growth of the economy. The production of food grains which had recorded an increase
of 5.8 per cent to 99.5 million tonnes in 1969-70 is expected to increase by another
5.5 per cent to 105 million tonnes in 1970-71. Despite progressive decline in imports,
it has been possible to build up a sizeable stock of food grains in the hands of the
Government which at present amounts to more than 51/2 million tonnes as compared
to less than 41 million tonnes a year ago. The larger availability of food grains has
also been reflected in a reduction in food grains prices.
9. With the exception of sugarcane, however, the production of commercial
crops, notably cotton and oilseeds has been inadequate; and this has had adverse
effect on industrial production and prices. We have attempted to restrain the resultant
increase in prices of major agricultural raw materials by restraint on credit and
speculative activity and by larger imports. Our agricultural scientists have achieved
some success in evolving new programmes for raising the productivity per hectare of
commercial crops. It is necessary to extend this process not only for price stability and
reduction in the reliance on imports but also for improving living conditions for most
of our poorer farmers in dry areas. I can assure Honourable Members that all promising
programmes for increasing yields per hectare in respect of commercial crops will
receive our maximum support, both financial and otherwise.
INDUSTRY
10. During the year as a whole, industrial production is expected to increase
by roughly 6 per cent. The improvement in performance has been shared not only by
2
capital goods industries, particularly machinery and machine tools, but also by important
intermediate goods industries such as aluminium, nitrogenous fertilizers, petroleum
products and heavy chemicals and by a wide range of consumer goods industries. The
performance of new industries and the small-scale sector has also been encouraging.
Nevertheless, the fact remains that the tempo of industrial production in the country
needs to be substantially accelerated and to this end the supply of both agricultural
and industrial raw materials particularly steel needs to be rapidly increased. It is with
this end in view that Government proposes to speed up the completion of the Bokaro
Steel plant, to improve the performance of existing steel plants both in the public and
private sector and to set up three new steel plants in the southern States. Preparatory
work on these new steel plants is proceeding satisfactorily. Here again, we shall not
allow their progress to falter as a result of financial constraints.
11. New industrial investment propositions approved during 1970 have been
much larger in magnitude than during the corresponding period in the preceding year.
Production of capital goods within the country is increasing and so are the applications
for the import of capital goods. We shall endeavour to accelerate this process of
industrial investment so that more employment opportunities are created and there is
no shortage in the coming years of key commodities.
12. Honourable Members are aware that during the last year we have taken a
number of important policy decisions regarding industrial licensing, control of
monopolies and greater emphasis in the policies of the public financial institutions
towards assisting the backward regions and the newer entrepreneurs and towards
participation in the management and the profitability of the larger units they might
assist in the national interest. The vast potential for further industrial growth which
has been created by our efforts over the past two decades cannot be exploited fully
without bringing in a larger number of smaller people within the net-work of initiative
and enterprise. When large new investments or expansion of existing large units become
necessary in the over-all interests of the economy, it shall be our endeavour to reconcile
growth and efficiency with reduction in the concentration of economic power by
an imaginative and flexible use of the concept of the joint sector and by the
expansion of the public sector.
PRICES
13. In the latter part of 1970, the price situation in the country became a
matter of concern as the wholesale price index from week to week remained higher by
as much as 7 per cent or more when compared to the corresponding week in the
preceding year. During recent weeks the general price index has shown an increase of
4 per cent or less as compared to the corresponding weeks in 1970. Even so, the price
situation warrants continued vigilance and we propose to take vigorous measures to
ensure a reasonable degree of stability in the prices of essential goods which enter
into mass consumption.
3
 14. The phenomenon of rising prices has been a matter of concern all *over
the world and there is hardly any country which has been able to avoid at least a
moderate increase in prices of 3 to 4 per cent per annum in recent years. We cannot,
however, ignore the implications of an unabated price increase, particularly its effects
on the standard of living of the fixed income groups and the weaker sections. It is now
generally recognised everywhere that without an active policy of restraint on wages
and prices and, therefore, on incomes, we cannot avoid a price spiral which moves
continually upwards from one industry to the other. In our circumstances, the shortage
of some key raw materials which we can relieve only to a limited extent by larger
imports has also been a major contributory factor. Efforts to increase production in
key areas is thus an essential part of any price policy. Any attempt to accentuate
unavoidable shortages in the short run by speculative activity will also have to be
resisted firmly.
15. The overall growth in money supply has also been larger than what is
warranted by the growth in production. The budgetary deficit at the Centre has been
of the same order as set in the last Budget. However, commercial banks’ borrowing
from the Reserve Bank remained at unusually high levels for most part of the current
year. It was against this background that the Reserve Bank raised the Bank Rate from
5 to 6 per cent early in January and took simultaneously a number of measures to
encourage savings and assist deposit mobilisation and to discourage bank borrowing
from the Reserve Bank except for priority purposes. These measures together with the
tightening of selective controls on advances against commodities in short supply have
already had a salutary effect
FINANCIAL INSTITUTIONS
16. Honourable Members would be happy to know that an impressive
beginning has been made with the achievement of the objectives that we had in mind
when we took the eventful stop of nationalising fourteen major banks in the country.
For example, in the first seventeen or eighteen months of nationalisation, Le., between
July 19, 1969 and end of December 1970, the public sector banks, Le., the fourteen
nationalised banks and the State Bank of India and its seven subsidiaries, opened, on
an average. as many as 145 new branches per month as against 80 per month during
the first six. Months of 1969 an ‘ d 47 per month during 1968. Roughly 70 per cent of
these new branches have been located in centres which had no banking facilities at all
so far, the bulk of them being in the rural areas. The Lead Batik Scheme for the
intensive development of banking in over 330 districts of the country is making
satisfactory progress. Survey reports on about 80 districts have already been prepared
and many more are nearing completion. The results of the surveys are being pooled
and centres for new branches are being allotted continuously to the commercial banks.
The record of the new branches opened in mobilising local deposits and in utilising
them for productive purposes in the same areas has been particularly commendable.

4
 17. The shift in emphasis in the matter of giving credit in favour of relatively
weaker sections of the society which had hitherto been neglected by the banking
system has been equally pronounced. Between June 1969 and November 1970, the
aggregate number of borrowal accounts in respect of previously neglected sectors
such as agriculture, small-scale industries, road transport operators, small traders and
self-employed persons and professionals increased from a little less than 3 lakh to
more than 11 lakhs and the total assistance given to these sectors almost doubled. This
process will gather further momentum with the formation of the Credit Guarantee
Corporation of India Ltd. early this year. Small borrowers are also likely to benefit
once the scheme of differential lending rates, the details of which are currently being
worked out by a Committee, is introduced.
18. Honourable Members would appreciate that the ability of the public sector
banks to fulfil their obligations to the weaker sections of the community without
neglecting the genuine requirements of all productive establishments would depend
ultimately on the success in mobilisation of deposits and on the ability to scrutinise
the end-use of credit so as to eliminate all wasteful and unproductive borrowings.
While the nationalised banks have made a good beginning in regard to both these
objectives, I -am deeply conscious of the fact that much remains to be done in this
regard as also in respect of improvement of service to customers. We propose to
increase greatly the facilities for meaningful training of employees and so to shape
personnel policies as to bring about a greater sense of dedication and harmony among
management and staff at all levels. The bank employees have been among the staunchest
supporters of bank nationalisation for many years and we,. on our part have not been
slow in responding to their legitimate demands for improvement in emoluments and
working conditions. I hope and trust that individually as well as collectively bank
employees will play their part in the vital task of economic regeneration of the country.
19. The long-term financial institutions including the Industrial Development
Bank of India, Industrial Credit and Investment Corporation of India, Industrial Finance
Corporation, the Life Insurance Corporation and the ‘Unit Trust of India have had
another successful year. Honourable Members are perhaps aware that a new Industrial
reconstruction Corporation with headquarters at Calcutta is being set up. This
Corporation is expected to play a significant part particularly in the Eastern region in
and around Calcutta. Where ever possible, the Corporation will endeavour to rehabilitate
industrial units which have recently closed down or are facing the risk of closing
down by reconstruction of the share capital, strengthening of management,
diversification of products, improvement in technology and labour relations and
provision of finance on suitable soft terms. I have no doubt that with the active
cooperation and participation of all concerned, this Corporation will play a useful role
in reducing unemployment as well as economic and Social tensions in a vital area of
the economy.
5
BALANCE OF PAYMENTS
20. Honourable Members would lie happy to know that by the end of the
current fiscal year, we would have repaid all the outstanding drawings on the
International Monetary Fund that we had to make during the critical years of 1966 and
1967. In addition, we have fulfilled our obligations in relation to an increase in our
International Monetary Fund quota from 750 million to 940 million dollars. We have
also been an important beneficiary of the scheme for the creation of Special Drawing
Rights.
21. While the overall improvement in our foreign exchange position during
the past two or three years has been unmistakable, I cannot help emphasising that
there is no room for complacency whatsoever in regard to our balance of payments.
During the current fiscal year, for example, the improvement in our position vis-a-vis
the International Monetary Fund will be matched by a corresponding decline in our
own reserves including Special Drawing Rights so that, on balance, our total reserves
position will show little or no improvement. There has also been a substantial increase
in import licences issued for the maintenance of the economy the full impact of which
is yet to be felt. Much greater and continuing effort on a wide front would also be
necessary if the target of a 7 per cent per annum increase in export earnings set in the
Fourth Plan is to be realised from year to year. The outlook regarding the net inflow
of foreign aid remains uncertain. This is particularly so in respect of readily useable
aid such as non-project assistance and refinancing of our heavy debt repayments.
22. Against this background, it would be prudent on our part to seize every
worthwhile opportunity for export promotion as well as import substitution and to
exercise the maximum restraint on the imports and consumption of less essential
items. This underlines once more the need for keeping a firm rein over costs and
prices, and for the deployment of fiscal instruments to regulate consumption. The
priorities in investment also have to be guided by the exigencies of the balance of
payments. Let us not forget that our objective is to combine growth not only with
social justice but also with self-reliance. We have a long way to go before we can rest
content with our achievement on any one of these fronts.
EMPLOYMENT
23. By far the most urgent problem that needs our whole-hearted attention is
the problem of unemployment. It is this more than anything else which poses a threat
to the stability of our young democracy. There are indications that the employment
situation in the country has improved somewhat in response to the revival of agricultural
and industrial production over the past two years. But the fact remains that
notwithstanding the rapid economic strides we have taken over the past two decades,
the twin problems of mass poverty and unemployment remain as acute as ever. In
large pockets, there has perhaps been a worsening of conditions. There can be no
question that poverty and unemployment cannot be eradicated without a substained

6
process of growth. But there are several ways of achieving growth; and we have to
seek out those which make the maximum impact on unemployment and mass poverty.
24. It was with this end in view that the Government took a decision some
time back that new employment- oriented schemes should be taken up in each district
in the country with a view to provide employment to at least one person in every
family. Instructions have already gone to the State Governments to prepare schemes,
which apart from creating additional employment opportunities would also add to the
productive potential in each district. In the Budget for 1971-72 a provision of Rs.50
crores is being made to support this country-wide programme of creating more
employment opportunities with a productive bias.
25. The Committee which was set up by the Reserve Bank of India to review
the special credit schemes of the Commercial banks has offered a number of valuable
suggestions for promoting and encouraging self-employment. The recommendations
made by the Committee are receiving urgent attention and decisions thereon will be
taken expeditiously.
BUDGETARY OUT-TURN, 1970-71
26. The Budget introduced last year by the Prime Minister provided for a
substantial increase in Plan outlay at the Centre, massive assistance to the States for
a similar increase in Plan outlay at the State level and a series of new initiatives in
order to combine growth with a greater regard for the welfare of the most needy
sections of society. During the year, we have honoured our commitments to the States
and have indeed given substantial assistance in addition to what was provided in the
Budget for urgently felt needs such as those for the improvement of living conditions
in the Calcutta Metropolitan Area and for relief in the flood and famine-stricken areas
in other States. The minimum pension as also family pension for Central Government
employees has already been increased. A similar scheme for family pensions as well
as lump sum payment in the event of death has already been introduced in respect of
industrial workers who are liable to pay contribution to the Employees Provident
Fund at the rate of 61 per cent of their pay as well as for workers covered by the Coal
Mines Provident Fund and Bonus Scheme Act, 1948. The newly set up Housing and
Urban Development Finance Corporation has made a beginning with its activities and
it shall be our endeavour to ensure that these activities gather rapid momentum so that
there is visible improvement in some of our largest urban conglomerations. The
nutritional programmes for children in tribal blocks and slum areas, extension of
drinking water and special schemes for small farmers, marginal farmers and dry farming
areas have been taken in hand. While the expenditure on selective rural works
programmes in chronically drought affected areas is likely to fall short of the target of
Rs.25 crores because of the time taken in preparing and finalising worthwhile schemes,
Honourable Members would note that outside this provision a sum of Rs.100 crores
has been provided for natural calamities relief as against the Budget provision of
Rs.50 crores only. Provision is being made in the Budget for the coming year for the
continuation of these special schemes.
7
 27. There is every reason to believe that the step-up in Plan outlay envisaged
at the State level during the current year will be achieved and in fact in several States
Plan outlay will exceed the initial provision. The provision for special assistance to
the States in a weaker financial position has been increased from Rs.175 crores provided
in the Budget to Rs.195 crores which is being provided in the Revised Estimates. It is,
however, a matter of some concern that despite the enlarged provision for special
accommodation, a number of State Governments have continued to incur large
overdrafts with the Reserve Bank of India, thus adding to inflationary pressures in the
economy. Considering the fact that funds to be earmarked for special accommodation
are going to be smaller in the coming years as per the agreed pattern, it to vitaly
important that State Governments, no less than the Centre, observe the strictest fiscal
discipline and adopt all possible measures to raise and conserve resources.
28. As far as the Centre’s Plan outlay is concerned, indications are that the
actual expenditure in 1970-71 would show a substantial increase of the order of Rs.180
crores over. the actual expenditure in 1969-70. It is a matter of great disappointment,
however, that the actual outlay in both the years is likely to show a significant shortfall
in relation to the original Budget provisions. Many of the industrial projects in the
Central sector, notably Bokaro Steel Plant, the fertilizer plants and petro-chemical
projects have not been able to get into stride as rapidly as was expected. Clearly, we
need to examine critically our present procedures for the scrutiny and sanctioning of
major Plan schemes and to put greater speed in implementation. We propose to review
the progress of major schemes included in the Central Plan ‘so that the provision
made for them in the coming year is as realistic as possible. Additional schemes
particularly those which can be taken up quickly and which can yield quick returns
and make an impression at the same time on the well-being of the poorer sections of
the community will also be kept ready to make up for shortfalls which become
inevitable. I would like to make it absolutely clear to Honourable Members that while
some readjustment of Plan priorities and re-arrangement of Plan programmes are
obviously called for, there is no question whatsoever of reducing the size of the Plan.
Quite the contrary to our intention.
29. In the Revised Estimates for the current financial year, tax revenues-
particularly revenues under Income and Corporate Tax-are expected to show some
Improvement over the Budget Estimate for 1970-71. The Revised Estimates for the
current year thus show a tax revenue of Rs.3,198 crores against the Budget Estimates
of Rs.3, 134 crores. There is likely to be a similar increase in non- tax revenue as well.
This improvement under revenue receipts, however, will be offset by a reduction of
about Rs.26 crores under market loans and of nearly Rs.50 crores under external
assistance. I have already referred, briefly, to the position regarding expenditure in the
current year on the Plan and by way of assistance to the States. On non-Plan expenditure,
a major item of variation has been the incidence of the interim award of the Pay
Commission which was accepted in toto by the Government. On the whole, and in

8
part as a result of the incidence of the Pay Commission’s interim award, the contribution
of Public Sector enterprises to the Budget is expected to be of a lower order. Loans to
some of these enterprises for meeting their cash loss and working expenses would
also be some Rs.30 crores larger than what was provided in the Budget. On balance,
the budgetary deficit at the Centre in the Revised Estimates for the current year is now
estimated at Rs.230 crores, i.e., roughly of the same order as the Budget Estimate of
Rs.227 crores.
BUDGET ESTIMATES, 1971-72
30. At existing rates of taxation, total tax revenue next year is estimated at
Rs.3,403 crores, of which the share of the States will be Rs.850 crores. Non-tax revenue
excluding food aid and PL 480 revenue grants is expected to increase from Rs.908
crores this year to Rs.966 crores next year. While receipts under market loans and
small savings will show an increase, receipts under external assistance are expected to
show a significant decline from Rs.518 crores this year to Rs.421 crores in 1971-72.
The major part of this decline is accounted for by receipts under PL 480. Net receipts
from non-project and project assistance also are likely to decline from Rs.355 crores
in the Revised Estimates this year to Rs.324 crores next year.
31. On the expenditure side, normal administrative expenditure will show an
increase of Rs.15 crores over the current year’s level. An additional provision of
Rs.65 crores is being made for expenditure on Defence both revenue and capital as
compared to the Budget provision in the current year. The provision of Rs.50 crores
for employment- oriented schemes to which I have referred earlier, is for the time
being treated as outside the Plan. Excluding this, the provision in the Central Budget
for the Plan for 1971-72 will be Rs.1980 crores representing an increase of Rs.74
crores over the Budget Estimates for the current year. This entire increase is by way
of Plan assistance to the State Governments and the Union Territories, the provision
for which is being increased from Rs.711 crores in the current year to Rs.785 crores
in the coming year. This is in accordance with the discussions held between the Planning
Commission and the State Governments regarding their Plans for 1971-72. I have
chosen to make full provision for Plan assistance to the States even at this stage so
that State Governments can proceed with their Annual Plans for 1971-72 without
having to wait for the Central Budget proper to be introduced next May.
32. The provision of Rs.1195 crores for the Central Plan proper next year is at
the same level as in the Budget for the current year although in relation to the likely
expenditure, the interim provision now being made would represent a significant increase.
I have already made it clear that we have every intention of augmenting the provision
for the Centre’s Plan in the Budget to be presented in May. We shall also endeavour to
make sure that the outlays provided for different programmes in the Central Plan proper
are so scrutinised and re-arranged as to avoid the kind of shortfalls which have been a
disturbing feature of the past two years. At the same time, the search for identifying
areas for securing economies in non-Plan expenditure will be vigorously pursued.
9
 33. The revenue account next year on present indications is expected to show
a surplus of Rs.114 crores. The fact that we can look forward to a revenue surplus
next year without any additional taxation is an indication that the attempt to enlarge
the tax base in the last year’s Budget has met with significant success. And yet, this is
only one part of the story. The capital account is expected to show a deficit of Rs.354
crores, so that the overall deficit in the Interim Budget is estimated to be Rs.240
crores, or roughly of the same magnitude as in the Revised Estimates for the current
year. Since a sizeable increase in Plan outlay would have to be provided for in the
Budget to be presented in May, and since it would not be prudent to enlarge the
quantum of the budgetary deficit, the task of widening and deepening the resource
base will have to continue. If the momentum of growth is to be improved and sustained,
this is an obligation from which we can scarcely renege.
34. Sir, the brief outline of the Interim Budget that I have just given is only a
token of our determination to accelerate the momentum of growth and to provide for
the needs of the weaker sections of the community. If it has not been possible in this
Budget to give a more positive indication of our intention to increase Plan outlays and
to enlarge the resources required for this purpose in a manner which serves at the
same time our larger social objectives, Honourable Members would appreciate that
the Budget I have presented could not take into account the mainstay of all Finance
Ministers, namely, the power to raise more revenues and redistribute incomes and
wealth by suitable changes in the fiscal system. I hope to receive constructive
suggestions during the coming weeks from all Honourable Members and from the
people at large.
35. The vitality of the political freedom we won and of the democratic
institutions we gave ourselves has been demonstrated in recent weeks as never before.
We are now engaged in a new struggle against poverty and injustice. I have no doubt
that the people of India will once again prevail and we shall witness soon a new dawn
of social and economic freedom in this great and ancient country.
Sir, with these words, I have the honour to commend this Interim Budget to the
House.
(March 24, 1971)

10
 SPEECH OF SHRIMATI INDIRA GANDHI PRIME MINISTER AND
MINISTER OF FINANCE INTRODUCING THE BUDGET FOR THE YEAR
1970-71
Sir,
I rise to present the Budget for the year 1970-71. The annual Budget is the most
important instrument through which we implement our successive Plans for
development.
2. Before I proceed to delineate the broad features of our present economic
situation and of the Budget, I should like to spell out briefly the main. ingredients of
Government’s approach.
3. It is generally accepted that social, economic and political stability is not
possible without the growth of productive forces and the augmentation of national
wealth. Also, that such growth and increase in wealth cannot be sustained without due
regard to the welfare of the weaker sections of the community.
4. Therefore, it is necessary to devise policies which reconcile the imperatives
of growth with concern for the well-being of the needy and the poor. Measures have
to be devised which, while providing welfare, also add momentum to productive forces.
Any severance of the vital link between the needs of growth and of distributive justice
will produce stagnation or instability. Both must be avoided.
5. The provision of adequate employment opportunities is not just a welfare
measure. It is a necessary part of the strategy of development in a poor country which
can ill-afford to keep any resources unutilised or under-utilised. Greater attention to
dry farming areas is not merely to avoid inequalities in the rural areas. It is also an
essential part of any programme to achieve sustained increases in agricultural
production. Encouragement to small enterprises and to new entrepreneurs is vital to
build up managerial and entrepreneurial talent which is all too scarce today. Without
some restraint on urban land values and individual ownership of urban property, we
cannot adequately develop housing and other amenities necessary to wrest the maximum
benefit from the vast productive investments already made in our over-crowded towns
and cities. The weaker sections of the society are also the greatest source of potential
strength. We cannot provide for all the urgent needs of society with our limited
resources. But a balance has to be struck between outlays which may be immediately
productive and those which are essential to create and sustain a social and political
framework which is conducive to growth, in the long.
6. Economic conditions in the country at present permit and indeed require
a more vigorous effort to stimulate growth. During 1969-70, the first year of the
1
Fourth Plan, there is every likely hood of achieving an over-all rate of growth of 5 to
51/2 per cent. The modernisation of Indian agriculture is well on its way; and it has led
to a substantial recovery in industrial production. There has been a welcome increase
in foreign exchange reserves; and the general level of prices over the past two years
has been relatively stable. At the same time, it is necessary to set up new capacity in
a number of fields in order to sustain growing levels of consumption, exports and
employment.
7. If the opportunities for growth, which are now available, are to be seized
fully, the Central and State Governments must make adequate provision for
developmental outlays in the coming year. Private investment in agriculture, small
industry and construction has been buoyant for some time now; and there is a revival
of interest in investment in organised industry. A decisive increase in Plan outlay in
the public sector will also stimulate productive investment in the private sector.
8. Apart from providing for a significantly higher Plan outlay, the Budget
for 1970-71 makes special provision for a number of schemes which combine an
element of social welfare with future growth potential.
9. It is with this positive approach to problems of growth with stability and
social justice, that we have sought to give new emphasis and a new sense of urgency to
economic policy in recent months. The nationalisation of banks, for which there is
overwhelming support in this Honourable House and the country at large, will, I am
sure, be soon put on a stable footing. The Monopolies Act and the decisions that the
Government have already taken in the light of the recommendations of the Industrial
Licensing Policy Inquiry Committee should help to avoid the concentration of economic
power and provide encouragement to small and new entrepreneurs. At the same time,
well -established industrial companies will be able to participate in the core sector and
in industries with export orientation. It has also been decided that Government as well
as financial institutions should assume special responsibility to promote industrial
development in selected backward areas. The Fourth Plan, as it is now being revised,
will take particular care to look after some of the urgent socio-economic requirements,
such as the development of suitable techniques for dry farming areas, greater employment
opportunities for landless labour, the adequate supply of drinking water and the
improvement of urban environment in many of our congested metropolitan areas.
10. According to Revised Estimates, the deficit at the Centre for 1969-70 is
now estimated to be Rs.290 crores as against the Budget Estimates of Rs.254 crores.
The transfer to State Governments, on account of their share in Central taxes and
duties, has increased by Rs.104 crores over the Budget Estimates, largely as a result
of the Finance Commission’s award. A substantial provision of Rs.275 crores by way
of non-Plan assistance to the States had also to be made so as to enable them to carry
out their Plan programmes. As a result of continued decline in imports, collection
2
under import duties and disbursements under external aid are not likely to come up to
Budget Estimates. On the other hand, collections under income-tax and non-tax revenues
and receipts from market loans will be larger.
11. Since several States continue to have gaps in resources, it would be prudent
to provide in advance for special assistance to them. Accordingly, it is proposed to
provide Rs. 175 crores in the Budget next year to cover the gaps in the resources of
certain States since otherwise it would be difficult for them to undertake worthwhile
Plan programmes. Provision for Plan assistance to the States is also being increased
from Rs.615 crores this year to Rs.635 crores next year. If State Governments are able
to raise additional resources and keep a careful watch on non-Plan expenditure, it should
be possible for them to increase their Plan outlay from roughly Rs.950 crores this year
to about Rs.115 0 crores next year, i. e. an increase of the order of 2 0 per cent.
12. It is proposed to raise Central Plan outlays, including those on centrally
sponsored schemes from Rs.1223 crores this year to Rs.1411 crores next year, i. e. by
roughly 15 per cent. The Centre’s Plan next year provides Rs.39 crores more for
agriculture and allied programmes, Rs.84 crores more for transport and communications,
Rs.31 crores more for power and Rs.28 crores more for social services, including
family planning. The Plan outlay of the Union Territories is also being augmented
from Rs.66 crores to Rs.76 crores.
13. Taking the Centre, States and the Union Territories together, the Plan
outlay will increase from Rs.2239 crores in 1969-70 to Rs.2637 crores in 1970-71 i e.
by about Rs.400 crores. At this stage, this represents a substantial effort to accelerate
the pace of development. In addition to the Plan provisions made in the Budget,
institutional finance to assist industry and agriculture will also be mobilised on a
larger scale next year. With the considerable step up in Plan outlay and the increased
provision of institutional finance, there should be significant increase in employment
opportunities in the coming year.
14. Programmes of rural development which will be given special emphasis,
with the help of Plan provisions and Institutional. Finance, are summarised in a
memorandum which is being separately circulated to Honourable Members. This
memorandum also outlines some of the new initiatives which we propose to take in
order to combine growth with a greater regard for the welfare of the most needy
sections of society. I shall, therefore, refer to them only briefly here.
(a) Special schemes for small farmers are being taken up in 45 districts and
research on dry farming techniques is being accelerated.
(b) It is proposed to provide next year a sum of Rs.25 crores for selected rural
works programmes particularly in areas which are prone to famine. This
provision will be outside the Plan and will form part of the amount set
aside for drought relief during the year.
3
 (c) An Urban Development Corporation with an authorised share capital of
Rs.10 crores is being set up. The Corporation will borrow in the market to
supplement its share capital and to set up a revolving fund for financing
activities, such as slum clearance, housing and urban land development.
(d) A substantial provision has been made in the Fourth Plan for the supply of
drinking water. I have written to the Chief Ministers that the bulk of this
provision should be used to provide drinking water to those areas which
have no easy access to this basic requirement rather than to improve
existing facilities in bigger towns.
To provide more comprehensive benefits to industrial workers, who are
liable to pay contribution to the Employees Provident Fund at the rate of
8 per cent of their pay, it is proposed that a part of the contribution of
employers and employees should be supplemented by a contribution from
the Government to make up a separate fund from which family pensions
as well as a lump sum payment in the event of death will be provided.
(f) The minimum pension as also family pension for Central Government
employees is proposed to be increased to Rs.40 per month. This decision
will apply to those receiving’ pension at present as well as to those entitled
to pensions in future. For industrial employees also, the scheme, to which
I referred earlier, provides for a minimum family pension of Rs.40 per
month.
(g) To supplement existing schemes for school-feeding and the like, a
beginning is being made with a programme to meet the nutritional
requirements of the age group 0-3. A provision of Rs.4 crores is being
made in the Budget for children in tribal development blocks and in city
slums. From time to time, the programme will be extended with the help
of specially designed schemes to raise additional resources.
15. At the existing rates of taxation, revenue receipts are likely to increase
from Rs.3587 crores this year to Rs.3867 crores next year. After allowing for statutory
transfer to the States, the revenue receipts available to the Centre will increase from
Rs.2965 crores to Rs.3167 crores. Revenue expenditure next year is expected to increase
by Rs.176 crores, of which Rs.68 crores is on Plan schemes and Rs.108 crores on non-
Plan items. Total non-Plan expenditure has been restricted to the minimum and will
increase by about 4 per cent.
16. Honourable Members will also be glad to note that the internal resources
of public sector enterprises, which are available for their expansion, will increase
from Rs.162 crores this year to Rs.2 02 crores next year. Market loans are estimated
at Rs.162 crores next year as against Rs.141 crores in the current year. Receipts under
PL 480 and other food aid, including some on revenue account, are expected to decline
4
from Rs.239 crores this year to Rs.161 crores in 1970-71. Receipts under other aid
should be more or less of the same order as this year. Taking account of all other
items, including the provision for the Plan and for special assistance to the States
outside the Plan, the capital account will show a deficit of Rs.365 crores. The revenue
account is expected to show a marginal surplus of Rs.15 crores.
17. With growing prosperity in rural areas, it has become all the more important
to tap rural savings for further development. Schemes to mobilise savings for a specific
purpose are likely to have greater appeal. A model scheme of debentures to be issued
by State, sponsored institutions has, therefore, been prepared and it is hoped that rural
debentures, floated in accordance with the scheme, will be an additional instrument
for the orderly mobilisation of rural savings. The extension of banking to rural areas
will serve the same purpose. Even today, our postal system extends to many areas
which cannot be- covered by banks in the near future. The postal system, therefore,
also needs to be harnessed for greater mobilisation of savings. At present our small
savings schemes, including Post Office Savings Bank accounts, otter facilities for
savings with a number of tax concessions. These tax concessions, however, are not of
much interest to the rural population or to low income groups, which by and large, are
not subject to taxation of income. To these groups, a higher rate of interest would be
more attractive than a lower rate with corresponding tax Concessions. Accordingly, it
is proposed to introduce a new series of time deposits, recurring deposits and savings
certificates, which will carry higher rates of interest without any special tax concessions.
The present tax-free facilities will also be continued with slightly higher rates of
interest. The rates of interest on contributions to the General Provident Fund and the
Public Provident Fund are also being enhanced slightly. I shall have occasion later to
refer to some changes in our direct tax structure, which are designed to promote
higher savings. A memorandum giving the full details of all these changes is being
separately circulated.

PART ‘B’
18. The expenditure proposals for 1970-71 which I have just presented have
been aimed at stimulating growth while providing for some measures of social welfare
for the less privileged sections of the community. The same considerations of growth
with social justice must govern the manner in which resources are raised to meet the
requirements of Government.
19. In a country like India, where Government assumes the major part of the
responsibility for the promotion of capital formation, the Government Budget should
yield a substantial revenue surplus to take care of a part of the needs on capital
account. This is all the more so at a time when net receipts under foreign aid and
5
concessional imports of food grains are declining in keeping with our objective of
achieving self-reliance in the shortest possible time. At existing rates of taxation, the
revenue account for 1976-71 will yield only a nominal surplus. The ratio of taxation
to national income in India is among the lowest in the world and over the recent past
it has declined from the level of a little over 14 per cent which was already reached in
1965-66. There is thus need to enlarge the tax base, so as to meet adequately the
continuing requirements of growth and social welfare.
20. In enlarging the tax base, our first concern must be to ensure that the
taxes which are already levied are not avoided or evaded by devices which just manage
to keep on the right side of the law. Accordingly, I have tried to plug some major
loopholes in our tax system and to withdraw some of the concessions which have
outlived their utility. Taxation is also a major instrument in all-modern societies to
achieve greater equality of incomes and wealth. It is, therefore, proposed to make our
direct tax system serve this purpose by increasing income taxation at the higher levels
as well as by substantially enhancing the present rates of taxation on wealth and gifts.
Because of the urgent need to restrain speculative increases in urban land values and
individual holdings of urban property, the taxation of urban land and buildings is
being substantially increased. At the same time, the concessions available at present to
stimulate savings are being rationalised, so as to make them more effective. Some
marginal relief in direct taxation is also proposed for low income groups. In keeping
with the need to stimulate higher production and investment, no significant change in
corporate taxation is proposed.
21. Nearly 75 per cent of Central tax revenues are derived from indirect
taxation, i.e. from customs and excise duties. Any attempt to impart greater strength to
the fiscal system, therefore, cannot disregard the scope for increase in indirect taxation.
The proposals in this field are designed primarily to raise additional resources in a
manner which helps our progress towards self reliance and restrains the consumption
of certain commodities. Such restraint is necessary from the economic or the social
point of view. By and large, the additional taxation of investment goods or producer
goods has been avoided and the bulk of the increase is in respect of final consumer
goods. Wherever it has been necessary to touch items of common consumption, an
attempt has been made to safeguard the consumption of the poorer sections of the
community to the maximum extent possible.
DIRECT TAXATION
22. The marginal rates of income taxation will be increased progressively m
all personal incomes above Rs.40,000 per year. With the addition of the surcharge at
10 per cent, the maximum rate of 93.5 per cent will now be reached in the slab over
its. 2 lakhs as against 82.5 per cent, in the slab over Rs.2.21 lakhs at present.
23. Simultaneously, the existing rates of ordinary wealth tax are being,
enhanced. At present, these rates vary from 0.5 per cent to 3 per cent. They will now

6
vary from 1 per cent at the lowest slab to 5 per cent at the highest slab. For the
individual, who derives his entire income from wealth, the combined effect of income
and wealth taxation, as now proposed, will impose an effective ceiling on income
after tax, when such income reaches approximately Rs.25,000 per annum. On the
other hand, there will be an inbuilt incentive in favour of earned incomes. When
income is wholly earned, for example, there will be no absolute ceiling, as the highest
marginal tax of 93.5 per cent will leave some room for increase in income after tax at
all levels.
24. Honourable Members are aware that we are at present examining practical
means of imposing a ceiling on urban property. While the legal and other aspects of
the matter are being examined, it is proposed to increase the additional wealth tax on
urban lands and buildings, so that the objective of a ceiling on urban property is
achieved, at least in part, within the framework of the powers already available to the
Centre. At present, the additional wealth tax on urban lands and buildings is leviable,
in the case of individuals and Hindu undivided families, on the value of lands and
buildings situated in cities and towns with a population exceeding one lakh and with
an initial exemption ranging from Rs.4 to Rs.7 lakhs in different categories of cities.
The tax is leviable on the balance at rates ranging from 1 per cent to 4 per cent. The
maximum rate is reached when the value of urban lands and buildings exceeds Rs.19
to R s.22 lakhs. It is now proposed to levy a tax of 5 per cent on the value of urban
lands and buildings in excess of Rs.5 lakhs and at the rate of 7 per cent on the value
in excess of Rs.10 lakhs. No distinction will be made in regard to the exemption on
the basis of the population of the area, in which the properties are situated. The
definition. of an urban area is also being enlarged to include areas within the limits of
any municipality or other similar authority having a population of 10, 000 or more,
with powers to cover by notification areas upto 8 kilometres outside such limits.
Business premises will continue to be excluded from the proposed levy as at present.
However, guest houses maintained by those liable to pay this tax will not be reckoned
as business premises. Provisions are also being made to prevent avoidance of the tax
by transfer, from individual or joint Hindu family ownership, to ownership by
partnership firms, associations of persons and closely-held companies. Another measure
which is intended to serve a similar purpose, provides for the taxation of capital gains
arising from the sale or transfer of agricultural land situated within urban areas.
25. One of the major devices leading to tax evasion and avoidance is the
creation of private trusts. At present discretionary trusts are taxed on their income and
wealth at the rates applicable to individuals. These lower rates lead to the proliferation
of such trusts. It is proposed that in future, discretionary trusts would be taxed at a flat
rate of 65 per cent on their incomes and 1.5 per cent on their wealth or at the rates
applicable in the case of individuals, whichever is higher. Provision is, however, being
made for exemption from these flat rates for certain categories of existing discretionary
trusts.

7
 26. In the case of charitable and religious trusts, exemption from tax would
be allowed only in respect of income actually, applied to the purposes of the trust in
the same year, or within three months of the close of the year. Further, the exemption
will be forfeited altogether if the trust funds, constituting its corpus or income, are
invested in a concern in which The author or founder of the trust or any of his relatives
is substantially interested and the amount of the investment exceeds 5 per cent of the
capital of that concern. These provisions will curb the use of the funds of charitable
and religious trusts to acquire control over industry and business. Some changes are
also being made to prevent indirect benefits being enjoyed by the authors or founders
of such trusts. On the, other hand, the present complete exemption from tax, which
applies to Universities and other educational institutions, will also be applied in the
case of hospitals and other similar institutions.
27. At present, one residential house is exempted from wealth tax, irrespective
of its value, if it is situated in a place with a population not exceeding 10,000. For
houses situated in larger towns, the monetary limit for exemption is Rs.1 lakh. The
monetary limit of Rs.1 lakh will now be applied uniformly irrespective of the location
of the residential house.
28. The rates of gift tax are also being revised to bring them more in line with
the rates of estate duty and the present exemption limit of Rs.10,000 in respect of gifts
made during a year is being lowered to Rs.5,000.
29. Those who are united in Heaven should not be put asunder by a mere tax
collector. On this view, the income and wealth of husband, wife and minor children
should be aggregated for purposes of income and wealth taxation. But in matters like
this, enforced unity sometimes leads to sharper division. It is, therefore, proposed to
examine the matter in greater detail and to bring forward the necessary legislation
subsequently, giving opportunity for discussion in this House and outside.
30. At present, income upto Rs.1,000 from investment in the Unit Trust and
upto another Rs.1,000 of dividends an shares in Indian companies as well as the
whole of the interest earned on a number of small savings schemes and Post Office
savings accounts is exempt from income tax. There is no reason why a distinction
should be made between such investments, and investments in other financial assets,
such as securities of the Central or State Governments, approved rural debentures,
deposits in banking companies, cooperative banks and land mortgage or land
development banks and the new small savings scheme and Post Office deposit accounts
which are not to enjoy any special tax concessions. It is, therefore, proposed that
income upto Rs. 3,000 will be exempt from income tax, provided it is derived from
investments in Unit Trust or shares in Indian companies or any of the other categories
which I have just mentioned. The exemption in respect of small savings schemes and
Post Office savings accounts, where special tax concessions are available, will continue
to be available additionally.

8
 31. Similarly, it is proposed that, apart from the present general exemption of
Rs.1 lakh in the case of individuals and Rs.2 lakhs in the case of Hindu undivided
families and a residential house upto the value of R s. 1 lakh, investments in a wide
variety of financial assets upto a total of R s. 1.5 lakhs will be exempt from wealth
tax. Even today, investments in specified small savings certificates, Post Office savings
accounts and five-year fixed deposits with the Central Government are exempt from
wealth tax and any one who takes the maximum advantage of these provisions can
claim exemption upto Rs.1.2 lakhs. The enlarged limit of Rs.1.5 lakhs will now include
investments in the Unit Trust, shares of Indian companies, securities of the Central or
State Governments, approved rural debentures, the new small savings schemes and
Post Office deposit accounts and deposits in banking companies, cooperative banks
and land mortgage or development banks.
32. Or the other hand, in view of these generalised provisions to encourage
savings, there is no reason to continue the scheme of tax credit certificates in respect
of investments in new equity issues. These will accordingly be discontinued in relation
to new equity issues after 31st March 1970. Existing concessions regarding
contributions to life insurance, provident funds, etc., will continue.
33. Suggestions have been made, from time to time, that the exemption limit
for income tax should be raised as a measure of relief to lower income groups and in
the interest of better tax administration. It has been urged that by removing a large
number of small assesses from the scope of income taxation, Income-tax Officers will
have more time to devote to larger cases where the gain to revenue would be
correspondingly greater. In a poor country like ours, the present exemption limit which
varies from Rs.4,000 to Rs.4,800 in accordance with the number of dependents, cannot
be considered unreasonably low in relation to the average level of income in the
country. At the same time, there is considerable force in the argument that tax
administration would improve if income tax authorities did not have to devote so
much time to smaller cases. Faced with this dilemma, I have decided to appeal to the
higher court of family planning, and I propose to do away with the present system
where exemption is related to the number of dependents. In future, a uniform exemption
limit of Rs.5,000 will apply in the case of all non-corporate assesses irrespective of
whether they are married or have any children. This will make for greater administrative
simplicity and give a small benefit to all income tax-payers. The relief will be naturally
greater for those who continue to seek relief from matrimony or parenthood as well.
The change in respect of the exemption limit would involve some loss of revenue. But
I have taken no debit for it as it should be more than offset by the improvement in tax
administration resulting from greater concentration on cases involving the bigger
assesses.
34. It is also proposed to provide a minimum deduction of Rs.20 per month in
lieu of the cost of travel to work to all salaried assesses. At present, deductions ranging
from Rs.5 per month to Rs.250 per month are permissible for people who travel to
9
work on a bicycle, motor-cycle, scooter, moped or a motor car. The deduction of
Rs.20 per month would be available to those who travel to work on a bicycle or by
public conveyance or by any other mode. At the same time, the higher deduction of
Rs.250 per month for a motor par which is applicable to higher income groups is
being reduced to Rs.200 per month, as there is no reason why those who presumably
own a more expensive car should be given a larger deduction. On balance, the revenue
loss from travel concession to the lower income groups would be met by the
corresponding gain from the reduction in the concession to the higher income group.
35. It has been decided to leave the present structure of corporate taxation
more or less alone in the interest of maintaining a stable climate for investment
decisions. The only significant change is that all entertainment expenditure incurred
in India in business and. the professions will now be disallowed in computing profits.
Similarly, expenditure on guesthouses, other than holiday homes for the benefit of
employees on leave, will be disallowed. Those who enjoy the hospitality of their
business friends should now no longer find their sense of gratitude diminished by the
thought that a part of the hospitality is really paid for by the Exchequer.
36. The combined effect of the increases in direct taxation in a full year
would be a gain to revenue of Rs. 36 crores. In fact, when the measures to plug
loopholes such as the revised procedure for the taxation of trusts become fully effective,
the revenue gain will be substantially larger. The additional revenue from wealth tax
will become available only in 1971-72. The additional revenue from income tax also
will be available only in part during 1970-71 by way of advance tax and deductions at
source. Thus, despite the substantial measures of additional direct taxation, the net
addition to the Centre’s resources from these changes in 1970-71 would be RS.5
crores only. But it will rise to Rs.23 crores in 1971-72. The States will gain to the
extent of Rs.10 crores in 1970-71 and Rs.13 crores in 1971-72.
INDIRECT TAXATION
37. Turning now to indirect taxation, it is proposed to abolish or reduce export
duties on a number of items so as to maintain their competitive position in world
markets. The duty on jute canvas, jute webbings, jute tarpaulin cloth and manufactures
thereof is being reduced from its. 500 to Rs.200 per metric tonne. The most important
change relates to tea, where the export duty is being abolished altogether. At the same
time, the excise duty on loose as well as package teas is being raised with the provision
for ad hoe rebate on exports at rates varying with the price of exported tea. On balance,
the duty burden on the export of all teas will be reduced with a margin in favour of
teas fetching a higher value so as to encourage the export of quality teas. The export
duty reductions will mean a loss in revenue of Rs.9.75 crores.
38. In order to give impetus to import substitution, the import duty on
machinery is being raised from 271/2 per cent to 35 per cent ad valorem. This increase,
however, will not apply to the machinery which is required for the initial setting up of

10
projects, or for substantial expansion of existing projects, whether in the public or the
private sector. The import duty on ‘ motor vehicle parts, pharmaceutical chemicals
and non-electrical instruments, apparatus and appliances will be increased by 10 per
cent ad valorem. The duty on certain plastic material and nichrome and other electrical
resistance wires will be raised from 60 per cent to 100 per cent ad valorem.
39. There is a proposal regarding customs duties which is intended neither to
replace imports by domestic production nor to produce revenue. In order to curb
conspicuous consumption and as a modest gesture of personal, if not political,
reconciliation, I propose to increase the duty on whisky, brandy, gin and wines.
40. Inclusive of additional duties corresponding to the changes in excise duties
to which I will soon turn, the additional revenue from, import duties will amount to
Rs.29.75 crores. Thus, the net gain in customs revenue after adjusting the export duty
loss will be Rs.20,00 crores.
41. It has often been suggested that the scope for excise taxation should be
widened to include taxation at a low rate of about 10 per cent on practically the whole
range of manufactured products. Without going that far, it is proposed to levy a 10 per
cent ad valorem excise duty on a number of new items including office machines, metal
containers, sparking plugs, stainless steel blades, slotted angles, iron safes and safe
deposit vaults. The levy on office machines will cover items like typewriters, calculating
machines, cash registers, cheque-writing machines, computers and intercom devices.
The duty on metal containers will be confined to those intended for the packaging of
goods for sale, including, casks, drums, cans, gas cylinders and rigid containers. The
additional revenue from these new duties will amount to Rs.10. 40 crores.
42. Similarly, among chemical products, duty at the rate of 10 per cent ad
valorem will now be levied on calcium carbide, bleaching powder and sodium
hydrosulphite and the present duty of 5 per cent on soda ash and caustic soda will be
raised to 10 per cent. An excise duty of Rs.300 per metric tonne is also being levied
on synthetic rubber. These changes will bring in an additional revenue of Rs.5.30
crores.
43. A 10 per cent ad valorem duty was levied last year on prepared and
preserved foods. The scope of the duty was, however, limited by notification to
preserved and canned fruits, jams, jellies, fruit juices, squashes and certain meat
products. I propose now to remove the bias against fruits and meat by extending the
scope of the levy to include products such as vegetable juices, synthetic syrups and
sherbets, de-hydrated peas, malted foods, instant coffee, instant - tea, jelly crystals,
custard and ice-cream powders, biscuits, cocoapowder, drinking chocolate, pasteurised
butter, processed cheese, branded aerated waters, glucose and dextrose. I hope
Honourable Members will not accuse me of having preferences of my own as. even
under my proposals. aerated waters, biscuits, butter and cheese will be taxed only
when manufactured with the aid of power and there will be total exemption from tax
11
for baby foods and branded ‘deshi’ ghee. These proposals will yield an additional
revenue of Rs.8. 68 crores.
44. The duty on sanitary ware and glazed tiles of porcelain will be raised
from 15 per cent and 10 per cent respectively to 25 per cent. The duty on room air -
conditioners will be raised from 40 per cent to 53-1/3 per cent and a similar increase
is also being made in respect of larger refrigerators with a capacity exceeding 165
litres. The duty on parts of refrigerators, air-conditioning plants and machinery is also
being raised from 53-1/3 per cent to 66-2/3 percent. Components and machinery
required for cold storage plants, air-conditioning of hospitals run by Government,
local bodies and public trusts, as well as factory establishments will, however, be
exempted from the scope of the increase. It will be seen that small size refrigerators
will not be affected. I propose, very reluctantly, to withdraw the exemption in favour
of television sets and impose a duty of 20 per cent ad valorem. The gain to revenue
from these measures will be Rs.2.24 crores.
45. In the case of aluminium, the existing specific duties are being replaced
by ad valorem duties. With a certain degree of rationalisation, this will produce an
additional revenue of Rs.4.70 crores. The duty on rigid plastic boards and unsupported
P.V. C. sheets is also being rationalised by transferring the incidence to the end product
and this will yield an additional revenue of Rs.96 lakhs.
46. It is proposed to increase the basic excise duty on polyester fibre of 2
deniers or less from Rs.21 to Rs.25 per kilogram with a corresponding increase in
special excise duty. The present nominal duty of 7. 8 paise per sq. metre on artificial
silk fabrics which include rayon, nylon, terylene, terycot and terywool fabrics is being
replaced by ad valorem duty ranging from 3 per cent to 10 per cent. The duty will vary
according to the value of the fabric and in the case of the cheaper varieties, whose
wholesale price is less than Rs.2.50 per sq. metre, there will in fact be some relief as
compared to the present position. I propose to make no change in relation to cotton
fabrics with the exception of a minor measure of rationalisation, whereby certain
fabrics at present taxed at specific rates, win be subjected to ad valorem levy. The
proposals on synthetic fibre and artificial silk fabrics will yield an additional revenue
of Rs.13. 78 crores.
47. The demand for petroleum products has been increasing very rapidly and
it is necessary to exercise some restraint in the interest of saving valuable foreign
exchange. It is also necessary to curtail the adulteration of diesel oil by kerosene,
which has assumed substantial proportions, and to discourage the use of furnace oil as
a substitute for other fuels such as coal. Accordingly, the duty on motor spirit is
proposed to be, increased by 10 paise per litre, on superior kerosene by 2 paise per
litre and on furnance oil by 2 paise per litre. The additional excise duty on these three
items will yield a revenue of Rs.39.56 crores of which Rs.21.36 crores will be in
respect of motor spirit and Rs.9.2 crores in respect of kerosene. The increase in the
duty on furnace oil will not apply to such oil used in coastal shipping and for electricity
12
generation and there will be no change in the dity on inferior kerosene. Honourable
Members will also note that the increase in the price of superior kerosene will be only
modest, i.e., 3.5 per cent.
48. I am sorry that the smoker’s pocket has to be touched once again. The
duty on cigarettes is being enhanced with the increase ranging from 3 per cent to 22
per cent ad valorem depending on the value slabs. The cheaper varieties of cigarettes
will go up by only one or two paise per packet of 10 cigarettes. Assuming that the
smoking community remains steadfast in its devotion, the additional revenue from
this measure will be Rs.13. 50 crores.
49. As already mentioned, the excise duty on tea is being raised in order to
release larger quantities for export particularly of quality teas. There will be no increase
in the duty on loose tea produced in zone one and only a marginal increase of 10 paise
per kilo on teas produced in zone two. For other zones, the increase varies from 45
paise to one rupee per kilo. After allowing for the rebate on export, there will be an
additional revenue of Rs.7. 87 crores which will be more than offset by the loss in
revenue from the abolition of the export duty on tea.
50. A uniform duty of 23 per cent ad valorem was levied last year on both
levy sugar and free market sugar. Prices of sugar in the free market have declined
substantially since then. Accordingly, it is proposed to increase the duty on free market
sugar from the present level of 23 per cent to 371/2 per cent ad valorem. In the case of
levy sugar, which accounts for 70 per cent of the total, there would only be a marginal
rounding off of the present rate from 23 per cent to 25 per cent. In line with the step
up on free sugar, though not to the same extent, the tariff rate of duty on khandsari
sugar is being increased from 121/2 per cent to 171/2 per cent. But as far as the rates
under the compounded levy system are concerned, which most of the producers elect
to adopt, there will be a reduction on the present rates which are being revised keeping
in view the fall in prices. The net additional revenue from sugar is estimated at about
Rs.28. 50 crores.
51. There are also a number of changes proposed in the excise duty structure
by way of rationalisation, simplification or clarification of the present position. The
statutory rate of duty on tin plates, for example, is being raised from Rs.375 to Rs.400
per metric tonne, in order to remove the present anomaly of the indigenous tin plates
paying a higher cumulative duty than the additional duty borne by imported tin plates.
The excise duty on paints and varnishes manufactured by units not employing power
will be wholly exempted as also the duty on fertilizer mixtures made out of fertilizers
which have already paid duty irrespective of whether such mixtures are produced by
power or not. Some relief, is also being accorded in the case of strawboards and
millboards by revising the excise duty exemption at certain levels of production. These
measures of relief in excise duties will involve a loss in revenue of Rs.43 lakhs.
Certain enabling provisions of the Finance Act 1969 are also being continued.

13
 52. The total effect of all these proposals relating to excise duties will be an
additional revenue gain of about Rs.135 crores, of which Rs.100 crores will accrue to
the Centre and Rs.35 crores will be the share of the States and Union Territories.
POSTS AND TELEGRAPHS
53. The Posts and Telegraphs Department is likely to be in deficit next year
also. Accordingly, postal, telegraph and telephone tariffs will be revised to some extent
from dates to be notified. These revisions are outlined in a memorandum being
circulated with the Budget papers. Briefly, there will be some increase in postal tariffs
in respect of parcels, registration fee, despatch of value payable articles, money order
commission, supplementary fee for telegraphic money orders and book, pattern and
sample packets. Phonograms and Greetings telegrams win cost a little more. Charges
for telephone calls beyond the first 750 ‘calls in a quarter will increase from 15 paise
to 20 paise per call. Honourable Members will note that services such as post cards
and inland letter cards, which are generally used by common people, are not being
touched; in the case of money orders also no increase is being made upto Rs.100. The
proposed changes will yield Rs.8. 22 crores in a full year and would leave for next
year a surplus of Rs.1 crore after meeting the anticipated revenue deficit. The effect of
these changes has been accounted for in reckoning the total internal resources of
public undertakings.
SUMMING UP
54. To sum up, the measures for the additional taxation proposed will yield
a total, revenue of about Rs.170 crores in 1970-71 of which Rs.125 crores will
accrue to the Centre and.Rs.45 crores to the States. In subsequent years, when the
full effects of the changes in direct taxation will be felt, the gain to Central and
State revenues would be larger even without allowing for the normal growth factor.
As a result, the budgetary gap at the Centre next year will be of the order of Rs.225
crores as against the Revised Estimate of Rs.290 crores for the current year. In view
of the recent upward pressure on prices and the substantial increase in money supply
over the past year, some reduction in deficit financing is clearly desirable. At the
same time, a deficit of the order of Rs.225 crores should not cause concern in view
of the present favourable supply conditions in regard to food grains. The Reserve
Bank has already taken a number of steps recently to control credit; and with
continued vigilance in this regard, the deficit in the Government Budget now proposed
should pose no threat to the general stability of prices. The Central Budget has
provided adequately for the Plans of the States not only by increasing Plan assistance
and by providing for substantial non-Plan assistance but also by raising additional
resources in a manner which would bring considerable gains to the revenues of
State Governments. I hope that against this background, the States will be able to
look after their Plan and non-Plan needs without recourse to unauthorised overdrafts
from the Reserve Bank.
14
 55. Sir, before I conclude, I should like to say that in presenting my first
Budget to this Honourable House, I have become acutely aware of the challenges as
well as the constraints of the contemporary-epoch of development of our national
economy. ‘ At the very beginning of my speech, I endeavoured to set out the broad
framework within which this Budget is cast. That framework, I believe, is consistent
with the political, economic and social realities of our country. Convinced as I am of
its essential soundness, there is no alternative but to tread a difficult but determined
course. If the opportunities for growth which are so much in evidence are to be seized
fully, no effort must be spared in raising resources for the purpose. To flinch from this
effort at this stage would be to impose even heavier burdens in the years to come. If
we allow the present momentum of growth to wane for the sake of some purely
temporary advantage, we will deny ourselves the cumulative benefits of a higher rate
of growth for all time to come. If the requirements of growth are urgent, so is the need
for some selective measures of social welfare. The fiscal system has also to serve the
ends of greater equality of Incomes, consumption and wealth, irrespective of any
immediate need for resources. At the same time, the needs of these sectors of our
economy which require private Initiative and Investment must also be kept in mind in
the interest of the growth of the economy as a whole. I can only hope that the proposals
I have just presented steer clear of the opposite dangers of venturing too little or
attempting too much. Thank you.
(February 28, 1970)

15
SPEECH OF SHRI MORARJI R.DESAI, DEPUTY PRIME MINISTER AND
MINISTER OF FINANCE, INTRODUCING THE BUDGET FOR THE YEAR
1969-70
Sir,
I rise to present the first Budget of the Fourth Plan period. In doing so, I feel
somewhat handicapped as the Plan document is not yet available to Honourable
Members. I am, therefore, left to perform the traditional role of a Sutradhar who must
make a brief appearance on the stage before the start of the play to arouse the interest
of the audience. I hope 1 will not disappoint Honourable Members at least on the
score of brevity.
INTRODUCTION
2. The year that is now drawing to a close has been a good one for the Indian
economy. The expectation in my last Budget speech that, given the right policies,
1968-69 could become a year of revival has been largely fulfilled. For the second year
in succession, It should be possible to reap a satisfactory harvest. There are distinct
signs of an industrial revival and industrial Production should register an increase of
almost 6 per cent. Transport activity and trade have revived; and there have been no
serious shortages of power or raw materials. The general price level now is somewhat
lower than last year. There has been a remarkable increase in exports. Imports are now
being replaced by domestic production over a wide front as a result of the efforts
made over successive Plan periods. Despite heavier repayment obligations and
somewhat lower utilization of foreign aid than in 1967-68, It should be possible to
close the current year without any material variation in our foreign exchange reserves.
Against this background of a new dynamism in agriculture, industrial revival, restoration
of Price stability and progress towards self-reliance, It is possible now to approach the
next Plan period with a measure of confidence. All the same, there are a number of
factors which limit considerably the area of choice before us in the immediate future.
3. While food production has increased, we have still a long way to go
before we can assure satisfactory levels of consumption for our growing population.
Imports of agricultural raw materials and foodgrains are still sizeable. Investments in
agriculture, including those in research, inputs such as fertilizers and water and provision
of credit and storage facilities must, therefore, have a prior claim on our limited
resources matched only by the attention to family planning.
4. The substantial development of capital goods industries that has already
taken place makes it necessary as well as feasible to step up investment outlays. But
rising levels of investment can be achieved without inflation only on the basis of a
growing volume of production of essential consumer goods. This requires not only a
1
steady Improvement in agricultural productivity but also greater efficiency and
expansion of capacity in consumer goods industries. Attention to these industries is all
the more important as they help stimulate the motivation for higher productivity and
contribute to growth of public revenues.
5. In a year that is dedicated to the memory of the Father of the Nation, we
cannot but remind ourselves that the ultimate objective of economic development is to
serve certain larger social values. We have, therefore, to respond also to the natural
urge of our people for basic amenities, such as drinking water, for education and
medical aid, for opportunity to work and indeed for a growing measure of equality in
general which is the essence of a socialist society.
6. On the external front, the improvement has been as notable as it is welcome;
yet, export earnings amount only to two-thirds of cur current import requirements.
There cannot, therefore, be any complacency in regard to export promotion or Import
substitution. The abnormal circumstances of 1965-66 and 1966-67 have led to a decline
in the rate of saving in the economy. Despite substantial efforts to mobilize resources
and considerable restraint on expenditure, the financial position of the Government
has weakened over the past few years.
7. In short, general economic conditions in the country are propitious for
resuming the threads of progress over a wide front during the next Plan period. Equally,
however, there is need for the right balance between consumption and investment,
resources and outlays, economic growth on the one hand and external viability on the
other and indeed between larger social values and purely economic considerations.
Honourable Members will now appreciate why economic planners are often regarded
as some of the finest exponents of the art of tight-rope dancing.
REVISED ESTIMATES 1968-69
8. Having outlined briefly the current economic situation and the tasks ahead
without, I hope, stealing the show from the Planning Commission, I must now turn to
the more mundane matters which fall to the lot of Finance Ministers. In the Revised
Estimates for 1968-69, customs revenue will show a shortfall of Rs.94 crores as
compared to the Estimates presented last February. Union excise duties and income-tax,
on the other hand, are expected to yield Rs.54 crores more. After making allowance
for non-tax revenues, total revenue receipts accruing to the Centre are likely to show
a shortfall of Rs.11 crores only as compared to the anticipated realisation of Rs.2760
crores.
9. Revenue expenditures are likely to exceed the Budget Estimates of Rs.2629
crores by Rs.116 crores. Almost half of this increase, however, represents a purely
accounting change which is balanced by a corresponding gain on capital account.
Another Rs.49 crores is accounted for by additional defence expenditure on revenue
account. This is the result of increases granted daring the year in allowances to certain
categories of service personnel, the dearness allowance which became due last
2
September, the recent decision to merge a part of the dearness allowance with pay and
speedier deliveries of stores against existing orders. On capital account, there has
been a reduction in defence expenditure of Rs.13 crores. Honourable Members would
see that barring the increase under defence and transactions of a purely accounting
nature, revenue expenditure has been held within less than 1 per cent margin of the
Budget Estimates.
10. On capital account, the variations have been of a more substantial order.
Net external assistance will show a shortfall of Rs.121 crores and PL 480 and other
food aid a shortfall of Rs.43 crores. This would be offset to an extent by Improvement
under market loans, reduction in the provision for transactions in foodgrains and
fertilizers and some shortfall in Plan outlays. There are also a number of variations in
other Items which make on balance for an Improvement in the resources position.
11. In the aggregate, the budgetary deficit this year is now estimated at Rs.260
crores as against Rs.290 crores in the Budget Estimates. Honourable Members, I am
sure, would not consider this 10 per cent variation in deficit financing as an index of
conservative budgeting on my part.
BUDGET ESTIMATES 1969-70
12. In the Budget Estimates for 1969-70, I have assumed that at existing rates
of taxation, total revenues accruing to the Centre will increase by Rs.151 crores. I
anticipate a further decline in customs receipts from Rs.445 crores this year to Rs.426
crores in 1969-70. This reduction is based on the expectation that while there would
be some increase in total non-food imports, there would be a shift away from items
such as petroleum products which bear duties at a higher rate. Union excise duties are
expected to show an increase of Rs.101 crores. Corporate and income taxes should
yield Rs.675 crores as against Rs.660 crores this year. Non-tax revenues should also
yield Rs.50 crores more.
13. The increase in revenue will, however, be more than absorbed by increases
in expenditure on revenue account. Defence expenditure on revenue account will be
more by Rs.42 crores. Excluding certain accounting adjustments, the non-Plan civil
expenditure will be more by Rs.142 crores. Of this Rs.41 crores are accounted for by
interest charges. The Fifth Finance Commission’s recommendations have necessitated
an additional devolution of Rs.36 crores to the States. Committed expenditure arising
out of completed Plan schemes has meant an increase of nearly Rs.35 crores. Export
promotion measures account for another increase of Rs.10 crores. Various miscellaneous
Items, including administrative services, tax collection and assistance to neighbouring
countries account for the rest of the increase. Detailed explanations have, as usual,
been given in the Explanatory Memorandum.
14. On capital account, net market borrowings next year are estimated at
Rs.106 crores as against Rs.81 crores this year. Small savings are placed at its.135
crores, i.e., Rs.10 crores more, but of this nearly two-thirds will accrue to the States.
3
The Public Provident Fund should yield Rs.5 crores next year as against Rs.2 crores
this year. On the other hand, as the author of the once famous but now almost forgotten
Compulsory Deposit Scheme. I propose to redeem myself by making full provision of
Rs.25 crores for the repayment of the deposits made in 1963-64.
15. Net external aid, excluding PL 480 and other food aid, should show a
marginal increase from Rs.459 crores this year to Rs.467 crores in 1969-70. While
debt repayments would be larger, we expect an increase in aid disbursements also
mainly as.a result of resumption of aid by the International Development Association.
16. In December 1968, we signed an agreement with the United States
Government under PL 480 for the import of 2.3 million tonnes of foodgrains. In
addition, we have continued to receive food assistance of a sizeable order from Canada
as also some assistance under the International Grain Arrangement from Australia and
the U.K. A substantial part of the food assistance thus negotiated will result in imports
only next year. Honourable Members would also appreciate that arrangements for the
concessional imports of foodgrains and agricultural raw materials will be necessary
for some more time. Consequently, the net budgetary support accruing as a result of
PL 480 transactions and other food aid, excluding PL 480 grants already accounted
for in the revenue estimates, is placed at Rs.224 crores next year as against Rs.226
crores this year.
17. The improvements under internal borrowing and external assistance, just
mentioned, i.e., Rs.13 crores in all, will be more than absorbed by the increase in
defence expenditure on capital account, Rs.17 crores and on border roads, Rs.4 crores.
18. As regards other capital transactions, the food and fertilizer transactions
together show an Improvement of Rs.76 crores. Total stocks of foodgrains with the
Food Corporation at the end of March 1969 should be of the order of 3.5 million
tonnes. During the coming year, we propose to add another 1.5 million tonnes to these
stocks. It is our intention to provide budgetary resources of Rs.25 crores in 1969-70
for this purpose. The balance of the requirements will be provided by way of
accommodation to the Food Corporation from commercial banks.
19. The Improvement under foodgrains and fertilizer transactions, however,
will be wiped out by the increases in revenue and capital expenditure already mentioned
and worsening under various miscellaneous debt-deposit heads. I have also had to
provide for some relief to States by way of adjustment in their repayments to the
Centre and assistance towards the non-Plan gaps of some of the States to enable them
to undertake a satisfactory Plan next year. In the net, the resources available, at the
existing rates of taxation and on the basis of the likely availability of internal borrowing
and external assistance, leave practically no margin for increasing the provision for
the Plan to be financed through the Centre’s Budget next year.
20. The budgetary contribution of public sector undertakings next year is also
not likely to show any significant Improvement over the current year. The question of
4
better functioning of public sector undertakings has been examined in detail by the
Administrative Reforms Commission as well as by the Bureau of Public Enterprises
Government have already taken a number of decisions to Improve the working of
these enterprises and I am separately circulating a memorandum on this subject to
Honourable Members.
21. Honourable Members may well ask whether the margin of resources
available for the Plan could not have been increased by economies in non-Plan
expenditure. I have given the most careful thought to this question in framing the
expenditure estimates for the coming year. But Honourable Members would appreciate
that a certain increase in non-Plan expenditure is inevitable as It arises from contractual
obligations or decisions already taken. The transfer of completed Plan schemes to the
non-Plan side, interest charges, export promotion, the incidence of dearness allowance,
the merger of dearness allowance with pay and the recommendations of the Finance
Commission which belong to this category account for the bulk of the increase in civil
expenditure. The increase of Rs.59 crores in defence expenditure is explained mainly
by normal increases in salaries and pensions, the additional dearness allowance which
became due last September, merger of dearness allowance with pay, additional equity
investment in the production units under the charge of the Defence Ministry and
larger deliveries against contracts already entered into.
22. I should perhaps also say a word at this stage about the scope for deficit
financing next year. This scope cannot be defined in terms of the needs of the Budget.
It has to be determined in relation to the needs of the economy in the light of the likely
growth in production and the saving habits of the people. Taking everything into
account, I have come to the conclusion that a budgetary deficit next year of roughly
the same magnitude as this year is likely to reconcile best the concern for price stability
and the maintenance, of a climate for growth.
23. It is against this background that 1 come now to my proposals for resource
mobilization for the coming year. In framing these proposals, however, I have not
adopted the simple approach of deciding first on a certain desired level of Plan outlay
and of proceeding then to raise resources on the required scale. There are limits beyond
which resources cannot be raised in the short-run without impairing the functioning of
the economy. Equally, the annual Budget has to take into account not only the needs
of the year but the requirements of long-term growth as well. The approach, in other
words, has to be one of making such changes in the tax structure as are necessary and
feasible to build up the ability of the Government-and even more important of the
economy in general-to sustain progressively larger developmental outlays and of limiting
the expenditure proposals in the short-run to the total resources that can be so mobilised.
24. Honourable Members would now naturally be anxious to see how well I
measure up to my own standards. I hope that in passing judgement, the customary
indulgence towards Finance Ministers will not be denied to me merely because this

5
predicament of being held up before my own mirror is not altogether unfamiliar to me
in this Honourable House.

PART B
25. Broadly speaking, my tax proposals are intended:
(a) to provide a measure of relief where necessary, particularly in the interest
of exports, savings and modernisation of key industries.,
(b) to remove anomalies;
(c) to provide a further measure of rationalisation and simplification;
(d) to plug the loopholes which make for tax avoidance or evasion;
(e) to spread the burden of taxation more evenly by bringing within the tax
net commodities or incomes which are hitherto not taxed or taxed lightly
in relation to essentiality of consumption or capacity to pay; and
(f) generally, to make the tax system more responsive to the needs of economic
growth.
Before Honourable Members conclude that I am about to serve them a rich fare,
I should reassure them that I propose to bring up my appetizers at suitable intervals.
I shall also concentrate on the main courses, leaving the sundries to be discovered in
the Explanatory Memorandum.
CUSTOMS DUTIES
26. To begin with, an export offering to propitiate the gods of international
competition. I propose to reduce the export duty on jute hessian from Rs.500 per
tonne to Rs.200 per tonne. The duty on jute sacking is also proposed to be reduced
from Rs.250 per tonne to Rs.150 per tonne, while the duty on wool sacks and cotton
bagging is being completely exempted. The export duty on tea is being reduced from
20 per cent less 35 paise per kilogram to 15 per cent less 55 paise per kilogram. The
duty on degreased raw wool and on package tea in metal containers is being completely
exempted while the duty on package tea in other containers is being reduced from 15
per cent to 5 per cent. The export duty on mica is proposed to be reduced from 40 per
cent to 20 per cent in respect of loose splittings of smaller size. The total effect of
these reductions will be a loss in revenues of Rs.23 crores per year.
27. Generally, we levy an import duty of 100 per cent ad valorem on all items
of luxury. The duty on Imported motor cars is 60 per cent. I propose to improve the
value of imported motor cars as a status symbol by increasing the duty to 100 per cent.

6
In the case of dry fruits, the present valuation for calculating the duty is unrealistic. I
propose to adopt a more realistic basis for valuation which will have the effect of
raising the duty realisation. The import duty on lubricating oil is being raised from 15
per cent to 271 per cent to bring It in line with the duty on their constant companion,
viz., machinery, and to give an edge to their domestic rivals. These changes will bring
in a revenue of Rs.6.2 crores.
28. We levy a countervailing import duty whenever a commodity is subject to
excise. We also have power to levy a countervailing duty in lieu of the excise on the
raw materials and components used in any excisable item. No such power exists when
the commodity itself is not excisable. I propose to take power to remedy this omission,
in the interest of import substitution. In certain cases such as bearings, ship stores and
imports by post or air for personal use, multiplicity of rates or classification depending
on use causes unnecessary delay and annoyance; and I propose to rectify this also.
EXCISE DUTIES
29. Coming to Excise Duties, it is now generally recognised that ad valorem
duties are more rational than specific duties whose incidence declines during periods
of rising prices and increases when prices fall. Ad valorem duties can also act as a
spur to reduction in costs and prices. I propose, therefore, to convert the existing
specific rates into ad valorem rates for cement, vegetable products, electric fans, lighting
bulbs and tubes, soaps, soda ash, caustic soda and sodium silicate. Despite the necessity
of rounding, I have resisted the temptation of collecting in the process any appreciable
crumbs for the Exchequer.
30. But every rule has an exception; and I have been helped by one special
circumstance in deciding on the exception to prove this particular rule. In the case of
sugar, we have now a price for controlled releases and a free market price. The incidence
of the present specific duty when converted into an ad valorem rate, would obviously
give two different rates. In choosing between the two rates, I have shown some partiality
for the controlled releases on which the present basic and additional duties work out
approximately to an ad valorem rate of 23 per cent on an average. I have applied this
rate to all crystal sugar. As a result, there will be no change in the average price of
controlled sugar with only marginal variations in the different zones. Correspondingly,
the duty on Khandsari is proposed at 121 per cent ad valorem with suitable revisions
in existing compounding rates. I hope Honourable Members would not object to free
market sugar being taxed at the same ad valorem rate as controlled sugar merely
because it has the incidental effect of an additional revenue of Rs.27.45 crores.
31. I propose to levy an excise duty at the rate of 10 per cent ad valorem on
specified domestic electrical appliances and processed food. Honourable Members
will recall that last year a duty at the rate of one paisa each was imposed on crown
corks. I propose now to unite kings and commoners by an extension of the levy to
other similar devices for covering bottles, and containers. The levies oil electrical
appliances, processed food and pilfer-proof caps will bring in a revenue of Rs.4 crores.
7
 32. Honourable Members would agree that those who benefit by our substantial
investments in agriculture, including research, irrigation facilities, fertilizer plants,
rural electrification, credit facilities and support prices should contribute a part of
their prosperity towards the cost of development in general. This is all the more so
when the benefit of improved technology cannot yet be shared by the majority of our
farmers, particularly in dry regions where fertilizers and new seeds are not easy to
apply. Similarly, the facilities for lift irrigation by power driven pumps are not spread
uniformly. If the benefits of the new agricultural technology are to be carried
progressively to a growing proportion of our farming population, the resources needed
for this purpose should come at least in part from the beneficiaries of the process.
Against this background, I propose to levy an excise duty of 10 per cent ad valorem
on fertilizers and 20 per cent ad valorem on power driven pumps with a revenue yield
of Rs.24 crores of which Rs.22 crores would be in respect of fertilizers.
33. It is obviously time new for me to turn to appetizers once again. As
Honourable Members are aware, the cotton textile industry is going through a difficult
time. Some relief in the excise duty is, therefore, called for. The excise duty on yarn
in the form of hanks of plain straight reels is being abolished in respect of certain
counts and lowered in respect of certain other counts. This should benefit the handloom
sector. The powerloom sector will benefit by the abolition of the differential duty on
sizing even though the duty on unsized yarn of some counts in the fine and superfine
category is being increased. Further, duty on grey fabric is proposed to be abolished
and the processing surcharges reduced by five paise per square metre on all varieties
of Medium A and non-controlled Medium B and coarse categories of fabrics. This
relief would very substantially benefit the weaker cotton mills. The total effect of all
the relief proposed will be about Rs.15.30 crores.
34. About Rs.9.5 crores of this loss would, however, be made up by levying
a higher duty of 5 paise per square metre on superfine and fine and 2.5 paise per
square metre on all other categories of printed fabrics except the controlled ones and
by selectively levying an ad valorern duty of 15 per cent on costlier varieties of
fabrics such as sultings, tapestry and furnishing fabrics, turkish towels and others
which at present bear a low incidence of duty in relation to their price. In addition, I
propose to double the existing compounded levy on powerloom fabrics and to rationalise
the duty structure on fents.
35. The duty on nylon yarn in the lower deniers is being reduced and this
would be compensated to some extent by an increase in some of the higher ones. The
net effect will be a drop in revenue of Rs.3.9 crores. This concession should help towards
eliminating smuggling of nylon yarn about which there has been genuine concern.
36. The duty on confectionery, but not on chocolates, is being reduced from
80 paise per kilogram to 30 paise per kilogram. The duty on electronic valves, transistors
and semi-conductor diodes used as components by radio manufacturers is being halved.
Low priced sets manufactured by the large manufacturers in the organised sector will,
8
however, bear a duty of Rs.10 per set. In the case of steel ingots and products
manufactured out of scrap by electric furnace owners, I propose exemption to the
extent of the ingot duty. The duty on embroidery, which is proving rather heavy, is
being reduced. I am assured on good authority that in the topsy-turvy world of the
cinema, the highest achievements of subtlety belong to those who are accustomed to
think in terms of black and white. Accordingly, I propose to give some relief to the
black and white cinematograph films and raise the incidence on colour films. I also
propose to levy a nominal duty of two paise per metre on unexposed cinema films.
The overall effect of the somewhat mixed bag of concessions on confectionery,
component parts of radios, scrap based steel ingots, embroidery and cinema films will
be a revenue loss of Rs.3.13 crores.
37. To return to more familiar ground, I think the time has come when some
of the old faithfuls of indirect taxation everywhere such as cigarettes and motor spirit
are relieved of their annual agony. One way of achieving this is to raise the duties
sufficiently. I must confess that I did not do a neat enough job in this regard in my last
two Budgets. Accordingly, I propose to increase the duty on motor spirit by 7 paise
per litre and on cigarettes by 6 per cent to 18 per cent ad valorem in the different value
slabs with a revenue of Rs.29.84 crores. The duty on superior kerosene, which is
being increasingly used as an adulterant for motor fuels, is also being raised by 4
paise per litre with a yield of Rs.14.40 crores.
38. The basic excise duty on jute manufactures is being raised by Rs.100
per tonne so as to yield a revenue of Rs.4.95 crores. The duty on cellulosic and
non-cellulosic staple fibres is being raised by 20 paise per kilogram and Rs.12 per
kilogram respectively. The duty on rayon yarn is also being raised by about 10 per
cent of the existing rates in all except the industrial deniers and the margin of
concession in the rates of duty available to small producers compared to large
producers of rayon yarn is being reduced. These proposals on synthetic fibres and
yarn will yield an additional revenue of Rs.9.37 crores annually. It is also my intention
to transfer the duty on woollen yarn to wool tops; and to begin with, I am levying
a small duty on wool tops with a yield of Rs.6 lakhs.
39. The cumulative effect of all the proposals relating to excise duties
including a few sundries will be an additional revenue of Rs.104.57 crores in a full
year of which Rs.79.95 crores will go to the Centre and Rs.24.62 crores will be the
States’ share. As a result of the proposals relating to excise duties, there will be an
additional yield of Rs.26 crores on account of countervailing duty most notably on
fertilizer imports.
40. The scheme of self-assessment and removal introduced since June 1968
has worked well and I propose to extend it as soon as possible to most excisable
commodities.
9
DIRECT TAXATION
41. In regard to corporate taxation, I propose to extend the tax holiday
concession for new industrial undertakings and ships for a further period of five years
from April 1, 1971 to March 31, 1976. I have also come to the conclusion that the
familiar instrument of development rebate need not be abandoned or replaced by
fancier alternatives. Accordingly, the development rebate will continue to be admissible,
but in respect of machinery and plant installed after 31st March, 1970, the reduced
rates already provided in the law will apply. The ceiling in the Companies (Profits)
Surtax Act on the aggregate corporation tax payable by, a widely-held domestic
company at 70 per cent of its total income has now become meaningless. But it still
continues to mislead people as If the virtually non-operative ceiling is the norm.
Accordingly, I propose to do away with this ceiling. Public companies whose shares
are listed in a recognised Stock Exchange in India will now be treated as widely-held
companies.
42. In order to minimise the repetitive Import of technology and indeed to
encourage the development of local know-how, I propose to tax income derived by
Indian companies from the transfer or servicing of such know-how on a concessional
basis. To encourage the modernisation of two of our important export industries, viz.,
cotton and jute textiles, I propose to include them in the list of priority industries for
the purpose of the development rebate.
43. I propose to introduce later this Session a comprehensive Bill to amend
the income-tax Act and other related enactments. In that Bill, I intend to provide for
amortization, over a 10-year period, of promotional expenses and expenses on project
report, market surveys, etc. In the case of Indian companies, which are not at present
eligible for any depreciation allowance or other deduction. The amount to be
amortized will be limited to 21/2 per cent of the project cost. The classification of
different items of machinery, for the purposes of depreciation, is also being
considerably simplified, and the general rate for plant and machinery is being raised
from 7 per cent to 10 per cent.
44. In order to bring about a smoother progression in the tax rates on personal
incomes, I propose to make a marginal increase in the rate of tax on incomes in the slab
of Rs.10,001 to Rs.15,000 by 2 per cent from 15 per cent to 17 per cent, and on incomes
in the slab of Rs.15,001 to Rs.20,000, by 3 per cent from 20 per cent to 23 per cent. The
full effect of these increases will fall on tax-payers having incomes of Rs.20,000 or
more and, taken together with the surcharge of 10 per cent of the basic income-tax, the
additional tax will amount in each such case to Rs.275 per year. These changes are
expected to yield, in a full year, an additional revenue of Rs.13.82 crores.
45. I propose to simplify and rationalise the taxation of co-operative societies.
In the case of registered firms, I propose to increase taxation slightly by introducing
a new slab of income between Rs.10,001 and Rs.25,000 on which the rate of basic
10
income-tax will be 4 per cent. This change will yield in a full year additional revenue
of Rs.4.32 crores.
46. I have a special word of cheer for authors, artists, play-wrights, musicians
and actors. In their case, 25 per cent of the professional income derived from a foreign
source and received in India. In foreign exchange will be deducted from taxable income.
In case this creates apprehensions of cultural drain, I would remind Honourable
Members that the best things in life are generally for export.
47. Honourable Members are aware that there has been renewed interest in
the equity market on the part of genuine investors. In order to encourage this trend. I
propose to raise the exemption from tax enjoyed by dividend incomes from Indian
companies from Rs.500 at present to Rs.1,000 per year. This will bring investment in
shares in Indian companies in line with investment in units of the Unit Trust. I also
propose to extend the area of existing tax relief in respect of life insurance premiums.
48. Agricultural wealth has so far been exempt from wealth tax. This has
encouraged purchase of such land by the richer professional and business classes.
While this has often acted as a spur to greater productivity in agriculture, there is no
case in equity for taxing other productive wealth but exempting wealth in the form of
agricultural land. I am advised by the Attorney General that the Parliament is competent
to legislate for the levy of wealth tax on agricultural wealth. Accordingly, I propose to
provide in the Wealth Tax Act for the levy of wealth tax on the value of agricultural
land including buildings situated on or in the immediate vicinity of such land. Standing
crops, tools, Implements and equipment such as tractors will, however, be exempt.
Agricultural wealth will be added to other wealth for the purposes of the tax at the
existing rates with effect from the assessment year 1970-71. This measure will yield
additional revenue of Rs.5 crores in a full year. But in view of what I have just said,
there would be no revenue gain in the coming year. It is my intention to pass on the
net proceeds of the revenue of wealth tax on agricultural property to the States as
grants-in-aid.
49. I am proposing a number of changes in the scheme of advance tax payments
so as to make it more effective and also to reduce the burden of compliance on small-
income tax payers. I am also proposing certain changes in the scale of penalties under
the Wealth Tax Act for failure to furnish returns of net wealth and to produce accounts,
documents, etc. Another change proposed is meant to ensure the smooth working of
the provision made last year for greater use of the banking system in making payments
for business expenditure.
50. Honourable Members are aware that ordinarily it is not possible for
individuals to escape taxation on their income by transferring their assets to their
spouse or minor children. This is, however, often circumvented by use of the special
provisions relating to taxation of a Hindu undivided family as a separate unit. I intend
to close this loophole by making a suitable provision in the Amendment Bill.
11
 51. Altogether, the changes in direct taxation that I have proposed will yield
an additional revenue next year of Rs.11 crores for the Centre and Rs.2.5 crores for
the States.
POSTS AND TELEGRAPHS
52. The Posts and Telegraphs Department will again run into a deficit next
year. It is, therefore, proposed to revise from dates to be notified certain telephone and
telegraph tariffs based broadly on the recommendations of the Tariff Enquiry
Committee. A memorandum showing the proposed changes is being circulated along
with the Budget papers. The telephone rentals in the four principal cities of Bombay,
Calcutta, Madras and Delhi as also for other exchanges will be raised. The Directory
enquiry service, which was hitherto free will be charged. The additional charge for
Particular Person and Fixed Time trunk calls will now be uniformly 50 per cent of the
basic charge. Increases are also proposed on greetings telegrams, multiple telegrams
and telex and a few other services. These changes are expected to yield in a full year
Rs.6.46 crores, and would be just sufficient to cover the anticipated revenue deficit.
The effect of these changes has been accounted for in reckoning the total internal
resources of public undertakings.
SUMMING UP
53. To sum up, the net additional revenue accruing to the Centre next year
from the measures of taxation I have proposed would be about Rs.100 crores, of
which Rs.11 crores would be under direct taxes, Rs.80 crores under excise duties and
Rs.9 crores under customs duties after allowing for the reduction of Rs.23 crores in
export duties. In addition, a sum of about Rs.27 crores will accrue to the States.
54. I may now summarise the Centre’s resources position for the next year. The
total gross revenue, after taking into account the additional taxation measures, is estimated
at Rs.3,519 crores, of which Rs.519 crores will accrue to the States leaving Rs.3,000
crores for the Centre. Non-Plan expenditure on revenue account, including grants to
States, interest charges and defence expenditure, is placed at Rs.2,558 crores, leaving a
non-Plan revenue surplus of Rs.442 crores. Next year’s market borrowing and external
borrowing, net of repayments, are estimated at Rs.106 crores and Rs.691 crores
respectively. After taking into account the transactions under miscellaneous debt deposit
heads and after providing for non-Plan capital expenditure and loans, including buffer
stock provision and cash losses of some public-sector undertakings, the resources on
capital account will be Rs.1,046 crores. The Centre’s budgetary resources for the Plan
are accordingly Rs.1,738 crores, including Rs.250 crores of deficit financing. In addition,
the public-sector undertakings, including the Railways and Posts & Telegraphs, are
expected to find Rs.165 crores for the Plan out of their own resources. The total availability
of resources for the Plan next year, exclusive of the States’ resources, will thus be
Rs.1,903 crores. Of this Rs.615 crores have already been earmarked for Plan assistance
to the States and Rs.65 crores to the Union Territories, leaving Rs.1,223 crores for the
Central Plan proper including the Centrally sponsored schemes.
12
 55. Next year’s Budget makes a total Plan provision of Rs.1,738 crores of
which Rs.402 crores are in the revenue budget and Rs.1,336 crores are in the capital
budget. The provision on revenue account includes Rs.185 crores as grants-in aid for
State Plan schemes, being 30 per cent of the block Central Plan assistance payable
from next year as against an average of 20 to 25 per cent at present. The rest of the
Plan provision in the revenue budget is on account of Union Territories Plan as also
Central Plan. The Centrally sponsored schemes account for a provision of Rs.117
crores taking revenue and capital sections together.
56. The Central Plan next year makes a larger provision as compared to the
current year for steel production, ports, petrochemicals, fertilizer plants, development of
Iron ore mines for export and copper and aluminium production. In the main, the increase
in outlay reflects the higher tempo of activity on continuing schemes. Even so, it will
give a fillip to industries engaged in construction activity and specially the engineering
industries. It is also proposed to accelerate the programme of construction of storage for
foodgrains. The institutional arrangements for agricultural credit, particularly for fertilizer
distribution and rural electrification, are being strengthened with necessary budget support.
Larger outlays have also been proposed for family planning.
57. Sir, I cannot emphasise too strongly that my tax proposals and the modest
increase in Plan outlays next year should be considered against the background of the
severe constraint on our resources. For the past few years, the surplus on revenue account
has been declining. For the next year, a revenue deficit of Rs.60 crores at existing rates
of taxation to anticipated in the Centre’s Budget. Even after the proposed measures of
additional taxation, the deficit will be converted into a surplus of Rs.40 crores only. On
capital account, the position has not shown undue deterioration only because food
assistance has been maintained at a high level due to spill-over of imports from this year
to next year. As self-reliance in foodgrains to achieved, this resource will progressively
dwindle; and If development outlays are not to be curtailed unduly, other measures of
raising resources will have to be devised. Honourable Members will also appreciate that
the all-pervasive objectives of growth with social and political stability and increasing
self-reliance cannot be achieved by budgetary policy alone. It will require the disciplined
participation of every section of the community and every region of the country. Only so
we can carry this great nation forward in the struggle against mans poverty which is as
rewarding as it is arduous. I can only hope that the Budget I have had the honour to
present makes a modest contribution towards this end.
Thank you.
(February 28, 1969)

13
SPEECH OF SHRI MORARJI R.DESAI, DEPUTY PRIME MINISTER AND
MINISTER OF FINANCE INTRODUCING THE BUDGET FOR THE YEAR
1968-69
Sir,
I rise to present the Budget for the year 1968-69. The Indian economy is emerging
now from one of the most difficult periods since independence. Successive droughts,
shortage of food and raw materials, rising prices, subdued industrial demand, inadequacy
of exports and savings and sluggishness in the capital market had combined to create
a feeling of despondency which has afflicted us in the recent past. Honourable Members,
I am sure, would agree that we can now look back on the past two years with a sense
of relief. With the help of our friends abroad and the efforts of our own people, we
have been able to avoid a major disaster and to impart at the same time a new sense
of dynamism to our programmes of agricultural development.
2. I look upon the coming financial year with a certain degree of optimism
and with the expectation that given the right policies, it can become a year of revival.
With the sharp increase in agricultural production and rising incomes, there would
undoubtedly be some increase in the demand for industrial products. Recent trends in
exports have been encouraging. The price level is registering a decline. The objective
of policy in the coming year must be to consolidate the gains: so that a major
developmental programme can be undertaken in our Fourth Five-Year Plan which will
be launched in the following year.
3. Honourable Members are already familiar with the various aspects of the
new agricultural strategy. The availability of nitrogenous fertiliser has been more than
twice as high this year as in 1965-66. Arrangements are in hand to maintain supplies
at a high level in the coming year. The area under high yielding varieties of seeds is
expected to increase from 15 million acres this year to 21 million acres next year. In
recent years we have concentrated on minor irrigation works in order to get quick
results from investments. In the current year, 3 to 31/2 million acres were covered by
new minor irrigation facilities and the target for the coming year is another 31 million
acres. Major irrigation schemes on which substantial progress has been made also
deserve our prior attention.
4. We have to make earnest efforts to ensure that we introduce the same kind
of technological advance in commercial crops as we have achieved in respect of
foodgrains. Increased productivity per acre is essential if adequate returns to the farmer
are to be reconciled with reasonable prices to the domestic consumer and
competitiveness in export markets. The processing industries can make a valuable
contribution in this regard; and I shall have occasion later to refer to a measure I
propose to introduce to encourage these efforts.
1
 5. Assurance of remunerative prices to the farmer for his products is an
integral part of the new agricultural strategy. I should like to assure the House that
inadequacy of finance will not be allowed to stand in the way of purchase by
Government and the Food Corporation of such supplies as may be forthcoming at the
procurement prices. The target of procurement is 7 million tonnes; and well-planned
procurement measures by all concerned will have to be undertaken to reach this target.
Even with this target, import of substantial amount of foodgrains appears to be necessary
in order that the long unfulfilled programme of building up a sizeable buffer stock can
be achieved after making allowance for replenishment of private inventories and some
increase in consumption. An agreement has already been signed to import 3.5 million
tonnes of foodgrains from the U. S. A. under PL 480.
6. The steady rise in prices over the last few years has been a matter of
all-round concern. Over the four years ending March 1967 prices had risen by 60 per
cent and there was a further rise during the earlier part of the current financial year. In
recent months there has been a downward trend. A part of the recent decline is no
doubt seasonal; bit it is reasonable to hope that the increasing flow of foodgrains and
consumer articles will help in the stabilisation of prices at reasonable levels.
7. Sir, I am happy to say that Government was able to get agreement this
year that a part of the increase in dearness allowance which was due to Government
employees be credited to their provident funds instead of being paid in cash. These
special contributions can be withdrawn in the coming year. But may I request my
Honourable friends to join me in an earnest appeal to Government employees not to
withdraw these contributions as that will help in maintaining a climate of price stability.
Economics, they say, is a dismal science; and I see no escape from saving more in
order to preserve the value of the savings.
8. A substantial part of increase in incomes would need to be ploughed back
into further investment, if an adequate tempo of development is to be achieved and
maintained. In part, investments will be undertaken directly by those who save out of
larger incomes. Farmers will wish to purchase pumps, tractors and other equipment.
In part, however, savings of all classes have to be mobilised for outside investment,
public or private.
9. The small savings movement has a vital role to play in securing this
objective. Net small savings have been relatively low in the recent past, in consequence
of the droughts. I am making a number of modifications in the small savings schemes
and necessary notifications are being issued in this regard. Briefly, we are introducing
a new five-year deposit scheme with a tax-free return of about 4.5 per cent and are
accordingly revising the return on the existing five-year cumulative time deposit scheme,
and the 12-year and 10-year tax-free savings certificates. With a renewed drive for
collection, particularly, in the rural areas, these measures should help in greater
mobilisation of resources.

2
 10. The return on provident fund accumulations of Government employees is
also being raised; I propose to do so, however, on the first Rs.10,000 of accumulations
only. Those who are self-employed do not have the facility of saving through provident
funds. I propose, therefore, to introduce a public provident fund scheme under which
all sections of the community will have the opportunity of contributing to a provident
fund, and to avail of the income-tax benefits provided for under the law in respect of
contributions to such funds. It is my hope that in time, this provident fund scheme will
secure substantial resources for the exchequer. Self-employed persons such as doctors,
lawyers, artists, actors and actresses, like old soldiers, are never known to retire. But
they too reach their prime some day. Something laid by-legitimately, and with
considerable saving in tax liability-should prove valuable even to those who have a
greater claim to immortality than most of us.
11. A moderate increase in exports has occurred during the current year; and
the increase in imports has been less than that in exports. Nevertheless, our foreign
exchange reserves declined by $ 60 million between April and mid-November, 1967;
and it became necessary to draw $ 90 million from the International Monetary Fund.
In recent weeks, there has been a welcome increase in reserves. In response to better
export performance, which may be expected to continue. The fact that we have been
able to get some debt relief this year has also helped in managing the over-all foreign
exchange position. With the revival of industrial activity, import demand will be strong
once again; and this underscores the fact that we cannot restore viability to our balance
of payments without a sustained increase in export earnings . Basically, this is a
question of increasing the production of exportable goods and increasing efficiency
and savings all round. Export policies have also to be geared promptly to changing
circumstances.
12. That is why we announced a number of changes in export duties on the
7th of February without waiting for the presentation of the Budget when every Finance
Minister likes to mix the bitter with the sweet. The urgency of the situation was such
that 1 had to forego the certainty of receiving at least one bouquet in the midst of
whatever brickbats that may be in store. We have been giving cash assistance to some
of our exports, particularly the newer manufactures. Certain adjustments in these rates
of assistance have already been made. Government propose to maintain the new
structure of assistance intact-encouraging neither uncertainty nor perpetual expectations
of further assistance. We have also recently streamlined and simplified the procedures
for release of foreign exchange for the purpose of export promotion.
13. One of the important needs of the export sector has been the provision of
adequate and cheap credit. During the year, the industrial Development Bank enlarged
the facilities for medium-term export credit; and the Reserve Bank also took measures
to ensure that credit for exports of newer manufactures was available at particularly
concessional rates. It is desirable that credit should be available for exports generally
at a relatively low rate of, interest. I am, therefore, making provision in the Budget for
3
the coming year for grant of a subsidy towards interest charges on export finance
provided by the banks. The Reserve Bank will announce the details of the scheme
which will include the prescription of a ceiling on interest charges qualifying under
the scheme.
14. An adequate expansion of India’s export earnings is only possible within
an appropriate international framework. It is a matter of gratification for us that the
second session of UNCTAD is being held in New Delhi. It is our earnest hope that the
deliberations of the Conference will help in promoting co-operation in trade and aid
between the developed and the developing countries and among the developing
countries themselves.
15. As the Honourable Members are aware, we took a series of steps during
the year to stimulate industrial output. With the revival of agricultural production and
the consequent rise in incomes, a number of consumer goods items such as cotton
yarn and vanaspati are showing an increase in production. There are also signs of a
revival in the production of commercial vehicles. Industries supplying the needs of
agriculture have done well even in the recent past and continue to do so. The level of
private investment should pick up in response to the generally better economic outlook.
Continued increase, in exports and progress towards reducing the dependence on
imports will also be necessary to create and sustain a climate of industrial revival. In
this connection, it is a matter of satisfaction that our capital goods industries have won
valuable export orders in the recent past and that we hope, to get sizeable orders for
wagons, rails and other steel products from the Soviet Union. I expect an increase in
the industrial production of the order of at least 5 to 6 per cent in the coming year.
This increase, though moderate as compared to our past performance, would represent
a significant advance over the rate of growth in the last two years.
16. The working of public Sector undertakings has been engaging our earnest
attention. The public sector has been particularly hit by recession because it is mostly
engaged in the production of capital goods or producer goods. The general recovery in
the economy will undoubtedly help, but the basic problem of achieving a long-term
improvement in efficiency and yields will have to be tackled urgently. The
recommendations made by the Administrative Reforms Commission are being actively
studied and 1 trust before long certain concrete steps will be taken to effect a lasting
improvement.
17. Now that I have taken you through a survey of savings and exports, of
prices and production, I could perhaps turn safely to some inconvenient facts of life.
In my Budget Speech last year, I had referred to the need to avoid deficit financing in
the circumstances then prevailing in the country. These circumstances have changed
for the better; but unfortunately, not my budgetary fortunes so far. In actual practice,
the current year is expected to end with a large deficit of Rs.300 crores at the Centre.
Honourable Members would appreciate that it is neither an easy nor a pleasant matter

4
for me to come to this House with this particular piece of information. It is some
solace that the worsening in the budgetary position has little to do with unexpected
increase in expenditure. The deterioration has come about on account of shortfalls in
revenues and foreign aid utilisation which in turn have been due to the low level of
economic activity and also, because of a decline in the resources of the States and
public sector enterprises. To some extent perhaps, we were also misled into undue
optimism by the oft repeated charge of underestimation of resources. As soon as the
picture regarding shortfall in resources started emerging, I tried to make judicious
readjustment of outlays. The manoeuvrability for such an exercise in the midst of the
year is extremely limited, particularly if this is super-imposed on a tight budget. There
was also the consideration of the effect which any drastic cut in public spending
would have had on the recessionary situation. In fact there were suggestions from
most quarters to step up expenditure in one way or the other. Some steps were also
taken in this direction. However, the expenditure estimates in totality have been
contained; and on this count at least I can claim Some credit for having taken to heart
the admonitions of the Honourable Members.
18. The Budget which 1 presented in May last had assumed the utilisation of
external assistance, other than PL 480, of Rs.865 crores. Actual aid utilisation is not
expected to amount to more than Rs.756 crores, thus showing a shortfall of as much
as Rs..109 crores. The receipts from import duties will be about Rs.125 crores less
than assumed in the original Budget. Further, the Railway revenue shows a shortfall
of Rs.17 crores, their ordinary working expenses being at the same time, Rs.23 crores
higher-in all, a deterioration of Rs.40 crores. On the Posts & Telegraphs side also,
there is a similar deterioration of Rs.22 crores. I The internal resources of public
sector undertakings have gone down by Rs.41 crores, the bulk of which is in respect
of Hindustan Steel.
19. There is one other factor which has also contributed to the large deficit
this year-I am referring to the overdrafts of States. Last March we had provided Rs.55
crores’ to some States in order to enable them to clear their overdrafts with the Reserve
Bank which were likely to be outstanding at the end of 1966-67. In the Budget that I
presented last May, I had also made a provision of Rs.50 crores for the same purpose.
In the event, a total of Rs.113 crores was given to the States in respect of their overdrafts
at the end of the last fiscal year; it was hoped that with the burden of past overdrafts
taken care Of, the States would be able to avoid similar overdrafts in the current fiscal
year. Unfortunately, some of the States are still running overdrafts and 1 have decided
to provide Rs.50 crores more in the current year’s Revised Estimates to clear the
overdrafts once again at the end of the current year. While we have thus decided to
safeguard the Plans of the States next year, Honourable Members would appreciate
that we cannot allow a similar situation to develop next year also. I trust that the State
Governments will not precipitate a situation in which we will be obliged to reconsider
the existing banking facilities enjoyed by the States with the. Reserve Bank.

5
 20. Next year’s revenue receipts at existing levels of taxation are estimated at
Rs.3132 crores, being Rs.1 38 crores more, than the current year’s Revised Estimates.
The major increase of Rs.86 crores occurs under excise duties. Income tax is likely to
show an improvement of about Rs.10 crores only as the profitability in the corporate
sector this year will be reflected in the assessment next year. Customs revenue is
expected to show a slight fall of Rs.3 crores, the anticipated improvement, under
import duties being more than offset by reduction under export duties. The rest of the
increase in revenue next year occurs mainly under interest receipts. Of the total revenue
receipts, Rs.423 crores will be transferred to the States as their share of Central taxes
and duties.
21. External aid, other than PL 480, is placed at Rs.775 crores. Next year’s
repayment liabilities are Rs.193 crores, thus giving a net figure of Rs.582 crores. The
rupee accruals in respect of PL 480 imports as also the dollar credit under the new
agreements are placed at Rs.274 crores as against Rs.366 crores this year.
22. Next year’s expenditure estimates include Rs.1015 crores for Defence as
against Rs.970 crores in the Revised Estimates, thus showing a rise 6f Rs.45 crores
which is mostly accounted for by dearness allowance increases and somewhat larger
provision for replacement stores. Included in these estimates is also an increase of
Rs.2 crores for pension charges and Rs.7 crores under Capital. Border roads account
for a provision of Rs.48 crores which is Rs.5 crores higher than in the Revised Estimates.
23. Sir, I am well aware that our defence expenditure should receive the utmost
scrutiny so that the resources available for development are not unduly eroded. The
question of reducing the magnitude of defence expenditure without detriment to national
security has been continually receiving our earnest attention. Significant progress has
already been achieved towards improving the teeth-to-tall ratio and further measures
to Improve this are in hand; likewise, other measures for improving the
cost-effectiveness of our defence outlays are also under consideration. It is obvious
that with the substantial increase in the price-level that has taken place over the recent
past, some increase in defence expenditure would become unavoidable. Honourable
Members would, however, be interested to note that as a percentage of gross national
product, defence expenditures have already come down from 4.4 per cent in 1963-64
to an estimated 3.2 per cent in 1967-68.
24. The Budget estimates for 1968-69 include Rs.243 crores on account of
non-Plan grants to States and Union Territories. A provision of Rs.223 crores has also
been made for giving non-Plan loans to States and Union Territories of which Rs.105
crores is for purchase and distribution of fertilisers, seeds and pesticides, and Rs.20
crores for scarcity relief. The provision for non-Plan expenditure under the
developmental heads is estimated at Rs.237 crores as against Rs.214 crores this year
in part as a result of increased provision for export promotion. Rs.186 crores are
provided under heads relating to Administration as against Rs.177 crores this year, the
6
bulk of the increase being on account of higher dearness allowance. The total interest
charges are estimated at Rs.550 crores as against Rs.50 8 crores this year.
25. The resources for the Plan next year on the basis of the estimates just
mentioned and a number of miscellaneous items not mentioned here, are placed at
Rs.1544 crores of which Rs.170 crores are to be contributed by public sector
undertakings including the Railways and the Posts and Telegraphs.
26. The requirements for meeting the Plan outlays of the Centre and those of
the Union Territories as well as for providing Plan assistance to States are, however,
much larger. In making provision for the Plan at the Centre, a balance has to be struck
between the constraint of resources and the need to maintain the progress in respect of
continuing schemes and the initiation of new schemes in sectors of high priority. On
this basis, a sum of Rs.615 crores has been allocated for providing assistance to the
States as against Rs.595 crores this year. Rs.65 crores have been provided for Union
Territories-one crore more than this year. The provision of Rs.1179 crores for the
Centre’s own Plan will only be marginally higher than the current year’s budgeted
outlay of Rs.1172 crores and the expected outlay of about Rs.1150 crores. In the
aggregate, the provision for the Plan in the Centre’s Budget for the coming year
amounts to Rs.1859 crores as against the expected outlay of about Rs.1809 crores in
the current year. This would, of course, be augmented by the resources that the States
themselves are able to raise for their Plans. Honourable Members may like to note that
a provision of Rs.140 crores is being made for building up a buffer stock of foodgrains
which has a valuable part to play in underpinning our plans for development. If account
is taken of this, what may be broadly caned “planned outlays for development” would
show a significant increase over the current year.
27. I would also like to point out that of the Plan assistance of Rs.615 crores
to the States, Rs.590 crores has been already allocated among the different States by
the Planning Commission and the remaining Rs.25 crores is being specifically
earmarked for a speedy completion of selected major irrigation projects. It is my
earnest hope that the State Governments will provide adequate resources for the urgent
requirements of minor irrigation and rural electrification. Over the year, depending
on the economic situation, I will do my best to supplement the efforts of the States
in these two priority areas.
28. The main items forming part of the Centre’s outlay of Rs.117 9 crores are:
Rs.172 crores for the Railways, Rs.153 crores for iron and steel, of which Rs.110
crores are for Bokaro, Rs.82 crores for petroleum and Rs.70 crores for chemicals
including fertilisers. The provision for agriculture is Rs.53 crores, that for Posts and
Telegraphs Rs.48 crores and for financial institutions Rs.35 crores. I quite realise that
these provisions do not meet the requirements of all the Ministries; but the constraint
of resources has left me with no choice.

7
 29. Honourable Members would note that we have decided to appoint a Finance
Commission in advance of the due date so that its findings are available for the
formulation of the Fourth Plan. A copy of the Notification constituting the Commission
and incorporating its terms of reference is being laid on the Table of the House today.
I have been particularly keen for sometime that the various financial problems between
the Centre and the States, and among the States themselves, should be objectively
reviewed so that solutions are found which are not only just but accepted as such by
all concerned. The recommendations of the Commission, I am sure, will serve this
purpose and contribute towards national integrity and harmony.

PART B
30. Sir, I now come to the much awaited and perhaps much dreaded part of
my Budget speech. I trust the Honourable Members will not take me to task if the
proposals I unfold do not fulfil the expectations of dread. With resources available for
the Plan next year of Rs.1544 crores and the proposed Plan provision of Rs.1859
crores, there is a gap in the Centre’s Budget of Rs.315 crores. A deficit of this kind is
usually an invitation to a Finance Minister to sharpen his knife for a major operation
for mobilisation of additional resources. On this occasion, I propose to engage myself
essentially in a minor operation in the nature of plastic surgery-taking out a little
flesh here and adding a little bit there in order to make the tax-system more efficient
and attractive.
31. A number of radical suggestions for tax reform have been made from time
to time by Honourable Members, individual scholars and associations of labour, trade
and industry. The final report of Shri Bhoothalingam has been received and will be
made available to Honourable Members. The Public Accounts Committee has also
recently made a number of suggestions in this regard; and we are awaiting the
recommendations of the Administrative Reforms Commission. Over the year, I have
given the most anxious consideration to the revision and simplification of the tax
structure, both direct and indirect. While some changes are obviously desirable and
could be introduced without further delay, fundamental changes in the tax system
should not be made without a very thorough study of all the Implications. I am having
such a study undertaken in earnest and am hoping that the climate of the country will
be conducive to the acceptance of more thoroughgoing changes in the next Budget.
DIRECT TAXES
32. Coming to direct taxes first, my main proposals in the field of corporate
taxation relate to the discontinuance of the ‘dividend tax’ on excess distributions of
equity dividends and a reduction in the surtax on company profits from 35 per cent to

8
25 per cent. The abolition of the ‘dividend tax, apart from making for simplification,
should improve the climate for equity investment. The reduction in the surtax on
company profits is intended as a spur to efficiency.
33. I propose to introduce a number of concessions to promote higher
agricultural productivity, particularly by encouraging the efforts of user industries. I
propose to make a provision for the deduction, in the computation of business profits
of companies, of an amount equal to one and one-fifth of the expenditure incurred by
them in providing agricultural inputs, such as, fertilisers, seeds, implements and
pesticides, and extension services, in spheres related to the particular industry in which
the company is engaged. This weighted deduction will be available where the qualifying
expenditure is incurred by the company directly and also through approved associations
or organisations. The development of the seed processing industry occupies high priority
in our agricultural programme. I, therefore, propose to accord to it the ‘priority industry’
treatment.
34. As part of the measures designed primarily to assist export promotion, I
propose to extend the concession of development rebate at the higher rate of 35 per
cent of the cost of new equipment, to the manufacture of vegetable oils and oilcakes
through the solvent extraction process, processed concentrates for cattle and poultry
feeds and processed fish and fish products. I propose also to provide for the grant of
an Export Markets Development Allowance to taxpayers other than foreign companies
at the rate of one and one-third of the revenue expenditure incurred for the development
of export markets. Further, to encourage export of technical ‘know-how’ and technical
services by Indian companies, I propose to exempt from tax the whole of their income
consisting of dividends, royalties and fees derived through these activities from foreign
companies.
35. In the field of taxation of personal incomes, I have reached the conclusion
that in the interest of simplification of the tax structure and convenience of taxpayers,
the Annuity Deposit Scheme should be discontinued. Accordingly, I propose that no
Annuity Deposits will be required to be made on incomes arising after the current
financial year.
36. Last year, as a measure for stimulating investment in equities, Indian
company dividends were exempted from income-tax in cases where the total income
from dividends of the taxpayer during the year did not exceed five hundred rupees. I
propose to extend this concession by exempting the first five hundred rupees of such
dividend income from tax even where the total dividend income exceeds five hundred
rupees in the year.
37. For several years past the rate structure of tax on personal incomes has
included the levy of separate surcharges in relation to unearned incomes and earned
incomes in excess of specified limits. Under our integrated scheme of direct taxation
which comprises, besides income-tax, an annual tax on wealth and taxes on gifts and
9
inheritance, I do not see any need or justification for differentiating between unearned
and earned incomes through the levy of surcharges on income-tax, which result in
complications in tax calculations. I, therefore, propose to discontinue the levy of separate
surcharges on unearned and earned incomes. Simultaneously, in order to maintain the
progressiveness of the income-tax, I propose to step up the basic rates of income-tax
on incomes over Rs.1 lakh from the present rate of 65 per cent to 70 per cent on
income in the slab between rupees one lakh and rupees two and half lakhs and to 75
per cent on income above that level. I also propose to step up the rates of ordinary
wealth-tax on wealth in the slab over Rs.10 lakhs by half per cent, that is, from 2 per
cent to 21/2 per cent on wealth between Rs.10 lakhs and Rs.20 lakhs, and from 21/2 per
cent to 3 per cent on wealth above Rs.20 lakhs.
38. In a situation where both the husband and the wife are tax-payers in their
own right, It would be improper for any outsider to decide as to who is dependent on
whom. At present, we avoid this ticklish question by allowing both parties to claim a
spouse allowance. This still leaves open the question as to who brings more tax benefit
to the partnership through marriage. To eliminate this unintended strain on the
relationship of marriage, I propose to provide that where both the husband and the
wife have taxable incomes, the spouse allowance will be available to neither.
39. As a measure of relief to totally blind individuals, I propose to provide for
the deduction of Rs.2,000 in the computation of their taxable income.
40. I also propose to simplify the existing basis of the calculation of tax on
partnership incomes derived from registered firms. This will be done by deducting the
tax borne by the firm itself in computing the partners’ shares in the income of the firm.
At present, we grant rebate of tax at the average rate to the partners on the proportionate
amount of the tax borne by the registered firm. In order to maintain the overall incidence-
of tax, I propose to make a consequential upward adjustment in the rates of tax on
registered firms. Some rationalisation is also being undertaken in regard to rate structure
of tax on the incomes of cooperative societies and Local Authorities.
41. There are a number of changes I propose to introduce in regard to the
computation of income from house property, deduction for the cost of maintaining a
vehicle by salaried employees, procedure for grant of refunds and withholding of tax
from interest payments.. It is not necessary for me to go into the details of all these
changes which are spelt out in the Explanatory Memorandum on the Finance Bill.
42. I shall now refer to some of the measures that I propose to introduce for
countering tax evasion and avoidance. In this context, I propose to take steps for
setting up, departmentally, an organisation for valuation of lands, buildings and other
assets. Further, J propose also to have administrative instructions issued to secure
that, as far as possible, the same value is adopted for an asset for the purposes of
income-tax, wealth-tax, gift-tax and estate duty.

10
 43. Another measure is to classify as short-term capital gains, the gains arising
from the sale or transfer of capital assets within 24 months of their acquisition, as
against the present period of twelve months.
44. The deductible amount of entertainment expenditure in businesses and
professions is already subject to certain limits. These limits are often circumvented
through entertainment undertaken out of entertainment allowances or ‘expense accounts’
operated by employees. Henceforth, such expenditure will also be brought within the
purview of the limits. The existing restriction in the case of companies on the deductible
expenditure on provision of perquisites, benefits and amenities to their higher-paid
staff will be extended to non-corporate enterprises. An alternative monetary limit of
Rs.1,000 per month for each employee will also be laid down. Further, depreciation
allowance and maintenance expenditure admissible to the employer on residential
accommodation and household equipment such as refrigerators and air-conditioners
provided by him to the employees free of charge, will also be brought within these
limits.
45. Tax liability is sometimes artificially reduced by diverting profits to
relatives and associate concerns in the form of excessive payments for goods and
services. Claims are also made for deduction of expenses in large amounts shown to
have been paid in cash, often with a view to frustrating investigation as to the identity
of the recipients and the genuineness of the claim. To plug these loopholes, I propose
to provide that payments made in businesses and professions to relatives or associate
concerns will have to pass the test of reasonableness in order to qualify for deduction.
Further, I propose to provide that payments made in amounts exceeding Rs.2,500 after
a date to be notified later will be allowed as a deduction only If these are made by
crossed cheques or by crossed bank drafts.
46. In order to expedite tax assessments, I propose to reduce the period of
time limitation for completion of assessments in original proceedings for 1969-70 and
later years from four years to two years from the end of the relevant assessment year.
As a corollary to this, the time limitation for making applications for refund of tax
will also be reduced, likewise, to two years from the end of the relevant assessment
year.
47. I propose to lay down very stringent penalties on those who continue to
avoid taxes by concealing their incomes or wealth. For this, the penalties for
concealment of income or wealth will be stepped up to a minimum of 100 per cent and
a maximum of 200 per cent of the concealed income or wealth. In the case of persons
defaulting in the statutory obligation to deduct tax at source and pay At to the credit
of the Central Government, I propose to provide for punishment of rigorous
imprisonment up to six months and a fine of not less than 15 per cent per annum of the
tax in default, on conviction before a court. Currently, such punishment is only a fine
upto Rs.10 for every day of default.

11
 48. The changes proposed by me in regard to corporate taxes and the taxes on
personal incomes will take effect prospectively i.e., in relation to incomes on which
advance tax is payable or tax is deductible at source during the coming financial year,
1968-69. Similarly, the proposed increases in the rates of ordinary wealth-tax will take
effect prospectively from the assessment year 1969-70. The discontinuance of annuity
deposits from the coming financial year is expected to bring in, in a full year, additional
tax revenue of the order of Rs.18 crores due to non-deduction of deposits in computing
the taxable income. Other changes in the taxation of personal incomes are likely to
result in a reduction in revenue to the extent of about Rs.4 crores in a full year, leaving
a net gain to revenue of about Rs.14 crores. I have not taken into account the gain to
revenue on account of increase in the rates of wealth-tax as the benefit of It will
accrue only during the financial year 1969-70. Together with the changes in corporate
taxation, which Imply a loss in revenue next year of about Rs.4 crores, the yield from
direct taxes would show an increase of Rs.10 crores next year as a result of all the
changes I have proposed.
49. Before concluding the subject of Direct Taxes, I should like to add that I
have been impressed with the view expressed in this Honourable House that the medium
of the Finance Bill should not be utilised to make too many changes in the income tax
law. Accordingly, I have brought up only such changes in regard to which delay would
have been inadvisable, leaving out changes concerning structural or administrative
matters to be considered and brought up separately in the course of the year.
INDIRECT TAXES
50. I now come to indirect Taxes. In keeping with the objective of maintaining
price stability for items of essential consumption, I have maintained the utmost restraint
in proposing changes in excise and customs duties. At the same time, some additional
taxation of items of less essential consumption cannot be avoided. There is also need
to deploy the instrument of indirect taxation for assisting export promotion and Import
replacement. I have also taken the opportunity of removing anomalies and introducing
a measure of rationalisation and simplification.
51. It is proposed to levy an excise duty on six now commodities, namely,
confectionery and chocolates, leather cloth, embroidery, parts of wireless receiving
sets like valves and transistors, steel furniture and crown corks. The duty on
confectionery and chocolates is proposed at 80 paise per kilogram which is expected
to yield an annual revenue of Rs.2.4 crores. The duty on embroidery and steel furniture
will be at the rate of 20 per cent d valorem which together will yield a revenue of
Rs.5.4 crores in a full year. Leather cloth will bear a duty of 25 per cent ad valorem
yielding an annual revenue of Rs.1.52 crores. On crown corks a duty of one paisa per
piece is proposed which will yield an annual revenue of Rs.1.50 crores. The statutory
rate of duty on valves and transistors is proposed to be fixed at Rs.5 per piece, but the
effective rates at present are being fixed at Rs.3 and Rs.1 per piece respectively by

12
exemption notification. The likely yield would be Rs.2.90 crores. The new levies on
confectionery, embroidery and steel furniture will be confined to the organised sector
of these industries manufacturing the products with the aid of power. These new
levies will collectively yield a revenue of Rs.13.72 crores in a full year.
52. Among the commodities which are already excisable, the existing rates of
duty on all varieties of unmanufactured tobacco other than tobacco dust are proposed
to be stepped up by about 10 per cent. On this occasion, I have decided to be Impartial
between the different devotees of nicotine, be they addicted to the humble bidi, hookah
and chewing tobacco or to cigarettes, cigars and the pipe. These increases will yield
an additional revenue of Rs.6.36 crores in a full year. Another item on which increase
has been proposed is jute manufactures of which the rate of basic excise duty on
hessians is being increased from Rs.375 to Rs.450 per tonne and on other manufactures
from Rs.175 to Rs.250 per tonne. These increases will yield an additional revenue of
Rs.4.02 crores in a full year.
53. My next proposal is to increase the basic excise duty on complete
refrigerators and airconditioners from 20 per cent to 30 per cent ad valorem and that
on component parts from 30 per cent to 40 per cent. This measure will appeal to at
least those Honourable Members who pulled me up in the last Budget session for
overlooking such obvious Items of less essential consumption. The increase in duty on
these Items will yield an additional revenue of Rs.2.40 crores in a full year.
54. It will be recalled that as a part of the Budget proposals last year the duty
on sized cotton yarn of fine and super-fine counts was increased substantially.
Representations have been received from the powerloom weavers that the burden of
this duty at the weaving stage is rather heavy. It is therefore proposed to re-adjust the
rate structure in such a way that relief is afforded on sized yarn and duties suitably
stepped up at the processing stage of powerloom fabrics. The overall budgetary effect
will only be marginal. It is also being ensured that the incidence of the duty on composite
mill fabrics, handloom fabrics and hosiery remains more or less unchanged. Particular
care is being taken to ace that the handloom sector is left unaffected, and in fact some
relief is proposed to be given to this sector by exempting totally hank yarn in plain
straight reels of new French counts 29 or more but less than 34-the latter being
equivalent to a shade more than 40 British counts. This will involve a loss of about
Rs.10 lakhs in a full year. Representations have also been received from the smaller
producers of aluminium that the effect of the Budget proposals of last year has affected
their profitability adversely. It is proposed to afford some relief to these smaller
producers by reducing the effective duty to the extent of Rs.150 per tonne; this
concession will be available only to those ore-based producers whose clearance of
aluminium and products made out of aluminium had not exceeded 12,500 tonnes in
the previous financial year. The revenue effect of this concession will be a loss of
about Rs.25 lakhs in a full year.

13
 55. Rationalisation of the existing concessions to certain paper manufacturers
and exemptions applicable to some varieties of paper are being given effect to by
notifications, the overall revenue effect of which will be a nominal gain of Rs.15
lakhs in a full year.
56. The ceiling rates fixed in the Mineral Products (Additional Duties of
Excise and Customs) Act, 1958 have no w been found to be inadequate. The
over-recoveries in the hands ‘ of the oil companies which have to be appropriated to
the Consolidated Fund through levy of these additional excise duties require a higher
rate of levy. It is accordingly proposed that the ceiling rates in respect of Motor spirit,
Refined diesel oil and Petroleum products not otherwise specified be raised sufficiently
and the effective rates which are fixed by notification issued by the Central Government
stepped up suitably. These changes will yield an additional revenue of Rs.10.13 crores
in, a full year, but the consumers will not be affected as the duties, though recovered
from the oil companies, cannot be passed on by way of price increases to the consumers.
The cumulative effect of all the proposals relating to excise duty will be an additional
revenue of Rs.36.4 3 crores in a full year.
57. It is proposed to continue the levy of special excise duties at the existing
rates for another year. The provision for levy of regulatory duty of excise in the same
manner as in section 42 of the Finance Act 1967 is being continued though there will
be no levy of this duty at present.
58. For some time past 1 have been exercised over the administrative burden
on the excise department and the complaints of abuse associated with the existing
system of physical control. I have accordingly decided to extend the system of self-
assessment by the manufacturers, to all manufacturers, big and small, making exception
in respect of a few excisable commodities only which present complications in
assessment or where there is substantial movement in bond. A large measure of trust
will thus be placed in the manufacturers, their declarations and their accounts. Day to
day verification of clearances by Central excise officers will be dispensed with and
replaced by periodical cheek of the self-assessed documents and accounts to ensure
that the amounts due to Government have been properly assessed and paid. This
change in procedure will, however, necessitate certain essential revenue safeguards.
To this end, the penal provisions for unauthorised removal of the goods or other
contraventions of the rules and regulations with intent to evade payment of duty are
proposed to be made more stringent.
59. I have also reviewed the existing system of control on the tobacco growers
for the purpose of levying excise duty on unmanufactured tobacco. Steps are being
taken by which the need for the excise officers to contact the growers will be
considerably reduced. The excise control on sparse growing areas is also being
simplified.

14
 60. The levy of local sales tax by the States on goods declared to be of special
Importance in inter-State trade is limited to 3 per cent at present. On a request from
some of the States, suitable amendment is being made in the Central Sales Tax Act
deleting mill-made silk fabrics from this list of goods. This will give the States freedom
to levy sales tax on It without any restriction.
61. I was reminded last year that in spite of my much discussed aversion to
alcoholic liquors, I had not made any proposals in this regard. I should retrieve my
reputation now; and I propose to increase the Import duty on whisky, brandy, and a
few other alcoholic liquors by about Rs.9 per bottle. I also propose to increase the
Import duty on cloves, cassia and cinnamon by about Rs.12 to 13 per kilogram. There
is a high margin of profit in respect of these spices and their use is confined to the
comparatively affluent sections of the community. The proposals with regard to these
consumer goods will yield an extra revenue of Rs.2 crores.
62. My next proposal is in regard to chemicals, plastics, synthetic resins and
miscellaneous articles not otherwise specified in the Customs tariff schedule. The
present effective rate of 50 per cent ad valorem is proposed to be raised to 60 per cent
ad valorem with some exceptions. This will yield an additional revenue of Rs.12
crores. The proposed increase is not likely to cause any hardship because the cost of
chemicals is usually, a small fraction of the price of the manufactured article, and
secondly, because imported chemicals are usually not required in the manufacture of
articles consumed by the common man; wherever they are, the existing rate is proposed
to be maintained. Thus, though the tariff item regarding chemicals covers drugs and
medicines too, the present rate on the latter as also on the chemicals and intermediates
required for their manufacture is being maintained by issue of exemption notifications.
Similarly, the existing rate on carbon black and red phosphorus will be continued by
issue of an exemption notification. Further, sulphur, dye intermediates recommended
by the Tariff Commission and various other chemicals, the duty on which had been
specially reduced or exempted wholly in the past, will continue to pay duty at the
existing rates. In this connection I should like to make a special mention of an exemption
that is proposed for chemicals and intermediates used in the manufacture of insecticides,
pesticides and fungicides. Some of these have already been exempted, but it is now
proposed to issue an omnibus exemption notification covering all such chemicals and
intermediates as are not manufactured in the country. This concession is being given
to encourage the use of these products as an aid to agricultural production.
63. The last proposal on the Customs side is an increase in duty on some of
the iron and steel products which at present carry a specially reduced rate of 15 per
cent ad valorem. This rate is proposed to be raised to 271 per cent add valorem as a
specially reduced rate is no longer justified in view of the indigenous production
which is coming up. The revenue effect of this proposal will be an additional yield of
Rs.1.50 crores in a year.

15
 64. The special duty of Customs is being continued for another year but a
notification is being issued exempting imported goods from this levy so as to maintain
the status quo. The provision for levy of regulatory duty of Customs in the same
manner as in section 39 of the Finance (No.2) Act, 1967 is being continued though
there will be no levy of this duty at present.
65. As a result of the proposals relating to excise duties, there will be an
additional yield of Rs.3.80 crores on account of the increased collections under
countervailing duty. The aggregate additional revenue under import duties will be
Rs.19.30 crores.
POSTS AND TELEGRAPHS
66. I had occasion to mention earlier that the deterioration in the revenue
budget of the Posts & Telegraphs Department this year would be of the order of
Rs.22 crores. The result is that they have not only not been able to pay the due
dividend liability to the General Revenues but have not, also been able to cover
their working expenses this year. The working expenses of the Post Office Branch
have particularly gone up very rapidly due to the increase in staff costs. It has been
agreed that the shortfall of this year and the last two years should be made good
over a period of three years commencing from the next year. On this basis and at
existing tariffs, It is anticipated that the deficit in the revenue budget of the Posts
4-Telegraphs Department next year would be Rs.23.83 crores. Honourable Members
are aware that a Tarill Enquiry Committee under the Chairmanship of Shri Mahavir
Tyagi had been appointed to evolve definite principles on which the tariff policy of
the Department might be based. The Committee’s interim report covering the Post
Office Branch has since been received and based on the principles suggested by the
Committee, It is proposed to revise the postal tariffs. The interim report and a
Memorandum showing the proposed changes is being circulated separately along
with the Budget papers and I shall, therefore, mention only the more important
changes. The postage on letters upto 15 grams is proposed to be increased from 15
paise to 20 paise and that for a letter-card from 10 paise to 15 paise and for a post
card from 6 paise to 10 paise. The postage for books, pattern and sample packets
and book packets containing printed books and registered newspapers will also be
raised. The money order commission which is 15 paise per Rs.10 will now be 20
paise per Rs.10 upto Rs.200 and 30 paise per Rs.20 thereafter. The postage charges
for foreign malls will also be revised. The Committee has not yet reported on the
tariffs for other branches, but in view of the loss in the working of the Telegraphs
Branch, It is proposed to make a small increase in some of the inland telegraph
rates. These changes are expected to bring in an additional revenue of Rs.24.70
crores on the Postal side and Rs.1.08 crores on the Telegraphs side in a full year.
The changes would be given effect to from dates to be notified later and are expected
to cover the deficit of the Posts & Telegraphs Department next year.
16
 67. I might add that 1 have already taken account of the increases in the posts
and telegraphs rates in preparing the Budget Estimates for 1968-69 so that they will
not count towards reduction of the initial deficit of Rs.315 crores. Similarly, the changes
in fares and freights announced by my colleague, the Railway Minister, have also
been taken into account before striking the deficit.
SUMMING UP
68. To sum up, the additional revenue next year from the measures of taxation
1 have proposed would be Rs.65.73 crores of which Rs.10 crores would be under
direct taxes, Rs.36.43 crores under excise and Rs.19.30 crores under customs. Of this,
a sum of about Rs.15 crores will accrue to the States leaving a balance of Rs.50.73
crores available for the Centre’s Budget. I hope the State Governments will utilise this
addition to their resources for minor irrigation and rural electrification.
69. On capital account, the abolition of the Annuity Deposit Scheme will
mean a loss to the Central exchequer of Rs.35 crores next year. Part of this loss will
be made up by contributions to the new public provident fund for which I am taking
credit for Rs.10 crores only. There will, therefore, be a net loss on capital account of
the order of Rs.25 crores. The net gain to the Centre’s Budget on revenue and capital
account taken together of all the changes will be of the order of Rs.25 crores so that
the initial deficit of Rs.315 crores goes down to about Rs.290 crores.
70. Honourable Members may well appreciate the immense reservation with
which I have reconciled myself to a large deficit next year. A number of considerations
have weighed with me. In so far as the Plan outlays are concerned, It is clear that any
further reduction can only lead to dislocation of the progress of continuing schemes
even in critical areas such as agricultural development, fertiliser production and family
planning where we are poised for substantial achievements. We have also to keep in
mind the problem of unemployment among technicians which is already a matter of
concern. Besides, it would be shortsighted to retard the process of recovery by putting
an undue curb on Governmental spending. I am sure that no section of the House
would have commended such an approach. The other alternative was to put up proposals
for massive mobilisation of resources. It is my judgement that this would hurt the
economy and retard the process of growth.
71. I have done my best to restrict the outlays on Defence and Administration.
I am happy to note the earnestness in all parts of the Defence Services to eschew
every form of avoidable expenditure. I am anxiously awaiting the finalisation of the
Reports of the Administrative Reforms Commission. I need hardly reiterate that
Government would go into the recommendations of the Commission with earnestness
and promptness in order that the objectives of efficiency and economy in administration
can be fulfilled as early as possible.

17
 72. In estimating the resources at the existing rates of taxation, having been
bitten once, I have assumed a modest recovery in industrial production. If, as I hope,
the modifications in taxation I have proposed succeed in Improving the climate for
saving, investment and export, the economy might revive more vigorously and this
would help in moderating the actual deficit. Honourable Members may rest assured
that I have not changed my belief that we cannot afford to indulge in large budgetary
deficits year after year. If I have reconciled myself to a deficit next year, it is in the
expectation that by assisting the revival of the economy at this stage, we shall be able
to achieve a more satisfactory budgetary balance before long.
73. No Finance Minister can claim either perfect foresight or absolute wisdom.
But I do feel that the situation is as hopeful as it is challenging. The utmost co-operation,
discipline and even a measure of self-denial by all sections of the community will be
necessary If we are to meet the challenge. I would like to appeal to all the Honourable
Members for their co-operation and constructive suggestions so that, together, we can
turn the present challenge into hope and opportunity for the future. On my part, I can
only assure a continuous watch on Implementation of economic policies and a readiness
to take appropriate action from time to time. In conclusion, It is my earnest hope that
the Budget I have had the honour of presenting today reconciles as best as possible the
variety of concerns that are so anxiously felt in this Honourable House and in the
country as a whole.
(February 29, 1968)

18
SPEECH OF SHRI MORARJI R. DESAI DEPUTY PRIME MINISTER AND
MINISTER OF FINANCE INTRODUCING THE BUDGET FOR THE YEAR
1967-68 (Final)
Sir,
On the 20th of March this year, I presented to this Honourable House an interim
Budget for the year 1967-68. In presenting that Budget, I had occasion to remark that
a number of difficult and even conflicting considerations had to be taken into account
in framing the Budget for the current year. There was not enough time in the last
session of Parliament either for Honourable Members or for the Government to review
the situation fully. It was against this general background that it was proposed to
present a fuller picture of Government’s budgetary as well as general economic policies
in the current session of Parliament; and it is for this purpose that I stand before the
Honourable House today.
2. The areas of immediate concern in the economic field are easy to define:
First, there is the serious situation created by the drought concerning food supplies
in general and the well-being of the people in the scarcity affected areas in particular.
Second, the steady rise in prices which has been with us now for more than
three years has to be arrested in the shortest possible time.
Third, there is need to revive industrial activity, particularly in a number of
capital goods industries which are suffering from lack of demand.
Fourth, recent adverse trends in exports have to be reversed as soon as possible.
And finally, these immediate problems must be tackled in a manner which gives
us confidence that we can look forward to a long period of satisfactory growth with
reasonable price stability and increasing self-reliance and without sacrificing the claims
of national security and social justice.
FOOD SITUATION
3. The average production of foodgrains during the last two seasons has
been 17 per cent below the level reached in 1964-65. This sharp decline in output has
meant loss of income for farmers in many parts of the country. Our first concern in
this situation has naturally been to prevent undue hardship to the vulnerable sections
of the community by provision of work and incomes and by substantial distribution of
foodgrains through public channels. It is, I think, a matter of gratification for the
country and for our friends abroad who have rendered us a valuable help at this
difficult juncture that despite the sharp reduction in output, a major calamity has been
averted. I can assure the Honourable House and the people affected in all scarcity

1
areas, and particularly in large parts of Bihar and eastern Uttar Pradesh, that we shall
spare no effort or money to ensure that relief measures and public distribution of
foodgrains will be continued and extended to the extent necessary during the lean
months still ahead of us. I propose to make a substantial additional provision of Rs.38
crores in the Centre’s Budget for the current year for supporting relief measures and
assisting the scarcity affected States. This is in addition to the provision of Rs.37
crores already made in the interim Budget. Honourable Members would agree that
relief to the people in the scarcity areas should be the first charge on any resources
that we, at the Centre, can spare even in our present difficult conditions.
4. We have already imported 3.5 million tonnes of foodgrains during the
first five months of 1967. Another 2.6 million tonnes are expected to arrive after the
end of May. Of this total of some 6 million tonnes, a little over one million tonnes
represent purchases, of roughly equal quantities of rice and wheat, from our own
resources; the balance consists of PL 480 supplies from the United States and assistance
from a number of other countries notably Canada, the Soviet Union and Australia.
Subject to appropriate matching, the United States has indicated its willingness to
provide another 3 million tonnes of foodgrains; and of this 1.5 million tonnes are
expected to be authorised shortly. A considerable part of the purchases we have
authorised from our own resources is in the expectation that appropriate assistance
will be available from other countries in a form which will relieve our general balance
of payments position. Apart from these purchases, we also have to spend large amounts
of our own foreign exchange earnings for meeting freight payments on foodgrains
supplied on concessional terms. Nevertheless, to the extent necessary, arrangements
for further imports from our own resources will be made to prevent a breakdown of
the public distribution system.
5. The availability of rice around the world is extremely limited; and even
such quantities as are available can be had at prices much higher than those for other
cereals. Our public distribution system will, therefore, have to rely primarily on wheat
and milo. While supplies of wheat can be supplemented appreciably by imports, the
supply of rice has to depend essentially on internal procurement. I am happy to say
that all State Governments, whether surplus or deficit, are co-operating in the task of
procuring internal supplies of rice, wheat and other foodgrains. To facilitate this effort,
we have increased procurement prices and have maintained and indeed strengthened
zonal restrictions between States. Whatever may be the merits of the system of free
distribution and free movement of grains in normal times, it is obvious that in the
present circumstances, the public distribution system and the zonal restrictions will
have to continue.
6. Honourable Members are aware that the present system of distribution of
foodgrains imposes a heavy burden on the financial position of the Centre on account
of the subsidised rates at which we supply imported foodgrains to State Governments
and others. This subsidy is expected to cost as much as Rs.118 crores to the Central
2
Government in the current year. Despite the difficult budgetary situation, we have for
the present thought it prudent to continue the Central subsidies or foodgrains. It is our
policy, however, to reduce and eliminate this subsidy as soon as circumstances permit.
The large expenditure on food subsidies is me of the main reasons why it has been
difficult for us this year to provide for important developmental needs. Any sustained
erosion of developmental outlays through a policy of subsiding consumption, however
essential cannot but have serious repercussions on our ability to provide the same
essential consumer goods in the years to come.
7. In addition to the subsidy given by the Centre, some State Governments
also are subsiding foodgrains. In our Federal Constitution, it is not for the Centre to
decide what the States should do in matters like this. But it is my duty to make it clear
that if any State Government wishes to subsidise foodgrains, over and above the
substantial subsidy given by the Central Government, it will have to do so on the basis
of its own resources and without counting on any additional Central assistance for the
purpose.
AGRICULTURAL PRODUCTION
8. Honourable Members are aware of the steps we are taking to increase
agricultural productivity on a sustained basis in connection with what has come to be
known as the new agricultural strategy. But there is urgent need also to take immediate
steps to ensure that the next kharif crop turns out to be as good as possible. It simply
will not do to rest content with the hope that after two severe droughts, weather
conditions are bound to take a turn for the better in the coming season. Whatever the
weather conditions, immediate steps have to be taken to make sure that programmes
like minor irrigation and provision of better seeds and more fertilizers, which can
make the maximum impact on the crop prospects for the coming year, are proceeded
with on an emergency basis. This is why, even in the interim Budget, we had sought
to provide the full needs of agriculture for the current year. On a review of these
needs, some additional provision for Land Mortgage Banks has been found necessary;
and I propose to provide Rs.5 crores more for this purpose. I propose also to increase
Plan assistance to the State Governments from Rs.535 crores provided in the interim
Budget to Rs.590 crores. It is essentially for the State Governments to decide how best
to deploy their resources. But I hope that they will earmark a large part of the total
resources available to them for securing an immediate increase in agricultural
production. We are currently providing nearly 300 million dollars for import of fertilizers
as against less than 100 million dollars only three years ago. Correspondingly, fertilizer
credits are also being substantially enlarged.
9. The drought has affected severely not only the food situation but also the
supply position in regard to a number of other essential products such as raw jute,
cotton, oilseeds and sugar. Arrangements nave had to be made for substantial imports
of both raw jute and raw cotton and we shall make provision for additional imports in
order to sustain both exports and internal consumption. In the case of raw jute imports,
3
the subsidy to maintain the competitive position of the Indian jute industry has been
continued in the current year. We shall review the position regarding both imports and
subsidy in the light of the prospects for the coming crop. In the meanwhile, in order
to encourage domestic production, the minimum support price for raw jute has been
raised from Rs.35 per maund to Rs.40 per maund.
10. In respect of raw jute and cotton as well as oilseeds, it is of the utmost
Importance to step up research and other activity for increasing per acre yields. The
future of many of our important export industries will turn heavily on the efficiency
with which we produce the raw materials for them. It is gratifying that industry is
becoming increasingly conscious of this need; and at a later stage, I will have occasion
to refer to a change in our tax laws that I propose to introduce for encouraging research
activity in general by our industry.
11. The decline in sugar production this year has been particularly sharp.
There is no escape from a reduction in the internal consumption of sugar; and the
present controls on price and distribution will have to be maintained in order to distribute
the shortage equitably. We shall keep the situation under review and take whatever
steps are necessary to increase the output of sugarcane in the next season and to keep
its diversion to other uses within reasonable limits.
PRICE STABILITY
12. In the wake of the recent drought, there has been a sharp increase in
prices. To some extent, upward pressure on prices was exerted also by devaluation. A
situation in which prices have risen by as much as 46 per cent over a period of three
years naturally creates apprehensions about further inflation; and this, in turn, depresses
savings and encourages unproductive investments in land, urban property, gold and
commodities. Curbs on such investment become, therefore, more important than ever.
Again, in a period of inflation, prices increase at an uneven pace for different products
and services; and this raises many difficult problems of adjustment of relative prices.
13. In addition to these standard concomitants of inflation, we have to reckon
with special complications when the primary impetus for the rise in prices comes
from a sudden and sharp decline in output rather than from an excessive increase in
demand. It is not always possible to reduce demand swiftly in the face of a sudden
decline in output; and it becomes necessary to spread the process of adjusting supply
and demand over a period of time and, with the help of larger imports. But foreign
exchange earnings from exports also get adversely affected as a result both of the fall
in production and the rise in prices; and this makes it difficult to augment domestic
availability by larger imports. Again, the necessity to put an end to the inflationary
psychology and the adverse effect of the decline in production on governmental revenues
requires a restraint on public and private expenditure; and this in turn tends to depress
demand conditions for specific industries. Similarly, when crops fail and there is
extensive loss of real incomes, there is a tendency for consumer demand to be depressed
and for raw material costs to increase so, that some industries get caught in a real
4
squeeze. What I have just said describes in essence, the kind of difficult and complex
situation which we are facing today. There are no perfect answers to deal with a
situation of this character; and I can only indicate to Honourable Members the lines
along which we propose to move in the coming months to reconcile, as best as possible,
the different elements in the present situation in the light of our general policy
objectives.
14. We consider it of the utmost importance that our primary concern at the
present moment should be to put an end to the psychology of inflation. Continued
and large budgetary deficits over the past few years have contributed to this
psychology. I propose, therefore, in the present budget also to limit the outlays of
the Central Government strictly within the resources which can be mobilised in a
non-inflationary manner.
15. Equally, we must avoid a repetition of the situation, in which the State
Governments can shift their budgetary burdens to the Centre by resorting to
unauthorised overdrafts from the Reserve Bank. In order that the task of avoiding
overdrafts may not prove impossibly difficult for the State Governments, I propose to
help them in advance to a greater extent than was possible in the interim Budget.
Taking account of both Plan and non-Plan requirements, the assistance now being
proposed for the States is Rs.98 crores more than in the interim Budget. I am well
aware that this does not meet all the needs of the State Governments; but I hope that
they also will do their part for meeting their needs. This is not the time when either the
Centre or the States can afford to give up or erode important sources of revenue. If
some concessions are to be given, say to very small farmers, they will have to be made
up--and indeed, more than made up--by higher levies on better-off farmers. It is
sometimes suggested that if the Centre cannot help in any other way, it should help by
postponing recovery of interest and amortisation charges from State Governments.
While we are prepared to discuss all problems with Chief Ministers and others, I hope
it is clear that if we are to help the States more in one way, we will be able to help
them less in other ways.
16. I am well aware that avoidance of deficit financing is neither a necessary
nor a sufficient condition for price stability in all circumstances. Over a period, some
expansion in supply is necessary to accommodate the needs of growing production.
Nevertheless, in the present circumstances, it is desirable that Government should not
appropriate any part of the permissible limit of monetary expansion. This will allow
a larger expansion of bank credit to agriculture and industry to facilitate higher
production. The new agricultural strategy and the immediate programmes for increasing
agricultural production that ‘ are so vitally important require a substantial increase in
credit. It is equally important to ensure that private industry is not inhibited from
increasing production by undue limitations on the availability of credit. Some restraint
on private credit, particularly for speculative and unproductive purposes, will, of course,
be necessary. But apart from its psychological importance, the avoidance of deficit
5
financing by the Government would place the Reserve Bank and the banking system
in general in a better position to meet the genuine credit requirements of agriculture
and industry, whether public or private.
17. The question of adjustment in relative prices raises difficult social and
economic questions. When costs have risen, some adjustment of prices becomes
unavoidable if production is not to be affected. Similarly, when real incomes are
eroded by increases in the cost of living, some compensation to the lower income
groups becomes not only unavoidable but also necessary in the interest of maintaining
social harmony and good industrial and service relations. At the same time, the process
of prices chasing costs and costs chasing prices cannot be allowed to go unchecked.
For this reason, Government has endeavoured to stagger adjustments in relative prices
without ruling out such adjustments altogether; and the same discriminating policy
will have to be adopted for some time to come with a somewhat greater accent against
upward revisions either in wages or in prices.
18. Considerable concern has been caused rightly in the country by the recent
deterioration in industrial relations. At a time when some hardship is unavoidable and
when it is of the utmost importance to increase efficiency and production, such
deterioration is particularly regrettable. I would, therefore, appeal most earnestly to
employees and employers to solve their mutual problems in a spirit of give and take.
Any further deterioration in industrial relations can only spell greater hardship for the
vulnerable sections of the community.
REVIVAL OF INDUSTRIAL PRODUCTION
19. The growth of industrial output has slowed down considerably over the
past two years. There has been a modest revival since October last. Nevertheless,
industrial production in general has by no means been buoyant and several industries
are actually experiencing a decline in production and an increase in excess capacity.
20. The situation that prevails at present cannot be described as one of general
recession. In such a situation, one would expect to find excess capacity all round and,
therefore, the possibility of increasing output by general stimulation of demand. There
is obviously no immediate possibility of increasing agricultural output merely by
stimulating demand. Even in regard to industry, the emergence of sizeable excess capacity
is concentrated in capital goods industries, notably, railway wagons, machine tools,
textile machinery, castings and structurals. Among consumer goods industries, difficulties
are felt particularly by the weaker cotton textile mills which have been in need of
rationalisation and more efficient management for quite some time. Policies which are
designed to stimulate demand in general are clearly out of place in the present situation
when availabilities of basic consumer goods and agricultural raw materials cannot be
increased significantly in the short-run. At the same time, there cannot be any question
that whatever can be done has to be done to revive industrial production.
21. Basically, Government’s approach to the revival of industrial production
consists of a number ingredients.
6
 For the priority industries, we are continuing the liberal import policy; for other
industries producing essential consumer goods also, the import requirements of raw
materials and components will be met on a more liberal basis.
Despite the difficult budgetary position, it is proposed to provide additional
sums beyond what was already provided in the interim Budget for the developmental
and other needs of both the Centre and the States.
To the extent possible, additional outlays are being directed to the capital goods
industries which are in need of some impetus to demand.
It is my intention also to explore all avenues of stimulating investment and
developmental outlays as soon as the basic supply conditions in regard to essential
consumer goods show some improvement. Planning for a revival of investment activity
whether in the public or the private sector should, therefore, receive no set-back.
As already mentioned, avoidance of deficit financing will make it possible to
ensure that production is not held back for want of credit.
22. To some extent, the present difficulties of the capital goods industries
spring from the fact that the expectations on which the earlier investments were made
have not materialised. In such a situation, industry will have to show considerable
initiative in diversifying production in the light of changing circumstances. Government
also has a responsibility to facilitate this; and to this end, selective relaxations have
already been made in respect of industrial licensing. The decontrol over the pricing
and distribution of steel should also go some way in facilitating this process of adjusting
the pattern of production to the changing pattern of demand both in respect of steel
production as such and in the large number of industries using steel.
23. Again, larger exports offer a way out of the present difficulties of many of
our engineering and other industries. An increase in exports of our newer products is
vitally important from the point of view of achieving a sustained increase in our total
export earnings; and the present situation offers a welcome opportunity, of redoubling
our efforts in this direction. The subsidies that we provide on the export of engineering
and other products should help in this direction. Whereever necessary, we will support
the effort of industry to increase exports of capital goods by suitable credit arrangements
also. But industry also will have to adjust its pricing and other policies in relation to
export orders IT they are to do their part in counteracting current recessionary trends
in a constructive manner. At a time when excess capacity exists, it should be in the
interest of the industry concerned to seek actively new outlets for its products even if
this has to be done without covering in full the normal share of fixed costs.
24. In short, the present industrial scene is compounded of a number of complex
elements and no single or simple answer will suffice to transform it. The approach I
have described is calculated to make the maximum impact on industrial recovery
without jeopardising the chances of restoring price stability.

7
EXPORT PROMOTION
25. The question of export promotion is, of course, relevant not only to
industries suffering from lack of demand at present but also to the general run of our
economic activities and policies. It cannot but be a matter of great concern that the
momentum in our export earnings, which was witnessed during the early years of
Third Plan, has not been sustained. The performance of exports during 1966-67 has
been particularly disappointing. Of late, there have been signs of a modest recovery in
export earnings. With the revival of agriculture and industry, and continued efforts to
explore markets for them abroad, some further improvement in export earnings can be
expected.
26. Nevertheless, it would be necessary to exercise a restraint on domestic
demand for products which can be exported in larger quantities. Equally, export duties
have to be revised if such a revision becomes necessary in order to maintain the
competitiveness of our major export industries. Quite apart from this, a major
break-through in export earnings can be expected only on the basis of modernisation
and rationalisation of our established industries, and a judicious expansion of capacity
both in agriculture and industry in directions where we have a long-term competitive
advantage. From time to time, special arrangements will have to be made to make sure
that industries and activities with an export potential are given the highest priority in
the allocation of scarce resources. Export industries are now able to import their raw
materials and component requirements for export production from the cheapest source
and with the least administrative intervention. In regard to capital goods imports,
foreign exchange releases for other purposes and rupee finance as well, export.
Industries will have to be given a preferential treatment.
27. Promotion of tourism has a great potential for adding to our foreign
exchange earnings. I propose, therefore, to announce some measures later to help the
tourist industry. We also propose to take steps to prevent the leakage of tourist earnings
to unauthorised channels which still takes place.
28. A hospitable environment for private foreign investment in priority areas
has also considerable bearing on promotion of exports. It is generally recognised that
private foreign investment can make a valuable contribution to reducing our reliance
m imports, particularly when it brings with it know-how and sophisticated techniques
as well as capital resources. But foreign investors can also bring with them knowledge
of foreign markets and the organisation and other resources to exploit them. As they
get to know our own country and potential better, they help promote our exports. We
should, therefore, welcome private foreign investment particularly when it can assist
our export effort.
29. I cannot help emphasising that the restoration of general price stability is
an imperative necessity not only for maintaining social harmony but also for
under-pinning and strengthening our export promotion efforts and indeed, our efforts
to reduce the reliance on imports. Honourable Members may rest assured that we are
8
determined to do all that we can to maintain the external value of Indian rupee so that
distortions of the kind that led to the devaluation last June, and the necessity for sharp
adjustment in the internal economy that followed from it, are avoided.
30. While everything possible has to be done to promote exports, it has also
got to be recognised that only those exports, which can hold their own in the long run,
should receive the maximum encouragement so that we do not waste our scarce
resources for propping up export earnings which are bound to prove short-lived. An
environment of stability, whether in respect of the general price level or the frame-work
of promotion measures, is absolutely vital for a steady increase in export earnings. A
climate of expectations in which export industries seek to neutralise all their inefficiency
and disadvantages by budgetary support cannot be conducive to enduring and sound
export promotion. It should, therefore, be perfectly clear that while the Government
would be prepared to allocate scarce resources on a priority basis for the export
industries, this preference will have to be justified increasingly in terms of the efforts
of the industries themselves to increase their efficiency and profitability.
IMPORT POLICY
31. What I have just said applies equally to industries which compete with
imports. We have built up considerable capacity for producing a large variety of goods
in the country over the last ten to fifteen years. Through import restrictions as well as
high tariff duties, we have sought to protect domestic industry from competition from
producers abroad who have the advantage of long experience and trained labour force,
not to mention the advantage of easier access to capital and even raw materials. It is
now generally recognised that domestic industries in developing countries require
some protection against foreign competition. However, the development of industries
behind protective walls can lead to distortions and waste of scarce resources unless
industries, which have already been established for some time, became progressively
more efficient. In short, a competitive environment is as vital for the healthy promotion
of import substitution as it is for the sound promotion of exports. That is why we have
relaxed quantitative import restrictions in a selective manner. This policy will be
continued and strengthened as circumstances permit, particularly when it is important
to provide a spur for domestic industry to increase its efficiency.
32. We recognise that Indian industry has still a long way to go in the direction
of diversification and efficient production. Not all the disadvantages from which our
industry suffers can be removed over a short period. Again, as some industries have to
be exposed more and more to international competition, others will emerge and get
established and would require protection in the initial stages not only by way of tariffs
but also by way of quantitative restrictions. What we need, therefore, in regard to
import policy is not some rigid approach, which tends to justify all restrictions for all
time, or its antithesis in which all restrictions are sought to be abolished on a particular
day. What is required is a deliberate and discriminating policy in which the frontiers
of protection keep on moving from time to time and from commodity to commodity;
9
so that, by progressive stages, protection is removed from some commodities while it
is introduced in the case of other commodities which begin to be produced in the
country.
CONTROLS
33. If Indian industry needs to be exposed to a competitive environment in
relation to exports and imports, such an environment is all the more necessary as
between different industries and between different units in the same industry. This is,
not the occasion for me to review the machinery of controls over investment, distribution
and prices that we have been operating in India for several years now. Our approach
to these controls has been pragmatic; and we have not hesitated to relax them or to
intensify them from time to time in the light of changing circumstances. Basically our
approach to controls has also been positive; we have sought thereby to promote
development by conserving scarce resources. A similar pragmatic and positive approach
would be necessary even for the future. Where it is necessary to retain controls, it
shall be our endeavour to administer them in a manner which minimises delays and
inconvenience and ensures equal treatment to all concerned. It has to be recognised,
however, that controls are only a means to an end and that, by their very nature they
tend to introduce rigidities which often impair efficiency and initiative on the part of
all concerned. Very often the social objectives of controls such as maintaining a measure
of equality between people with different initial advantages and prevention of an
undue concentration of wealth and economic power can be achieved by other means
which may have less inhibiting effect on productive efficiency. That is why, for some
time, we have been following a selective policy of relaxing controls.
34. This question has also been examined by the Administrative Reforms
Commission and by a number of independent experts. We propose to consider their
recommendations carefully. I would only point out at this stage that there cannot be any
question of our giving up the basic objectives behind the controls that we maintain. The
question only is whether these objectives could not be better served by a different
combination of policies in which controls play a less important part than today and other
instruments, particularly fiscal and monetary instruments, play a more active part.
LONG-TERM CONSIDERATIONS
35. This brings me to some of the longer term considerations which have to be
kept in mind even as we deal with our difficult short-term situation. Our immediate
difficulties are essentially the result of two aggressions on our territory and two droughts.
It is, however, important for us to enquire whether they do not signify something more
basic in our plans and policies which also calls for a correction in emphasis if not in
direction.
36. There is general agreement in the country that the highest priority should
be given to agriculture and to family planning in our plans for the next few years. No
one seriously questions also that as soon as possible, and consistent with the avoidance
of inflation, programmes of social betterment should be pursued more vigorously. In
10
this connection, next only perhaps to the importance of providing an adequate supply
of foodgrains comes the necessity of enlarging greatly the facilities for drinking water
all over the country. Improvement in the quality of education and the welfare of
backward classes, particularly of scheduled castes and tribes, will also require more
urgent attention than hitherto.
37. If I am not mistaken, the differences and the doubts that are often expressed
about our plans relate mainly to two or three basic areas. There is, first of all, the
question of the speed with which we can increase the rates of saving and capital
formation in the country. Related to this is the problem of our ability to increase the
productivity of such capital as we already have. Differences are also expressed about
the proportion of available savings which should be invested by the private sector and
the public sector in the light of their respective responsibilities and ability to invest
the savings profitably. There is also some question whether consumer goods industry
or capital goods industry should receive somewhat higher priority than in the recent
past.
38. It is not my intention here to enter into a debate about the pros and cons
of the issues around which differences and doubts of the kind that I have just outlined
revolve. But let me say that if we have over-estimated in the past our capacity to save
as a nation or our capacity to secure a certain return from the capital already invested,
such an over-estimation was, in part, at any rate, intended as a spur to better effort on
the part of all of us. Certainly., in future, we shall have to be more realistic about what
we can do in regard to savings or the improvement in the efficiency of capital over
any given period. But when all care and caution have been exercised, we shall still
have to make an effort to do a little more than what the prudent among us, might
regard as the maximum feasible. What is involved here are the hopes and aspirations
of millions of our people; and it simply will not do to assume that what might be good
and prudent for some of us for some time will also be good and prudent for the
country as a whole for an time.
39. I do not think that there is also any scope for doubt about the importance
of industries in Indian economic development. Under modern conditions, even
agriculture cannot be transformed without a corresponding growth in industries which
either supply the requirements of agriculture or absorb its products. If we attach the
highest priority to agriculture in the present circumstances, it is essentially because of
our desire to be self-sufficient in regard to our food requirements. More generally,
investments in agriculture at the present juncture are capable of making a striking
contribution to both consumption and investment and to an improvement in the balance
of payments. This does not mean, however, that industrial investment can be held in
abeyance.
40. Whether we should make such investment as we make in industry primarily
in consumer goods industries or in capital goods industries is also a question which
cannot be decided on any a priori grounds. Obviously, increases in consumption provide
11
the ultimate justification for all developmental activity; and the total volume of
consumer goods we need will always be substantially larger than the volume of capital
goods we require. At the same time, increases in consumption cannot be sustained
without increasing the level of capital formation.
41. Perhaps in the past, our investment decisions have been guided more by
a general consideration of our long-term needs rather than by a precise assessment of
the relative rate of return in different activities. We will need to rely more, over the
years to come, on an analysis of costs and benefits in different sectors and to guide
our long-term strategy in the light of alternative courses of action. But I have no doubt
that, barring marginal variations from time to time, the general thrust of our
developmental strategy will have to be on a broad front, comprising a wide range of
agricultural and industrial activity. Mistakes certainly have been: made and will perhaps
also be made in future in regard to investment decisions by both the public and the
private sector. But behind the mistakes and miscalculations that we might have made,
there lay, I am sure, a genuine desire to speed up progress, to short-circuit the process
of growth so that the trials and tribulations of our people would be short-lived. While
we should certainly profit from our mistakes and be prepared to rearrange priorities at
any given time in order to meet the exigencies of the situation in the short-run, it
would not be prudent to dismiss the long-term requirements of the economy as
altogether irrelevant.
42. I do not suppose that in any active democracy like ours, there would
ever be complete agreement about the respective roles and abilities of the public
and the private sectors. Both have an important role to play; and I can only say that,
over time, their relative roles win necessarily be determined by their relative abilities.
Without seeking to supplant the private sector, Government is committed to an
expansion of the public sector, and to this end, we shall give the highest priority to
the improvement of the management and efficiency of the public sector enterprises
already created.
43. In keeping with the Directive Principles of our Constitution, Government
is fully committed to the achievement of a socialist society within the framework of
an actively functioning democracy. Much has already been achieved in this connection;
and in the coming months, we propose to explore all possible avenues to make sure
that whatever initiatives we have taken in this regard are pursued and implemented
with vigour and that further progress is made without impairing the productive efficiency
of the economy in general.
BUDGET ESTIMATES FOR 1967-68
44. So, much for economic policies both in the short and the long run, I shall
now summarise briefly the Budget Estimates for 1967-68 as I now wish to present
them and compare them with those given in the interim Budget. But before I do so, I
would like to refer briefly to the Revised Estimates for the year 1966-67 about which
some more information is now available.
12
 45. Honourable Members will recall that I had stated, when presenting the
interim Budget, that the Centre’s budgetary operations for 1966-67 were expected to
show a deficit of as much as Rs.350 crores. Though full details are not yet available,
I am glad to say that the deficit has turned out to be somewhat smaller than anticipated,
namely, of the order of Rs.313 crores. The improvement of Rs.37 crores is the result
of a number of factors of which I shall make only a general mention. The receipts
from tax revenues have been of about the same order as estimated in the Revised
Estimates, in fact, a shade better. External assistance has, however, shown a significant
shortfall. But this has been made up by savings under various items of expenditure.
The foodgrains transactions have turned out to be better than estimated and this accounts
to a large extent for the reduction in the anticipated deficit. The Budget documents
repeat the Revised Estimates as presented earlier as the actual figures in most cases
are not yet available.
46. Turning now to the Budget Estimates for the current year, I shall indicate
the main changes in the interim Budget which I presented in March last. I anticipated
some shortfall in the revenue from Excise Duties on sugar on account of lower
production. But, I expect that this would be made up under other receipts and have,
therefore, not made any change in the estimate of Revenue Receipts.
47. As regards foreign aid, Honourable Members will recall that I had provided
for the utilisation of Rs.835 crores or 1115 million dollars this year. Since then, the
Aid-India Consortium met in Paris and we have had further discussions, including
those with the President of the World Bank. In the interim Budget, I had already taken
credit for some disbursement from the 900 million dollars of non-project assistance
that we expect to be committed this year. It would appear from recent discussions that
the pace of disbursements from the new non-project assistance may be somewhat
quicker. On the other hand, our experience during 1966-67 should warn us against too
optimistic a view of aid disbursements. Taking everything into account, I have increased
the earlier estimate of foreign aid utilisation by Rs.30 crores.
48. The changes made by the Railways in fares and freights will improve the
position of their Funds which are deposited with the General Revenues by Rs.7 crores.
49. Defence expenditure is also proposed to be reduced by Rs.6 crores. In the
interim Budget, this expenditure was only 3 per cent higher than in 1966-67 in money
terms. The cost of maintaining defence services and defence supplies has gone up
over the past 12 months as a result both of internal price rise and the change in the
exchange rate. A substantial reduction in the interim provision for defence, therefore,
is not possible. Honourable Members are aware that we are prepared to explore all
possible avenues of reducing the tension on our borders and of improving our relations
with our two neighbours, China and Pakistan. But as long as these efforts do not meet
with a genuine response, we cannot allow our search for economies to come in the
way of the needs of national security. But consistent with this, it shall be our endeavour
to seek economies in this as in other fields.
13
 50. Since the presentation of the interim Budget, Government has reduced
significantly the fertilizer subsidies, particularly in the context of the higher procurement
prices which are being offered for foodgrains. This, together with reduction in the
purchase price of fertilizers is expected to benefit the current Budget to the extent of
Rs.51 crores in comparison with the interim Budget. Further, a saving of Rs.7 crores
will also be available in respect of the subsidy on sugar exports which are likely to go
down in view of the reduction in sugar output.
51. I have already referred earlier to the additional provision that I propose to
make in respect of some of the Items included in the interim Budget. Assistance to the
States is proposed to be increased by Rs.98 crores including Rs.38 crores for the
scarcity affected areas. I have also allocated an additional Rs.45 crores for the Central
Plan, over and above the provision of Rs.1176 crores made in the interim Budget. Of
this, Rs.14 crores are for Transport, mainly roads, ports and shipping, Rs.6 crores for
Oil exploration and Refining, Rs.5 crores for, Bokaro Steel Plant, Rs.4 crores for the
Union Territories and Rs.3 crores each for Atomic Energy, Posts and Telegraphs and
Family Planning. The rest of the provision relates to Education, Heavy industries,
Rhadi and Village industries, Chemicals and Tourism.

PART B
MOBILISATION OF RESOURCES
52. In the Budget Estimates that I have just presented, the availability of
resources will be higher by Rs.101 crores and expenditures by Rs.143 crores in
relation to the interim Budget. I should, however, explain that I have chosen on this
occasion, for reasons of security, to mention some of the facts in Part B of the
Budget Speech only.
53. On the expenditure side, I have not so far provided anything additional
for assistance to the financial institutions. In the interim Budget, a provision of Rs.30
crores was made for this purpose. This is sufficient for enabling these institutions to
honour all their existing commitments as well as to meet disbursements on new
commitments in respect of the priority sectors of fertilizers, alloy and tool steel and
the like. However, some additional provision for these institutions is necessary if they
are to play a reasonable part in supporting private investment activity and thereby
helping the revival of the investment goods industries. I, therefore, propose to provide
an additional sum of Rs.10 crores for the financial institutions. In a Budget of this
magnitude, It is also necessary to make a provision for contingencies. Taking account
of all the considerations, I estimate that the deficit of the Centre, without any further
mobilisation of resources, would be of the order of Rs.68 crores.
14
 54. By far the best way of mobilising resources is to economise on Government
expenditure without sacrificing efficiency. I have already set in motion a thorough
examination of the expenditure patterns of all Central Ministries. Already, some
decisions have been taken which will reduce the strength of my own Ministry. Similar
decisions in respect of other Ministries will be announced as they are taken. In respect
of Government projects, the Bureau of Public Enterprises will keep a constant watch
in order to secure genuine economies. I do not propose, however, to take any credit at
this stage for reduction in Government expenditure as a result of the economy drive
that I propose to pursue vigorously. In matters like this, It is best to take credit for
success only when success has already been achieved.
55. Better collection of existing taxes is also an important and indeed most
equitable way of mobilising additional resources. This is a continuing programme
where constant endeavours have to be made to improve tax administration as, well as
tax laws. In this connection, we have been experimenting for some time with a new
system of distribution of work in the income-tax Department. Under this system,
particular functions such as those of assessment, collection, refunds, etc., are performed
by the income-tax Officers specifically entrusted with these functions. This experiment
has shown encouraging results. To facilitate the extension of the functional system, I
propose to make specific provisions in the law and I am circulating separately a detailed
note on the subject for the information of Honourable Members. I propose, however,
to take only a small credit for better collection of income-tax this year, as It is premature
to expect any sizeable gain in the early stages of the operation of the scheme.
56. It is also desirable to rely to the maximum extent on mobilisation of
private savings for meeting the requirements of the Government. In the present
conditions in the country, however, It would not be prudent to take credit for anything
more than what I have done in the interim Budget under small savings market
borrowings and the like. At a later stage, I shall refer to one or two fiscal concessions
which I propose to give in order to promote savings. But these measures are designed
with an eye on the long run rather than on improving the budgetary position during the
current year itself.
EXPORT DUTIES
57. Coming to taxation proper, the mostimportant changes involving a loss in
revenue that I have to announce relate to export duties. Our exports of jute manufactures
have declined in the recent past and some of the promising lines are being threatened
with competition from substitutes. I propose, therefore, to reduce the duty on sacking
(other than cotton bagging) by Rs.150 per tonne, on carpet backing and jute specialities
by Rs.300 per tonne and on the other hessians by Rs.150 per tonne. The effect of these
reductions would be a loss of revenue of Rs.13.50 crores in a full year.
58. A reduction of Rs.7.50 per tonne has been proposed in the export duty on
manganese ore having 10 per cent or more but not more than 48 per cent of manganese
content, mainly with a view to offset the effect of the recent increase in railway freight
15
on manganese ore. A marginal reduction of Rs.1 per tonne is also being made in the
export duty on iron ore fines (including blue dust). These changes will result in a loss
of revenue of Rs.83 lakhs in a full year., A change is also being made in respect of the
duty on tea to which I shall refer later.
DIRECT TAXES
59. In respect of direct taxes, I propose to give a number of selective and
indeed minor concessions. The main concessions in respect of taxes on personal incomes
are as follows:
(a) In our society, many of us have to maintain dependent parents or grand
parents. I propose, therefore, to grant a fixed allowance of Rs.400 for
maintenance of one or more of the dependent parents or grand parents in
the case of resident individuals having a total income not exceeding
Rs.10,000. The tax relief on this allowance will be calculated at the rate
of 5 per cent applicable to the initial slab of income. This allowance will
be available only when the dependent parent or grand parent does not
have personal income exceeding Rs.1000 in the year. This concession is
estimated to cost approximately Rs.2 crores.
(b) At present we levy a surcharge on unearned income in excess of Rs.15,000.
I propose to raise this exemption limit to Rs.30,000. In a sense, the principle
of taxing income from investments at a rate higher than income from
work runs counter to the desirability of increased savings. I have, therefore,
sought to take this into account at least partially this year. This concession
will mean a loss of Rs.75 lakhs.
(c) I propose that all tax-payers having dividend incomes not exceeding Rs.500
during the year be allowed to exclude from their taxable income the whole
of the dividend income received by them from Indian companies. This
should encourage equity investment by tax-payers in the lower and middle
income groups. The revenue loss of this measure is estimated at Rs.1.50
crores.
(d) The present limit of the amount of approved savings in life insurance,
Government and recognised provident funds and cumulative time deposits
in Post Offices, which qualify for tax relief in the case of individuals and
Hindu Undivided families, is proposed to be increased from 25 per cent
of the total income to 30 per cent of the total income. The monetary limits
of Rs.12,500 in the case of individuals and Rs.25,000 in the case of Hindu
undivided families will also be raised, simultaneously, to Rs.15,000 and
Rs.30,000 respectively.
(e) Given our present need for resources, I have found it necessary to continue
the Annuity Deposit Scheme. I have, however, made some marginal
modifications in the Scheme. For example, people over the age of 60 need
16
 not make a deposit; at present, the age limit is 70 years. Similarly, for all
assessees, no penal tax will apply in case of shortfalls in deposits upto
Rs.100 or upto 10 per cent of the deposits required to be made.
(f) Indian scientists, professors and research workers who spend a part of the
year in foreign universities or other educational or scientific institutions
will be allowed, subject to certain conditions, to deduct from their taxable
income 50 per cent of the remuneration received by them from foreign
sources.
60. I will now summarise some of the concessions-again, selective and
minor-that I propose to give in respect of corporate taxation:
(a) As a measure of relief to small-scale industries in the corporate sector. I
propose to extend the concessional rate of 45 per cent to widely-held
domestic companies having total incomes not exceeding Rs.50,000 as
against Rs.25,000 at present. This is likely to result in a loss to revenue of
about Rs.18 lakhs.
(b) As a tourist promotion measure, I propose to extend the priority industry
treatment to approved hotels run by Indian companies. Further, I propose
to provide for the allowance of initial depreciation of hotel buildings
constructed by such companies after the 31st March 1967 in an amount of
25 per cent of their cost of construction. Some other relaxations are also
proposed in favour of the hotel industry.
(c) It has often been represented that our present tax-holiday concession does
not benefit adequately those undertakings for which profitability is usually
low in the initial years. In order to make the tax exemption more meaningful
in such cases, I propose to allow a carry-forward of the unabsorbed benefit
of the ‘tax-holiday’ relating to the assessment year 1967-68, onwards,
upto eight years from the year of commencement of the business.
(d) The existing tax law has certain features which inhibit desirable
amalgamations of companies by attracting certain liabilities on such
amalgamation. Merging of uneconomic units is desirable in order to
improve productivity and realise economies of scale. I propose to facilitate
this process by removing the existing disabilities in the matter in the law.
(e) The progress in resettlement of displaced persons from East Pakistan and
repatriates from Burma, Ceylon and certain East African countries has
been painfully slow. To supplement the efforts made in this direction by
the State Governments, it is proposed, subject to some conditions, to allow
industrial units employing such displaced persons and repatriates to deduct
50 per cent of their profits in computing their taxable income.

17
 (f) I also propose to provide certain tax concessions to industries damaged or
destroyed by enemy action or by natural calamities.
(g) In order to promote scientific research in our country, I propose to enhance
the rate of development rebate on machinery and plant installed for scientific
research after the 31st March 1967, from the existing general rate of 20 per
cent, to the priority rate of 35 per cent. Further, the whole of the capital
expenditure incurred after the 31st March, 1967 on assets used for scientific
research 111 be allowed as a deduction in the year in which It is incurred.
61. The combined effect of the various concessions in direct taxes that I have
listed will be a reduction in revenue of about Rs.5 crores in a full year. I do not
propose, however, to take any debit for this item as a reduction in revenue of this
order should be made up by better tax collection assisted by the proposed extension
over a wider area of deduction of taxes at source.
62. In addition to the changes in direct taxes which I have described, a few
other changes are proposed in the Finance Bill which are intended either to continue
the existing concessions or to clarify the intentions of the present law. I do not propose
to describe these here as they are set out in detail in the explanatory memorandum on
the Finance Bill.
63. Some time back Government appointed Shri S.Bhoothalingam, formerly
Secretary. Ministry of Finance, as a one-man Committee for recommending measures
for simplifying and rationalising the existing structure of direct and indirect taxation.
Shri Bhoothalingam recently submitted his first interim Report, which relates
exclusively to direct taxes, particularly income tax. Copies of this Report will be
made available to Honourable Members as soon as possible. Apart from simplification
and rationalisation, the Report also suggests a reconsideration of some of the policy
aspects of the present tax structure. In a sense, major modifications in the tax structure
should not be made in one area, without examining similar suggestions for application
to other areas. It is also desirable that on substantive issues, this Honourable House,
expert public opinion and people at large should have an opportunity to express their
views before Government makes up its mind. I propose, therefore, to publish also the
subsequent reports of Shri Bhoothalingam. It is my intention that the publication of
these reports will provide an occasion for Parliament and for others to discuss some
of the basic aspects of the tax structure so that it can be put on a sound and progressive
basis as soon as possible. It is, for this reason, quite apart from the difficult financial
situation in the current year, that I have decided to restrict my proposals for modification
in the direct tax structure to a minimum. It is my intention, however, to introduce even
in the present Budget some of the measures of rationalisation and simplification which
have been recommended in the interim Report.
64. One of the main recommendations is that changes in the tax laws and rates
of taxation should be applied prospectively to current incomes. The existing practice of
18
applying the rates of tax to incomes already earned in the past year, which has been
followed over a long period of years, is not sound in principle. The annual Finance Acts
not only prescribe rates of tax but often provide incentives or disincentives in various
directions. Such incentives or disincentives can obviously be meaningful only if they are
applied prospectively. Apart from this consideration, it stands to reason that the tax-payer
should know before hand his tax liability for any given income year. I propose, therefore,
to apply the several measures for making changes in the tax laws as also in the tax rates,
prospectively, to current incomes which will fall due for assessment next year, except
where it is felt that a particular measure calls for retrospective application for special
reasons. We also propose to consider seriously the recommendations about adopting a
standard tax year co-terminous with the financial year.
65. Another measure recommended for simplifying tax calculations is the
elimination of most of the areas in which calculations of rebates and reliefs have to be
made at present by applying the average rate of tax on the total income. In these areas,
I propose to make provisions for allowing a straight deduction of the whole or a
specified proportion of the income qualifying for the rebate or relief in computing the
taxable income. Similar provisions will also be made for calculating rebate of tax on
charitable donations. Donations to the Prime Minister’s Drought Relief Fund will be
added to the categories of donations which at present qualify for tax relief without the
operation of the ceiling limit of 10 per cent of the total income or Rs.2 lakhs, which
applies to ordinary charitable donations.
66. There is only one other significant change in respect of direct taxes, which
I might mention here. At present, tax is withheld at source in the case of Indian residents
out of their income consisting only of salaries, interest on securities, or dividends. In
order to improve and speed up the collection of tax, it is proposed to extend, in the case
of residents, the requirement of deduction of tax at source to interest on deposits, loans
or other borrowings as well as to fees for professional services and brokerage and
commission payable by banks, companies and other organised entitles. However, in
order to avoid hardship, certain exemptions are being provided.
POSTS AND TELEGRAPHS
67. As the House is aware, the Postal and Telegraph Branches of the Posts
and Telegraphs Department have been working at a loss. Most of the services we
provide on the Postal side are unremunerative. The cost of services has increased
appreciably during recent years. To meet the loss partially, It is proposed to raise
slightly the rate of postage on parcels, registered newspapers, book packets etc., as
also to raise the registration fee and fees for express delivery, insurance and air mail
fee on packets. The additional annual revenue expected from these increases in the
postal rates is about Rs.1.84 crores. On the Telegraph side, it is proposed to raise the
minimum charge on an ordinary Greetings telegram and the rate for Express Greetings
telegram. The existing rate for non-Press inland telegrams will remain unchanged but
the minimum charge will be for the first 8 words instead of first 10 words as at
19
present. The rental for a teleprinter machine is proposed to be raised and revision is
also proposed in the rental for part-time telegraph and teleprinter circuits other than
those given to the Press. (Details of the principal changes in the Posts and Telegraphs
tariffs are given in a separate memorandum). These measures are expected to yield an
annual revenue of Rs.1.02 crores. Opportunity has also been taken to rationalise the
tariffs for various telephone services and make certain minor revisions therein. The
additional annual revenue from the various changes proposed in the telephone tariffs
is expected to amount to Rs.1.58 crores.
68. The proposed changes in the Postal, Telegraph and Telephone rates will
not come into effect immediately. The dates from which they will be operative will be
notified later. These changes will yield Rs.4.44 crores in a full year and Rs.3 crores in
the rest of the current year. As however, the Posts and Telegraph Revenue is not now
expected to come upto the interim Budget Estimate, I am taking credit for an additional
Rs.1 crore only on this account.
EXCISE AND CUSTOMS
69. I turn now to my proposals in regard to Union Excise Duties. The large
number of changes that I have made in direct taxes will not make any significant
difference to the Government’s budgetary position. Import duties have been rationalised
on a number of occasions in the recent past including at the time of devaluation last
June. Honourable Members will recall that although the import tariff was adjusted to
take account of the higher rupee cost of imports, the total incidence of devaluation
and import tariff was such as to increase substantially the rupee cost of all Imports
including the import of machinery, raw materials and spares. It is not desirable to give
another jolt to the economy by any further increases in import duties. It is, therefore,
inevitable that I should essentially increase the Union Excise Duties for raising
additional revenues in order to balance the Budget after allowing for the effect of the
reduction in export duties.
70. have, however, endeavoured to adjust excise duties in such a way that
apart from raising additional resources, these adjustments will be consistent with the
requirements of the current economic situation. Thus, in the main, I have endeavoured
to increase duties on those Items where (a) it is necessary to exercise some restraint on
domestic consumption in order to augment export earnings, or (b) where high profits
are made by industry and trade at present or (c) where some increase in prices cannot
be considered socially undesirable. In particular, I have sought to ensure that prices of
essential consumer goods are not affected and that the demand for those industries
which are already saddled with considerable excess capacity is, not further depressed.
Altogether, additional excise duties are proposed to be levied on only a limited range
of selected Items so that the price situation is not disturbed at many points. This
explains in part the sizeable increases that I propose in a few cases.
71. I propose to raise the excise duties on coffee and tea so that the internal
consumption of these is restrained and more quantities are made available for export.
20
These increases will yield a revenue of Rs.8.40 crores in a fun year without taking
into account the revenue loss from reduction in the export duties on tea to neutralise
the effect of the higher excise on export shipments. In the case of tea, the increase
proposed is lower on cheaper tea than on the higher priced teas from Zones III, IV and
V. Similarly, the increase on the cheaper Robusta or Liberia variety of coffee is less
than on superior varieties like Arabica.
72. Another export item on which I propose to increase the duty is jute
manufactures. The existing basic excise duties on hessians and other jute manufactures
which are Rs.250 and Rs.125 per tonne respectively are being raised to Rs.375 and
Rs.175 per tonne. The effect of this will be an additional revenue of Rs.3.00 crores
annually. As usual, the duties will be rebated on export shipments.
73. As for tea exports, the effect of higher excise duties on exports will be
neutralised by a reduction in export duties by 24 paise per kilogram. While this will
fully offset the burden of the excise duty increase on the higher priced varieties, the
inferior teas from Zones I and II will have a slight edge over the others as the export
duty reduction in their case will exceed the excise duty increases. While making this
reduction in the export duty, the rate schedule is also being simplified and rationalised
to obviate the practical difficulties in the present system of levy. The effect of the
reduction proposed will be a loss of Rs.4.68 crores annually so that in the net Rs.3.72
crores would be realised from tea and coffee in a full year.
74. I propose to re-impose the duty on footwear and parts which have a good
export potential. This duty was withdrawn by an exemption as a part of the Budget
proposals of February 1965. As before, footwear made without the aid of power or in
small power operated establishments will continue to be exempted. This proposal will
yield an additional revenue of Rs.2.75 crores annually.
75. It is necessary also to restrain the increasing consumption of cigarettes
which cuts into the exportable surplus available of cigarette tobacco, an important
foreign exchange earner. I, therefore, propose to raise substantially the duties on
cigarettes which would yield a revenue of Rs.28.50 crores annually. The increase
proposed on higher priced cigarettes will be more than on the cheaper varieties. Some
increase has been proposed also on cigars and cheroots, the yield from which will be
about one lakh of rupees. I realise that the increase proposed is high. But Honourable
Members and others can at least escape its incidence by reducing consumption and
thus perhaps prolonging their lives in the bargain.
76. Honourable Members will recall that at the time of devaluation, excise
and customs duties on petroleum products were adjusted in such a way as to avoid any
increase in their price. This step meant a considerable loss of revenue for the
Government and was in fact on par with the subsidies given on foodgrains and fertilizers
at the time for the same purpose. Subsidies on, fertilizers have already been reduced.
I see no reason why the prices of some of the petroleum products also should not be
21
allowed to rise, reflecting the effect of devaluation. I propose, therefore, to increase
the basic excise duty on motor spirit from Rs.451.05 per kilolitre to Rs.550 per kilolitre
and on refined diesel and vaporising oils from Rs.441.05 to Rs.461.05 per kilolitre.
The excise duty on petroleum products not otherwise specified is also proposed to be
increased from 10 per cent ad valorem to 20 per cent ad valorem. These increase on
mineral oil products will yield a revenue of Rs.25.60 crores annually. Honourable
Members would note that these changes will not result in any increase in the price of
kerosene, of diesel oil used by agriculturists or fuel oil which is used by industry. In
fact, the increase in the case of refined diesel oil is also marginal-of the order of 2
pales per litre.
77. I come now to a few less essential Items of consumption where there is
scope for mopping up the high profits made or where even an increase in the price to
consumers will not be a great hardship. The basic excise duty on artificial or synthetic
resins and plastic materials is proposed to be raised from 20 per cent to 30 per cent ad
valorem which will yield an additional revenue of Rs.4.5 crores annually.
78. Production of rayon and synthetic fibres and yarn has increased and the
margin of profit on these is also high. I, therefore, propose to make a substantial
increase in the excise duties. The increase on cellulosic fibres and yarn, such as viscose
rayon and acetate rayon will be lower than the increases proposed on non-cellulosic
fibres and yarn such as polyster fibre and nylon yarn. The effect of the increases
proposed will be an additional revenue of Rs.22 crores annually.
79. The excise duty on aluminium has remained unchanged since 1960 and
there has been a substantial increase in the indigenous production in the recent years.
I propose to increase the basic excise duty on aluminium ingots from Rs.300 to Rs.950
per tonne on plates, sheets, circles and strips from Rs.500 to Rs.1450 per tonne, and
on foils from Rs.600 o Rs.2000 per tonne; the duties on pipes, tubes and extruded
shapes and sections are also being raised from 10 per cent to 20 per cent ad valorem.
These changes will bring in an additional revenue of Rs.10.98 crores annually.
80. It is my expectation that in the case of aluminium, rayon and synthetic
fibres, it should be possible for producers to absorb the increase in the excise duties
without any increase in the prices charged to consumers in any event, producers of
these products will not be allowed to increase their present prices without prior
consultations with the Government. If, on examination, it is found that the additional
excise duties cannot be absorbed by producers without a change in the price charged
to consumers, we shall be prepared to take appropriate remedial action. However, It is
our intention to make sure that to the maximum extent possible, the incidence of
higher duties in these cases is absorbed in the profits made at present by producers
and distributors.
81. The present structure of excise on cotton textiles allows such a high margin
of preference to powerlooms that it encourages tax avoidance. This has been pointed out
22
by two successive Committees. I propose, therefore, to raise the excise duty on cotton
twist, yarn and thread Which go into the production of fine and superfine fabrics in the
powerloom sector. The increase win be mostly on sized yarn cleared in the form of sized
beams required for weaving in the powerloom factories. Rates of duty on sized yarn of
fine and superfine counts are proposed to be raised in such a way that the margin of
difference in the excise duty between powerloom and mill-made grey fabrics of fine and
superfine varieties is narrowed sufficiently. These changes will, however, not affect the
handloom sector as the duty on hank yarn is not being raised. The duty on mill fabrics
will also remain unchanged as the increase in the yarn compounded duty is being offset
by a corresponding reduction in the grey fabric duty, so that the cumulative effect leaves
the duty on fine and super fine grey fabrics unchanged. The effect of these changes will
be an additional revenue of Rs.7.80 crores annually.
82. The only new Item on which excise duty is proposed to be imposed this
year is rubber piping, tubing and belting. These are being added to the item of rubber
products like latex foam sponge and tread rubber which are already excisable. The
proposed basic excise duty on these new rubber products will be 15 per cent ad
valorem which will yield an additional revenue of Rs.1.98 crores annually.
83. Special excise duties will continue to be levied at the existing rates subject
to modifications consequent on the changes proposed in the basic excise duties outlined
earlier. The provision for levy of regulatory excise duty in the same manner as in
section 49 of the Finance Act, 1966 is being continued though there will be no levy of
this duty at present.
84. The total effect of all the proposed changes in the excise duties will be an
additional revenue of Rs.115.52 crores in a full year out of which Rs.22.98 crores will
go to the States.
85. I have not proposed any increase in the import duties. But wherever excise
duties have been increased or modified the countervailing duties on imported goods
equivalent to such increases will be chargeable in addition to the existing duties. In
the case, of Imported aluminium ingots and wire bars the increase in the countervailing
duty will not be to the full extent of the excise duty increases but will be lower by
R9.400 per tonne. The increases in countervalling duties will yield an additional revenue
of Rs.7.33 crores annually.
86. I have already discussed earlier the reductions in export duties. Taking
into account the loss of Rs.19.01 crores annually under these Items and the increases
on account of countervailing duties, the net loss of customs revenue would be Rs.11.68
crores in a fun year. Taking excise duties and customs duties together, the total additional
revenue in the full year will be of the order of Rs.103.84 crores of which Rs.22.98
crores will go to the States and balance will accrue to the Centre. However, during the
current year, the changes in customs and excise duties will apply not for the full year
but only for a little over ten months. During the current year, therefore, the additional
23
revenue accruing to the Centre will be of the order of Rs.68 crores. Changes in posts
and Telegraph rates will bring in Rs.1 crore. The additional revenues of about Rs.69
crores win more than cover the initial deficit of Rs.68 crores. Essentially, therefore,
the Budget that I am presenting now is a balanced one. Honourable Members would
also note that in addition to the substantially larger resources made available to the
States from the Central Budget, the State Governments will benefit subtantially to the
extent of almost Rs.20 crores by the taxation proposed here.
87. I am well aware that I have been able to balance the Budget primarily by
keeping the Plan .outlays strictly in check. The provision for the Plan in the Budget,
for Central schemes, assistance to the States and to the financial institutions taken
together is not materially different from the level of the first year of the Fourth Plan.
At a time when essential consumer goods are in short supply and when it is difficult
to reduce subsidies, I could not have provided more for the Plan without jeopardising
the chances of restoring price stability. Considerable restraint has also been exercised
in regard to non-Plan outlays at the Centre, the bulk of which relate to interest payments
which are contractual obligations and to defence.
88. To those who may have been looking forward to sizeable reductions in
taxation, I will say only this. As long as we in this Honourable House remain responsive
to the needs and aspirations of the poor and the downtrodden, there will always be
need for the Government, no matter what its persuasion, to command a growing volume
of resources from year to year. Some of the resources available to the Government at
present, such as the counterpart of PL 480 supplies of foodgrains etc., should not and
indeed cannot continue for long, Before giving any tax concessions, therefore, I would
like to be doubly sure that there is at least a reasonable chance of such a step contributing
to larger revenues by stimulating activity or savings in general. Under the present
circumstances, I see no clear prospect of this; but we will explore all possible avenues
of putting our tax structure on a sound, stable and progressive basis. My main
justification for the selective but sizeable increases in excise duties is that these are
necessary in the interest of exports and for avoiding too deep a cut in Plan outlays.
Indeed, even as it is, I do not feel happy about not being able to provide more for the
Plan than we did last year. That is why we propose to pursue a more positive policy
of encouraging public and private investment activity as soon as the basic supply
position in the country improves.
89. In the meanwhile, I can only hope that this Budget wig contribute to the
restoration of 6 climate of stability which is so essential for sound and sustained
growth. We are determined also to redouble our efforts to provide a clean and efficient
administration. I have every confidence that at this difficult juncture, all sections of
the community-farmers, workers, businessmen and leaders of public opinion-will give
of their best so that the spell of stagnation which has been upon us for more than two
years how is lifted and we begin to move forward once again to our cherished goals.
(May 25, 1967)
24
 SPEECH OF SHRI MORARJ1 R. DESAI DEPUTY PRIME MINISTER
AND MINISTER OF FINANCE INTRODUCING THE BUDGET
FOR THE YEAR 1967-68 (Interim)
Sir,
The presentation of the Budget is an important occasion when the Government
comes to this Honourable House ‘for approval of its proposals for expenditure and
mobilization of resources during the coming fiscal year. On this occasion, however,
we are meeting under special circumstances. As Honourable Members are aware, a
vote on account for enabling the Government to carry on its business during the
financial year 1967-68 has to be considered and passed before the 3 1st of March. But
the new Government at the Centre and the Honourable Members assembled here
cannot, between now and the end of March, give full consideration to the budgetary
requirements for the whole of the coming year. The Government, therefore, wishes to
bring before this Honourable House in a few weeks’ time a Budget outlining the
proposals for the full year, 1967-68. The usual Economic Survey will also be presented
to the House together with the final Budget.
2. My purpose today is a limited one. I propose first to present the revised
estimates for the current year in the usual way. I propose also to present the estimates
of Government receipts, both revenue and capital for the year 1967-68 at existing
rates of taxation and on the basis of indications available at present regarding non-tax
receipts. As for Government expenditure during 196768. I shall seek a vote on account
for a period of four months only. The estimates of expenditure for 1967-68 as a whole
that I shall be presenting today are tentative and have been limited strictly to resources
that are now in sight. These will be revised appropriately in the Budget to be presented
later in the light of a thorough review of requirements and resources that we propose
to undertake in the meanwhile. I shall introduce a Finance Bill today which merely
seeks to continue the existing tax structure for a further year.
ECONOMIC CONDITIONS
3. Even for my limited purpose, it would be appropriate to draw the attention
of the Honourable Members to a few salient features of the current economic scene.
The initial year of the Fourth Plan which is now drawing to a close has proved
disappointing in many ways. Economic conditions caused concern not only because
output was low and the foreign exchange situation disconcerting but also because
prices have continued to rise rapidly despite a slackening in the pace of monetary
expansion. Honourable Members are aware that unfavourable weather conditions have
plagued the Indian economy for the second successive year; and the drought has
overshadowed the economic scene for the past many months. Our present difficulties

1
should not obscure altogether the strength and resilience that the Indian economy has
acquired over the three Plan periods. But our policies and expectations in the short-run
must necessarily be based on a realistic assessment of the current situation.
4. Although agricultural output is likely to show some recovery compared to
the rock-bottom levels of 1965-66, recent estimates are far less optimistic than earlier
predictions. Production levels in the current year will, it is feared remain far below the
bumper harvests of 1964-65. Total foodgrains production during 1966-67, for example,
may be as low as 76 million tonnes as against 89 million tomes in 1964-65 and 72.3
million tonnes in 1965-66. The failure of the monsoons has wiped out incomes and
purchasing power in large parts of the country and has created a serious supply problem
not only in respect of foodgrains but also many raw materials. Once again, we have
had to step up Imports at the expense of our slender foreign exchange reserves and
with the help of food assistance from friendly countries. Further substantial imports,
are, however, still urgently needed to tide over the period before the arrival of the new
kharif crop. The question of food aid to India is to be discussed at a meeting of the Aid
India Consortium early next month. Whatever the available supplies will also have to
be distributed equitably; and we propose to evolve soon an agreed Policy in this
regard in co-operation with State Governments. Meanwhile, the programme to raise
sharply the availability of fertilizers and high yielding seeds, to strengthen farm credit
and to promote agricultural research is making reasonable progress.
5. The growth of industrial output had slowed down considerably in the
final year of the Third Plan. In the current financial year also production has increased
rather slowly. The index number of industrial production showed an increase of 2.6
per cent during April-November 1966 over the corresponding period of the preceding
year. The slackness in industrial growth was a widespread phenomenon and there was,
in fact, an absolute drop in production in many agriculture-based industries, such as
cotton textiles, vanaspati, jute, etc. On the other hand, industries catering to the
requirements of agriculture-such as those producing diesel pumping sets or
pesticides-have fared quite well. The failure of monsoons affected industry in many
ways. First, agricultural raw materials were scarce and their prices were high. Secondly,
farm incomes were low and consequently the effective demand for manufactured
consumer goods was depressed. Thirdly, high prices of food diverted urban purchasing
power away from manufactured articles. Fourthly, economy measures introduced by
Government designed to limit monetary expansion at a time when food was scarce,
created areas of depressed demand for certain categories of manufactures, for example
railway wagons and machine tools.
6. Partly as a result of low domestic production, our exports also have not
fared well during 1966-67. Preliminary data indicate that the foreign exchange value
of exports shipments during April-December 1966 was about 9 per cent below that in
the same period of 1965. Apart from domestic supply shortages, the export position
during these months reflects the dislocation in trade that followed in the wake of the
2
change in the exchange rate. Demand conditions in some of our major markets abroad
have also been slack. These and other developments in world markets have tended to
depress the value of our traditional exports, for example, tea, jute manufactures and
cotton fabrics. On the other hand, these losses were offset to some extent by gains
secured by such items as leather goods, footwear, iron ore, steel products and
cashew kernels.
7. A deterioration in exports combined with rising debt service payments
caused a depletion of our international reserves. Between April 1966 and December
1966, our foreign exchange reserve fell by the equivalent of about 18 million dollars
despite a net drawing of 137.5 million dollars from the International Monetary Fund.
It is also noteworthy that this loss was incurred during a period when imports were
significantly lower than during the same period of 1965. The reduced import bill
reflected the stringency of quantitative restrictions on most non-food items in 1965-66.
Although total imports were rather low, food imports increased substantially during
the current fiscal year owing to the necessity of supplementing domestic supply. Imports
of fertilizers were also substantially larger than in earlier years. The liberalisation of
licensing policy has not yet had an impact on the actual flow of imports, although
there are indications of sizeable orders having been placed against the larger volume
of import licences issued this year. Since December 1966 there has been some
Improvement in foreign exchange reserves. A part of this Improvement, however, is
on account of temporary and reversible factors like an inflow of banking funds.
8. Honourable Members will recall that in the last year of the Third Plan
there was a partial pause in foreign aid. This interruption, together with general
conditions in the country, has led to somewhat smaller disbursements of foreign
assistance during the current year than was envisaged earlier. In all, Consortium
countries pledged 900 million dollars for non-project aid during 1966-67. Against this
pledge, firm commitments have been signed for 760 million dollars. The remainder is
expected to be committed soon. Honourable Members would appreciate, that in a
continuing programme, a firm pledge of assistance enables us to license imports even
in advance of actual commitment of funds, so that, for all practical purposes, the
Consortium pledge of 900 million dollars has been available to us for some time for
backing our import programme. In addition, members of the Consortium signed several
loan agreements relating to particular projects in the field of steel, power, railway, etc.
Aid agreements were also signed with other friendly Governments-the Soviet Union,
Yugoslavia, Hungary and Sweden.. For this aid we are thankful to our friends abroad.
I must also acknowledge gratefully the generous assistance received from a number of
countries and international organisations for scarcity relief which has helped greatly
in the difficult food situation.
9. The agricultural situation has not only led to a slow down in industry, an
impairment of export capacity and a heavy bill for food imports but it has also
aggravated the inflationary problem. Food prices rose at a more rapid rate during
3
1966-67 than in the previous year. The demand for compensatory allowances by
fixed-income groups to protect their standard of living gained ground and put
considerable pressure on Government finances. The index number of wholesale prices
went up by about 17 per cent between March 26, 1966 and February 18, 1967.
10. Monetary expansion slowed down during the current year. In the current
busy season, however, bank credit to the private sector has expanded more rapidly
than in the 1965-66 busy season whereas deposit accrual to the banks has been on a
smaller scale. The busy season has yet to run its course, and in the prevailing price
situation, it would be clearly necessary to keep a close watch on monetary developments.
11. The pace of the price increase is the most disturbing, fact which
Government will have to keep in focus in formulating its financial and economic
policies. What we have witnessed essentially is a spiral of rising prices where shortages
and budgetary deficits have led to higher prices and higher wages and dearness
allowances. This in turn has accentuated budgetary difficulties and has led to further
rise in prices. This process has to be halted by concerted action on many fronts. But
Honourable Members, I am sure, would agree that our first task in these circumstances
to restore financial and general economic stability the need for which would be all the
more clear from the brief review that I propose to make now of budgetary developments
during the current year.
REVISED ESTIMATES 1966-67
12. As in the case of the general economic situation, the budgetary outlook
daring the current year has also been dominated by the set-back in agriculture. On the
expenditure side, considerable scarcity relief assistance had to be provided to the
States to enable them to generate gainful employment and to extend other assistance
to the population in distress. Large Imports of foodgrains had also to be subsidised in
order not to accentuate the price-rise. Even so, higher prices added to the burden of
dearness allowance and necessitated increases in other Government outlay. Increased
outlays on agricultural schemes were also undertaken in order to step up food production
on an urgent basis.
13. On the receipts side, the generally sluggish conditions in the economy
have been reflected in lower tax revenue. The decline in non-food Imports has meant
lower collections under import duties. The Railways too have suffered from the
recession in demand and the higher wage bill consequent on enhanced prices of food
articles; they have for the first time in decades failed to earn the normal dividend.
14. The Centre has also had to incur substantially larger liabilities on behalf
of the States than was envisaged at the beginning of the year. The net result is that
despite economy measures undertaken by Government, the current year is expected to
end with a much larger deficit than was envisaged initially.

4
 15. Customs revenue will be Rs.36 crores more than the Budget estimate. This
is after taking credit for sizeable receipts under export duties levied after devaluation.
Import duties proper show a shortfall of about Rs.79 crores. Income-tax revenue shows
a fall of Rs.40 crores whereas excise duties are expected to yield Rs.10 crores more.
The States’ share of Central taxes and duties will also be Rs.12 crores more, mainly
due to payment of arrears. The net tax receipts retained at the Centre will thus be
slightly less than the Budget estimate, despite the large, receipts of Rs.117 crores
under export duties.
16. The net budgetary receipts corresponding to loan assistance obtained
from foreign countries and international organisations will be Rs.135 crores more.
This, however, is due to the accounting difference made by the change in the exchange
rate. In foreign exchange terms, disbursements’, of gross assistance have fallen short
of earlier expectations. The rupees accruing from PL 480 Imports from the United
States of America will be nearly Rs.93 crores more. Assistance of the value of Rs.85
crores in the form of food-gifts from Canada, Australia, Soviet Russia and a number
of other countries has also accrued to the Budget.
17. On the disbursement side, the purchase and sale of food grains and
fertilisers account for a deterioration of Rs.235 crores. The bulk of this-approximately
Rs.180 crores-is on account of the subsidy borne by Government on imported foodgrains
and fertilisers.
18. During the year, provision had also to be made for a substantial increase
in assistance to State Governments. Rs.108 crores more were provided to enable them
to undertake larger Plan outlays. Of this, Rs.60 crores were for minor and major
Irrigation and rural electrification schemes, in order to step up agricultural programmes,
particularly of a quick yielding type. Additional scarcity relief assistance sanctioned
to the States amounted to Rs.40 crores. Special loans amounting to Rs.113 crores had
also to be provided to enable some of the States to clear their unauthorised overdrafts
with the Reserve Bank, thus adding up to a total of Rs.261 crores by way of increased
assistance to the States.
19. The Central Plan including the outlay in the Union Territories financed
out of the Budget is expected to be Rs.117 crores more than provided for in the
Budget estimates. This increase is accounted for by the need to provide more funds to
public sector undertakings and larger assistance towards debenture programmes of
land mortgage banks, agricultural credit stabilisation funds, consumer cooperatives
and family planning and additional outlays in respect of schemes of agricultural
importance. An additional provision of Rs.13 crores for the financial institutions has
also been included here. Honourable Members would appreciate that larger provision
became necessary after devaluation in the case of many Plan projects and programmes.
20. On the non-Plan side, an increase of Rs.29 crores occurs under defence,
including border roads, due mainly to devaluation and dearness allowance increases,

5
Similarly, interest charges show an increase of Rs.48 crores. There are a number of
other individual variations which taken together counterbalance one another and I
shall not mention them.
21. The increase in expenditure might have been even more but for the
economy measures taken during the year. The Budget grants were reviewed in the
course of the year and sizeable reductions were made in revenue and other expenditure.
The savings located were of the order of Rs.91 crores, which made it possible to
absorb unavoidable additional requirement.
22. In the aggregate, the Revised Estimates, show a deficit at the Centre of as
much as Rs.350 crores for the current year, as against Rs.32 crores estimated at the
Budget stage. The large budgetary deficit has been a matter of concern to Government
as It must be to the House. I would, however, like to draw the attention of Honourable
Members to the fact that but for the additional assistance to some of the States to clear
their overdrafts and the subsidised sale of foodgrains and fertilizers, the deficit at the
Centre would not have been materially different from what was originally anticipated.
23. The assistance of Rs.113 crores to some of the States because of their
overdrafts from the Reserve Bank has merely had the effect of increasing the deficit
at the Centre. The financial position of the State Governments will not be clear till
their Budgets for next year are presented. And I would like to remind Honourable
Members that if there are some States which have contributed to the deficit at the
Centre, there are others whose financial position has been sound. Indeed, it is likely
that by taking on a substantially larger responsibility for assisting the States, the
Centre has, during the year, improved the financial position of the State Governments
taken together.
24. But Honourable Members, I am sure, would agree that a situation in which
any State Government can run unauthorised overdrafts from the Reserve Bank without
limit cannot be allowed to continue. Apart from adding to the deficit at the Centre,
such a situation is not equitable between one State and another. In view of the
seriousness of this problem, the Reserve Bank, in consultation with the Central
Government, informed the States in December last that in case an unauthorised overdraft
persisted in future, the Bank would issue a notice to the State calling upon it to take
adequate steps to eliminate such overdraft within a Period of three weeks failing
which it would be open to the Bank to stop payments on account of the State.
Simultaneously, the facilities for temporary accommodation were also suitably enlarged
to give the State Governments greater flexibility in their ways and means position. It
is my earnest hope that with these arrangements, we would begin a new phase in
which deficit financing by the State Governments would be a thing of the past. At the
same time, Honourable Members, I am sure, would agree that the Centre also will
have to set a better example of financial discipline, if it is to enlist the cooperation of
the States in ensuring the maintenance of sound fiscal and budgetary policies. At this
stage, I can only assure the House that we are determined to pursue sound financial
6
policies ourselves and to ensure the same in the States with the cooperation of all
concerned, including the cooperation of the Honourable Members assembled here.
BUDGET ESTIMATES 1967-68
25. I shall now turn to the outlook for the next year. A number of different and
even conflicting considerations have to be taken into account in framing the Budget
for 1967-68. Plan outlays were restricted in the first year of the Fourth Plan and there
is obviously need to resume the momentum of development as soon as possible. In
any event, agricultural programmes, including minor irrigation, major irrigation works
nearing completion, provision of credit and the like must be carried forward vigorously
if the momentum already gained in the implementation of the new agricultural strategy
is not to be lost. The same is true of the family planning programme as of industrial
programmes, including production of fertilizers and pesticides which are so essential
for underpinning our efforts for increasing the productivity of our land. Developments
in other sectors also cannot be held back for long without jeopardising the progress
towards self-reliance.
26. In one sense, the present situation in which there are signs of a recession
in demand and of excess capacity in many areas, notably capital goods industries and
transport is propitious for a step-up in developmental outlays. Liberalisation of imports
and greater availability of non-project assistance should facilitate our task. On the
other hand, the prevailing price situation and the very difficult supply position created
by the second drought in succession make it obviously undesirable, to step-up
investment to the point when prices of essential goods come under further pressure.
27. Next year’s Budget has necessarily to be framed in the background of the
complex picture which I have just outlined. In order that both Government and
Parliament r may have adequate time to assess the situation fully, we have decided for
the present to come to the Honourable House with a Budget in which expenditures
have been restricted to resources in sight at present. At the same time, I must repeat,
that this is only an interim Budget presented primarily for obtaining Parliamentary
Appropriations for expenditure during the first four months of the next year in terms
of Constitutional requirements. As I mentioned at the outset, Government expect to
review the position shortly and bring forward such proposals for incurring additional
expenditure and raising resources for the purpose as may be necessary and feasible in
the present circumstances. At this stage, therefore, I shall merely indicate the basis on
which the present Budget has been framed.
28. Next year’s Revenue receipts at existing rates of taxation are estimated at
Rs.3071 crores being Rs.214 crores more than the current year’s Revised Estimates.
The major increase occurs under excise duties, namely, Rs.86 crores due mainly to the
expected offtake from the new oil refineries. Customs revenue is also expected to be
Rs.58 crores more mainly because of anticipated larger imports next year. Income tax
is not likely to show an improvement of more than Rs.15 crores because of the
inadequate growth of industrial production this year, particularly in the agro-based

7
industries. The rest of the increase occurs mainly under interest receipts, Rs.37 crores.
Of the total revenue receipts, Rs.370 crores will be transferred to the States as their
share of Central taxes and duties.
29. Credit has been taken for a market loan of Rs.350 crores next year.
Considering that the maturities next year are of the order of Rs.255 crores, this will
mean a net borrowing of Rs.95 crores as against Rs.81 crores this year. Some
improvement has been assumed in view of the fact that the Reserve Bank has so far
this year been a net seller of Government securities which is an encouraging feature.
30. Foreign loans other than PL 480 are placed at Rs.835 crores or 1115
million dollars gross which is significantly higher as compared to the current year’s
Revised estimates of 800 million dollars. The bulk of the non-project assistance of
900 million dollars pledged this year is expected to flow in next year. Further
non-project assistance and drawals therefrom should also be possible. The repayment
liabilities next year are about Rs.195 crores; thus giving a net of Rs.640 crores.
31. The rupee accruals in respect of PL 480 imports which are invested in the
special securities of Government are expected to amount to about Rs.285 crores.
Assistance of 50 million dollars on account of the wheat gifted by Canada has also
been taken into account.
32. Next year’s expenditure estimates include Rs.969 crores for Defence as
against Rs.942 crores in the Revised, thus showing a rise of Rs.27 crores which is
mostly accounted for by provision for normal increments and increased cost of stores
and purchases. Border Roads account for a provision of Rs.42 crores which is Rs.4
crores more than in the Revised.
33. The purchase and sale of foodgrains and fertilizers account for a net
expenditure of Rs.159 crores because of the subsidised sale of imported foodgrains
and fertilizers Rs.13 crores are also payable to the manufacturers of fertilizers as a
subsidy on the imported raw materials used by them. On the basis of the economic
cost to Government and the existing issue prices, the total food and fertilizer subsidies
to be borne by Government next year amount to about Rs.185 crores .
34. A provision of Rs.105 crores has also been made in the next Budget for
loans to, States to enable them to purchase and distribute fertilizers, seeds and pesticides
as against Rs.60 crores in the current year. Other provisions include Rs.13 crores for
the Food Corporation as against Rs.12 crores this year and Rs.37 crores for scarcity
relief assistance to States as against Rs.70 crores this year, both loans and grants.
35. Non-Plan grants to States and Union Territories next year will be Rs.241
crores of which Rs.141 crores are granted under the Finance Commission’s award and
Rs.16 crores in lieu of tax on Railway passenger fares. Non-Plan expenditure of the
Centre under developmental heads next year is estimated at Rs.183 crores as against

8
Rs.164 crores this year. The increase of Rs.19 crores occurs mainly under Education,
Scientific Research and Public Works. The total interest charges next year are estimated
at Rs.510 crores which is Rs.47 crores more than the Revised. The administrative
expenditure is placed at Rs.164 crores as against Rs.154 crores this year.
36. The need for economy has been taken into account in making the budgetary
provisions for next year on the expenditure side. Provisions for payment of interest
charges, transfers to States and Union Territories under the Finance Commission is
awards or similar arrangements or scarcity relief, assistance to neighbouring countries
and obligatory payments like pensions, etc. hardly offer any scope for reductions. The
increase in Defence expenditure next year has been restricted to the minimum
considered necessary. The increase in administrative expenditure has been held at
Rs.10 crores of which Rs.3 crores relate to Police and Rs.2 crores to tax collection
charges. I would, however, like to assure the House that the objective of the utmost
economy in expenditure consistent with efficiency will continue to be pursued as a
matter of the highest priority.
37. The resources for the Plan next year on the basis of the estimates just
mentioned and a number of miscellaneous items not mentioned here are placed at
Rs.1711 crores including Rs.189 crores to be found by public sector undertakings
from their own resources. Of these, Rs.535 crores have been allocated to the States for
their Plan schemes and the balance has been retained for the outlay on the Central
Plan including the Plan of the Union Territories.
38. The provision for Central assistance to States includes Rs.172 crores for
agricultural programmes and Rs.145 crores for irrigation and rural electrification
schemes. In addition, a provision of Rs.8 crores has been made for similar programmes
in the Union Territories Plan. The Central Plan also includes Rs.51 crores for agricultural
programmes and Rs.25 crores for the Agricultural Refinance Corporation, the land
mortgage banks debenture programmes and the Agro-Industries Corporations . Another
Rs.4 crores have been provided for transfer to States for building up agricultural
credit stabilisation funds. Thus, the Central Budget for the next year includes Rs.405
crores for programmes of agricultural importance. In addition, as already mentioned,
Rs.105 crores have been provided for giving fertilizer credits to States. The Central
Plan also includes a provision of Rs.28 crores for family planning. Honourable Members
would like to note that in keeping with the priority we attach to agriculture and family
planning, the requirements of both these as estimated at present have been provided
for even at this stage when a final view on next year’s Plan is not possible. For
other sectors, the tentative Plan provisions now being made are indicated in the
Budget documents.
39. Sir, I am well aware that the provisions which have now been included in
the Budget for the requirements of the various Public Sector projects, the States and
private industry through financial institutions are modest. At this stage, I can only say
9
that the budgeted provisions will be reviewed to make sure that essential programmes
do not suffer and quick results are obtained from investments already made or in
progress. The major circumscribing factor is the availability of resources and it shall
be our endeavour to explore all possible avenues of mobilising additional resources.
40. Our aspirations and hopes for economic well-being and a higher standard
of living for millions of our people lie in accelerating the tempo of development. But
this has to be done without generating further inflationary pressures, and on the basis
of a realistic assessment of the resources that can be mobilized in a non-inflationary
manner. Government’s energies will be directed towards attaining this objective in the
shortest possible time; and I propose to present a fuller picture of Government’s
budgetary as well as general economic policies at the time of the presentation of the
final Budget in the next Session of the Parliament. I hope and trust that in the course
of the debate on the present Budget, Honourable Members would have many
constructive suggestions to make about the future course of our policy. We, on our
part, shall give every consideration to the criticisms and suggestions offered so that
we can carve out a surer path out of our present difficulties. With this hope and
assurance, I commend this interim Budget to the House.
(March 20, 1967 )

10
 SPEECH OF SHRI SACHINDRA CHAUDHURI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1966-67
Sir,
I rise to present the Budget of the Government of India for the year 1966-67.
But before I do so I must pay homage to our late Prime Minister, Shri Lal Bahadur
Shastri. His life was given, as indeed it had been lived, in the cause of our country and
our people. With him he had brought a deathless spirit and in Me death he has made
a gift of this spirit to the nation. With this heritage we have to proceed in the service
of our people, well guided by our beloved Prime Minister and companioned by our
esteemed colleagues. With the Honourable Members I share this task.
2. The Budget of the Government of India is a major instrument for
implementing our plans and policies. It has to be framed, therefore, in response to
current-economic trends as well as the long-term requirements of the economy. Recent
trends in the economy have been outlined in the Economic Survey which was presented
to Parliament a few days ago. I shall, therefore, refer only to a few major developments
which have a bearing m the formulation of the next year’s Budget.
3. In many ways, the year that is now drawing to a close has been a very
difficult one. Some of the difficulties such as the inadequate performance of the
economy, the sluggishness of the capital market, the pressure on the balance of payments
and the rise in the prices of essential commodities have been with us now for a
number of years; and it is imperative that budgetary and indeed all economic policies
are framed with a view to reversing these adverse trends, At the beginning of the
current fiscal year, it was our hope that the substantial Improvement in agricultural
production and national income which had taken place in 1964-65 would make It
possible to bring about a corresponding improvement in the general economic situation.
This expectation, however, has not been realised as a result of a number of unforeseen
adverse happenings. Apart from the unprecedented failure of monsoons during the
current year, we have had to reckon with hostilities on our borders and a pause in
foreign aid.
4. Honourable Members will recall that the Budget for the current year as
presented in February last had forecast a small overall surplus. In the early part of the
year itself, however, it became apparent that supplementary measures for raising
revenues were necessary to keep to our resolve of avoiding deficit financing.
Accordingly, the supplementary budget presented last August provided for additional
revenue measures with a yield of over Rs.100 crores for the rest of the current financial
year. Since then, the budgetary outlook has become worse. On present indications, the
current year will close with a large deficit of about Rs.165 crores. As compared with
1
the original Budget estimates, taken together with the effect of the supplementary
budget, the revenue account is now likely to show a shortfall of Rs.53 crores. The
major deterioration of about Rs.112 crores, however, is likely to be on capital account.
I do not propose to burden Honourable Members with details of the variations that are
likely to occur on the revenue and capital account in relation to our earlier estimates.
I shall, therefore, mention only those changes which have some relevance for the
future.
5. Under revenue, receipts from income and Corporation taxes are now
expected to show a shortfall of the order of Rs.73 crores. On the other hand, Customs
receipts are likely to be Rs.31 crores more and Excise revenues Rs.16 crores more;
total tax receipts will, therefore, fall short by Rs.26 crores.
6. As for revenue expenditure, Honourable Members will appreciate that the
hostilities m our borders that wore started last August have made it necessary to
increase the outlay both on defence and border security. Revenue expenditure on
defence is expected to show an increase of Rs.20 crores over earlier estimates, grants
to States for border security, Rs.61/2 crores, and payments for Police Battalions raised
by the States for the Centre, Rs.11 crores, making a total increase in expenditure
under these three items of Rs.28 crores. The net result of these and other variations on
the revenue account is that the estimated revenue surplus of about Rs.335 crores will
now be reduced to Rs.282 crores.
7. On capital account, the major developments are a shortfall of Rs.43 crores
in respect Of external assistance and an addition of Rs.100 Crores by way of loan
assistance to the States which will not be recovered during the current year iteslf. In
response to the general weakness of the budgetary position of the States as well as the
need to enable the States to undertake special agricultural programmes on an emergency
basis, Central assistance by way of loans to the State Governments for their Plans had
to be increased by Rs.40 crores. In addition, it is estimated that loans of the order of
another Rs.45 crores will be needed over the year to strengthen the budgetary position
of some of the States. An additional amount of Rs.10 crores was given to the States as
loans for the purchase and distribution of fertilizers. Loans to the States in respect Of
Small Savings will be larger by Rs.5 crores. The requirements of the public sector
concerns, notably the Heavy Electricals, the Indian Oil Corporation, National Coal
Development Corporation and Noyveli Lignite are also likely to be higher, On the
other hand, some savings in capital expenditure on a number of heads may reasonably
be expected.
8. Honourable Members will note that the net deterioration of Rs.112 crores
on capital account is really explained by two major factors, namely, additional loan
assistance to the States and the shortfall in external assistance. The decline in Central
tax receipts of the order of Rs.26 crores represents less than 11 per cent of total tax
receipts. Further, considering the gravity of the situation that we had to contend with,

2
the increase in revenue expenditure on defence and border security has been modest.
The shortfall in respect of external assistance is naturally a matter which is largely
beyond our control. But for the additional liability of Rs.100 crores by way of loan
assistance to the States, not recoverable within the year iteself, the overall deficit in
the Centre’s Budget this year would have been only Rs.65 crores. Even so, Honourable
Members, I am sure, will agree with me that the developments during the current year
are a matter of concern and call for a greater degree of realism in budget-making as
well as greater sense of determination in restraining expenditures, whether revenue or
capital, whether Plan or non-Plan, whether by the Centre or by the States.
9. I cannot emphasise too strongly that the weakness of the financial position
of the States and the tendency on the part of some of them to resort to unauthorised
overdrafts from the Reserve Bank are matters which have to be remedied. The
responsibility which we have assumed so far to clear these overdrafts inevitably strains
the Centre’s budgetary position. But this strain is bound to be reflected in turn in the
Centre’s ability to help the States in respect of their Plans. Unauthorised overdrafts
and deficit budgeting by some States inevitably have repercussions on other States
which are better able or more willing to manage their affairs on a more realistic basis.
Both the Centre and the State Governments taken as a whole, therefore, have to share
the responsibility for ensuring that unsatisfactory budgetary practices such as budgeting
for deficit and unauthorised overdrafts from the Reserve Bank are avoided in future
by adopting common standards of discipline. We propose to devote urgent attention to
the problem in consultation with the Planning Commission and the State Governments
to ensure that the present unsatisfactory situation in regard to financial management
by some States does not continue.
10. The Budget of the Government of India for the year 1966-67 will
necessarily have to be framed in the light of the budgetary developments during the
current year which I have just outlined. As mentioned at the outset, it must also take
into account recent trends in the economy and the continuing requirements of defence
and development. The year 1966-67 is the first year of the Fourth Five Year Plan. The
Budget for 1966-67, therefore, should give to the Fourth Plan as good a start as is
possible consistent with the immediate need to restore a greater measure of monetary
and price stability. Honourable Members will also appreciate that while It has always
been our policy to restrict expenditure on defence to the maximum extent possible so
as to conserve all possible sources for securing the well-being of our people, we
cannot afford to take any chances with the security of the nation, devoted though we
are to the cause of peace.
11. Honourable Members are already familiar with the major strands in the
country’s economic situation. The substantial improvement in agricultural production
that took place in 1964-65 could not be sustained in the current year on account of
adverse weather conditions. Although no precise estimates of agricultural output in
the current year are yet available it is clear that there would be a substantial decline in
3
the output of foodgrains as well as a reduction, in varying degrees, in the outturn of
commercial crops such as jute, mesta, oilseeds, tobacco, tea and cotton. Honourable
Members would, I am sure, like me to take this opportunity to express our gratitude to
friendly countries and international institutions, and particularly to the Government
and the people of the United States, for agreeing to supply to us substantial quantities
of foodgrains at a time of need. Even with this help, however, the availability of
essential foodgrains and agricultural raw materials during the coming year would be
considerably restricted so that it becomes more necessary than ever to restrict the
expansionary impact of Government expenditure in general.
12. The growth in industrial production has also slackened during the current
year. During the first six months of 1965-66, industrial production increased by 7.3
per cent over the corresponding period of 1964-65. During the second half of the
current fiscal year, however, industrial production is expected to increase by only 5
per cent so that over the year as a whole we are likely to have an increase of about 6
per cent in industrial production. Our continuing developmental efforts are showing
results. Capacity in a number of industries such as those producing finished steel,
aluminium, engineering goods and chemicals has been increasing steadily and can be
expected to increase further in the coming year. On the other hand, the shortage of
domestic raw materials and our inability to compensate this by larger imports has
seriously contributed to the sluggishness of industrial production in recent months.
13. Superficially, it might appear that our balance of payments position has
shown some improvement during the current fiscal year. In 1964-65, for example, our
foreign exchange reserves declined by Rs.72 crores. By contrast, it may well be possible
for us to avoid any decline in foreign exchange reserves during 1965-66 with the help
of a net drawing from the International Monetary Fund of Rs.11.9 crores. But we have
been able to stem the decline in our already depleted reserves during the current year
only on the basis of a highly restrictive import policy. Fresh licensing for imports for
the maintenance of the economy during the current year has been on a very restricted
basis; and this is already beginning to affect industrial production despite a substantial
decline in the inventories of imported materials and components within the country.
14. Over the months to come, our needs for inescapable imports of foodgrains
and agricultural raw materials will increase as a result of the drought. It will also
become even more difficult than before to maintain the exports of some of our
agricultural products in the face of a decline in production. Difficult as the foreign
exchange situation has been and, indeed, is likely to be over the months to come, I
think it would be self-defeating to intensify or even to maintain the present severity of
our import restrictions. What we need, indeed, is a significantly larger flow of
maintenance imports over the coming months so that inventories within the country
are restored to normal levels and capacity already created is utilised as fully as possible.
It is only m the basis of a more liberal import policy that we can hope to give a fresh
momentum to industrial production and greater regard for efficiency all round in the
4
immediate future. Situated as we are at present, it is not possible for us to undertake
a more liberal licensing of essential imports of raw materials and components without
external assistance in suitable forms. But Honourable Members may be sure that it
will be the constant endeavour of this Government to seek the cooperation of
international institutions and friendly foreign governments to reduce the severity of
our present import restrictions.
15. Over a period, however, our ability to maintain imports at satisfactory
levels and to meet external obligations such as those for the repayment of debt will
necessarily have to turn m our own efforts to increase our foreign exchange earnings
not only by higher exports but also by way of increase in invisible receipts from
tourism, remittances, shipping and the like. During the first three years of the Third
Plan period, there was a rapid increase in our exports which was all the more gratifying
for the reason that it took place despite the fact that the growth of production within
the country failed to come up to expectations. The same momentum in exports, however,
has not been maintained during the past two years; and we are confronted in the
immediate future with the patent possibility that the drought might affect adversely
some of our agricultural exports.
16. Fundamentally, we cannot give a continuing impetus to our export effort
without increasing production and productive efficiency all round and without a check
on general inflationary pressures within the country. While efforts in these directions
are required m a continuing basis in the interest of higher export earnings as, indeed,
of development along sound lines, we have not hesitated to adopt a number of measures
to give specific incentives for promoting higher exports. The Tax Credit Certificate
Schemes introduced during the year and the Import entitlement schemes which have
been in operation for some time are examples of the inducements we offer at present
to promote higher exports. More recently we introduced the National Defence
Remittance Scheme and I am happy to say that the response to the scheme has been
encouraging. It is in view of this that the scheme has been extended now by another
three months though a second look may have to be taken to lower the rate of benefit
inherent in the scheme. We shall continue to review, modify and extend the export
promotion measures that we have designed in the light of our needs and experience to
make sure that they continue to provide a strong, stable and comprehensive basis for
a vigorous export drive.
17. With the best will in the world and the utmost effort we are capable of, we
still cannot dispense with foreign aid in the near future. We in India have always
recognised that foreign aid can at best supplement our own efforts to raise both internal
and external resources. No self-respecting nation can ever look upon external assistance
as a substitute for reasonable effort m its own part or as a continuing feature of its
economy. It is also both natural and unavoidable that the willingness of our friends
abroad to assist us will depend on the confidence that we are able to inspire in our
ability to grapple with our problems and to put such aid as we get to the best possible
5
use. Only so can we hope, before long, to dispense with extraordinary forms of external
assistance altogether. We are hopeful that the Consortium organised under the leadership
of the World Bank will approach the task of mobilising external assistance for our
Fourth Plan in the same constructive way as it has done in the past for our Second and
more particularly for our Third Plan. At the same time, Honourable Members will
appreciate that the Plan itself and our policies in support of the Plan have to be
consistent not only with reasonable developmental goals but also with a greater
determination on our part to rely increasingly on our own strength and resources.
18. I would like to refer, in particular, in this connection, to the need to reduce
our dependence on assistance under the United States PL 480 programme for the
import of foodgrains and other agricultural commodities. Honourable Members will
have, I am sure, every opportunity to review the measures that we have set in motion
for achieving a substantial increase in agricultural production during the Fourth Plan
period. I have to emphasise in particular the fact that our budgetary position also has
come to lean heavily on the import of agricultural commodities under the PL 480
programme. We cannot possibly regard a large accretion of resources to the Budget
from PL 480 transactions as anything but a fortuitous counterpart of our difficulties
on the agricultural front. The fact that we depend today to such a large extent on the
PL 480 programme for supplementing our budgetary resources emphasises once again
the need for caution in regard to governmental expenditure as wen as for exploring
every available opportunity for raising more internal resources.
19. More and more, the possibility of raising additional internal resources
will depend m the growth and dynamism of the Indian economy itself. Whichever way
we look at it, therefore, It is of paramount importance to improve the performance of
the economy by raising productivity both in agriculture and industry. From this point
of view, I attach importance to strengthening and maintaining the confidence of the
private sector as also to the more efficient working and management of our growing
family of public enterprises. It is not necessary for me to dwell at any length on the
malaise of the capital market which has continued now for more than three years.
While we have endeavoured to meet the genuine requirements of private industry for
investment by greater assistance from financial institutions, there cannot be any doubt
that the revival of the capital market and a greater flow of private savings to industry
in the form of equity investment are desirable in the larger social interest. A democratic
society desiring rapid development both in the public and the private sector but averse
to concentration of wealth and economic power has all the more reason to make
investments in the private sector as widespread as possible. Growth of private industry
in such circumstances must depend more and more on the equity participation of a
growing number of people drawn from different strata of society. More widespread
equity participation would also facilitate stricter control on management in the
private sector.
20. In the monetary field, till recently, a great deal of stringency has been felt
6
despite the fact that the supply of money has continued to increase at a much faster
rate than the supply of goods and services. Given the developments in the budgetary
field to which I referred earlier, it is not surprising that money supply has increased at
a faster rate than what had been envisaged. But clearly, the combination of monetary
stringency and a rapid-increase in money supply is an indication of the fact that genuine
savings have not increased adequately and that a part of these have been diverted to
less desirable forms of investment. We cannot relieve monetary stringency by continuing
to increase money supply at the same rapid rate as we have done over the past few
years. To do so would only aggravate the inflationary situation in the country.
Honourable Members are well aware that the general price level in the country has
shown a significant increase of 7.6 per cent during the 12 months ending January
1966. While the Reserve Bank will continue to deploy flexibily the instruments of
monetary policy in keeping with the genuine requirements of credit for achieving
higher levels of production, we shall have to make sure that the expansion of credit
for legitimate purposes takes place increasingly on the basis of growth of deposits and
at the expense of credit expansion for less desirable social purposes. Indeed, quite
apart from these considerations, It is essential to ensure that lending by the banking
system is directed towards socially desirable objectives such as greater economic
opportunity to a wider spectrum of producers and the prevention of undue concentration
of wealth and economic influence.
21. I may now sum up the main considerations which have guided me in
framing the next year’s Budget in the light of the developments, to which I have
referred so far. First and foremost, the Budget has to be production oriented, creating
a better psychological climate for a greater regard to savings and efficiency all round.
Secondly, while investments in progress have to be completed as speedily as possible
in the interest of better performance of the economy and while the claims of national
security have to be met, every effort has to be made to restrain Government expenditure,
particularly m general administration and m pew schemes of development with a long
gestation period. With the restraints just indicated It is proper to state that it is the
intention of this Government to establish progress and press m with such enterprises
in the public sector as are beneficient to the country. The Bokaro Steel Plant made
possible with the assistance of the USSR to whom we are grateful is one such project.
I have also endeavoured to estimate revenue and capital receipts on as realistic a basis
as possible.
22. Coming now to the estimates of next year’s revenue expenditure,
Honourable Members would appreciate that certain increases are almost automatic in
the sense that they result from decisions already taken in the past or from Constitutional
obligations. Transfers to States m the basis of the recommendations of the Fourth
Finance Commission will, for example, lead to increase in expenditure of Rs.77 crores
under Statutory Grants and Rs.67 crores under States, share of Union Excise duties.
The cost of servicing debt will increase by Rs.42 crores and export promotion measures

7
and the various tax credit schemes already adopted will result in an increase in
expenditure of another Rs.24 crores. If these special items and certain self-balancing
items such as PL 480 Grants, Emergency Risks insurance Scheme and write back of
Capital Grants are excluded, revenue expenditure next year will show an increase of
only Rs.46 crores. While Plan expenditure m revenue account is less by Rs.36 crores,
the increases are accounted for by Rs.29 crores under Defence Services, Rs.141/2
crores under Police, mainly for requirements of border security, Rs.111 crores under
grants for drought relief and Rs.6 crores to Union Territories to cover their budgetary
gaps. Administrative Services proper, excluding Police, would cost Rs.99 crores next
year as against Rs.93 crores this year and Rs.83 crores last year. The increase of R9.6
crores next year includes Rs.21 crores m account of next year’s election expenses.
The balance of the increase in revenue expenditure after excluding reductions under
subsidies and aid, namely, Rs.18 crores, occurs mostly under non-Plan developmental
heads, and includes committed expenditure arising out of the completed Third Plan
Schemes. Honourable Members would appreciate that the small increases I have just
mentioned represent a considerable effort at economy and restraint. Most of the
increases are in respect of obligatory expenditure or items like Defence expenditure
and border security which in view of the circumstances that we have to contend with,
cannot but be regarded as absolutely unavoidable.
23. Disregarding certain self-balancing items, next year’s revenues should
show an increase of Rs.191 crores as compared to the revised estimates for the current
year. Customs duties are estimated to yield Rs.29 crores more mainly because the
increases in duties already made would yield results now over a full year. Receipts
from Excise duties are expected to increase by Rs.108 crores mainly in response to
larger production and clearances of petroleum products from the new refineries as
also of cement and iron and steel. Considering the experience this year and the fact
that the current year’s receipts include a considerable portion of tax from voluntary
disclosures, I have assumed that receipts from Corporation and income taxes next
year will be higher by only Rs.20 crores.
24. Taking into account the factors that I have mentioned and a number of
other miscellaneous items, total revenue receipts next year at existing levels of taxation
are estimated at Rs.2617 crores and expenditure on revenue account at Rs.2407 crores.
The revenue surplus of Rs.210 crores next year will thus be Rs.72 crores less than the
revised estimates for the current year.
25. On capital account, I have assumed external borrowings of Rs.460 crores
as against Rs.490 crores in the current year. This is exclusive of fresh accretion of PL
480 funds of Rs.230 crores. Market loans have been assumed at Rs.280 crores, about
the same as in the current year. However, since repayments next year are substantially
higher, the net Market borrowing at Rs.86 crores next year would be Rs.22 crores less
than that during the current year. It is, therefore, my hope that the target for market
borrowing next year will be fulfilled without any significant support from the Reserve
8
Bank over the year as a whole. Honourable Members would recall that since last
October, we have floated emergency market loans on tap. In view of the consolidated
market borrowing programme now proposed for the next year, the emergency loans
on tap will be discontinued at the end of March.
26. On Small Savings and Annuity Deposits, I have assumed no net increase
over the anticipated outcome of the current year. After taking account of receipts
under repayment of loans, accretions under miscellaneous debt and deposit heads and
the revenue surplus of Rs.210 crores, the total budgetary resources in sight for
total capital outlay next year, both Plan and non-Plan, would be of the order of
Rs.1835 crores.
27. I have considered whether the capital outlay next year could not be
restrained within the limits set by resources in sight to which I have just referred.
Unfortunately, while total capital outlay next year, excluding the notional adjustment
of PL 480 loans, and loan disbursements, would show a significant reduction over the
current year’s level, it has not been possible to restrict the outlays within the strict
limits set by resources in sight. Here again, there are a number of items such as debt
repayments where an increase in outlay is unavoidable. Debt repayments next year at
Rs.314 crores would be larger by Rs.45 crores in relation to the current year. While
there is practically no increase in defence capital outlay next year, an additional
provision of Rs.20 crores is required for giving loans for the purchase and distribution
of fertilizers, seeds and pesticides and Rs.12 crores for loans for drought relief. The
provision for contribution to financial institutions will also be larger by Rs.71/2 crores.
28. In regard to Plan schemes also, expenditures on continuing schemes have
to be provided for in the interest of speedy implementation, especially when foreign
exchange provision for their import requirements has already been made. Some of the
important increases that have been proposed in the next year relate to the Bokaro Steel
Plant and the development of Atomic Energy which have been allotted Rs.13 crores
and Rs.18 crores more respectively. On the other hand, Plan assistance to the States
and the Union Territories by way of loans has been curtailed by Rs.135 crores and
capital outlay m Railways has been reduced by Rs.59 crores. On balance, and after
taking into account a number of miscellaneous items, total capital outlay including
loan disbursement and debt repayment next year will amount to Rs.1952 crores thus
showing a reduction of Rs.296 crores as compared with the current year.
29. In terms of Plan outlay, the Centre and the States next year are expected
to spend Rs.2081 crores, that is, Rs.144 crores less than the current year’s budgeted
Plan outlay of Rs.2225 crores. The State Plans excluding that of Nagaland will account
for an outlay of Rs.926 crores and the Central Plan, an outlay of Rs.1155 crores. Of
the States’ outlay, Rs.505 crores will be financed by Central assistance and Rs.421
crores from the resources of States concerned. The Centre’s Plan will be financed to
the extent of Rs.189 crores from the internal resources of the Railways, the Posts and

9
Telegraphs Department, the Hindustan Steel, the Indian Oil Corporation, the Oil and
Natural Gas Commission and other public sector enterprises, including the foreign
exchange resources to be mobilised by them directly. For the balance of Rs.1471
crores, inclusive of Rs.505 crores of Central assistance to the States, Rs.56 crores for
the Union Territories and Rs.4 crores for Nagaland, as also Rs.143 crores for the
Central Plan on Revenue account, provision has been included in the Budget.
30. The distribution of the Plan outlay under different heads takes into account
the higher priority that needs to be given at the present stage to quick yielding
programmes of agricultural development and to the speedy implementation of projects
already in hand. To a certain extent, a comparison between the Plan outlay next year
with the Plan provision for the current year is misleading in the sense that a part of the
outlay included in the Plan during a Plan period becomes committed and gets treated
as non-Plan outlay from the beginning of the next Plan period. Even so, there is no
denying the fact that the exigencies of the budgetary situation have made it necessary
to exercise the utmost caution in regard to both Plan and non-Plan expenditure during
the coming year. The gap between resources, in sight and total provision for expenditure
in the Centre’s Budget to which I will now turn has to be judged in the light of this
consideration.
31. The overall budgetary position for the next year may now be summarised
in conventional terms as follows. The revenue account will yield a surplus of Rs.210
crores. The total disbursement on capital account, excluding the notional adjustment
of PL 480 Loans, will be Rs.1952 crores. This will be met, apart from the revenue
surplus, by internal and external borrowings of Rs.744 crores, collections under Small
Savings of Rs.135 crores, fresh accretion to PL 480 Funds of Rs.230 crores, Annuity
Deposits of Rs.44 crores, repayment of loans of Rs.370 crores and receipts under
miscellaneous debt and deposit heads of Rs.102 crores, leaving an overall deficit of
Rs.117 crores.

PART B
32. In the light of what I have said earlier, Honourable Members would have
gathered that I would have very much liked to avoid a deficit by the simple method of
containing revenue expenditure and capital outlays within the resources available. I
have explored this possibility to the maximum. Revenue expenditure has been held
down. In the case of Plan outlays, however, it is necessary to provide for what is
required for securing essential and productive development, particularly in regard to
agriculture and other continuing schemes. Consistent with this, Plan outlays have also
been kept down to the minimum. A further reduction would retard agriculture and
jeopardize the growth of the economy.
10
 33. It is, therefore, Imperative for me to cover the deficit by raising additional
resources. This I have sought to do by methods which cause minimum disturbance
and hardship and ensure maximum simplicity. Honourable Members would recall that
in presenting the last Budget my predecessor had emphasised the importance of stability
and simplicity in the tax structure in the interest of providing a proper climate of
expectations for orderly growth. ‘ The supplementary budget introduced last August
took this process a step further, particularly in regard to the rationalisation of import
duties. I have kept these basic objectives clearly in view in proposing measures for
raising additional resources. Even in so doing, I have sought to carry the process of
simplification a step further by proposing a number of changes and reliefs. I shall now
explain my proposals in detail.
34. Starting with indirect taxes, I propose to leave customs duties alone as
they were rationalised and raised only a few months ago. I, however, propose to
increase the excise duties on a few commodities, not simply for raising revenue but
also for restraining consumption where this can be done without too much hardship
and increasing exportable surpluses. Two commodities, namely, optical bleaching agents
and synthetic detergents will be subject to duty for the first time.
35. The excise duty on crystal sugar will be raised from Rs.28.65 to Rs.37 per
quintal. Correspondingly, the duty on khandsari will also be raised. Taken together,
these will bring in additional revenue of Rs.21.93 crores. Assuming the duty is passed
on fully to the consumer, the incidence will be only 8 to 9 paise per kilogramme of
crystal sugar. As supply is expected to be adequate to meet demand, there is some
prospect that the whole of the duty may not be passed on to the consumer.
36. The duty on cigars and cigarettes, as well as on unmanufactured tobacco
for use in the manufacture of cigarettes and pipe mixtures, will also be raised by about
25 to 30 per cent. These increases are expected to yield additional revenue of Rs.9.01
crores. The incidence of this increase will be about 5 paise per packet of expensive
cigarettes and 1 to 2 paise per packet for the relatively cheaper ones.
37. The excise duty on diesel oil not otherwise specified, that is, light diesel,
is proposed to be raised by Rs.60 per kilo litre in order to bring it in line with duties
on other petroleum products, so as to avoid undesirable mixtures. The additional revenue
expected is Rs.5.35 crores.
38. In order to restrain consumption of finer qualities of cloth which require
imported cotton, I propose to increase duties on cotton yarn and cotton fabrics
selectively. There will be no increase in the case of coarser counts of yarn. In the case
of fabrics, the increase will be only in respect of processed products such as mercerised
shrink-proof and organdie processed varieties. The additional revenue from increases
in the duty on yarn is expected to be Rs.7.23 crores and on fabrics Rs.6.3 crores.
Correspondingly, the duties on rayon and synthetic yarns are also being slightly raised
and the revenue yield will be Rs.50 lakhs.
11
 39. The excise duties on a few other items, namely, sodium silicate and carbon
dioxide are also being raised and the slab concessions on paper boards are being
reduced. The additional revenue expected from these three Items is Rs.1.46 crores.
The new duties on optical bleaching agents and synthetic detergents are expected to
bring in Rs.58 lakhs. In order to give some relief to small establishments which
manufacture motor vehicle trailers, the ad valorem duty of 5 per cent on such trailers
as are manufactured in establishments employing not more than five workers will be
abolished. Altogether, the additional yield from the changes in excise duties proposed
together with corresponding increase in countervailing duties, will be Rs.52.86 crores
of which the States’ share will be Rs.10.07 crores. The Central resources, therefore,
will be augmented by Rs.42.79 crores.
40. I shall now turn to direct taxes. In the field of personal taxation, I propose
to increase the existing limits of total incomes not chargeable to tax by Rs.500. Similarly,
I propose to raise by Rs.500 the existing personal allowances on which tax relief is
given to resident individuals and Hindu undivided families. Thus, the exemption limit
in the case of individuals will be raised from Rs.3,000 to Rs.3,500 the personal
allowance of an unmarried individual, from Rs.2,000 to Rs.2,500 and the personal
allowance of a married individual with more than one dependent child, from Rs.4,300
to Rs.4,800. The effect of these will be a reduction in revenue by Rs.3.5 crores. The
principal reason is to provide a measure of relief to a class of tax payers who merit
their burden being lightened. But these measures will also accelerate the performance
of the task of the tax authorities by eliminating a large number of small assessments
and thereby enabling them to devote more and swift attention to tax collections from
higher incomes.
41. For similar reasons, I also propose to raise the exemption limit for annuity
deposits from Rs.15,000 to Rs.25,000. By this measure, the number of people required
to make annuity deposits will be reduced sizeably from 1,76,000 to 80,000, while the
reduction in receipts will only be of the order of Rs.7 crores, after taking into account
the corresponding gain to income-tax of Rs.2.42 crores. I have, however, provided
that even those in the income range of Rs.15,000 to Rs.25,000 who desire to make
annuity deposits, will be enabled to do so and obtain the consequent tax relief on the
amounts so deposited. Another small change which I propose to make is to provide
that persons on attaining the age of 70 will hereafter be allowed to opt out of the
Annuity Deposit Scheme, irrespective of whether they were liable to make annuity
deposits before or not.
42. Having given these reliefs, I propose to levy a flat special surcharge of 10
per cent of the amount of income-tax and surcharge in respect of earned income and
unearned income, payable by all non-corporate assessees. The additional revenue from
the special surcharge will be Rs.25.6 crores.
43. In regard to other personal taxes, I propose to abolish the expenditure tax.
I do so for administrative reasons. The yield from this tax is very little, namely, Rs.60
12
lakhs or thereabouts which has not been commensurate with the burden it puts on the
administration and the inconvenience it causes to the assessees. I recognise that on
purely economic grounds, it would be a very sound principle to replace the income-tax
increasingly by a tax on expenditure, so that the maximum incentive is provided for
savings. Given the substantial contribution made by income-tax to our revenues and
the administrative difficulties and inconvenience to assessees involved in the assessment
of expenditure, it is, however, not possible to attempt this substitution on any significant
scale at the present stage.
44. I also propose to revise the rates of gift tax in order to bring them more
closely in line with the rates of estate duty. In the process, the rates applicable to
different slabs of value of gifts are also being reduced. Thus, the exemption limit is
being raised from Rs.5,000 to Rs.10,000, the ‘rate on the slab from Rs.10,000 to
Rs.25,000 is being reduced from 8 per cent to 5 per cent and the rates on subsequent
slabs, up to Rs.15,00,000, by varying percentages. The present maximum marginal
rate of 50 per cent will, however, remain unchanged, but it will operate on the slab
beyond Rs.15 lakhs. I also propose to delete the provision for the aggregation of the
value of gifts to the same donee over a number of years. This provision was designed
to prevent avoidance of estate duty as well as gift tax at higher rates. But it is a
measure whose practical utility is not established, specially if the time and trouble it
involves on the part of both the administration and the assessees are taken into account.
But to some extent to balance this measure, I propose to provide, by amendment of the
Estate Duty Act, that gifts made within two years of death will be treated as part of the
estate. At present the relevant period is one year. I have also taken this opportunity to
raise the rates of estate duty on certain intermediate slabs, namely, Rs.1 lakh to Rs.2
lakhs, from 8 per cent to 10 per cent, Rs.31 lakhs to Rs.5 lakhs, from 15 per cent to
25 per cent and from Rs.5 lakhs to Rs.10 lakhs, from 25 per cent to 30 per cent. The
loss in revenue as a result of changes in the gift tax will be Rs.1.71 crores, whereas the
additional revenue from the changes in the estate duty, which will go to the States,
will be approximately Rs.70 lakhs.
45. I propose to make another change in respect of estate duty. Honourable
Members will recall that my predecessor had assured this House that the estates of
members of police forces killed in action in defending the borders of the country
would be exempted from estate duty in the same manner as members of the armed
forces. I have made a provision for this. I feel this is a recognition, though small, of
the courage and determination of members of this force in defending our country.
46. Finally, I would like to refer to one change in regard to personal taxation
which will also serve as a transition to my proposals in regard to corporate taxation.
Honourable Members are aware that at present when an equity shareholder is allotted
a bonus share, he is liable to pay income-tax on the notional capital gain accruing to
him. I propose to discontinue this provision and to provide that liability for tax will
arise only when the capital gain is actually realised. The loss to revenue from this
measure will be only Rs.7 lakhs.

13
 47. I shall now turn to corporate taxation. Here again, as in the case of personal
taxation, I propose to provide certain reliefs which I consider necessary for providing
a suitable climate for growth. At the same time, I propose to increase the general rates
of tax on corporate incomes by approximately 10 per cent. I shall now explain these
proposals in some detail.
48. The existing tax of 12.5 per cent, levied on domestic companies with
reference to the amount of their bonus issues will be discontinued. The loss to revenue
will be only Rs.9 lakhs.
49. At present, the dividend tax of 7.5 per cent on companies to which it is
applicable is, ordinarily, leviable on the whole of the dividends declared or distributed
during the previous year. I propose now to provide that this tax will be leviable only
on that part of the equity dividend declared or distributed which is in excess of 10 per
cent of the paid-up equity capital. The loss to revenue on this account is estimated at
Rs.4.8 crores.
50. I also propose to reduce the rate of surtax provided under the Companies
(Profits) Surtax Act, 1964, from the existing level of 40 per cent to 35 per cent. The
loss to revenue on this account is estimated at Rs.2.5 crores.
51. As already mentioned, I propose, simultaneously, to raise the effective rates
of the basic corporate tax on companies. Thus, the rate of tax on profits from life
insurance business will be raised from 47.5 per cent to 52.5 per cent. In the case of
domestic companies in which the public are substantially interested with a total income
not exceeding Rs.25,000 , the rate of tax is being raised from 42.5 per cent to 45 per
cent, and the rate of tax on such companies with higher incomes, from 50 per cent to 55
per cent. In the case of closely-held domestic companies also the existing general rate is
being increased from 60 per cent to 65 per cent, and the concessions rate applicable to
industrial companies on the first rupees ten lakhs of their income from 50 per cent to 55
per cent. In the case of foreign companies, royalty and technical service fees under
certain approved agreements will bear the, same effective rate of 50 per cent as at
present, but their other income will be taxed at 70 per cent, as against 65 per cent at
present. Similarly, some fiscal encouragement needs to be given to our industries to
encourage them to provide technical “knowhow” and technical services to newly
developing countries. I propose, therefore, to provide for a concessional rate of tax on
dividends received by an Indian company from a foreign company on shares allotted to
the Indian company in consideration for supplying technical “know-how” or rendering
technical services. This concessional rate will be 25 per cent. A similar concessional rate
of tax of 25 per cent will also be charged on royalties, commissions, fees, etc., received
by an Indian company from a foreign company for supply of technical “know-how” and
technical services. The net gain to revenues as a result of the changes in the basic rates
of corporate taxation is estimated at Rs.43.46 crores, after allowing for the consequent
reduction of Rs.5.6 crores under surtax.

14
 52. Honourable Members are aware that at present we have separate schedules
of priority industries, one for qualifying for development rebate at the higher rate of
35 per cent and the other for a concessional treatment in respect of the basic corporate
tax. I propose to extend the list of priority industries for the purposes of the development
rebate by inclusion of three more industries, namely, of the manufacture of tea,
newsprint and printing machinery. The same schedule will also apply for purposes of
concessional treatment in the rate of tax. As a measure of simplification, however, I
propose to modify the form of the concession. At present a special rebate on income-tax
and surtax is granted to companies on their income from priority industries. I propose
to replace this by a straight deduction of 8 per cent of the profits from priority industries
in computing the total taxable income of the companies concerned. This direct manner
of giving a rebate should greatly simplify the computation of the tax liability.
53. At present, 75 per cent of development rebate actually allowed is required
to be put into a reserve. In the case of the shipping industry, I propose to reduce this
requirement to 50 per cent, in order to provide an incentive for fresh investment in
this industry where levels of profitability are relatively low.
54. In order to provide a further incentive for the extension and renovation of
our tea plantations, I propose to liberalise the existing provisions in the law in regard
to the grant of development allowance. Firstly, the rate of development allowance for
new planting will be increased from the existing quantum of 40 per cent, of the actual
cost of planting to 50 per cent thereof and, for replanting, from 20 per cent to 30 per
cent. Secondly, I propose that the allowance may be granted in two stages, first, for
the year following the year in which the land is prepared for planting or replanting,
with reference to the expenditure incurred up to that year, and, as to the balance, for
the fourth year. This will replace the existing provision under which the whole of the
allowance is granted only for the fourth year.
55. The rate schedule of depreciation allowable in respect of buildings,
furniture, plant, machinery, etc., has become highly complicated. It is necessary to
review the position in the light of recent developments and to make appropriate changes
so that the schedule may be both rational and simple. I propose, therefore, to initiate
a complete review during the next few months. The recommendations of the Working
Group on Plantations Labour Housing will also be taken into account during this
review. Meanwhile, I propose to provide that the cost of small items of plant and
machinery costing not more than Rs.750 per unit may be allowed to be depreciated in
full in one year. I also propose to allow initial depreciation of 20 per cent on the cost
of new buildings erected by employers and occupied or used by employees drawing
remuneration upto Rs.7,500 per annum. At present, this is allowed only in the case of
buildings occupied or used by those drawing remuneration upto Rs.200 per month.
56. At present when development rebate is allowed, the plant and machinery
concerned is required to be retained in the possession of the assessee for a period of
8 years; otherwise, the rebate already allowed is liable to be withdrawn. When such
15
plant, however, is transferred in the course of amalgamation, including merger of a
subsidiary company with the parent company, the development rebate is not withdrawn.
This is, however, subject to the qualification that the merged subsidiary company is an
Indian company. I do not see any reason for the exclusion of a foreign subsidiary as
it comes in the way of merger of such companies with their parent companies. I,
therefore, propose to withdraw this disqualification.
57. At present, approved financial corporations which are engaged in providing
long term finance for industrial development in India are entitled to deduct, in the
computation of their profits, an amount up to 10 per cent of their total income carried
to a special reserve account. In order to enable relatively small financial corporations
to build up their financial resources at an accelerated pace, I propose to increase this
deduction from 10 per cent to 25 per cent of the total income, in cases where the
paid-up capital of the corporation does not exceed Rs.3 crores. This will benefit mainly
those financial corporations which are engaged in fostering industrial development on
a regional basis.
58. I propose to make a number of changes relating to closely-held companies.
Firstly, in determining whether a company is to be regarded as closely-held, I propose
that for such of them as are mainly engaged in certain manufacturing activities or in
ship-building, the test of the public being substantially interested should be regarded
as satisfied if 40 per cent of the equity is held by the. Government, public corporations
or members of the public, etc., instead of 50 per cent, as at present. Secondly, companies,
which are mainly engaged in ship building will not be compelled to distribute their
profits upto the statutory percentage. Companies which are only partly engaged in
manufacturing activities will also not be required to make a compulsory distribution
of their profits relating to such activities. Finally, certain types of expenditure incurred
by a closely-held company for earning its income are at present not allowed for purposes
of determining the tax liability. I see, however, no reason why such expenditure should
not be allowed as a deduction in computing the distributable income of such a company.
I propose to provide for this.
59. Honourable Members are aware that certain fiscal concessions have already
been announced in respect of the National Defence Remittance Scheme. Thus, capital
gains arising on the sale of bank certificates obtained under the Scheme would be
liable to tax at the concessional rate of tax applicable to long-term capital gains, even
though such certificates may have been transferred by the holder within a period of 12
months from the date of receiving the certificates. Non-residents who make a gift of
foreign exchange to a resident in India by making a remittance under the Scheme
would also be exempt from the gift tax. I have made provisions for these concessions
in the relevant Acts.
60. With a view to encouraging small savings, the requirement of deduction
of tax at source will be waived, subject to certain conditions, in the case of small
investments in Government securities. Similarly, the interest on the new series of
16
National Savings Certificates to be issued through the State Bank will bear the same
concessional treatment as the existing series of National Savings Certificates. In the
case of income from units of the Unit Trust of India, income upto Rs.1,000 win be
excluded from total income for purposes of tax assessment in the case of all assessees
irrespective of the amount of their other income. This should make for simplification
as wen as greater incentive for investment in the Unit Trust.
61. Finally, I would like to mention some other changes that I have proposed
essentially in the interest of simplification or better administration. I propose that the
total income of assessees should be rounded to the nearest multiple of ten rupees and
that the amount of tax, penalty, refund, etc., should be rounded to the nearest multiple
of one rupee. As a measure of curb on ostentatious consumption, I propose that for the
calculation of depreciation on motor cars acquired for the purposes of a business or
profession, purchase price above Rs.25,000 will be ignored. Those who are responsible
under the law for deducting tax at source will be charged, in case of default in fulfilling
these obligations, simple interest at the rate of 6 per cent per annum for the period of
the default. Another amendment relates to exemption of the income of charitable
trusts and institutions from income-tax. It is being provided that a charitable trust or
institution will forfeit the right to exemption if any part of its income or property is
used or applied directly or indirectly for the benefit of those who might be closely
associated with the trust or foundation as authors, substantial contributors or their
relatives.
62. Before I sum up the effect of the tax proposals which I have explained so
far, I would like to make two proposals designed to raise resources for the benefit of
the States. The first is to increase from 2 per cent to 3 per cent the rate of Central
Sales Tax leviable on inter-State sales. This will come into effect from 1st July, 1966.
This increase will yield an additional revenue of Rs.19 crores to the States in a full
year and Rs.9.5 crores in the year 1966-67. Since the new rates will become effective
from 1st July, 1966 and since collections are carried over from one quarter to the
other, the additional yield during the next financial year will accrue only during two
quarters of the year. Similarly, collections in the Union Territories which form part of
the Consolidated Fund of India will increase by Rs.1 crore in a full year and Rs.50
lakhs in 1966-67.
63. The second proposal is to raise from 2 per cent to 3 per cent the ceiling
prescribed in respect of sales tax on goods declared to be of special Importance in
inter-State trade or commerce. This is a permissive amendment and would enable the
States to refix the rates of local sales tax on coal, cotton, cotton yarn, hides and skins,
Iron and steel, jute, and oil seeds within-the ceiling of 3 per cent if they so desire. If
all the States raise their local sales tax rate to the permissible ceiling of 3 per cent
from the prescribed date of 1st July 1966, it would give them an additional revenue of
Rs.7.5 crores in the next financial year. During a full year, however, the additional
revenue would be Rs.15 crores.
17
 64. I shall now sum up the effect of my proposals. The additional yield resulting
from the changes in the excise duties proposed will be Rs.52.86 crores of which the
share of the States will be Rs.10.07 crores. The gain to the Central budget will, therefore,
be Rs.42.79 crores. The net effect of the changes in regard to personal taxation would
be again to revenue of Rs.22.14 crores. The additional yield from corporate taxation,
after taking into account the concessions in regard to the dividend tax and surtax and
the elimination of the tax on bonus issues, will be a gain to revenue of Rs.36.07
crores. The changes in the inter-State sales tax which I have referred to will bring in
an additional revenue of Rs.50 lakhs to the Centre. The total revenue effect of my tax
proposals is an addition of Rs.101.51 crores. On the capital account, there will be a
reduction in the yield of annuity deposits of Rs.9.39 crores. The total additional
resources thus available for reducing the deficit of Rs.117 crores will, therefore, be
Rs.92 crores, leaving an overall gap of Rs.25 crores.
65. Honourable Members will note, however, that the changes I have proposed
will also augment the resources of the States to a significant extent. Apart from their
share of Rs.10.07 crores in union excise and additional yield of Rs.69 lakhs in respect
of estate duty, they will get Rs.34 crores in a full year from the two changes that I
have proposed in respect of the sales tax.
66. In conclusion, may I say that I am keenly aware that by the compulsion of
circumstances I have had to propose additional resource mobilisation on a considerable
scale. The underlying budgetary position with which we end the current financial year
is itself not very satisfactory. This alone has required maximum restraint on both Plan
and non-Plan expenditure. At the same time, there are minimum claims of defence,
development and drought relief which we cannot disregard without peril. In distributing
the additional burdens, however, I have endeavoured to make the spread equitable
among the different sections of the community and to put the strain where it can best
be borne. I have also incorporated a number of reliefs and changes which are designed
considerably to simplify the tax structure and which, I hope, will provide a better
climate for orderly growth. Honourable Members would also appreciate, that, in
presenting my budget proposals, I have kept clearly in view the need to make the
economy stable. To this end, I would have liked to avoid deficit financing altogether
and to budget for some surplus. If I have left a deficit of Rs.25 crores, it is only
because of my firm belief that a greater degree of resource mobilisation would be self
defeating as it would come in the way of the buoyancy of production and revival of
confidence which are so urgently required. I cannot conclude my presentation of the
Budget without sharing with you, Sir, and the Honourable House a sentiment of
optimism in this that we are together and determined to change our fiscal climate for
the better. In whatever walk of life, in field or farm, factory or workshop, in offices or
Parliament, Sir, I earnestly invite every citizen of our country to share with us in this
House the task of building a more prosperous and happier India, truly free from fear
and from want.
(February 28, 1966)
18
 SPEECH OF SHRI T.T. KRISHNAMACHARI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1965-66

Sir,
I rise to present the Budget of the Government of India for the year 1965-66. On
this, the first occasion in independent India, when our beloved leader, Jawaharlal
Nehru, is absent from these proceedings, may I say that I miss him, as I am sure we
all do. Honourable Members would permit me, therefore, to begin by paying my
humble tribute to his sacred memory. For seventeen long years after independence,
Jawaharlal Nehru dominated the Indian scene, giving meaning and substance to our
aspirations as a nation. No aspect of our life, be it related to unity in the country, or
economic planning for a better future or the maintenance of peace and goodwill among
nations, escaped the mark of his unmistakable genius. Even such mundane matters as
the Budget and economic policy were raised to a lofty plane, where they became
instruments for advance towards a shining vision of economic independence, of
prosperity with social justice. It is now left to us, to my leader the Prime Minister, to
his colleagues in the Cabinet, as, indeed, to Honourable Members and to everyone
else in the country, to carry forward the legacy of Jawaharlal Nehru according to our
lights. And I can only hope that the Budget I am about to present will help to fulfil this
obligation in some small measure.
2. This year’s Budget has a unique significance in many ways. As the last
budget of the current Plan period, it marks the climax of our efforts for the fulfilment
of the Third Plan. It represents, at the same time, the setting of the stage for the more
complex and sophisticated and indeed, difficult tasks which await us in the coming
Plan period. Honourable Members are by now already familiar with our preliminary
thinking on the Fourth Plan. Apart from serving the ends of our plans for development,
budgetary policy must also make an impact on the immediate problems that confront
us from year to year. On particular aspects of the economic situation which have
caused us anxiety during the past year such as the rising prices, the difficulties in
raising adequate resources for investment and the sharp decline in our foreign exchange
reserves, I have made statements in the House from time to time. Like last year, the
Economic Survey has also been published a few days in advance of the Budget. My
task today is to that extent lightened. I shall, therefore, proceed to outline straightaway
the budgetary outcome for the current year as now estimated.
3. The Budget forecast an overall uncovered gap of Rs.97 crores. It now
looks as if the deficit will be somewhat smaller at about 80 crores. This has been
possible in spite of sizeable increases in expenditure in certain directions, both revenue

1
and capital. Thus, relief and rehabilitation of refugees has claimed Rs.12 crores more.
Increases of dearness allowance have raised expenditure this year by Rs.38 crores. On
the capital side, apart from larger provision for the purchase of fertilizers and for the
Food Corporation of India, there has been a sizable increase of Rs.85 crores in loans
to State Governments due mainly to larger ways and means advances, and increased
Central assistance for Plan schemes, particularly for agriculture, irrigation and power.
These additional outlays have been offset by reductions in expenditure under other
items and by improvement in revenue collections. The reduction in the capital outlay
of the Centre relates mainly to the steel plants, defence and net outlay on food purchases.
Details of variations in expenditure are given as usual in the Explanatory Memorandum.
4. Revenue collections are expected to show an improvement of Rs.49 crores
under Customs and Rs.66 crores under income and Corporation Taxes. Excise receipts
are expected to be about the same as budgeted. Together with a reduction in revenue
expenditure of Rs.42 crores spread over many heads, the revenue surplus is now
expected to be Rs.229 crores as against the Budget Estimate of Rs.83 crores.
5. Under capital receipts, collections under small savings have been
encouraging this year and are now estimated at Rs.135 crores as against the Budget
Estimate of Rs.125 crores. The Railway funds deposited with Government, however,
show a decline in relation to Budget Estimate and receipts from foreign loans are
likely to be lower by Rs.43 crores.
6. Honourable Members will see that despite substantial additional
requirements for various purposes I have just referred to, such as increase in dearness
allowance, refugee rehabilitation and assistance to the States, the overall deficit for
the current year will be somewhat less than originally forecast. In part, this reflects the
success of our efforts to bring about economics in expenditure after the presentation
of the last Budget. In an otherwise difficult situation, the reduction in the overall
deficit calls for some satisfaction. But with the continuance of inflationary pressures
in the economy, the need for restraint on wasteful or avoidable expenditure and for
efforts to get the maximum benefit from outlays already incurred remains as great as
ever. Only so can we reconcile our desire for rapid economic growth and the imperative
requirements of financial stability, both internal and external.
7. Honourable Members will have noticed also that the revenue surplus this
year will he even larger than last year. It is, however, the overall position, taking the
revenue and capital account together, which is really relevant for the health and stability
of the economy as a whole. In a growing economy, with progressive increase in Plan
outlays, the balancing of the capital budget cannot be done entirely by mobilisation of
voluntary savings and external assistance. These have to be supplemented increasingly
by public savings realised through a revenue surplus. The achievement of a sizable
revenue surplus this year is, therefore, a step in the right direction.
2
 8. Turning to developments in the economy, agricultural production recovered
somewhat during the 1963-64 season from the low level in the preceding year. During
the current year, there is every likelihood of total production of foodgrains and
commercial crops showing a further and substantial increase. Under normal
circumstances, the improvement in agricultural production should have led to a decline
in prices from the high levels already reached. The prevalence of inflationary pressures
at different levels in the economy and speculative withholding of supplies have,
however, prevented prices from falling to the extent that they should have. The fiscal
and monetary measures which we have taken and are now taking will, I hope, bring
about a fall in prices to the extent economically justified. We shall, however, take care
that the agencies we have created for the purchase of foodgrains will maintain prices
at levels remunerative to the farmer, so that he will have a continuing incentive for
producing more. These agencies will at the same time take advantage of the current
improvement in supplies to build up buffer stocks so that, in future, we shall be able
to deal better with any fluctuations in agricultural output.
9. Industrial production has been rising at the rate of 8 to 9 per cent per
annum for the last two years. Daring the first half of the current year, there were some
signs of a slackening in the pace of production. But industrial production is expected
to recover during the second half of the current fiscal year and the increase in production
for the year as a whole should be of the order of 8 per cent. Taken together with the
improvement in agricultural production, the growth rate of the economy in 1964-65
should be higher than in 1963-64 when national income in real terms is estimated to
have increased by about 4,15 per cent.
10. In a number of important industries such as steel, cement, aluminium,
cotton-spinning, etc. further increases in production would depend on the establishment
of new capacity. Programmes of expansion in the public sector in steel, machine-
building, fertilizer production, etc., are making progress, and these should result in
improvement in supplies over the next two or three years. Indian industry has now
reached a stage, when it can, and must, branch out into new and complex lines of
development. The expansion of capacity we need now, both in the public and the
private sector, has to take place not only in established industries but even more so in
new activities where requirements of capital and technical know-how are heavy. We
have taken several measures to encourage greater ploughing back of profits for
investment as well as to provide greater loan finance to private industry. It is equally
important to encourage a larger flow of individual savings so as to promote a greater
participation by individual citizens in the growth of industry. The new financial
institutions that we have created can assist in this process, by dissemination of
information and otherwise enable individuals to judge better the kind of industry that
they should invest in. But the primary objective must be to raise the capacity for
individual savings and to improve the performance of industry so that it is able to earn
and offer an attractive return on the capital invested.
3
 11. Efficiency in the running of enterprises, whether public or private depends
to a great extent on appropriate pricing policies. On the one hand, prices paid by
industry for scarce resources and materials it uses should reflect their true scarcity. At
the same time, the prices charged by enterprises for their products should provide
sufficient resources to industry for expansion without exploitation of the consumer.
We are attempting to evolve a price structure for agricultural commodities in keeping
with these general principles. In regard to industrial products also, we have endeavoured
to raise the cost of capital and of imports in keeping with the scarcity of savings and
foreign exchange in the economy, while permitting increases in the prices of final
products wherever necessary. Despite continuing difficulties in regard to raw materials
and the general upward pressure on prices the policy of decontrol initiated in 1963 has
been carried forward, particularly in respect of steel products. We have also raised the
prices to the extent necessary of a number of basic commodities, such as coal, from
time to time.
12. Improvement in productive efficiency and appropriate pricing policies are
as muchimportant for public sector enterprises as they are for private industry. In my
last Budget Speech 1 had drawn attention to the importance of a careful choice of
projects, after a detailed examination of costs and benefits. Careful selection of projects,
quick implementation, efficient working, appropriate pricing policies and adequate
returns on investments are all integral parts of the process of ensuring rapid growth.
It is in this sense that we have to devote increasing attention to planning in depth.
Maximising the fruits of past-investment offers the best scope for further advance.
Consolidation and expansion, a firm foot on the ground and sights set high, are not
thus conflicting but complementary objectives.
13. In the field of money and credit, it is a matter of some satisfaction that the
pace of monetary expansion which was very rapid in 1963-64 has slackened somewhat
during the current year. Expansion of bank credit to Government has been somewhat
less this year. I would like to draw the attention of Honourable Members to the fact
that over the past few years, a part of the market loans floated by Government has had
to be subscribed by the Reserve Bank. To this extent, a part of our long-term borrowing
represents deficit financing rather than mobilisation of the voluntary savings of the
people. This form of deficit financing must also be necessarily reduced, and indeed
eliminated, if we are to make a decisive impact on the forces of inflation in the
economy. For this reason, our borrowing programmes in future, both at the Centre and
the States, will have to be based on a strictly realistic assessment of the flow of
genuine savings. Greater efforts must be made at the same time to mobilise larger
amounts from the people by way of small savings and subscription to market securities.
Honourable Members are aware that we have taken steps to increase interest rates in
the economy to a significant extent over the past year. I propose to introduce a new
series of Small Savings Certificates with a higher rate of interest than at present.
Interest on the new certificates will be taxable, unlike in the case of existing instruments,
4
which also will be continued. The availability of yet another instrument at a higher,
though taxable, rate of return will, I am sure, provide a greater inducement for saving
to people of small and medium income, whose tax liability is also of a small or
medium order.
14. The expansion of bank credit to the private sector during the current busy
season has been somewhat smaller than in the corresponding months of the preceding
busy season. The current busy season, however, has several weeks to go yet. It is my
expectation that the measures that the Reserve Bank announced ten days ago will act
as a brake on the expansion of bank credit during the coming weeks. The contraction
in bank credit during the slack season this year will also have to be large enough to
ensure that the total increase in credit over the year is just sufficient to meet the
requirements of growing production. Monetary expansion during the Third Plan period
so far has kept ahead of the growth in real production. This situation cannot be allowed
to continue any further. In future, expansion of bank credit both to the public and the
private sector will have to be so limited that the increase C in money supply is no
more than what is warranted by realistic expectations regarding the growth of output.
15. The State Governments also have an important role to play in strengthening
fiscal and monetary discipline in the country. Some of the State Budgets for the coming
year which have been presented so far reveal deficits. I propose to have discussions
with State Governments to make sure that their operations are generally in line with
our policy of curbing inflationary pressures in the economy.
16. Honourable Members are aware that proper monetary management in the
country has been rendered difficult for some time by the existence of unaccounted
income and wealth in the country. This unaccounted income and wealth, which is
derived mainly from tax evasion and from violations of price control measures, has
been responsible to a considerable extent for speculative activity and for bidding up
the prices of goods and property in general. Apart from the measures we have already
taken including searches, stricter enforcement and more severe penalties, I propose to
take some additional measures to mitigate substantially the mischief of unaccounted
incomes and wealth already in existence and to reduce the scope and incentive for
their accumulation over the years to come. I propose also to take some measures to
discourage excessive investment in urban property, which comes in the way of adequate
resources being available for more productive purposes.
17. In my statement to the House on February 17,1 had dwelt at some length
on our extemely difficult foreign exchange position. I do not wish to repeat what I had
already said on that occasion. I would only underline the fact that our foreign exchange
reserves have been depleted to such an extent that we are unable at present to withstand
any small pressure on these reserves, without running into a critical situation. Some
strengthening of our foreign exchange reserves is, therefore, a matter of vital importance.
We have made considerable progress in reducing our reliance on imports in a number
5
of fields. Our export promotion during recent years is also a matter of some satisfaction.
Even so, given the necessity to strengthen the reserves and to meet the requirements
of imports in a growing economy, the need for vigorous export promotion remains as
great as ever.
18. We have been receiving sizeable assistance from friendly foreign
governments and international institutions. Honourable Members will, I am sure, join
me in expressing once again our gratitude to our friends abroad for giving us a helping
hand. The Aid-India Consortium organised by the World Bank pledged a further sum
of $1028 million last year in support of the Third Five Year Plan. A significant portion
of this assistance is not tied to specific projects but is intended for import of materials,
components and spares in general. This kind of assistance is of special importance to
us in the context of current balance of payments difficulties and I have every hope that
Consortium assistance during the coming year will include even larger sums for
purposes which give immediate relief to the balance of payments. Outside the
Consortium, we have received generous assistance from the United States for the
import of foodgrains and other agricultural commodities under the PL 480 programme.
Countries which are not members of the Consortium have also provided additional
assistance in 1964. More recently, we have concluded an agreement with the U. S. S.
R. for the Bokaro Steel Plant. I should not fail to mention also the gift of 150,000 tons
of wheat from Australia which was announced only a few days ago. This generous
and timely gesture is a matter of particular satisfaction to me as, I am sure, it augurs
well for increasing cooperation between our two Commonwealth countries.
19. Considerable progress has been made in the utilisation of external
assistance, which has now reached a rate, when it practically equals the commitment
of new assistance. Even so, a part of the assistance committed during the current Plan
period will necessarily be carried over into the Fourth Plan. We are currently reviewing
our foreign exchange requirements during the Fourth Plan period and we hope, during
the coming year itself, to initiate discussions with friendly foreign governments and
institutions to secure advance commitment for our requirements, to the maximum
extent possible. It is only on the basis of such advance planning for foreign aid that we
can be confident of beginning the Fourth Plan without any hiatus in the process of
growth.
20. In some measure, we have also been endeavouring to assist other
developing countries. Our aid to Nepal next year, for example, is estimated to be
Rs.8.5 crores. Assistance for Sikkim and Bhutan will be of the order of Rs.6.2 crores.
We have endeavoured also to facilitate joint ventures in a number of African countries
for the establishment of industries such as sugar, cotton, textiles, cement and vegetable
oil. During the next year, we propose to provide Rs.46 lakhs for technical assistance
to countries in South and South-East Asia and Africa and Rs.1.43 crores by way of
contribution to the United Nations Expanded Programme of Technical Assistance and
the United Nations Special Projects Fund.
6
 21. There has been a great deal of discussion in India in recent months about
the role of private foreign investment in our plans for development. We have recognised
for a long time that private foreign investment has a role to play not only as an
essential supplement to assistance from friendly foreign governments and international
institutions but also as a catalyst for the development of technical skills and enterprise
among our own people. For this reason, we have encouraged private foreign investment
in association both with the public and the private sector. All the incentives and facilities
that we have given to Indian enterprise for promoting investment are available equally
to private foreign enterprise; and we give every facility for repatriation of profits to
foreign investors. This policy of hospitable and fair treatment will be continued in
future; and our general policies, whether in regard to taxation, industrial licensing or
price controls, must be consistent with our desire to harness every possible source of
dynamism and enterprise, whether domestic or foreign, public or private, to the task
of rapid economic growth.
22. The Fourth Five Year Plan will involve large investments in the public
and the private sector. The first and foremost precondition for mobilisation of resources
for financing these investments is the maintenance of an environment of financial and
monetary stability. It is only then that voluntary savings could be encouraged and
directed to productive uses. Equally important is a degree of stability in our taxation
policies. It may be necessary to adjust the rates of indirect taxation from year to year
in keeping with supply and demand conditions. But a greater degree of stability in
regard to the structure of direct taxation is of vital importance as it has a bearing on
long-term decisions in regard to savings and investment. My budget proposals this
year have been designed to serve this end at least in part. I for one do not consider that
the scope for additional resource mobilisation is already exhausted. But there is no
reason why whatever framework we need for raising resources for the Fourth Plan
should not be erected in all its essentials before we embark on the implementation of
the Plan.
23. In the ultimate analysis, the resources available to the public sector and
to the private sector, the resources available by taxation, by mobilisation of savings
or by realisation of adequate profits, are all part of the same pool. We cannot hope
to tap one particular source without affecting other sources or divert more to one
particular channel without affecting what is left for other purposes. More production
and restraint on consumption, avoidance of waste and efficient use of scarce resources,
are the only ultimate instruments for promoting higher savings and investment.
Budgetary policy, therefore, is not simply or even primarily a matter of balancing
receipts and expenditures. It is no doubt of paramount importance to keep deficit
financing within safe limits and, indeed, to avoid it altogether. But the level at
which the budget is balanced and the manner in which this balance is secured are
even more relevant to the flow of savings and investments and to the performance
of the economy as a whole.
7
 24. The budget estimates for the next year to which 1 shall now turn have
been framed with these considerations in mind. The expenditure on revenue account
is estimated at Rs.2,116 crores, which is Rs.117 crores more than the revised estimate
for the current year. At existing rates of taxation, including the 10 per cent surcharge
on imports 1 announced ten days ago, the total revenue is expected to be Rs.2,353
crores. The revenue surplus will, therefore, be Rs.237 crores, i.e. Rs.8 crores more
than in the current year.
25. Of the total revenue expenditure of Rs.2,116 crores next year, Rs.749
crores will be for Defence Services. This is Rs.32 crore3 more than in the current
year. But actual rupee expenditure will not increase quite so much because purchases
of stores and aircraft, the full value of which is included in the expenditure estimate
are being made on deferred payment terms. Expenditure under civil heads is estimated
at Rs.1,367 crores, which is Rs.85 crores more than in the current year. If the amounts
transferred to the Special Development Fund in respect of PL480 grants are disregarded,
the actual increase in civil heads would, in fact, be greater. The major part of the
increase is explained by the additional provision of Rs.38 crores for debt servicing,
Rs.39 crores for grants-in-aid to States and Union Territories, Rs.9 crores for
Administrative Services, particularly under Police and Rs.20 crores for Social and
Developmental Services.
26. The revenue next year is expected to increase by Rs.125 crores. Here
again, if PL 480 grants, which are of a self-balancing nature are left out, the actual
increase would be greater. As usual, the principal heads of revenue account for most
of the increase; Rs.70 crores under income and Corporation Tax, Rs.54 crores under
Union Excise Duties and Rs.20 crores under Customs. In addition, interest receipts
from State Governments and public sector enterprises and surplus profits of the Reserve
Bank will show an improvement of Rs.39 crores.
27. The provision for capital outlay, including all loans except those to the
State Governments and Union Territories, is estimated at Rs.1,114 crores, representing
an increase of Rs.104 crores over the current year. This is accounted for mainly by
larger provision of Rs.24 crores for roads, Rs.23 crores for food purchases, Rs.15
crores for Atomic Energy, Rs.12 crores for Defence and Rs.16 crores for the industrial
Development Bank. Loans to State Governments and Union Territories are estimated
at Rs.712 crores, practically at the level of the current year. Loans for Plan assistance,
however, will be Rs.28 crores more, and ways and means loans correspondingly less.
28. The total Plan outlay of the Central and the States next year will be Rs.2,225
crores, Rs.241 crores more than the current year’s budgeted Plan outlay of Rs.1,984
crores. The State Plans will account for an outlay of Rs.1,027 crores and the Central
plan for Rs.1,198 crores. Of the total States’ outlay, Rs.650 crores will be financed by
Central assistance and Rs.377 crores from the resources of the States themselves. The
Centre’s Plan, it may be noted, will be financed partly by Rs.160 crores of contribution
8
from the internal resources of Railways, Posts and Telegraphs Department, Hindustan
Steel and other public sector enterprises. To this extent, therefore, a provision in the
estimates of the Central Government is not necessary. For the balance of Rs.1,688
crores, inclusive of Rs.300 crores on revenue account and assistance to States, provision
has been made in the Budget. Honourable Members will be glad to note that the
contribution of Rs.160 crores from the Railways, Posts and Telegraphs and public
sector enterprises will be Rs.45 crores higher than in the current year. With more
public sector enterprises coming into production and beginning to yield surpluses,
they should be able to contribute increasingly to the growth of the economy without
putting an additional strain on the budget.
29. I have referred earlier to the need for keeping public borrowing within the
limits set by a realistic expectation of the flow of genuine savings. In keeping with
this principle, I have provided for public borrowing at Rs.27 0 crores next year as
against Rs.293 crores in the current year. For the same reason, receipts from small
savings have been assumed at the level of the current year, namely Rs.135 crores.
Receipts from foreign loans will however be higher and are estimated at Rs.669 crores.
30. To sum up the overall position for next year, there will be surplus of
revenue account of Rs.237 crores at existing rates of taxation. The total disbursement
on capital account of Rs.2,094 crores, inclusive of debt repayment of Rs.267 crores,
will be met apart from the revenue surplus, by internal and external borrowings of
Rs.939 crores, collections under small savings of Rs.135 crores, repayment of loans
of Rs.334 crores. Investment of PL480 funds of Rs.191 crores, annuity deposits of
Rs.65 crores, and receipts under miscellaneous debt and deposit heads of Rs.203
crores. In the aggregate, Honourable Members would be happy to know that for the
first time in many years, the Budget for next year, at existing rates of taxation, is
expected to show a small overall surplus of Rs.10 crores.
31. Honourable Members might well ask why, after having announced a small
surplus for the next year, I should not let the Budget well alone and resume my seat.
It is, however, necessary, particularly on the eve of the Fourth Plan, to take a good
look at our tax structure as a whole and to make adjustments or changes to give
desirable effects. And it is to this task that 1 propose to address myself in the proposals
I am about to make.
INDIRECT TAXATION
32. Indirect taxation has two essential objectives: to raise revenues for the
State and to serve as an instrument of price policy. Those indirect taxes which are
designed primarily to raise revenue have to be adjusted not only in the light of
revenue needs but also in the light of their Impact on the budgets, of individual
citizens. I feel that in our present circumstances where high prices have put a strain
on a section of our people, a measure of relief is called for in those areas where the
supply position is such that one may reasonably expect the relief to be passed on to
9
the consumer. Clearly, given the needs of the State, relief in indirect taxation cannot
be extensive. Nor can indirect taxes be reduced in those areas where restraint on
consumption is essential from the point of view of economy in imports or releasing
larger supplies for exports.
33. In a growing economy with shortages at various levels, there is also a
tendency for the price structure to be distorted. It is common knowledge that excessive
profits are being made in the sale of products based on scarce materials whether
Imported or indigenous., and I propose to make selective increases in both import and
excise duties to mop up these surplus profits. We have today arrangements for the
distribution of scarce materials among priority users. We propose to strengthen these
arrangements. It has to be recognised at the same time that control over distribution
cannot always be carried to the point where the requirements of all end-users are met
through a central agency. Nor is there any reason to eschew the price mechanism to
the extent that It can be used to supplement distribution arrangements. What I have
essentially sought to do therefore is to increase indirect taxation in those areas where
it might correct existing distortions in the price structure and mop up some surplus
profits and to use the additional revenue from these measures for providing relief to
the consumer to the extent possible.
34. My proposals for concessions in regard to indirect taxation ^ relate to
excise duties only. I propose to remove the excise duty on footwear, cycle parts, cycle
tyres and tubes, printing and writing paper used in the publication of registered dailies
including their weekly issues. The effective rates of fabric duty on price-controlled
varieties of grey as well as processed coarse and medium cotton cloth are proposed to
be reduced by 50 per cent, ‘ duty on vegetable product by about 50 per cent and on
cheaper type of printing and writing paper and certain other qualities of typing and
manifold paper by 30 per cent. I also propose on other grounds to reduce the duty on
rayon yarn of coarser and industrial deniers, on cellulosic staple fibre and, marginally,
on staple fibre yarn. Duties on a few other items such as silk fabrics, gramphones,
cigars and silver are also proposed to be removed on grounds of insignificant revenue.
These reductions will mean a loss of revenue of Rs.29.5 crores in 1965-66.
35. I have made these reductions in duty on articles of common consumption
as I expect them to be passed on to the consumer. If this expectation is not realised, it
will become necessary to reimpose the duties in the course of the year. That is why the
proposed reductions are being made not by reducing the statutory rates of duty but by
issuing notifications under-powers already vesting in Government.
36. In selecting the Items for concessions in excise duty, I have given careful
consideration to the reduction of duty on kerosene. I have, however, come to the
conclusion that we cannot afford to give relief in duty on kerosene which is an important
item of import. Quite apart from this, even at present the duty on kerosene is low
enough to encourage its use by lorries and for other non-domestic purposes and there
is little to be gained by encouraging further diversion of kerosene to those users.
10
 37. I am also taking the opportunity of making certain technical adjustments
in excise duties mainly in respect of cigarettes and tyres. On the present pattern of
production, these modifications will increase revenue by Rs.40 lakhs in the case of
cigarettes and Rs.35 lakhs in the case of tyres. I am sure, It will be possible for the
industries concerned to absorb these small technical increases without any overall
effect on prices. I have proposed a few other minor changes in the description of
goods subject to duty and in the quantum of exemptions. These changes have no
significant revenue implications.
38. The profit margins on the distribution of a number of scarce materials
and on the sale of their products are high and I intend to mop up a part of the present
margin of profits on these Items by increases in excise duties. I propose to raise the
excise duty on copper and copper alloys in crude form from Rs.300 to Rs.1000 per
tonne and on circle and sheets etc., from Rs.509 to Rs.1,500 per tonne. I propose to
raise the duty on steel ingots, plates and rails and sleeper bars by Rs.10 per tonne,
on semi-finished products and bars, rods and structurals by Rs.15 per tonne, on
black sheets and hoops by Rs.40 per tonne, on skelp by Rs.50 per tonne, on strips by
Rs.90 per tonne and on galvanised plates and sheets by Rs.100 per tonne. It is also
proposed to raise the effective duty on tin plates and tinned sheets from Rs.165 to
Rs.225 per tonne. The increase of duty on this group will yield an additional revenue
of Rs.15.75 crores.
39. I also propose to further simplify the existing scheme of compounded
levy prescribed for the smaller powerloom units producing cotton fabrics. The total
exemption now enjoyed by a large number of units having less than five looms each
is being replaced by a small compounded levy of Rs.25 per annum per loom. The anti-
fragmentation provision is also being rephrased.
40. The net loss of revenue as a result of all the changes in excise duties will
be Rs.13 crores in 1965-66.
41. The revenue from Union Excise Duties has increased steadily from Rs.145
crores in 1955-56 to about Rs.773 crores in 1964-65. It is a matter of some satisfaction
that, for the first time in many years, we are able to give a measure of relief to the
consumer without any significant sacrifice of revenue in the aggregate.
42. Ten days back, I had announced the imposition of a regulatory Customs
Duty at 10 per cent of the value of Imported goods. This duty must continue in the
present circumstances. In addition, It is necessary to increase the present rates of duty
in some cases where there is a very large gap between the landed prices and the
current market prices. I propose, therefore, to increase the import duty on stainless
steel plates and sheets from 30 per cent to 100 per cent ad valorem and the duty on
steel tin plates from Rs.100 per tonne plus 5 per cent to Rs.325 per tonne, continuing
the present preference of Rs.20 per tonne where It is applicable. It is also proposed to
11
raise the duty on non-cellulosic art silk yarn and thread from Rs.7.5 per kilogram or
55 per cent whichever is higher to Rs.10.25 per kilogram or 75 per cent whichever is
higher. I propose to raise the duty on paints, colours and painters’ materials not otherwise
specified from 60 per cent to 75 per cent, on sodium hydrosulphite from 40 per cent
to 100 per cent, on essential oils and perfumery not otherwise specified from 75 per
cent to 100 per cent and on paper not otherwise specified but excluding newsprint and
printing and writing paper from 50 per cent to 75 per cent. I also propose to increase
the statutory import duty on raw cotton to 50 paise per kilogram in order to be able to
increase the effective duty in the course of the year, if this becomes necessary. The
increases in import duties along with the surcharge on them will yield a revenue of
Rs.6.5 crores in 1965-66. In addition, there will be increase in revenue of Rs.8 crores
as a result of the countervailing duty on steel tin plates, iron and steel products and
copper. The total additional revenue from Customs will be Rs.14.5 crores.
43. The changes in indirect taxes will have immediate effect under the
Provisional Collection of Taxes Act. The net effect including Customs and Excise,
will be a small increase in revenue of Rs.1.5 crores in 1965-66.
EXPORT PROMOTION
44. Honourable Members are aware that we have at present a number of
provisions for giving fiscal relief for the promotion of exports. Relief from the incidence
of Customs and excise duties is being given by way of drawbacks. In view of the
difficulties experienced by nascent export industries in a growing economy such as
ours which is afflicted by shortages at various levels leading to higher cost of production,
we also give a measure of relief to these industries in regard to railway freights and
taxation of profits.
45. While these measures to counteract the disabilities of our export industries
have had a degree of success in promoting higher exports, there are still other imposts
on raw materials and components that go into the end-product that is exported which
makes it necessary to provide some more, assistance to export industries on a
discriminating basis. For one thing, there are a variety of taxes levied in India today
such as the sales tax and octroi in respect of which relief from taxation on exports is
not available at present. It is difficult to refund the fractional parts of Import Duties
and Excise Duties on raw materials, components and intermediate products which
enter into the production of export commodities. In general, It is necessary to mitigate
the disadvantages of new export industries which have yet to achieve their full
competitive position in the world markets. I propose, therefore, to take powers to
issue tax credit certificates to exporters up to 15 per cent of the value of such exports.
The exact quantum of assistance will vary from commodity to commodity and will be
determined after a careful examination. The tax credit certificates could be used for
payment of taxes or refunded in cash to the extent that their value exceeds tax liability.

12
 46. Honourable Members are aware that the case for protecting the infant
industries of developing countries from competition from abroad by levying protective
import duties has been recognised by expert opinion as well as by international agencies
for a long time. The case for subsidising nascent exports from developing countries is
equally strong and is indeed based on the same considerations. This point of view is
already gaining acceptance among economic experts as well as among international
institutions. I think it is only appropriate, therefore, that we should arm ourselves with
powers to give direct financial assistance related to export earnings so that our export
promotion efforts could become more effective as well as efficient.
CORPORATE TAXATION
47. Honourable Members are aware that the structure of our corporate taxation
has undergone many changes during the past two years. These were necessitated
primarily by the paramount need of raising resources. In my last Budget I had introduced
several changes to reduce the severity of our corporate taxation. I am well aware that
the feeling still persists that corporate taxation in India is high and that some of its
features inhibit the progress of the corporate sector. I have carefully examined the
incidence of the different taxes which are now on the statute book and I have come to
the conclusion that there is need for some modification of the present structure of
corporate taxation without altering its essential features which are sound. The dividend
tax, for example, has come in for a great deal of criticism. Experience so far has
shown that it has not materially affected the distribution pattern of dividends. I cannot
help feeling, however, that in the present context, when we have to do everything
possible to combat inflationary pressures in the economy and to generate sufficient
resources for investment in the corporate sector, there is continuing need for a degree
of restraint on dividend distribution. Similarly, we have not yet had time enough to
assess the full effects of the surtax and there is, therefore, little reason for making any
material change in this particular aspect of corporate taxation also. However, I have
decided to make a number of changes in the general scheme of corporate taxes which,
I hope, will meet at least a part of the difficulties of the corporate sector.
48. Industries producing articles mentioned in Part IV of the First Schedule to
the Finance Act, 1964, are entitled to certain tax benefits. I propose to enlarge that list
by the addition of lime stone, flame and drip proof motors, malleable iron and steel
castings, calcium ammonium nitrate and ships.
49. I had announced last year that Section 104 companies wholly or mainly
engaged in the manufacture or processing of goods or in mining or in the generation
or distribution of electricity or any other form of power whose whole income did not
exceed Rs.5 lakhs will be liable to tax at 50 per cent on the first Rs.2 lakhs of income.
I propose now to enlarge this concession. All such companies except foreign
companies-will under my proposal be liable to tax at 50 per cent on the first Rs.10
lakhs of their income irrespective of the total size of their income. Under Section 104,

13
for certain types of companies, the penalty rate of taxation for non-distribution of
profits at present is 37 per cent. I propose to reduce this rate to 25 per cent for
companies other than trading companies. In the case of manufacturing companies, we
have given certain concessions to enable them to build up adequate reserves. For
non-trading companies, e.g., companies part of whose business is in the manufacturing
field, companies providing various services and companies engaged in constructional
activities, I propose to provide that the higher statutory percentage of 90 per cent for
compulsory distribution of profits will be attracted only if the accumulated profits and
reserves exceed twice the amount of their paid up capital and loan capital, or the value
of their fixed assets. At present, where in a public company 51 per cent or more of the
shares are held by another company in which the public are substantially interested or
by a 100 per cent subsidiary of such a company, the first mentioned company does not
qualify for being regarded as a company in which the public are substantially interested.
It is proposed to change this position and to treat such a company as one in which the
public are substantially interested.
51. Overcrowding has become a serious problem in many of our major cities.
Some incentive is, therefore, required to induce big factories to shift from such cities.
I propose, therefore, in the case of public companies to refund the tax on any capital
gains made on the sale of land and buildings in these cities to the extent that the
capital gains are re-invested with prior approval of Government in land and buildings
including housing for the employees in a new area.
51. I had stated last year that I propose to revise the rate of development
rebate under Section 33 of the income Tax Act. Honourable Members will recall that
the general rate of development rebate now is 20 per cent. It has been suggested that
the development rebate should be applied in a selective manner and we have already
sought to do so to some extent in the case of coal mining machinery and for ships. I
propose now to reduce the standard rate of development rebate to 15 per cent except
in the case of industries included in a new Fifth Schedule to the income Tax Act.
Industries included in this Schedule will be entitled to claim a development rebate of
25 per cent. The rebate for coal mining machinery and for ships will continue at the
rate of 35 per cent and 40 per cent respectively. The undertakings for which the
development rebate is now being reduced will, however, continue to enjoy the existing
benefit of 20 per cent up to 31st March 1967.
52. Often it is said that the total incidence of income-tax and surtax on
companies reaches very high levels having the effect of inhibiting investment. I do not
think that It is so, but to allay any mis-givings on this score, I propose to provide a
ceiling limit to the income-tax excluding the tax relating to bonus issues, but including
the tax charged with reference to distribution of equity dividends, and surtax at 79 per
cent of the total income of companies. Any excess of the aggregate tax liability in
respect of these taxes over this limit will be allowed as a deduction from the surtax
14
otherwise chargeable from the company. This provision will apply to Indian companies
and any other company declaring its dividends within India in which the public are
substantially interested.
53. The various changes in taxation affecting the corporate sector that 1 have
outlined should go some way in meeting the genuine difficulties of this sector. I also
propose to take some additional powers to stimulate production and to provide resources
for the expansion of industry. Given the needs of the State, I cannot do so by giving
up existing sources of revenue. A part of the Improvement in revenues, however,
could well be utilized for meeting the requirements of industrial expansion and for
providing a stimulus to greater production from existing investments. I propose,
therefore, to take powers to provide that tax credit certificates to the extent of 25 per
cent of the Central Excise Duty paid by any manufacturing unit on production in
addition to its production in the base year may be issued to the unit. Similarly, I
propose to take powers to provide for issuing tax credit certificates for 20 per cent of
the additional Corporation Tax including surtax paid by any manufacturing company
over the corresponding tax paid during the base year. This would be further subject to
the limit of 10 per cent of the overall tax for the year concerned. These certificates are
meant to be used for purposes relevant to the expansion of the industry namely
redemption of debentures or repayment of loan from approved institutions.
54. The Government had recently set up a Tea Finance Committee and that
Committee had made certain recommendations for relief in direct tax for tea companies.
I propose to accept these recommendations in a modified form and the necessary
provisions have been included in the Finance Bill
55. I also propose to allow in the case of companies a deduction for expenditure
incurred by them for payment towards family planning amongst their employees. Where
such expenditure is of a capital nature, It will be allowed as a deduction over a period
of five years.
PERSONAL TAXATION
56. I now come to my proposals for personal taxation. Honourable Members
would recall that earlier in my speech I had referred to the need for curbing excessive
investment in urban property which has been rising rapidly in value due to a variety
of reasons. Without such a curb, investment in more productive directions cannot be
encouraged. There has also been a demand that there should be some ceiling on vast
accumulations of urban property. I have considered this problem from various angles
and have come to the conclusion that the best way of dealing with it through a fiscal
measure is by way of an additional wealth tax on such properties. The tax will apply
to urban property in towns with a population of one lakh or more. In view of differences
in urban property values in towns of different sizes, I have decided to provide for
different exemption limits according as the population of the town is between 1 lakh
and 4 lakhs, 4 lakhs and 8 lakhs, 8 lakhs and 16 lakhs and over 16 lakhs. The exemption
15
would vary from Rs.2 lakhs in the smallest of these ranges to Rs.5 lakhs in the highest
of these ranges. Honourable Members will see that the classification of towns that I
have adopted for this purpose is the same as is already available for purposes of
granting compensatory and other allowances to Central Government employees. Urban
properties in excess of these exemption limits will under my proposal, bear an additional
wealth tax at progressive rates rising from one per cent to four per cent on successive
slabs of the total market value of such property. It is not possible for me now to
estimate precisely the revenue from this source, but as at present I would put down the
additional revenue expected at Rs.1.5 crores in 1965-66. I would like to emphasise,
however, that the purpose of this levy is as much to raise revenue as also to achieve
wider social purposes. It may be that as a result of this measure, property owners may
transfer properties to corporate bodies which are not now liable to the wealth tax or
property owning companies may come up. If this tendency develops, Government will
deal with it at the appropriate time.
57. I propose now to restore the exemption from wealth tax for five years for
equity investment in new industrial companies. This concession will apply in respect
of companies issuing capital for the first time after the 28th February 1965. The
companies issuing bonus shares pay a tax of 121/2 per cent on the face value of these
shares. It stands to reason that if a person pays capital gains tax on bonus shares
issued to him some part of the tax paid by the company on the same issue should go
to mitigate his liability for capital gains tax. I propose, therefore, to allow a rebate of
10 per cent of the face value of bonus shares from the capital gains tax on such shares
but limited to the amount of such tax.
58. In the region of personal taxation of incomes, the first need is for
simplification of the tax structure. For one thing, the distinction between income-tax
and super-tax is something of an anachronism and the manner in which we allow for
various deductions as at present is also not conducive to either simplicity or
comprehension of net incidence. I have endeavoured to simplify the whole tax structure
by integrating super-tax with income-tax and in other ways. This simplification will
cost something to exchequer for a little while. But it will improve tax administration
and help to modify the attitude of the ordinary citizen towards the tax liability.
59. Basically, I wish to provide for a system in which the present free allowance
for purposes of income-tax will be discontinued, thus eliminating inter alia the element
of acute discrimination against unmarried women and bachelors. Incomes in future
will be chargeable to tax, subject to relief on account of personal allowance for every
individual of Rs.2000 with an additional allowance of Rs.1500 for a married individual
and Rs.400 for each dependent child up to a maximum of two children. For a married
individual with two dependent children no tax will thus be payable up to an income of
Rs.4300 as against Rs.4000 as at present. The relief byway of personal allowances
will, at the new rate, amount to the same absolute sum of Rs.215 as a maximum for
all assessees. The simplification will entail a loss of revenue of Rs.3.64 crores.
16
 60. Another change in the direction of simplification that I wish to make
relates to deductions in respect of contributions to provident fund, insurance premium
and Cumulative Time Deposit Scheme. Apart from raising the money limit for
concession relating to these items from Rs.10,000 to Rs.12,500 for individuals, it is
proposed to give the concession by a straight deduction from income of 50 per cent of
the amount contributed to the items eligible for the relief. This measure, I am sure,
will facilitate the calculation of tax liability by each individual. I am also introducing
a new provision for exempting from tax income up to Rs.2,400 on account of
institutional bare of handicapped dependents. In the case of non-institutional care the
limit will be Rs.600. Honourable Members would agree with me that a measure of
relief in this respect is justified on social grounds.
61. While streamlining the tax structure and replacing the present taxes by
a revised and unified schedule, I have lowered taxes at all levels of personal incomes.
In the new schedule, the highest marginal rate of taxation on earned incomes which
will be reached at over Rs.70,000 will be 65 per cent. At the same time, the surcharge
on earned income has also been regraded at 5 per cent for incomes between Rs.1
and Rs.2 lakhs, 10 per cent for incomes between Rs.2 and Rs.3 lakhs and 15 per
cent for incomes above Rs.3 lakhs. In our scheme of taxation, we have come to
regard an income of Rs.15,000 as the dividing line for various purposes. The Annuity
Deposit Scheme, for example, does not apply to incomes upto Rs.15,000. I have
also decided that the same limit should be considered as the free limit for purposes
of the unearned income-tax surcharge. The present limit for this purpose is proposed,
therefore, to be raised from Rs.10,000 to Rs.15,000. With the base for unearned
income-tax surcharge being lowered by this measure as well as by the reduction in
tax rates in general, there is a case for increasing the surcharge on unearned incomes.
Accordingly, I propose to levy a surcharge on the tax at the rate of 20 per cent on
unearned incomes between Rs.15,000 and Rs.50,000 and at the rate of 25 per cent
on such incomes above Rs.50,000.
62. The Finance Bill looks very bulky as it contains a number of amendments
to the Income Tax Act, 1961. This has in the main become necessary in order to give
effect to this scheme of simplification of the tax structure. These amendments are,
however, of a permanent nature and will not have to be repeated in future Finance
Bills.
63. As I have just said the changes proposed will mean a reduction in tax at
all levels of personal income. The highest marginal rate on unearned income will go
down from 88.125 per cent to 81.25 per cent and that on earned income from 82.5 per
cent to 74.75 per cent i.e. the peak taxation will be reached in respect of income above
Rs.3 lakhs of earned income and above Rs.70,000 of unearned income. For a married
individual with two dependent children, the tax an earned income of Rs.5,000 will go
down from Rs.60 to Rs.35, at Rs.10,000, from Rs.685 to Rs.535 at Rs.20,000 from
17
Rs.2,360 to Rs.2,085, at Rs.40,000 from Rs.10340 to Rs.9,285, at Rs.70,000 from
Rs.26,590 to Rs.23,585 and at Rs.1 lakh from Rs.44,615 to Rs.39,160. This has been
worked out after taking into account tax benefit on the relative Annuity Deposit.
Despite these reductions, our tax rates will still be higher than in countries like the
United Kingdom and the United States of America at corresponding levels of income.
I make, however, no apology for not reducing personal income taxation in India to the
levels prevailing in other countries. For one thing, the same level of income in India
and United States of America does not imply the same level of absolute well being.
Much less does it imply the same relative position in society as a whole. For a country
like India, an income of Rs.1 or Rs.2 lakhs, represents economic power which is much
greater than that enjoyed by people of the same income in more fortunate lands.
64. The loss of revenue as a result of the reduction in tax rates and the changes
in surcharges will be of the order of Rs.20.69 crores in a full year. During 1965-66,
there will be an additional loss of Rs.15 crores on all types of direct taxation in
respect of advance collection of taxes. I have, however, every hope that apart from
giving a measure of relief to people in the lower and middle income groups the changes
I have made will stimulate a greater flow of personal savings and reduce the scope and
incentive for tax evasion.
65. Apart from the major changes I have described earlier, I propose to make
some other changes in the income-tax provisions. I had announced on the 24th
December, 1964 my intention of giving tax credit certificates to individual investors
in equity issues of new industrial undertakings, of exempting interest income from
funds brought to India and invested in banks in non-resident accounts and exemption
of interest on Government securities from the unearned income surcharge. Provision
has been made in the Finance Bill to give effect to these changes. It is also proposed
to extend the rebate on donations to amounts given for renovation of places of public
worship, approved in this behalf and also to exempt such gifts from gift tax. The
annuity received in respect of the Annuity Deposit Scheme is proposed to be treated
as earned income.
66. The present tax concession in favour of foreign technicians whose contracts
have been approved by Government is for a period of three years with a grace period
of two years where the employer pays the tax. For certain industries and sophisticated
processes, the services of such technicians have to be retained for a longer period. It
is, therefore, proposed that the second period of two years can be extended by a
further period of three years with the approval of Government. During the extended
period also the tax may be paid by the employer without attracting tax on tax.
67. Representations have been received from professional persons like
Chartered Accountants, Architects and Solicitors for tax relief to enable them to
make some provision for a superannuation scheme. Recognising the need for this, I
propose to give tax relief to partners of firms engage d in the profession of Chartered
18
Accountants, Architects, Solicitors and Lawyers on amounts spent for the purchase
of life annuities, commencing at an advanced age, under an approved annuity scheme
or sum contributed by them to an approved fund for providing retirement benefits.
This relief will be in the form of a straight deduction of such payments from their
total income subject to a limit of 10 per cent of the total income or Rs.5,000 whichever
is lower.
68. In order to provide a disincentive for repatriation of funds by foreign
investors who sell out their interest in industrial holdings, it is proposed that when
such persons reinvest the sale proceeds in approved industrial securities, rebate of
capital gains tax, if any, due on the original investment will be allowed in proportion
to the amount reinvested.
69. A change is being introduced in the basis of charging taxes on non-resident
assessees as well as resident assessees who are not ordinarily resident. In order to
remove some of the present complications and reduce the rigour of the tax burden,
these assessees will be charged to tax from the assessment year 1965-66 on their
income assessable in India at the rates applicable to residents but without deduction of
personal allowances for non-residents. The concept of world income is being dropped
in their case. The loss of revenue in this case is not material.
70. So far as Estate Duty and Gift-tax are concerned, I propose to enlarge
some of the existing concessions and also to amend certain provisions where I find
that their interpretation has been causing undue hardship to assessees. For example,
when a person gifts any property during his life time, the property will be liable for
inclusion in the estate on his death under certain circumstances, namely, if he dies
within two years after making the gift or if he has possession or enjoyment of the
property or any benefit out of it during the two years immediately preceding his death.
This requires to be remedied in the light of our present rates of Gift Tax and Estate
Duty. I, therefore, propose to reduce the period of two years to one year and further to
provide that where Gift Tax has been paid at the enhanced rates of Gift Tax in force
from 1964-65 on any gift of property to the wife, son or other close relative, there will
be a total exclusion of such property from the estate of the donor if he dies after five
years from the date of gift. I also propose to make a provision that if the donor stays
in a house which he has gifted to his wife, son or other close relative and there is no
right of residence or any benefit reserved to him under the deed of gift, or under any
collateral disposition, the property will not be included in the estate if the donor dies
after one year from the date of gift. Again, when a pension is given to the family of a
deceased employee by Government or by some other body or out of a superannuation
fund created by an employer and approved under the income-tax Act or out of a
similar fund maintained by any of the international agencies, the capitalised value of
the pension attracts Estate Duty. It is considered necessary to rectify the hardship
arising in such cases by exempting such pension from Estate Duty. The loss of revenue

19
as a result of these measures will be nominal. Further, I propose to make a provision
for the allowance of stamp duty paid on an instrument of gift as a deduction from the
Gift Tax subject to certain limits and conditions.
71. I now come to my proposals in regard to unaccounted incomes and wealth
which, as I have already mentioned, are a source of considerable mischief in the
economy. The question of how to mitigate this evil is a baffling and difficult one. We
have already taken a number of measures, apart from intensification of searches and
the like, to encourage voluntary disclosures. Amounts so disclosed are being exempted
from penalty. These measures have had some success in encouraging voluntary
disclosures particularly from people who have comparatively small and medium
incomes to disclose. Various suggestions have been made from time to time to encourage
disclosures on a larger scale and to give an opportunity to those who wish to turn a
new leaf to do so without undue harassment. I have every hope that with the reduction
in tax rates that I have already proposed the scope and incentive for tax evasion in
future would be reduced. The present time therefore, offers a good opportunity to
enable people who have evaded tax in the past to come out and make a clean breast of
it. I recognise that it is not at all an easy matter to devise a solution which would at the
same time be fair to people who have paid taxes honestly in the past and reasonable
enough to encourage voluntary disclosures on an adequate scale on the part of those
who wish now to be relieved of their past evasion. I have attempted to devise a
solution bearing in mind all the complex economic, social and moral considerations
that underlie the phenomenon of unaccounted income and wealth. I can only hope that
honest tax-payers will not be aggrieved by what I propose to do and that those who
have been misled in the past would find in it reason enough to return to the path of
civic responsibility.
72. My proposal in brief is this. Those persons who have undisclosed income
to declare can make a declaration with relevant particulars and at the same time deposit
in cash at the Reserve Bank of India sixty per cent of the income declared. The
remaining 40 per cent of the income so declared can be taken to the assessee’s books
under intimation to income tax authorities. No further question of assessment in regard
to the income so disclosed by this process will arise and the identity of the persons
will not be revealed. This offer will be open only for three months from now, till the
end of May. In order to induce people to come out quickly a rebate of 5 per cent of the
tax on all incomes declared and tax paid thereon in the month of March will be given.
In other words, in such cases the effective tax rate will be 57 per cent. Those who feel
that their tax liability in respect of amounts to be disclosed would be less than 57 or
60 per cent would be free to resort to normal disclosure and have the income so
disclosed taxed at the appropriate rates by income tax authorities after proper
assessment. Appropriate provisions are being made in the Finance Bill to give effect
to the scheme I have just outlined. I need hardly add that we propose to continue
with-our searches. It is incumbent upon the Government to use all the legal weapons
20
at its command to deal with those who spurn this particular opportunity of making
voluntary disclosures.
73. I also propose simultaneously to float once again the Gold Bonds. On the
last occasion when we issued such a bond, the response did not come up to our
expectations. The new bonds will be issued on exactly the same terms as the old
bonds except in one respect. In view of the increase in interest rates since the last
issue was made the new bonds will carry interest at 7 per cent per annum. Those who
subscribed to the first series of Gold Bonds and thus cooperated with the Government
at a time of national crisis will also be given the benefit of this higher rate of interest
for the remaining years of the currency of the bonds held by them. Any of the old
bonds submitted to the Reserve Bank and bearing the Bank’s imprimatur will bear
interest at the new rate after 1st April, 1965. I would like to add that this concession
is not to be taken as one that would be ordinarily extended to all similar cases. I would
appeal to everyone who holds gold, either under declaration or otherwise, to subscribe
to the new bonds to the maximum possible extent. The New Gold Bond will be in the
market for a period of three months, i.e. till the end of May, 1965.
SUMMING UP
74. I may now sum up the total effect of the changes that 1 have proposed.
The overall surplus at existing rates of taxation of Rs.10 crores will be augmented to
the extent of Rs.1.5 crores as a net result of changes in indirect taxation. The loss in
revenue of Rs.29.5 crores as a result of reduction in excise duties on a number of
items of daily consumption will be offset by revenue from technical adjustments in
respect of cigarettes and tyres of Rs.75 lakhs, yield of additional excise on copper
steel products and tin plates etc. of Rs.15.75 crores, and increase in Customs Duties
of Rs.14.5 crores.
75. Among direct taxes, the loss of revenue on account of the introduction of
personal allowances will be R s.3.64 crores and on account of adjustments in rates
Rs.2 0 crores making a total of about Rs.23.64 crores. Modifications in surcharges on
earned and unearned income will involve a loss of revenue of Rs.69 lakhs. The
concessions to Section 104 companies will cost to the exchequer Rs.2.73 crores. Other
miscellaneous concessions amount to Rs.2.34 crores. In addition, there will be a loss
of another Rs.15 crores in 1965-66 in view of the fact that all the new rates in this year
will apply both in respect of income taxable during the year and income on which tax
might be paid in advance. The wealth tax on urban property will yield a revenue of
Rs.1.5 crores. Thus, as a result of all the changes in direct taxation, including changes
in corporate taxation, the total loss to revenue in 1965-66 will be Rs.42.90 crores.
76. The estimated income under direct taxation from all sources for the year
1965-66 has been put at Rs.704.05 crores. Out of this Rs.42.90 crores will have to be
deducted as a loss because of the concessions mentioned earlier. However, because of
the perceptible lowering in personal taxation and improvement in tax collection, I
21
shall take a credit of Rs.30 crores making the total estimate of income from direct
taxation from all sources at Rs.691.15 crores. This leaves a deficit of Rs.12.90 crores
in direct taxation as against the budgeted figure. As against this, there is a surplus of
Rs.1.5 crores in indirect taxes. Taking this into account and the effect of the States’
share in excise duties, there will be a loss of revenue of Rs.6.38 crores, which together
with the overall surplus at the existing levels of taxation will give a net surplus of
Rs.3.78 crores,
77. I have taken no credit for receipts under the voluntary disclosure scheme.
Indeed, it is my hope that the entire loss in respect of direct taxation will be more than
made up during the year not only by improvement in tax collection resulting from the
changes made, but also because of receipts under the voluntary disclosure scheme. It
may, therefore, well be expected that we might end up next year with a larger surplus.
It is with this in view that I have not estimated any diminution in the States’ share of
direct taxes revenue. On the other hand such increases in the States’ share of income
Tax revenue as would accrue would in my view more than compensate, the reduction
in the States’ share in the revenue from Excise Duties.
78. It is a matter of some satisfaction to me to be able to present this Budget
which holds every promise of being a balanced one-if not a surplus one-taking both
the Revenue and Capital accounts together. Honourable Members, I hope, will also
find similar satisfaction in the fact that we have been able to present a balanced
budget while providing for the needs of the Plan and giving a measure of relief in
direct and indirect taxation. In conclusion 1 would appeal to Honourable Members
and to all those affected by our tax system that they should treat the present Budget as
an earnest of our desire to put the tax structure in this country on an enduring and
rational basis.
(February 27, 1965)

22
 SPEECH OF SHRI T.T. KRISHNAMACHARI MINISTER OF FINANCE,
ON ECONOMIC SITUATION AND TAXATION PROPOSALS

Sir,
Honourable Members will recall that in the past I have presented a mid-year
review of the economic situation to Parliament. The annual budget provides an
opportunity for a periodical review of our plans and policies. Nevertheless, there are
occasions when even a year’s interval becomes too long for initiating remedial action
to deal with emerging circumstances. The need for a mid-year review is all the greater
during the current year because of the need to pave the way for the launching of the
Fourth Five Year Plan. It is for this reason that I have taken this opportunity to present
some supplementary proposals framed in the light of the current economic situation
and the requirements of the Fourth Five Year Plan.
It is somewhat early at this stage to attempt a full picture of the likely budgetary
outcome for the current year. However, there are sufficient indications that
supplementary measures for raising revenue are necessary to keep to our resolve of
avoiding deficit financing during the current year. Since the presentation of the Budget,
the Centre has had to grant additional dearness allowances which would result in an
expenditure of about Rs.25 crores during the year. Despite repeated appeals to the
States to avoid recourse to overdrafts from the Reserve Bank and to consolidate their
financial position, some additional assistance to a number of States has become
inevitable; and this may account for an additional outlay of about Rs.40 crores.
Honourable Members would also appreciate that in view of renewed hostilities at a
number of points on our borders we have had to provide larger amounts for police and
border security.
There are indications also that receipts on capital account would be lower under
a number of heads. In view of the sluggish conditions in the money market, we had
to reduce the borrowings programme of the Centre by about Rs.20 crores; i.e., from
Rs.270 crores assumed in the Budget to Rs.250 crores. Trends in small savings during
the past three or four months have not altogether been satisfactory; and although I
expect some improvement in the coming months, it is likely that there may be a
shortfall of about Rs.10 crores from the Budget estimate of Rs.135 crores. We have
also to reckon with a shortfall of about Rs.15 crores under annuity deposits.
On revenue account, receipts under Customs may well be somewhat larger than
we had budgeted for. A similar improvement under Excise Duties, however, does not
seem likely. Receipts under income and Corporation Tax have not been buoyant so

1
far. It would be our endeavour to step up tax collections during the rest of the year by
even more vigorous efforts. But, on the whole, it would not be safe to count on
substantial additional revenue collections for offsetting the effects of additional
expenditure on a number of items and the reduction in capital receipts to which I
referred earlier.
As for economies and shortfalls in plan and non-plan expenditure, Honourable
Members would recall that it has been my endeavour to avoid any deliberate
over-budgeting of expenditures in general. It is also of the utmost Importance that
there should be no slowing down in the implementation of continuing schemes-and
there are several such schemes in the State sector-as it would only postpone the
fruits of investments in progress. With every possible effort to secure genuine
economies in expenditure, it would still be necessary to mobilize additional resources
on a substantial scale.
When I reviewed the economic conditions in the country at the time of
presentation of the Budget, there was a fair promise of our being able to hold the price
line during the current year. Rice prices had declined by more than 10 per cent between
October 1984 and January 1965-i.e., in the immediate post-harvest period. Wheat
prices also declined between January and May. The index of wholesale prices came
down from 161 at the beginning of January to 150 by the middle of March. This was
an experience which was in sharp contrast to the trends in 1964 when the post-harvest
decline in prices was negligible. Unfortunately, prices have started rising once again
from the beginning of the current fiscal year. The index of wholesale prices reached
a new peak of 164.8 on 24th July 1965. Apart from this overall position, there are
several pockets in the country in which prices of particular foograins have soared very
high. Some increase in prices during the summer months is perhaps a normal seasonal
phenomenon. But the fact that the seasonal rise this year has not been particularly
subdued despite the increase in agricultural production last year certainly warrants no
complacency regarding the budgetary and monetary situation.
The Reserve Bank took a number of measures to increase the cost of credit, as
the House is aware, in February last in order to check excessive creation of credit.
Despite these measures, credit expansion in the last busy season was as much as
Rs.407 crores as against Rs.376 crores in the 1963-64 busy season which was itself
judged excessive. So far, the contraction in credit during the current slack season has
been Rs.87 crores or only about one-fifth of the credit expansion which took place in
the last busy season, as against a contraction of Rs.111 crores in the comparable
period of last year, which represented between one-fourth and one-third of the credit
expansion in the 1963-64 busy season. Honourable Members would appreciate that
unless credit contraction in the slack season is adequate, it will not be possible for the
banks to meet the genuine needs for credit expansion during the next busy season
without excessive resort to the Reserve Bank. It is under these circumstances that It
2
has become necessary to supplement general measures of credit restraint by selective
and direct measures; and the Reserve Bank has recently announced certain measures
in respect of groundnut, wheat, cotton and vegetable oils as well as the advance deposit
scheme against imports and the regulation on clean advances. I will have more to say
about the deposit scheme against imports a little latter. But I would like to take this
opportunity to remove some of the misconceptions regarding the ceiling on clean
advances. The Reserve Bank, for example, has not put a ceiling on the clean advances
to each particular party. It has merely sought to limit the total clean advances of each
bank, it being the responsibility of the banks concerned to adjust the advances to
individual clients in the light of their individual needs and circumstances. It should
not be difficult for the banks to discharge this responsibility in the slack season when
there should be a decline in many individual advances. It is in this light that the
impact of the measure should be judged. As the Reserve Bank has made it clear, the
position will be reviewed at the beginning of the next busy season. And the review
will naturally take into account developments during the current slack season and the
requirements of the next busy season.
In a growing and complex economy like ours, credit policy has to serve a number
of aims; while attempting to exercise a general restraint on credit in keeping with the
requirements of stability, it must bear particularly on specific points so as to discourage
speculation without retarding production. Such a discriminatory approach is by no
means easy. But the operation of a sound monetary and credit policy presupposes in
any event that the efforts of the monetary authorities will not be neutralised by excessive
credit creation on behalf of the Government.
Before leaving the subject of credit control, I would like to refer to the question
of unaccounted money. The proposals regarding voluntary disclosure that I announced
last February have led to disclosures of about Rs.50 crores of which Rs.30 crores are
in the form of tax receipts. At the same time, the continued drive against bogus hundis
and unaccounted money and its consequence of driving unaccounted money
underground have necessarily their effect on the stringency of the money market. A
considerable part of transactions which were earlier carried on outside the banking
system have now to be financed by the banking system. In judging the recent increases
in bank credit, this factor has to be borne in mind. But Honourable Members would,
I am sure, agree that there cannot be any relaxation in the attempt to bring unaccounted
money into the open; and some of the proposals I make later in regard to direct
taxation have been intended to strengthen this attempt which has a far-reaching social
and economic significance.
I had occasion, in the broadcast talk on 17th July, to refer to the continuing
difficulties in regard to foreign exchange. Our reserves have reached a low level now
of less than Rs.100 crores which is hardly sufficient for meeting the seasonal swings
in our trade and payments let alone for providing a cushion against unforeseen
3
contingencies. Essentially, our foreign exchange difficulties have arisen from the fact
that whereas import commitments have grown on a number of counts, the buoyancy in
our exports which was witnessed during the first three years of the current plan has
not been maintained since then. Exports during 1964-65, according to balance of
payments statistics, amounted to Rs.803 crores i.e., roughly the same level as in 1963-64.
Export shipments during April-June 1965 amounted to Rs.185 crores showing a decline
as compared to Rs.196 crores in April-June 1964.
I need not dwell at length on the various measures which Government have
already taken to bring about a better balance in our foreign payments position. These
include import, cuts, staggering of import payments, continuance of the export incentive
schemes with modifications and the announcement of the tax credit scheme in respect
of a number of export items. The pressure on our reserves has somewhat lessened
during the past three or four weeks. On August 13, for example, our total foreign
exchange reserves excluding gold stood at Rs.99 crores, i.e. at a somewhat higher
level than on July 16, when they stood at Rs.96 crores. Ordinarily, there should be
seasonal improvement in export receipts after October; and if we succeed in our efforts
to push out all the exports that are possible, there is every likelihood of our ending the
current fiscal year without any further loss of reserves. There is, however, no room for
complacency in regard to our foreign exchange situation. As I have already mentioned,
our reserves are already at an uncomfortably low level. The remedial measures that
we have taken have been essentially of, a restrictive nature, and it is clear that the
continuance of the present very stringent restrictions on imports for long will have
adverse effects on the growth of the economy. It should be our endeavour, therefore,
to liberalise imports to the maximum possible extent; and we propose to seek the
cooperation of friendly foreign countries and international institutions in support of
this endeavour. In the long run, however, we have to secure a steady and sizeable
increase in our export earnings in order to sustain a resonably liberal Import policy as
well as to meet the growing burden of debt charges. But a sustained dynamism in
exports can be achieved only within an environment of internal price stability.
In short, the current price situation, our balance of payments difficulties,
conditions in the money market and emergent trends in respect of the budgetary
operations of the Government, all require a substantial additional effort at resource
mobilisation during the current year. At the same time, the measures that we take now
have to be consistent with the long range interests of the economy. They have in
particular to form a part of the general framework of policies for securing progressively
higher levels of investment and productivity in the economy with emphasis on export
promotion and on encouragement to people to shift from external sources of supply to
the development of indigenous substitutes.
The draft outline of the Fourth Five Year Plan is being finalised and would
be submitted for approval to the National Development Council, Full details of the
Plan therefore would perhaps be available to the House only during the next session.
4
In the meanwhile the Planning Commission has recommended tentatively that the
Fourth Five Year Plan should involve an outlay of Rs.21,500 crores of which Rs.19,000
crores would be investment and Rs.2,500 crores current outlay. Outlay for the Public
sector is planned at Rs.14,500 crores and that for the private sector Rs.7,000 crores.
The Prime Minister at the same time has emphasised that the actual implementation of
the Plan from year to year must proceed in keeping with the over-riding consideration
that inflationary financing should be avoided altogether. It is also clear that additional
mobilisation of internal resources of the order of Rs.3,000 crores and something more
win be required during the next Plan period if the tempo of development in the economy
is to be maintained at a reasonably satisfactory level.
In the ultimate analysis our objective is not so much to increase the pace of
investment for its own sake as to bring about an improvement in the growth rate of the
economy for assuring better standards of living to our people and, for making a
satisfactory advance towards the objective of self-sustaining growth. From this point
of view, the content of the Plan and the efforts that we make to increase the productivity
of capital are even more important than the size of the Plan. It is again from this point
of view that it is of considerable importance at this stage to give high priority to
agriculture and to redouble our efforts to promote family planning so that the
achievements of our Plans are not circumscribed by a rapid growth in population. As
for industrial development, the priority in the coming years must necessarily be given
to activities associated with agriculture as well as to the production of materials and
equipment which make it possible to secure greater utilisation of existing capacity and
Improvement in balance of payments.
A great deal of detailed work has already been done in regard to the content of
the Fourth Five Year Plan and tentative targets for a number ofimportant areas such as
agriculture, power, fertilizers, cement, steel, sugar and other basic industries have
been set. The studies undertaken so far make It abundantly clear that it is both possible
and imperative to rely to the maximum possible extent on the internal production of
machinery and materials for securing the growth of the economy in a number of vital
fields. Indian industry has taken rapid strides during the first three Plan periods and it
is now at a stage where, given necessary encouragement and concentration of effort in
suitable directions. It can make a sizeable contribution both to exports and to import
substitution. The additional efforts at resource mobilisation that we might adopt
therefore at this stage have to serve a number of objectives. Apart from contributing
to the objective of raising resources for growth without inflation, these measures must
be consistent with the broad objectives and priorities of the Plan. They must, in other
words, take into account the emphasis we wish to place on agriculture and on higher
productivity all round. They must also subserve the paramount objective of giving the
maximum possible encouragement to the domestic production of machinery and
materials. The measures that I propose to announce today have been designed in
keeping with all these considerations.
5
 Before I deal with the measures which I wish to submit to the House, I would
like to emphasise that the Centre alone cannot bear the full responsibility for restoring
and maintaining internal financial stability. In our Federal system, the State
Governments also have to take their appropriate share of the responsibility of raising
resources and of exercising the utmost economy in expenditure so as to achieve a
balance in their budgets.
I come now to my supplementary budget proposals. My proposals relate primarily
to changes in Import duties. Our Import Tariff has been amended piecemeal over
several decades and is no longer in tune with the requirements of our planned
development. Not only is the structure of rates inconsistent with the needs of impart
substitution, but there is a Very large number of administrative exemptions and
modifications of rates which were granted from time to time to meet particular situations
and which now result in numerous anomalies. The entire Import Tariff is proposed to
be recast to secure both higher revenue and rationalisation, bearing in mind the
considerable development that has taken place in our industrial structure over three
Plans and the imperative need to accelerate the pace of this development.
The broad structure of the proposed tariff is as follows:
The general statutory rate for machinery will be 40 per cent, but the effective
rate of import duty will be 35 per cent for the time being. Certain items of agricultural
machinery and Implements will, however, be charged at 15 per cent. Basic industrial
raw materials, such as prime steel, and non-ferrous metals will be charged to Import
duty at the rate of 40 per cent. Most processed industrial materials will be liable to
import duty at the rate of 60 per cent, Consumer goods will, by and large, be charged
at the rate of 100 per cent though higher rates charged at present on certain high profit
items such as betel nuts and liquor will continue. Protective rates will continue but
their levels have been suitably raised where appropriate in line with the structure that
I have described. GATT bindings continue to be honoured, but it is our intention to
approach the countries concerned for releases in suitable cases in order to complete
the rationalisation of the tariff.
There have often been complaints that the Import of equipment by projects is
impeded as a result of meticulous assessment at the appropriate rates of each
constituent item required for setting up the project. I now propose to introduce a
new tariff Item to cover the import of equipment needed for the initial setting up of
new projects or for undertaking substantial expansions of existing projects, in the
fields of industry, power, mining and prospecting for minerals or oil. Not only
complete equipment but also component parts and raw materials imported specifically
for fabricating equipment within India for a project, and some quantity of initial
stock of spare parts and other stores needed for the maintenance of the project can
be imported under this item. The contract or contracts would have to be registered
in advance with the Customs authorities and a provisional assessment will be made
6
immediately, obviating to the maximum possible extent the need for detailed
assessment of individual lots, after the goods arrive. The equipment imported under
the item will be charged to duty at the general machinery rate and I am confident
that the administrative improvement will facilitate the smooth import of such
equipment and also give some encouragement to the manufacture within India as
much as possible of the equipment needed for these projects.
The present tariff contains a large number of administrative reductions of rates
and exemptions, often historical survivals. Wherever possible these are being
withdrawn, except when there is still special justification, as for example, in the case
of raw materials needed to manufacture finished products for which rates of duty are
bound under the GATT. If we are to promote import substitution on a wide scale, the
imports of the finished products must bear the revised rates of duty, even if intended
for a high priority purpose.
The considerable simplification of the structure of rates should result in a saving
of time on assessment and reduction of the number of disputed cases. I am sure that
this simplification will be of help to industry in planning production.
Among the exceptions which I have retained to the general structure of rates
that I have indicated earlier I should like to mention a few. Books, fertilizers and
contraceptives will continue to be imported free of duty. Sulphur, which was paying a
duty of 10 per cent would be free hereafter. There will be no change in the rates of
duty on certain essential drugs, baby food, milk powder and newsprint.
With these revisions of the basic rates the surcharge of 10 per cent on the
amount of duty payable is being withdrawn. This also is a move towards simplification.
The regulatory duty of ten per cent is, however, being retained. In view of the extensive
changes in import duties, it is no longer necessary to continue the advance deposit
scheme against imports which was introduced as a temporary measure to stagger
imports. The Reserve Bank is, therefore, making an announcement in this regard.
The additional revenue in a full year from the revision of the Import Tariff is
expected to amount to Rs.119 crores, after allowing for a fall in revenue as a result of
the abolition of the surcharge and making provision for additional refunds and
drawbacks.
I propose in addition to raise certain Excise Duties. In the field of petroleum
products, the duty an high speed diesel oil is proposed to be raised by Rs.60 per
kilolitre from the existing level of Rs.429 and on motor spirit by about Rs.50 per
kilolitre from the present level of Rs.451. The duty on inferior kerosene will remain
unchanged, but that on superior kerosene will go up by about Rs.52 per kilolitre. The
House will appreciate that It is not practicable to raise the duty on high speed diesel
oil without a corresponding adjustment in the duty on superior kerosene 1f diversion
of kerosene to use in transport is to be avoided. In view of the plentiful supply of coal
7
the duty on furnace oil is being raised by about Rs.40 per metric tonne. On the other
hand, the duty on light diesel oil is being reduced by about Rs.125 per tonne in order
to stimulate the use of diesel engines for lift Irrigation and agricultural operations.
Altogether, the additional excise and countervailing import duty revenue from the
higher duties on petroleum products will amount to Rs.30.84 crores in a full year.
I propose also to raise by Rs.10 to Rs.50 per tonne the existing duties on steel
and pig iron and their products. The additional revenue from these excise and
countervailing import duties will amount to Rs.14.38 crores in a full year. I propose
further to levy fresh Excise Duties of Rs.500 per metric tonne on unwrought lead and
zinc and suitable adjustments are being made in respect of zinc manufactures. The
duty on copper ingot and copper manufactures will be raised by Rs.500 per metric
tonne. The additional excise and countervailing import duties on non-ferrous metals
will yield revenue of Rs..9.50 crores in a full year. Thus the total revenue from the
additional Excise Duties, including countervailing duties of Customs of the order of
Rs.12 crores, is estimated at Rs.54 crores in a full year out of which about six crores
or so will be the States’ share.
Taking Customs and Excise Duties together and exclusive of the States’ share,
the additional revenue would thus be of the order of Rs.167 crores in a full year or just
over Rs.100 crores over the rest of the current financial year.
A sizeable part of these additional duties will be borne by Government and
public sector units. It is my intention to absorb the increased cost as far as possible
through economies in expenditure.
The additional import duty proposed on machinery and equipment win, I hope,
promote import substitution through larger output of the machinery industries in India.
In order to offset the increased cost of machinery in part, while retaining the incentive
for the greater use of indigenous equipment, I propose to raise the rate of development
rebate in respect of certain priority industries from 25 per cent to 35 per cent. Coal
mining is being added to the list of priority industries. For all other industries, I
propose to extend by three years, i.e. upto 31st March, 1970, the period of operation
of the general rate of 20 per cent after which the lower general rate of 15 per cent, will
be operative. Similarly, in order to avoid delay in the implementation of priority schemes
in progress in the private sector, it is proposed to grant additional assistance in
appropriate cases through financial institutions.
Honourable Members will also recall that in keeping with the high priority for
agriculture, I have proposed a lower import duty of 15 per cent for agricultural
machinery as well as a reduction in the excise duty on light diesel oil. For the same
reason, I also propose to remove the existing excise duty on stationary diesel engines
of 10 hp and less which are generally used for agricultural purposes, as also to
provide a small sum for the grant of subsidy to the actual buyers of such engines for
use in agriculture.
8
 The House will be aware that Government has announced the commodities for
which tax credit certificates will be granted against export earnings, as also the rates
applicable. A number of Honourable Members have made the point that the exporter
should not have to wait for a period of 12 months before receiving payment of the tax
credit certificates; and I propose to eliminate this waiting period.
The Finance Bill also includes amendments to the Income-tax Act, Estate Duty
Act, Wealth-tax Act, Gift-tax Act and Companies (Profits) Surtax Act. Most of these
amendments are in pursuance of the announcements made by me while moving the
Finance Bill, 1965 for the consideration of this House. Briefly put, these amendments
will have the effect of extending the operation of the existing 5-year tax holiday
concession for industrial undertakings newly set up in India to such undertakings
going into production any time during the 5-year period commencing from 1st April,
1966; exempting from tax the bonus received by individuals on cumulative time deposits
in the post office; charging of tax at a concessional rate on the interest received by
individuals on the encashment of the recently issued National Savings Certificates
(First issue), and of authorising the payment of interest on these Certificates without
deduction of tax at source. The Bill provides for the exemption of the recently issued
7 per cent Gold Bonds 1980 from wealth-tax and the capital gains arising on the
transfer of such bonds from income-tax and enabling payment of the interest on such
bonds without deduction of tax at source in certain cases m the same lines and subject
to the same conditions as already apply in respect of the 61/2 per cent Gold Bonds
1977. Power is also proposed to be taken for the grant of cash refund of excess
annuity deposits in certain circumstances.
With a view to facilitating the economic rehabilitation of Ladakh, I propose to
exempt persons other than Government employees resident there from tax on their
income from sources in Ladakh and outside India, upto and inclusive of the assessment
year 1969-70. It is also proposed to write off arrears of outstanding tax from such
persons for assessment years prior to 1962-63. The amount of such arrears of tax is
about Rs.40,000 only.
Among the other amendments proposed to these Acts I would only mention the
following, namely, a provision to exempt from income-tax the commuted value of
pension, exemption of professional associations like Bar Councils from income-tax
on their enrolment fees and subscriptions, power to the Commissioner of income-tax
to waive or reduce the minimum penalty leviable under the Wealth-tax Act in cases of
voluntary disclosure of wealth and immunity from prosecution in such cases, increase
in the rate of simple interest chargeable on delayed payments of tax and payable by
Government on delayed refunds under the Wealth-tax Act and Gift-tax Act from 4 per
cent to 6 per cent and a provision enabling , the Central Government to enter into
agreements with foreign Governments for avoidance of double taxation of income in
relation to surtax. Donations made for a charitable purpose qualify for a rebate of
9
income-tax. Recently, a High Court has taken the view that a charitable purpose may
also include a religious purpose. This is, however, not in accordance with the intention
underlying the provision. It is, therefore, proposed to clarify that a charitable purpose
will not include a purpose which is wholly or mainly religious in nature. This
amendment will have effect in respect of donations made on or after 1.4.1964. Similar
amendments are proposed to be made in the Gift-tax Act and the Estate Duty Act. I
would mention that there are independent provisions in the income-tax Act and in the
Gift-tax Act for rebate of income-tax and exemption from Gift-tax in respect of
donations or gifts to temples, mosques, churches, gurdwaras, etc. These provisions are
not being changed by the proposed amendments.
Honourable Members will recall that in regard to the voluntary disclosure scheme
under the Finance Act, 1965, which was in operation for three months upto 31st May,
1965, it had been suggested in this House that the period allowed for payment of the
tax should be extended, Under the structure of that scheme, it was not possible to meet
this suggestion except to a very limited extent. I now propose to introduce a fresh
scheme for voluntary disclosure of unaccounted income which will be in operation
from today until the 31st March, 1966. One of the distinctive features of this scheme
is that tax will be charged on the whole of the disclosed income taken as a single
block, at the rates prescribed for personal income or corporate income by the Finance
Act, 1965, and not at an ad hoc concessional rate. Further, facilities will be allowed
for payment of the tax in appropriate instalments extending over a period not exceeding
four years, subject to a down payment of not less than 10 per cent of the tax due and
furnishing of security in respect of the balance. Income which has already been detected
on materials available prior to the date of the disclosure will, however, be assessed
under the regular provisions of the income-tax Act and not under this scheme. Any
admissions made by a person in the declaration filed by him under the scheme in
respect of such income will not be used against him in assessing that income under the
Income-tax Act. Under this scheme also, the disclosed income will not be subject to
any further proceedings of assessment. The identity of the declarant will not be revealed
and he will also be immune from penalty and prosecution for the past concealment of
the disclosed income.
Mr. Speaker, Sir, I am well aware that my proposals represent a formidable fare
for a supplementary budget. But the exigencies of the situation demand nothing less.
Our current needs, the claims of the Fourth Plan and the ever-increasing threat to our
national security add up to a challenge which has to be met squarely and with a
resolute heart. I can only hope that I have succeeded in presenting proposals which
carry forward the process of rationalising our tax-structure while responding to the
paramount need for raising progressively higher revenues for sustaining the dynamism
and soundness of the economy.
(Augustl 9, 1965)

10
 SPEECH OF SHRA T.T. KRISHNAMACHARI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1964-65
Mr. Speaker, Sir,
I crave leave of the House to present the Budget for the year 1964-65.
In presenting the Budget of the Central Government for the year ahead, it is
customary to start with a review of economic conditions in the year that is drawing to
a close and to assess the policies and trends in progress so as to provide a backdrop
for the Budget for the year to come. But my task in this respect is lightened by the fact
that the year has witnessed a considerable reappraisal and reassessment of policies
and performance, as well as a reaffirmation of the basic social values we seek to
promote through all our endeavours. Honourable Members would recall that I had
made before them a statement on the economic situation only a few weeks ago in
December last. The Economic Survey which in the past used to be presented to
Parliament along with the Budget papers has also been placed on the Table of the
House on this occasion a few days earlier. I shall, therefore, confine myself to those
aspects of the economic situation and perspective which are relevant to the proposals
which I shall be placing before the House in the latter part of my statement today.
2. By and large, the budgetary outturn for the current year bears testimony
to our determination to strengthen our defences without slackening our developmental
efforts or without resorting to unbridled deficit financing. The revised estimates for
1963-64 are presented in detail in a separate section of the Explanatory Memorandum
which outlines the variations between the budget and the revised estimates in the
same detail in which they were traditionally explained. Accordingly, 1 do not propose
now to dwell at length on the budgetary position for the current year. But it is noteworthy
that the overall deficit in the budget which was originally estimated at Rs.181 crores
is now placed at Rs.135 crores. The improvement of Rs.46 crores in the overall gap
has taken place despite the net increase of Rs.94 crores in loans and advances to
States and of Rs.27 crores in loans and advances to other parties. The major
improvement in revenue is on account of Corporation Tax and Taxes on income,
which together show an increase of Rs.70 crores, but this would be partly offset by an
increase of Rs.21 crores in the States’ share of income-tax. Customs and Union Excise
Duties also show an improvement of nearly Rs.35 crores.
3. It is a matter for particular satisfaction that collections under Small Savings
which amounted to Rs.73 crores in 1962-63 are now expected to amount to Rs.115
crores in 1963-64. Other miscellaneous Debt heads are also expected to show an
improvement of Rs.31 crores, but this will be offset by the decline in Emergency
Risks insurance receipts and Compulsory Deposits.

1
 4. A part of the improvement in the budgetary position is also explained by
the saving or perhaps shortfall in expenditure of Rs.27 crores under Revenue and
Rs.64 crores under Capital other than Loans and Advances. Of the saying under
Revenue, Rs.16 crores occur under Defence and the balance under Civil heads. The
major shortfalls in Capital expenditure are in respect of Defence, Rs.43 crores;
Hindustan Steel, Rs.19 crores; Atomic Energy, Rs.11 crores; and food purchases, Rs.14
crores. On the other hand, Capital requirements of Railways would show an increase
of Rs.19 crores.
5. Turning to the economic situation, the most disturbing feature is the rise
in the price level. While the increase in wholesale prices of the order of 8 per cent
over the first three years of the current plan period cannot be considered large by any
standards, and particularly against the background of the sizable step-up in outlays
under defence and development, the fact that the general index of wholesale prices
rose by as much as 7.2 per cent between March 1963 and January 1964 is certainly a
cause for great concern. Government have already taken several steps to afford relief
to the weaker sections of the community. We have, however, in the coming year to
apply new measures of discipline, fiscal and others, to arrest this unhealthy trend.
6. Essentially, the rising trend in prices is explained by the inadequate rate
of growth in agriculture. After increasing by 1.2 per cent in 1961-62, agricultural
production declined by 3.3 per cent next year. Crop prospects for the current agricultural
season, Which seemed somewhat better to begin with have been adversely affected by
the recent severe winter conditions in some parts of the country. The recent increases
in the prices of edible Items have been causing Government a great deal of concern.
The problem is being examined at the highest level and may I add with the greatest
care. My colleague, the Minister of Food and Agriculture has had meetings with Chief
Ministers and other concerned Ministers in the States and a programme of concerted
action is being evolved. While attention has to be given to the regulation of distribution
and prices, the main emphasis will have to be on higher production. The experience of
intensive agricultural production in certain selected areas through what are known as
‘package programmes’ has led us to decide that we should concentrate our efforts in
about 80 selected districts, or roughly about 1500 development blocks, which hold out
promises of quickest results. The impact of these and other measures which the State
Governments are taking should I believe be felt on the next Kharif crops. Government
also propose to create a special organisation for this purpose in the Food and Agriculture
Ministry to be headed by an officer, who has considerable experience in this field. It
is also proposed to build up later on, similar specialised agencies for the stimulation
of some of the cash crops as well.
7. On the industrial front production trends have been more satisfactory, the
increase being 10 per cent over the first nine months of the current year compared
with 8.5 percent in the corresponding period of the previous year. Honourable Members
are aware that a number of steps have been taken to stimulate industrial production
2
and a measure of acceleration in the rate of growth over the coming year should now
be possible. Even so, it is clear that the preservation of a reasonable degree of stability
in the months to come will call for a reduction in the volume of deficit financing in the
coming year.
8. In this connection, the overall rate of monetary expansion in the economy
will also call for a careful watching. During 1963, money supply with the public
increased by Rs.430 crores or 13.8 per cent as compared to an increase of 9.9 per cent
in 1962 and 6.1 per cent in 1961. Government indebtedness to the banking system has
been a major factor in monetary expansion in recent years; but bank credit to the
private sector has also shown a brisk increase during the current busy season. While
the Reserve Bank pursues a fairly liberal policy to help production and while the
availability of credit to the farmer is being improved by the Agricultural Credit
Department of the Reserve Bank, a close watch has to be kept on the situation so as
to ensure that credit creation is kept within reasonable limits and does not encourage
speculation or hoarding.
9. Externally, the current year has witnessed a welcome increase in export
earnings and a comparatively satisfactory position in regard to foreign exchange
reserves. On present indications, export receipts during 1963-64 should exceed Rs.760
crores and thus show an Improvement of at least 7 per cent over the corresponding
receipts in 1962-63. Partly as a result of better export performance and partly in view
of greater utilisation of external assistance, particularly of the non-project type, our
foreign exchange reserves are likely to show a slight improvement over the current
year as against a decline of Rs.2.21 crores in 1962-63 and Rs.6.30 crores in 1961-62.
In addition, we have reduced our indebtedness to the International Monetary Fund by
$ 50 million during this year as against an increase in such indebtedness of $ 25
million in 1962-63 and $ 122.5 million in 1961-62. While it is gratifying that the
combined burden of defence and development has not put an intolerable strain on our
balance of payments as a result both of our own efforts and the generosity of our
friends, our reserves are still far too low for us to be complacent. We cannot afford to
relax our efforts to strengthen them.
10. In the ultimate analysis, the three problems of prices, growth and balance
of payments on which I have focussed my remarks so far are inter-related and we
cannot solve any one of them without the fullest attention to the other two. Indeed, it
is only to the extent that all these problems are tackled within the framework of an
integrated policy, in regard to incomes, wages and investments that we can hope to
ensure that the necessary investment potential is made available for the development
of the economy.
11. Treating the problem of growth as an isolated factor and promoting growth
by stepping up investment from the sources available within and without the country,
without a corresponding policy for the incomes generated in the process, would not
3
only stimulate inflation but also other evils besides. Similarly, a price policy which
disregards the dynamics of growth, or the impact on investment decisions, cannot but
be self-defeating in the same way as a price policy which is not coordinated with a
corresponding policy in regard to wages. It is now generally agreed, for example, that
trying to keep agricultural prices too low for producers may defeat the objective of
raising agricultural production. If this is the case, one cannot, at the same time, try to
keep agricultural prices low for all consumers, or adopt a wage policy in which most
wage-earners are compensated for the increase in: agricultural prices. Nor can one
succeed in raising resources for defence or for that matter development by taxation if
each such effort leads to price increases which are passed on all along the line. These
are, I think, a few lessons which have emerged from our experience, in the recent past,
which deserve to be borne in mind in framing budgetary and other policies for the
period ahead.
12. As far as investment policy is concerned, there is little doubt that, at the
present stage of the economy, it is just as important to make the most efficient use of
the investments already completed as it is to step up further the tempo of investment.
Often, in the race for making the new starts, sufficient attention is not given to the
fullest exploitation of the facilities already created. We cannot at the same time afford
to postpone making new investments in development; nor can financial difficulties be
allowed to slow down the completion of schemes which have already been taken up.
From both these considerations; it follows that the, level of investment next year in
the public as well as the private, sector must be stepped up as much as possible.
13. In a certain sense Sir the broad pattern of investment that we must undertake
in India is self-evident; and it is easy enough to agree that we need to expand investment
in irrigation works, fertiliser plants, power and transport programmes, or indeed basic
and heavy industries which have a vital bearing on the future growth potential of the
economy. But broad generalisations of this nature are of little help at this stage when
the most important questions to decide are in regard to the choice of the specific
projects and programmes in each of these fields which promise the greatest benefit in
relation to the cost they entail. Our present arrangements for the choice of specific
projects and programmes after a detailed examination of the technical and economic
aspects of practical alternatives leave much to be desired; and it is my intention to
strengthen this aspect of the work of my Ministry during the months ahead.
14. Apart from this question of the size and pattern of investment, there is
need for speedier execution of projects and of earning better returns from the
investments that are, being made. Many of the public sector projects are lagging
behind the schedule of their construction, and what is more disappointing is that their
contribution to our resources is nowhere near the Plan estimates. It is of the utmost
importance for our economy that enterprises in the public sector should not only make
profits, but should make good profits. By that I mean that they should give a good

4
dividend to the Exchequer and yet be able to build up reserves to finance their own
future expansion. I know that some people think that public sector enterprises should
work on no profits or on low profits. Such an approach is wholly unsound in any
society, and more so one in which the State seeks to own or control the major sectors
in production. When the State does no more than build schools, hospitals and roads,
it need not look to direct returns on its investments. But when the State begins to
provide power and transport, when It begins to own steel plants, fertiliser plants and
machine-building plants, It must make sizable profits out of them, build reserves,
amortise loans and provide adequately 5, for depreciation of assets and their
replacement, so that the public sector can expand without adding unduly to the tax
burden. This is reinforced by the fact that the products and services provided by the
public sector are absorbed by the private sector which is not inhibited from making
adequate profits. To the future growth of the public sector in India, a major contribution
has to be made by the return on investments already made in the public sector.
15. It is equally important for our development that the private sector has the
resources to expand in the fields assigned to it. In my statement last December, I had
referred to some of the steps to be taken towards this end. Since then, the House has
enacted legislation for the establishment of the Unit Trust which has already come
into being. The House will also be considering the Bill for the establishment of a
Development Bank which is intended to make an additional contribution to the resources
for the development of our industrial economy.important and significant as these
measures are, basically the resources for development are generated not entirely by
the setting up of institutions such as these, but in the community through the savings
that are made. One of the prime objectives of our economic and fiscal policy, therefore,
must be to generate savings both in the hands of individuals and in the hands of
corporate bodies.
16. One of the weaknesses in our economy has been that a high proportion of
the community’s saving is being diverted towards industries of low priority, towards
quick speculative gains through purchase and sale of urban housing and the hoarding
of commodities in short supply in a manner which tends to push up their prices. Some
of these trends need rectification through fiscal measures to which I shall turn later. It
isimportant that these savings should be canalised into the industries to which we
attach the highest priority.
17. Part of the distortion, however, comes about through some of the short
term and, If I might say so, short sighted devices to deal with the price situation. By
Imposing statutory controls on the prices of certain basic commodities, we often succeed
in discouraging investment in the very industries which produce those items. This
tends to perpetuate the shortage and to aggravate rather than relieve the pressure on
prices. Often controls of this type do not result in the commodities in question being
available to the consumer at lower prices, What happens is that the high prices which

5
the consumer continues to pay do not benefit the producer, but go into the pockets of
others. And because these prices are not legally recognised, the Exchequer also is
deprived of its dues. In curbing profiteering, fiscal devices can be used much more
effectively than controls which lead to abuses. Reliance on price controls is only
appropriate where it is possible to exercise effective check on distribution and
consumption as well; in other words, where there cap be some form of rationing.
18. While conceding the need to provide private industry with resources for
the development entrusted to it in our planning scheme, I should like to say a word
about the equallyimportant point that we must net, in the process, allow concentration
of economic power and growth of monopolies. The question which we have to consider
is how we are to achieve this objective consistently with our concern to see that
genuine and desirable development is not stifled. For a proper formulation of our
policies and attitudes in this respect, Government feel that there is need for an Impartial
and objective enquiry so as to bring the relevant data out in the open. It is, therefore,
proposed to set up under the Commission of Enquiries Act a Commission to enquire
into monopolies and the concentration of economic power in the Indian economy.
While we must await its report before undertaking any legislation or setting up any
kind of a statutory body to deal with the monopolistic practices, I should like to draw
attention to some aspects of this problem.
19. There are basically three essential ingredients in any industrial or economic
set up. They are: ownership, control and management. When discussing the question
of monopolies, it isimportant to distinguish between these three elements and to have
a clear appreciation of their relative roles. It is popularly believed that the ownership
of industries in the private sector is concentrated in a few hands. This is only partially
true. No doubt in a country like ours with such widespread poverty, a very large
section of the population does not own any part of the industry, trade or banking
which is carried on in the country. It is also true that the wealthier a person is, the
larger would be his ownership of stocks and shares. At the same time, what is not
often realised is that even the biggest industrial plants in the country today belong, in
terms of ownership, much more to the people at large than to their original founders
with whose names they are popularly associated. The Life insurance Corporation is
itself a significant shareholder of many of the larger industrial and banking units in
the private sector. Investment by private individuals, many of them of modest means,
has also been increasing. Among the further measures through which Government
proposes to disperse the ownership of industry in the private sector, I would refer to
the Unit Trust, our efforts to Promote cooperative ownership, as we have done with a
fair degree of success in the case of new sugar factories, and the measures which we
adopt, and to which I shall turn later, to reduce the inequalities of wealth.
20. It is really disturbing that despite diffused ownership, control is
concentrated in a relatively few people. We have recently taken some major steps to

6
weaken this stranglehold. The changes in the Banking Companies’ Act and the
amendments to the Companies’ Act have paved the ground for the State to have strategic
control over the private sector in order to ensure that the investor in industry gets a
square deal and that anti-social activities are curbed and controlled.
21. It is net, of course, our intention to interfere in the detailed running of an
enterprise in the private sector. Indeed, the running of the enterprise is not a matter of
control, but of management. Management is a professional and technical job and the
skills necessary for that have to be encouraged and rewarded not only in the private
sector, but also in the public sector. One of the weaknesses in the public sector today
is the lack of adequate managerial personnel. The last thing which we should do is to
weaken the management. It is control which really is the vital element. In the society
which we hope to establish on an enduring basis, the private sector, in the sphere
assigned to It, will have the opportunity to grow, to attract individual savings, and to
develop managerial skills, subject to the overall discipline of the State, to prevent
monopolistic exploitation and the pursuit of methods which do not help the growth of
the economy. Our fiscal policies should give encouragement and support to larger
investment in priority industries, to better and more efficient management by those
who have the necessary talent and to a weakening of the devices, such as managing
agencies and Improvised selling agencies, through which dynastic domination of private
industry is perpetuated.
22. The efforts which we make through our fiscal and other devices to,
encourage savings, to invest them soundly and to run our plants efficiently and profitably
in the public interest, will for many years to come, need to be sustained by the inflow
of foreign exchange in the form of external capital which serves the dual purpose of
filling the gap between domestic savings and levels of investment and our export
earnings and Import requirements. Much of our foreign assistance has been coming in
the shape of credits and grants from friendly Countries, as well as from international
institutions, particularly the World Bank which takes an active role in organising the
aid effort through annual meetings of the Consortium. We have since the Emergency,
been also helped by external aid to strengthen our defence effort. In addition, supplies
of agricultural products, specially wheat and cotton and rice under the PL 480
programme of the United States have made a major contribution in meeting food and
other material shortages in the country. We owe a debt of gratitude to these friendly
countries and institutions, which I must, on this occasion, publicly acknowledge.
23. While for some years to come we must rely on continued external
assistance, it is important that we should at the same time, devote increasing attention
to the objective of reducing our requirements of such aid. We can do so by reducing
the level of our imports. But there is a point beyond which restrictions on imports,
whether fiscal or administrative, begin to do more harm than good, result in idle
capacity in industry and slower rate of growth and lead to higher prices with a
7
consequent fall in export earnings, which may well exceed the saving in foreign
exchange effected by a cut in imports. Our primary emphasis in import saving has to
be not on additional measures of restriction, but on tuning our investment policies to
give the maximum support to our balance of payments. Secondly, we must do everything
possible to increase our export earnings, though here again, we have to be careful not
to spend too much foreign exchange on the devices we use to help our exports. Finally,
we must make full use of private capital sources in the world outside to augment the
external aid we receive.
24. Quite apart from the credits which we receive em from Governments, we
could raise funds from the banking system and capital markets of the world. We have,
however, to remember that our external debts are already at a high level. For the Third
Plan, we had a repayment liability of approximately Rs.575 crores, including principal
and interest, and the repayment liability for the Fourth Plan is already in excess of
Rs.825 crores. In these circumstances, we should specially welcome foreign investment
in the shape of equity capital which not only brings with It technical know-how and
managerial skills, but has the special advantage of not adding to the heavy and growing
burden of debt repayment. To attract private investment in appropriate fields, we have
to offer some incentives and I shall deal with those which pertain to the fiscal field a
little later.
25. I shall now turn to the budget provisions for the coming year. At the
existing level of taxation, I have budgeted for a total revenue of Rs.2095 crores and
expenditure of Rs.2041 crores, leading to a surplus of Rs.54 crores on Revenue account.
26. As compared to the revised estimates for the current year, the Revenue
receipts next year would be more by Rs.181 crores. The four principal heads of Revenue
account for an improvement of Rs.92 crores, while interest receipts are expected to go
up by another Rs.32 crores. Following the change in the procedure for the release of
assistance under PL 480 on an advance basis, the grants for approved projects are now
expected to exceed the current year is provision by Rs.76 crores. But this would be
covered by a corresponding transfer to the Special Development Fund for which the
expenditure estimates take a debit. These improvements, however, will be partly offset
by a drop of Rs.12 crores under Emergency Risks insurance receipts and Rs.4 crores
under the surplus profits of Reserve Bank accruing to Government.
27. I am, as 1 said before providing for Revenue expenditure of Rs.2041
crores next year, of which Rs.718 crores will be for Defence Services and Rs.1323
crores for Civil purposes. The defence requirements debitable to Revenue next year
show an increase of Rs.25 crores over the revised estimates of Rs.693 crores for the
current year, while Civil Expenditure shows an increase of Rs.191 crores. The growing
volume and cost of public borrowings, mainly for development, account for an increase
of Rs.36 crores under Debt charges. A lump provision of Rs.10 crores has been made
on account of the increase in dearness allowance sanctioned recently with retrospective
8
effect from 1st July 1963. Miscellaneous Social and Developmental Services in the
fourth year of the Plan are expected to cost Rs.21 crores more whereas grants to States
for both Plan and non-Plan purposes would exceed the current year is Revised estimates
by Rs.53 crores. The self-balancing Items of grants under PL 480 deposits and
Emergency Risks insurance Receipts, to which I have just referred, together account
for a net increase of Rs.64 crores. The States’ share of Union Excise Duties would
also show an increase of Rs.5 crores.
28. In putting forth these estimates, I have tried to be as liberal as I could in
estimating receipts and as strict as possible in providing funds for expenditure, taking
into account the fact that actuals have, in the past, shown large increase in receipts
and savings in expenditure. At the same time, I must add that If for purposes of our
development or for that matter, defence, we find it necessary I shall not hesitate to
come to the House for Supplementary Grants.
29. Excluding the adjustment for the transfer of loan assistance from U.S.A.
which is notionally treated as Capital Expenditure, Capital outlay next year is estimated
at Rs.796 crores representing an increase of Rs.34 crores ever the current year is
Revised. The Defence Capital requirements next year at Rs.136 crores show an increase
of Rs.20 crores over the current year.
30. The repayment of debt, both internal and external, will be of the order of
Rs.259 crores next year. Loans to parties other than the State Governments at Rs.254
crores will be higher by Rs.64 crores. So far as States are concerned, the revised
estimates include Rs.101 crores as their share in the market borrowing in the current
year which was a combined effort for the States and the Centre. It has since been
decided, after consultation with the State Governments, to resume the practice of
separate market operations by the Central and State Governments for the next year.
Excluding the States’ share of combined market loan, loans to States next year at
Rs.606 crores show an increase of Rs.81 crores over the current revised estimates.
31. I must, at this juncture, digress to say that the financial position of most
of the States has been causing me a good deal of concern. The total amount due to the
Centre by the States at the end of the current financial year will be of the order of
Rs.3,000 crores. In addition, the States’ liability on account of market loans at present
amounts to Rs.656 crores. Both in terms of loans from the Centre and market borrowings
the States have been receiving more than what was originally contemplated in the
Plan. Their share of Central taxes and duties has also been increasing. Yet most of
them are constantly facing ways and means difficulties of a somewhat disturbing
nature. The whole position will require careful review in the context of the Fourth
Five-Year Plan. While we should aim at giving the States a good deal of flexibility in
allocating their own resources, so far as Central assistance is concerned we must also
ensure that a major portion of It is related to the Capital expenditure on identifiable
projects which are economically sound and can be expected to generate the resources

9
for the repayment of their liabilities. Other devices will also have to be thought of. As
a first step, it is proposed to set up the Fourth Finance Commission at the beginning
of the next financial year so that its report becomes available before we finalise the
shape and size of the Fourth Plan.
32. Provision has been included in the budget next year for a total expenditure
of Rs.1516 crores for implementing the Plan of which Rs.253 crores will be on Revenue
account and the balance of Rs.1263 crores as Capital outlay, including Loans. In
addition, Railways are expected to provide Rs.46 crores, Hindustan Steel Rs.25 crores
and other public sector enterprises Rs.44 crores from their own resources. These
estimates include Rs.559 crores as assistance to the States of which Rs.122 crores
would be on Revenue account and Rs.437 crores would be in the Capital budget. The
States are expected to find Rs.353 crores from their own resources. Thus, the total
State Plans next year would be of the order of Rs.912 crores as compared to the
current year’s budgeted outlay of Rs.750 crores. With the Central outlay of Rs.957
crores, contribution from public sector enterprises of Rs.115 crores and State Plans of
Rs.912 crores, the total Plan outlay in the fourth year of the Plan would amount to
Rs.1984 crores, showing a step-up of Rs.333 crores over the budgeted outlay of Rs.1651
crores for the current year. Much of this additional outlay is to strengthen the agricultural
sector, as well as to meet the cost of Plan projects which are nearing completion.
33. Larger outlays on Defence are also a matter of painful necessity to us.
The Defence Budget in 1964-65, taking Revenue and Capital together, is somewhat
lower than the budget estimate for the current year, but shows an increase of Rs.46
crores over the revised estimates. No one in this House will grudge this increase
though we may all regret it. For the current year’s budget, the House was pleased to
vote the necessary funds without asking for the usual details which, from the security
angle, it would not have been prudent to disclose. We are now in a position to give a
fuller picture and the budget papers contain the usual details. The point 1 would
emphasise is that our defence effort depends largely on building up our production
base and the steps we have taken to strengthen the economy are also those that will
strengthen our defences. In recognition of this fact, even the outlays to be voted under
the Ministry of Defence have a substantial provision for investment in productive
enterprises.
34. For meeting the increased cost of development in the coming year and in
the years thereafter together with our obligations to meet the needs of defence, it
would be necessary to take all possible steps for mobilising resources. Promotion of
savings would have to form a cardinal part of such mobilisation. I had indicated that
we are likely to end the year with record collections of Rs.115 crores through Small
Sayings. I am assuming for the coming year net collections of Rs.125 crores. I hope
this figure will be exceeded. Even at this rate we are not likely to reach the target of
Rs.600 crores for the Plan. We have, therefore, to make special efforts to step up the

10
level of savings in the community as a whole. To this end our policy in regard to
incomes, wages and consumption has to be reoriented. Savings, and as a consequence,
investment can only be generated by a margin between consumption and incomes or
wages. While we cannot afford to neglect our efforts to improve the lot of low income
groups, such efforts, I feel, should be directed more towards measures of social security
than towards an increase in their expendable income. This is not the time for me to go
into details but 1 will content myself by saying that Government intend to devote
special attention to the task of mobilisation of savings and social security measures in
the coming year. I am making suitable administrative arrangements for this purpose.
35. I may now summarise the overall budgetary position. Capital outlay will
amount to Rs.796 crores, loans to States and other parties Rs.860 crores and debt
repayments Rs.259 crores, leading to a total disbursement of Rs.1,915 crores. These
are expected to be met to the extent of Rs.54 crores from Revenue surplus, Rs.997
crores from internal and external borrowings, Rs.285 crores from repayment of loans,
Rs.125 crores from small savings and Rs.278 crores from miscellaneous debt and
deposit heads. These would leave a total uncovered budgetary gap of Rs.176 crores at
the existing level of taxation.

PART B
36. I have stated often that the growth of the economy has been commensurate
with our expectations. The measures we have taken during the last six months have
produced some improvement in the situation; but more has to be done to stimulate the
economy. The existing taxation policy, good as far as it goes in the direction of
producing revenue, has also to be geared to the paramount task of promoting growth.
It is admitted on all hands that fiscal measures have a major role to play in the process
of economic development. In this process of accelerating the tempo of development,
care has also to be taken to ensure that we do not, at the same time, add to the forces
of inflation which are always around the corner in an economy characterised by
shortages of one kind or another.
37. Against this background, the overall deficit of Rs.176 crores for 1964-65
which I have visualised at the existing rates of taxation is something which we have
to temper, if not altogether avoid, particularly as it would come on top of successive
doses of deficit financing and at a time when the upward spiralling of prices is causing
all of us concern. It is also necessary that the tax structure should not merely be
attuned to the needs of growth and to the revival of the capital market, but it should
also provide sufficient cushion for both corporate and individual savings with a cheek
on unproductive spending. Taxation has, therefore, to be used as a sensitive and
multipurpose tool, to encourage production, to keep a measure of restraint on rising
levels of consumption, to ensure that people get the fruits of their labour, to induce
11
savings and to prevent profiteering so that the inherent ills of a scarcity economy such
as ours are not multiplied. Having stated all this, I realise that these very desirable
goals cover a whole horizon and it is not possible at one stroke to serve all the purposes
in a single year’s budget proposals. But to the extent it is possible, I propose to
address myself to these tasks; and the proposals I am making are intended primarily to
serve these ends.
INDIRECT TAXES
38. I had given some thought to the structure of indirect taxes. While this will
bear more scrutiny than I have been able to give them, I am proposing some changes
in indirect taxes, both excise and customs, the cumulative effect of which will hardly
add to the burden that the economy is now bearing.
UNION EXCISE DUTIES
39. One of the essential conditions to be fulfilled by indirect taxes is that the
revenue from the items on which such taxes are imposed is sizable and secondly, that
the incidence of these taxes should be identifiable. Applying these two criteria, It is
proposed to remove the duty completely on a number of items. They are gramophone
records, all gases other than carbon dioxide used in the manufacture of aerated waters,
low voltage electric motors and all acids other than sulphuric acid. It is proposed to
withdraw the excise duty on soap, manufactured without the aid of power and to levy
an effective duty of Rs.40 per tonne on sodium silicate which goes into the manufacture
of such soap. This would free from excise control a large number of soap manufacturers.
It is also proposed to modify the sub-classification of soap produced with the aid of
power from four to two. Some changes are being made by regrouping items under
paper in order to simplify the schedule of rates and classification. With a view to
encourage the use of bagasse in the manufacture of paper, the duty on paper in the
manufacture of which more than 50 per cent bagasse is used would be reduced by 5
naye paise per kilogram. The special duty of excise is being abolished in respect of
synthetic dyes, glassware, chinaware, porcelainware, cellophane and certain types of
writing and printing paper and electric bulbs and reduced on the initial slabs on tyres.
The schedule of duty on cigarettes is being revised lowering the duty on one group
and raising it slightly on another so as to prevent shift in production. It is proposed to
revise the tariff description of plastics and electric wires and cables and of foot-wear
and aluminium. The net result of these changes is a loss of revenue of Rs.486 lakhs.
40. It has been decided to abolish the surcharge on iron and steel, which is
transferred to the Iron and Steel Equalisation Fund. The surcharge is being replaced
by an increase in the effective rates of Excise Duty on pig iron, certain steels and
steel products; some of these are being prescribed as ceiling rates so as to enable
Government to increase the effective rates further if circumstances call for such a
measure. The effective rates per tonne now proposed are Rs.30 on pig iron, Rs.90
on semi-finished steel and steel bars, rods and struturals, Rs.110 on all flat products

12
other than s kelp and Rs.150 on skelp. This will mean an increase in revenue of
Rs.1181 lakhs in 1964-65, more than compensating the loss of accrual to the Iron
and Steel, Equalisation Fund.
41. It is proposed to extend further the process of transferring Excise Duty
from cotton fabrics to yarn as well as to processed cloth. Increase in the duty of fine
and super-fine yarn has become necessary in view of the high profits that are being
made on such yarn which are spun from imported cotton. By levying a surcharge on
sized yarn and also by prescribing higher effective rates for yarn other than in hanks,
with the duty on yarn in hanks being kept at a comparatively low level, the impact of
these duties on hand-loom cloth will not, it is expected, be felt. The lowering of duty
on grey fabrics had necessitated lowering of the rates of compounded levy on power
loom units of 5 to 49. Power-loom units of 50 and above will pay a preferential duty
at 80 per cent, of the rates applicable to composite mills. The addition to revenue as
a, result of these changes will be Rs.981 lakhs on yarn and a reduction of Rs.286 lakhs
on fabrics. It is also proposed to raise the effective rates of duty by 50 per cent. In the
case of rayon yarn and about 100 per cent on other synthetic fibres and yarn and to
reduce the special duty on cellulosic staple fibre.
42. In addition certain minor adjustments will be made in some of the other
items of excise tariff such as paints, varnishes, worsted yarns, matches, rubber products
and a few more; the details of these changes will be found in the Memorandum
explaining the provisions in the Finance Bill, which is being separately circulated.
43. Taken all together, these changes in Excise Duties, would account for a
net gain in revenue of Rs.1954 lakhs in 1964-65, of which Rs.39 lakhs will accrue to
the States. The net additional burden on industry will, however, be only about 1 per
cent of the total estimated revenue from this source.
44. It is proposed to continue the power to levy regulatory duty, both for
Central Excise and Customs. There has been no occasion to use these powers during
the current year. Nevertheless, the continuance of this power is necessary in order to
meet unforeseen price or production situation. The lifting of control over prices of
certain goods would also necessitate a watch on their movement. It is, therefore,
proposed to take power to levy a regulatory duty of excise at the rate of 15 per cent.
CUSTOMS DUTIES
45. In regard to Customs Duties, my proposals are mainly confined to
maintaining the actual incidence of duty as it was till a few months back. It is
known that a number of items are assessed to import duty on basic tariff values.
Before the coming into force of the Customs Act of 1962, the tariff values were
based on market values which included certain post-importation charges. In view of
the provisions of the new Customs Act, it became necessary to fix the tariff values
without such charges. This resulted in the tariff values being lowered on certain
13
articles, especially dry fruits, copra and caustic soda and consequently the import
duty on these articles has gone down. It has been found that the benefit of lowering
the incidence of duty on these articles has not been passed on to the consumer and
it is, therefore, necessary to revise the rates of duty so as to keep the actual incidence
at about the same level as it was before the change in tariff values was made. In the
case of dry fruits it is proposed to adopt specific instead of ad valorem rates for
most varieties. The rate of duty on copra is being raised from 25 per cent to 30 per
cent and that on caustic soda from 40 per cent to 80 per cent. In both cases the
preferential rates will be 10 per cent lower. The increase in revenue as a result of
these changes which, as I have mentioned would compensate the loss we have had
in the current year, is expected to be Rs.202 lakhs in 1964-65.
46. It is proposed to raise the import duty on high carbon or spring steel wire
by 20 per cent to place the indigenous product on a competitive basis. The rate of duty
on motor cars, which has gone up to 150 per cent, though actual imports are few, is
very high and it is proposed to reduce this to 60 per cent. It is also proposed to abolish
the export duty on jute.
47. The net effect of the changes in the Customs duty will be an increase in
revenue of Rs.208 lakhs in 1964-65. There will also be an additional revenue of
Rs.429 lakhs from countervailing duties.
48. The total effect of all the changes in indirect taxes will be a gain in
Central revenue of a little over Rs.25 crores in 1964-65. As against this we should put
down the loss of Rs.7-8 crores, in Steel Equalisation Fund.
DIRECT TAXES
49. Revenue from direct taxes has shown a considerable amount of buoyancy.
This is partly due to the measures taken in recent years to close the gap between the
tax due and the tax collected. Due to a shortage of staff and the difficulties of training
new staff within a short period, assessments have been falling into arrears and even
provisional assessments were not kept up-to-date. This has been partly remedied but
a great deal more remains to be done. The administrative drive for better collection
and stricter enforcement requires to be supported by suitable legal powers. The tax
structure itself, which has grown in a somewhat haphazard manner, needs a closer
look and in this task one has to remember that direct taxes provide the means through
floe for change in the nature and direction of society towards the goal of removing
inequalities in income distribution.
INCOME-TAX
50. In the corporate sector, the primary need of the hour is to infuse some
confidence. The resources of this sector have to be augmented from within as well as
from without, and it is therefore, necessary to provide incentives for the existing
companies to plough back a larger share of their profits and also diminish the
14
disincentive for inter-corporate investment. In this process, it seems to me necessary
to make a distinction between capital intensive industries and others. The need for
basic industries to grow is recognised on all hands. Therefore, selective support has to
be given to these industries. I am aware that all the desirable things cannot be done
simultaneously. Though our present need for larger resources makes it difficult to give
up any source of revenue, I am sure the changes now proposed to be made and incentives
that are being provided would be appreciated and confidence would generally revive.
51. There has been considerable criticism in respect of the Super Profits Tax
and the uneven nature of its effect on industry as a whole. I understand that some of
the corporate units with a large capital base have not been unduly affected by the
Super Profit Tax as it is at present framed while some of the rest bear a much larger
share of the burden. The net result has been that it has produced a psychological
resistance and has to some extent affected industrial growth. I propose to address
myself to re-modelling the corporate tax structure having in view the needs I have
outlined earlier. The present tax on corporations of 25 per cent income-tax and 25 per
cent Super-tax would remain. In substitution of the Super Profits Tax, I propose to
levy, a surtax on profits of companies. The capital base for this purpose will consist of
equity and preference capital, reserves, debentures, loans from approved financial
institutions and loans for 10 years or more from banks, or from foreign sources for
creating capital assets. This tax will be at the rate of 40 per cent on the residue of the
profits after tax after deducting 10 per cent on the capital base.
52. In order to encourage development of certain industries which occupy an
important place in our economy, I propose to provide to companies which engage in
such industries a rebate of Corporation Tax equivalent to 10 per cent of the income-tax
and Super-tax, which will be normally payable by them. This rebate will also be
applicable in respect of surtax on such profits to the extent of 20 per cent of tax
assessed. These industries are named in the Finance Bill and power is being taken to
notify additions to this list from time to time. They include basic metals like steel,
copper and aluminium, mining of coal, lignite, iron ore and bauxite, industrial machinery
and machine tools, cement, fertilisers, paper and pulp, tractors, equipment for generation
of electricity and tea, coffee and rubber.
53. The reliefs which are being given are intended to strengthen the reserves
and augment the capacity of the corporate sector to develop. It is desirable to discourage
the dissipation of these additional resources in higher dividends. With this object in
view, it is proposed to levy a tax at the rate of 7.5 per cent on the amounts distributed
as dividend on capital other than preference capital. Where dividend has, however, to
be compulsorily distributed under the law, such distribution will not attract this tax. A
new company has, however, to wait for some years before it can declare a dividend,
such period varying with the nature of the undertaking. It would, therefore, be fair to
exempt such companies from this tax to the extent of a dividend of 10 per cent on

15
capital other than preference capital for a period of five years from the first declaration
of dividend by such a company.
54. At present, inter-corporate dividends bear income-tax at the rate of 25 per
cent and Super-tax at varying rates depending on when the company was formed and
whether it is an Indian company and is a subsidiary or not. It is proposed to abolish
these fine distinctions and exempt all inter-corporate dividends from Super-tax. It is
also proposed to remove the provisions in the income-tax law respecting disallowance
of expenditure incurred by companies on the remuneration of their Indian employees
above Rs.60,000 per annum for each employee. The imposition of this limit has not
brought any perceptible advantage to revenue and besides being discriminatory is an
ineffective restraint under tax law in respect of remuneration of Indian employees.
Salaries of certain categories of employees are subject to restrictions under the
Companies Act. I, therefore, see little advantage in continuing the application of this
limitation. It is, however, proposed to introduce a new provision in the income-tax Act
limiting the amount of deduction admissible to companies for expenditure incurred by
them in providing perquisites to their employees, whether of Indian or foreign
nationality, to an amount of 20 per cent of the salary of each employee. Any expenditure
in excess of that limit would not be deducted in computing the assessable income of
the company. This will have the healthy effect of putting a curb on excessive expenditure
on perquisites for companies’ employees. It is also proposed to reduce the deduction
of income-tax at source from dividends from 30 per cent to 20 per cent for resident
holders of shares. It is expected that this will be of some benefit to small investors
who have to wait for quite some time to get their refunds.
55. I propose to increase the rate of Super-tax in the case of non-resident
companies from 38 per cent to 40 per cent in respect of their income other than
dividends and also royalties and fees for rendering technical services received from an
Indian concern under an agreement approved by the Central Government. The Super-tax
on income from royalties and technical fees will be at the rate of 25 per cent. The
lncome-tax for these companies will continue at the existing rate of 25 per cent.
56. I propose to increase the rate of Super-tax from 25 per cent to 35 per cent
in the case of companies other than those in which the public are substantially interested
or are wholly subsidiary of public companies, namely the group generally referred to
as Section 23-A companies which are now governed by Section 104 of the income-tax
Act, 1961. Such of these companies as are engaged in specified industries will also be
eligible for the proposed rebate of Super-tax equivalent to 10 per cent of the income-tax
and Super-tax payable by them. Income-tax on dividends received by non-resident
companies engaged in the specified industries will be reduced from 25 per cent to 15
per cent. Further, I propose to exempt such Indian companies as are now governed by
section 104 of the income-tax Act, originally called section 23 A companies, and are
engaged in the manufacture or processing of goods or mining or generation and

16
distribution of electricity or any other form of power, and other classes of companies
as may be notified, from the existing requirement of compulsory distribution of
dividends. This will enable such companies to plough back their profit after tax in to
the undertaking to the extent it may be necessary. For companies other than these, the
Central Board of Direct Taxes will be empowered to exempt such portion of the
profits which it considers necessary to be retained to meet the development needs of
the company, subject to the limit of 20 per cent of the income required to be distributed.
57. I find that the provisions of the income-tax Act allowing as deductible
expenditure amounts spent wholly and exclusively for the purpose of business are
being abused in respect of certain types of expenditure. Unduly large amounts are
spent on daily allowance, on unnecessary bookings on planes and trains, on
advertisement and on the maintenance of guest houses and suites of rooms in hotels
outside the specific places of business, on providing conveyances and in paying high
rents for accommodation for the officers and directors and in many other ways. I am
afraid this tendency amongst companies is responsible in no small measure for the
present high costs and the time has come to put a cheek at least on some of these
expenses. It is not practicable to spell out all the restrictions in detail in the Act itself
as some room will always be left for those inclined to evade these provisions to find
ways and means of doing so. I feel it is necessary to have the power to make rules in
this behalf where a specific provision is not practicable. A provision has been included
in the Finance Bill for this purpose. Subject to these changes 1 propose to continue
the existing corporate tax structure, including the rebate on incomes earned from
exports.
58. I would have liked to discontinue the present general availability of
development rebate and to confine it on a graduated basis to certain selected industries.
I, however, appreciate that this might cause some difficulties to concerns who have
made plans for starting an industrial undertaking on the presumption that this rebate
would continue to be available to them in the near future. In view of this, I would like
to clarify that the continuance of the development rebate in its present form beyond
1st April, 1966 should not be assumed. I believe it is in the interest of industrial
development to give such notice.
59. On the non-corporate side, I consider that the present rate structure of
income-tax and Super-tax needs revision. The structure has grown over years with
annual additions and occasional reductions. A number of surcharges have been added
to it under a variety of nomenclature. It has been represented to me that the working
out of the tax due under the circumstances is itself a very difficult task even in the
case of small and medium incomes and this throws an enormous weight of work on
the staff all of which seems unnecessary. I feel it is time that we had a fresh look at
the basic structure itself. In this context it is worth while mentioning that the
motivating factor behind earned incomes should not be altogether ignored. Much of

17
it is due to the incentive, the initiative and hard work of the earner himself, and for
keeping up Ws effort and to enthuse the earner to greater efforts, it is necessary for
him to have a feeling that at least some substantial portion of what he earns is left
in his hands. In view of the present constitutional position and the need to augment
the resources of the Centre, it is proposed to continue to levy a surcharge for the
purposes of the Union.
60. The personal income-tax structure is being re-graded. This will provide a
revised and simplified schedule of rates of Income-tax and Super tax in which most of
the surcharges will be integrated and will mean a reduction of tax at all levels. With
this change, the burden on the incomes in the lower brackets will be substantially
lower than what it is now.
61. I propose to fix the Central surcharge on earned incomes above Rs.100,000
at 10 per cent and on unearned incomes above Rs.10,000 at 121/2 per cent where such
income does not exceed Rs.25,000 and at 15 percent where it exceeds Rs.25,000 but
does not exceed, Rs.75,000 and at 17.5 percent above that amount.
62. The Compulsory Deposit Scheme, which, as the House is aware, is now
only applicable to income-tax Paying category of persons, who can discharge a part of
their liability in respect of additional surcharge by making a deposit, would be
discontinued altogether. Income-tax payers in the small income groups were, I am
afraid, hard hit by the scheme, particularly, after discontinuance of the scheme for
other categories in September last. I did not like to make a change then though 1 was
alive to the need for giving marginal relief even in the current year on some of the
lower incomes. I now propose to make a retrospective amendment to the relevant
provisions of the Finance Act, 1963 to secure to such assessees appropriate marginal
relief from the additional surcharge.
63. I propose to introduce an Annuity Deposit Scheme to replace the
Compulsory Deposit Scheme which will operate at the income level above Rs.15,000
per annum. This deposit will be at the rate of 5 per cent in the case of assessees having
incomes between Rs.15,000 and Rs.20,000; at 7.5 per cent for those with incomes
between Rs.20,000 and Rs.40,000; at 10 per cent for income between Rs.40,000 and
Rs.70,000 and at 12.5 per cent where the income is above this amount. The deposit
which will be compulsory for resident assessees who are citizens of India will be
allowed as a deduction in computing the total income for the year in which it is made.
It will be repayable in ten annual equated instalments of principal and interest
commencing from one complete year after the year of assessment. The deposits in
1964-65 will earn interest at a rate slightly above 4 per cent per annum compound.
Deposits which are repaid from year to year will, however, be assessed as part of the
income of the assessee in the year in which it is so repaid. In addition, I also propose
to extend on a voluntary basis the benefit of this arrangement to authors, actors and
artists, who at their option can deposit a further amount not exceeding 15 per cent of
18
their income under this Scheme in order to reduce the taxable income in the year in
which it is earned and get it back in instalments over a period of ten years. It is
expected that this can be used by them as saving for their future benefit with the
advantage of a tax saving. I propose to extend this benefit to taxable gratuity income
also. Persons receiving a gratuity liable to tax can make at their option a deposit up to
50 per cent of the amount of the gratuity under this Scheme and get the benefit of
saving in tax.
64. With the coming into force of the Annuity Deposit Scheme the net income
in the hands of assessees in the income group of. Rs.15,000 and above will be slightly
lower than it has been hitherto, but there will be the advantage of an annual return in
this form besides the savings in tax on the aggregate amount. I consider a marginal
reduction in the expendible income of this group as something which is justified by
the present conditions.
65. The revised tax-structure without taking into account the capital receipts
from the Annuity Deposits would mean a lowering of revenue from these sources and
a compensatory lowering of tax at all levels. I expect, however, to make good this loss
wholly by tightening the tax assessment and the collecting machinery in a number of
ways. As the House is aware there is a general feeling that Government is losing a fair
share of its revenue due to evasion and avoidance. This has been attributed in part to
the prevailing high rate of taxes. With a reduction in the tax rates now proposed I hope
we shall hear less of this reason. The main steps proposed for checking evasion are
five-fold. Firstly, every tax return will carry an affirmation about its correctness. This
will, I hope, induce people to take additional care in preparing their return. Secondly,
the tax due according to the return will have to be deposited within one month of the
submission of the return, failing which the assessee will be liable to a substantial
penalty. This will ensure quicker collection. Thirdly, the existing provision in the
income-tax Act regarding the levy of penalty for concealment of income is proposed
to be amended. In the new provision where the income returned by a person is less
than 90 per cent of the assessed income, the assessee should be deemed to have
concealed his income unless he proves his bona fides. Fourthly, it is proposed to take
extensive powers to search for evaded wealth. The evil of unaccounted money has
become so great that its mitigation, if not its total eradication, calls for drastic measures.
It is intended to use the new powers effectively to ensure that no person possessing
income or wealth that has escaped assessment remains out of the reach of law. I would
like this to serve as a warning to persons entering into transactions involving large
sums in cash. Fifthly, it is proposed to do away with the secrecy provision in the
income-tax Act and other similar enactments. The combined effect of all these steps
will, it is hoped, prove beneficial to collection of revenues as well as to ensure a fairer
deal to the honest taxpayer.
66. I propose to allow rebate of Super-tax on contributions to recognised
Provident Funds, deposits in the 10 and 15 year accounts of the Post Office
19
Cumulative Time Deposit Scheme and premiums on life insurance but the limit for
this purpose will continue to be at Rs.10,000 per annum. Rebate of income-tax and
Super-tax will cumulatively be limited to 50 per cent of the payments or deposits
qualifying for relief.
67. Our tax rates cause some hardship to foreigners working in India. Many
of them find it necessary to keep their school going children in their own country. In
western countries there are liberal concessions in income-tax amongst other things for
children’s education. In the U.K., it is fixed at £150 per child. I, therefore, propose to
allow to resident assessees who are not citizens of India a rebate of income-tax and
Super-tax of a sum on Rs.2,000 per child up to two children under 21 years of age
receiving education outside India.
68. I also propose to extend the scope of two-existing concessions. As the
House is aware, under our income-tax Act, certain categories of foreign technicians
whose contracts have been approved before their arrival, enjoy exemption from tax on
their salary income for a period of three years. In the absence of prior approval, the
tax exemption is limited to one year. In some cases, it is found necessary to bring
technicians at a short notice when it is not possible to obtain prior approval to their
contracts of service. Sometimes it is found that the task for which a technician is
brought out takes longer than was expected and the period may go beyond one year.
To remove these difficulties, it is now proposed that the tax exemption for three years
will be available provided approval is obtained within one year of the arrival of the
technician in India. It is also proposed to extend the concession of exemption from tax
to foreign teachers and professors coming to India on approved programmes.
69. Under our law, incomes arising from a business connection are liable to
tax. While this principle is generally sound for developing countries, it is found
necessary in the context of our present drive for higher exports to exempt from tax
such income arising from purchase in India of goods which are exported. In order to
encourage our exports, it is necessary to remove the disincentive of tax liability which
does not exist in many other countries. I also propose to extend the scope of exemption
from tax on interest on approved foreign lending by bringing within its scope investment
in approved securities.
70. The tax on capital gains, which is on the statute book, has certain
drawbacks. It applies at the ceiling rate of 25 per cent on any capital gain made above
Rs.10,000 The tax laws as such in respect of capital gains require that the capital gain
accrues only when there is a transfer of asset and a payment for it in an encashable
form. Certain types of assets newly created like bonus shares which are in the nature
of capital gains do not attract this tax. Apart from the fact that the tax impinges
heavily on the lower receipts and lets off lightly larger receipts, it makes no distinction
in regard to different types of property on the sale of which capital gain accrues. All
these considerations make it necessary for the structure of the tax on capital gains to
be revised.
20
 71. At present, the law does not permit short-term gains made within one year
to be treated as capital gains and treats it as income and this is as it should be. Such
short-term capital gains will also bear the surcharge in respect of unearned income.
But in regard to the other types of capital gains, I propose to make three changes. The
main one is that the tax on capital gains will be on a graduated scale in future without
a ceiling of 25 per cent as at present. Secondly, the scale will be different for house
and landed property and will be at the rate of 75 per cent of the appropriate slabs in
the income-tax cum Super-tax rate of personal taxation. Other types of property will
bear tax at 50 per cent of the average rate of tax on personal income. The third change
will be that it is proposed to provide that an invester in shares after receiving bonus
shares shall be charged to tax on capital gains accruing to him in respect of such
shares in the year in which they have been issued to him with reference to the market
value of the bonus shares as on the 31st day from the date of their issue. There is no
reason why capital gains in respect of bonus shares should be computed only when
the shares are actually sold or transferred. Bonus shares result in a definite accretion
to the capital of the assessee even before they are sold or transferred. Therefore, they
will have to be distinguished from other assets. There is, however, no change in the
present exemption limit.
72. In regard to exporters, the existing rebate of income-tax and Super-tax on
profits derived from exports and on an amount of 2 per cent of the proceeds of exports
or sale for exports by manufacturers is proposed to be continued. It has, however,
been decided to exclude from the purview of the latter concession such articles as
arms, ammunition, photographic films and newsprint and to include items such as
non-jute textiles exported after the 29th February, 1964.
73. I have referred to the main changes which are proposed in the income and
Corporate Taxes. There are a few others in the Finance Bill which it is perhaps not
necessary for me to refer to here.
WEALTH TAX
74. In regard to Wealth Tax 1 Propose to make a few minor changes in the
rate structure. It has been decided to re-introduce the rate of 0.5 per cent for Wealth
Tax on the first slab of a net wealth of Rs.4,00,000 but beyond Rs.1,00,000. Other
slabs will be slightly re-arranged but their rates remain the same. It is also proposed
to exempt from Wealth Tax the value of a house or part of the house owned or used
by the assessee for residential purposes subject to the limit of Rs.1 lakh where such a
house is situated in a place with a population exceeding 10,000. Other exemptions
remain.
ESTATE DUTY AND GIFT TAX
75. I propose to completely re-cast the tax rate schedules of Estate Duty and
Gift Tax. The Gift Tax was introduced as a complement to Estate Duty in order to
deal with gifts which ultimately have the effect of reducing the value of the estate
21
subject to duty. The social purposes connected with these two taxes have somewhat
been haltingly reflected in the rate structure that now obtains. The time has now
come to put a check on the passing on of wealth and property covering large amount
by inheritance. It is conceded that the right of a person to own and enjoy the fruits
of his labour in his life subject to his social obligations should be ensured. But the
acceptance of this principle does not justify allowing large family fortunes being
passed on from one generation to another. If there is to be a limit on the amount of
wealth to be passed on from one generation to another, we cannot escape from
dealing with gifts which can be used as a means of avoiding or reducing the liability
to the Impact of Estate Duty. In this context it has been found necessary to ensure
that when gifts are made to the same donee over a period of five years, the gifts of
such donee should be aggregated with the value of other taxable gifts made by the
assessee during the preceding five years.
76. At present, the rates of Estate Duty are gradually reaching 40 per cent on
estates of over Rs.50 lakhs. I propose to replace It by a rate structure in which the rate
of 40 per cent will be reached on an estate worth over Rs.10 lakhs, going up to 5 0 per
cent on the next slab of Rs.5 lakhs and to 85 per cent on the value of the estates over
Rs.20 lakhs.
77. As the House is aware, the revenue from Estate Duty will accrue mostly
to the States and the revised rates will apply only to property passing on death taking
place after the rates have come into force. The total additional revenue expected in
1964-65 is Rs.300 lakhs, of which Rs.295 lakhs will accrue to the States.
78. I should like to clarify one point in connection with these changes. The
Estate Duty covers agricultural lands also. Estate Duty in respect of agricultural land
is a State subject. In view of Article 250 of the Constitution, the Parliament has power
at present to legislate in this respect also. The State legislatures will, however, have to
consider whether they would like the new rates to continue to apply to agricultural
lands after the period mentioned in clause (2) of Article 250 is over and if thought
proper, pass necessary resolutions for the purpose. On the passing of such resolutions
by some States, further legislation will be undertaken.
79. In the matter of Gift Tax, in the existing scales the highest rate of 40 per
cent is reached on gifts over Rs.50,00,000. The highest rate which 1 now propose is
50 per cent which will be applicable to taxable gifts of a value above Rs.3,45,000. The
rate of 40 per cent will apply on gifts between Rs.1,45,000 and Rs.3,45,000. The
existing exemption limit of Rs.10,000 is proposed to be reduced to Rs.5,000. It is
hoped that these changes will restrict transfer of property by gift.
80. In circumstances arising out of the stepping up of the rates of Estate Duty
and Gift Tax, and in order to discourage spending, I think it is necessary to reintroduce
Expenditure Tax. I have carefully considered the circumstances and difficulties which
22
made my predecessor suspend the collection of this tax. It seems to me that these
difficulties arose on account of too many exemptions and the high rates of the tax.
Besides, the wording of the charging section of the Act was highly defective and
considerably limited the scope of the operation of the tax. This clause has now been
redrafted so as to attract Expenditure Tax on ‘ all expenditure above Rs.36,000 per
annum no matter from which source the money for expenditure came. It is also necessary
to harmonise the process of lowering of the rates of income-tax with the Imposition
and changes in Expenditure Tax with reduced rates. I, therefore, propose to reduce the
exemptions and exceptions to the minimum, and to have the rates rising from 5 per
cent to 20 per cent on successive slabs of Rs.12,000. There win be no tax on first Rs.3
6,000. The rate of tax will be 5 per cent on the next Rs.12,000,7.5 per cent on the slab
of Rs.12,000 after that and 10 per cent on the next slab of Rs.12,000. It will be 15 per
cent between Rs.72,000 and Rs.84,000 and 20 per cent above Rs.84,000. I also propose
not to apply the highest slab of 20 per cent for the expenditure in the years 1963-64
and 1964-65. I also propose to prescribe a compulsory return for certain categories of
persons in order to ensure that evasion is reduced.
81. As a result of all the changes 1 have proposed in the direct taxes, there
will be an additional revenue of Rs.15 crores to the Centre. The abolition of the
Compulsory, Deposit Scheme and the introduction of Annuity Deposit Scheme will
result in a net credit of Rs.50 crores in 1964-65 on the capital side after allowing for
a drop of Rs.7 crores in the accretion to the Iron and Steel Equalisation Fund.
82. The combined effect of the changes in taxes and deposits will be a net
gain to revenue of Rs.40 crores and to capital of Rs.50 crores leaving an overall gap
of Rs.86 crores as against Rs.176 crores originally estimated. Given the present
economic situation to which 1 have referred earlier, this order of deficit, I think,
should serve best the requirements of growth as well as reasonable stability in prices.
Honourable Members would note that in my remarks today, I have given attention to
the overall deficit, rather than to the position on the revenue account. With the growing
importance of capital expenditure in our budgets, It is no longer sufficient merely to
balance the revenue budget. Indeed, the revenue budget must yield an increasing volume
of surplus If the requirements of public investment are to be met without continually
growing reliance on private or foreign savings.
83. In presenting the estimates for the coming year, I have taken substantial
credit for higher collections of revenue by improvement in administration and stricter
enforcement. On the other hand, in estimating expenditure, I have enforced very tight
budgeting. I have emphasised the role of savings in the community and Government
itself should set an example by economising in expenditure and by not investing in
less essential fields. Economy in administration is fully compatible with efficiency;
and it shall be my constant endeavour to ensure that the administrative machinery of
the Government to reorganised so that it is fully responsive to this need.

23
 84. Our standards of performance, be it in economy in expenditure, or in
efficiency in collection, have to Improve if we are to put our limited resources to the
best possible use. In formulating these proposals, my attempt has been to correct
anomalies, to rationalise the structure of taxation, to initiate steps to plug loopholes,
to create incentives and to reduce unearned profits. Generally, I have attempted to
create some cushion in our tax structure which could be relied upon in the event of an
unforeseen contingency. We are passing through difficult times. We might perhaps
have to face a rehabilitation problem of some dimension. Our defence requirements
may also any day make a larger demand on our resources. We have to be ready to meet
any more unforeseen contingency by keeping a margin for safety in our budgetary
transactions. But above all, we must prepare ourselves for shouldering ever-increasing
responsibilities in the sphere of development, social justice and social security where,
despite what has been done so far, the road ahead is long and arduous. Sir, I hope that
in framing my budget proposals, I have been able, at least in some measure, to keep
my gaze fixed at this distant and difficult goal even as we prepare for meeting the
requirements of the immediate future,
Sir, I conclude.
(February 29, 1964)

24
 SPEECH OF SHRI MORARJI R.DESAI, MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1963-64.

Sir,
I rise to present the Budget for the year 1963-64. For a number of years now the
annual Budget has been framed primarily with reference to our plans for development.
The year that is now drawing to a close has witnessed the emergence of yet another
challenge to us as a nation; and much of what 1 have to say this evening will relate
necessarily to the new situation that confronts us in regard to the defence of our
country.
2. I shall, therefore, not dwell at any length upon economic trends and
developments in the current year. These have been set out fairly fully in the Economic
Survey which is being circulated separately. I would, however, like to touch upon
those aspects of the current economic situation which have a bearing on our tasks
during the coming year.
3. Honourable Members would recall that shortages in the basic sectors of
the economy, particularly in regard to the supply of power, transport, coal and steel,
were a source of concern during the first year of the current Plan period. It was in
the light of these shortages that the Budget for 1962-63 had made provision for a
sizable increase in Plan outlay. During the course of the year, programmes of
development in these vital sectors were reviewed carefully so as to ensure accelerated
and coordinated development of the economy as a whole and I am happy to say that
there has been a significant improvement in the availability of coal, power, steel and
transport over the past year. This trend will be strengthened further in the months to
come as programmes now in hand begin to get completed. Some of our major public
sector projects have made further progress. The Bhakra Dam has been completed
and substantial additions to power capacity have been made from the Rihand and
Hirakud projects. The public sector steel plants are now producing to near capacity.
Industrial production as a whole has continued to grow and during the first half of
the year, It was 7.2 per cent higher than in the corresponding part of 1961-62. We
shall have to improve upon this performance in the coming years, particularly in
view of the demands of the present Emergency and to this end, both the public and
the private sectors must play their part.
4. Agricultural supplies during the year were not uniformly satisfactory. As
the 1961-62 crop was no higher than the crop in the preceding year, prices, particularly
of foodgrains, increased between March and August 1962 and there was an increase
1
of 6.1 per cent in the general index of wholesale prices during this period. To keep
prices in check a number of steps were taken. Monetary policy was geared to an
orderly increase in the cost of credit as well as to a restraint on speculative tendencies.
With a view to stimulate agricultural production and to give the agriculturist the
confidence that If :he stepped up production, he would not lose by a fall in prices,
minimum prices for wheat and procurement prices for rice were announced, the ceiling
price for cotton was further raised and measures to sustain jute prices at remunerative
levels have been strengthened. It is gratifying to note that the general index of wholesale
prices for the month of January, 1963 averaged Th as against 127.5 at the beginning
of the Third Five-Year Plan. Foodgrains output during the current season is expected
to be better than the previous one. Even so, we shall have to redouble our efforts to
increase agricultural production if the rate of growth of the economy in to be accelerated
and the general stability of prices, which has on the whole been a welcome feature of
the past two years, is to be preserved. In these efforts, measures to increase the
production of rice and of Items such as cotton and oil-seeds deserve special emphasis
on account of theirimportant bearing on the coat of living and the balance of payments.
5. The one sector of our economy which has been the cause of the greatest
concern to me throughout the year is our external payments position. The summer of
1962 witnessed a sharp deterioration in our foreign exchange reserves. The foreign
assets of the Reserve Bank, which were already drawn upon heavily during the earlier
years, declined further from Rs.129.7 crores at the end of March, 1962 to Rs.97 crores
by the end of June. We had, therefore, to make further cuts in import quotas already
announced and impose severe restrictions on foreign travel as well as to enter into a
stand-by arrangement with the International Monetary Fund. Improvement in export
earnings and larger reimbursements under aid have staved off further pressure on
reserves over the past few months and on February 15, 1963, the foreign assets of the
Reserve Bank stood at Rs.105 crores. But a level of reserves only a little above the
legal minimum at the height of the favourable export season cannot be contemplated
with equanimity.
6. Turning to the budgetary and fiscal developments during the current year,
the revenue originally estimated at Rs.1386.93 crores will, according to latent
indications, go up to just over Rs.1500 crores. Of the improvement of over Rs.119
crores in revenue, Rs.73.70 crores occurs under the three principal heads. Customs
revenue win go up by about Rs.24 crores due mainly to larger Imports of machinery,
which we welcome as they reflect an acceleration of our developmental effort, and of
kerosene, diesel and other oils, which clearly are a cause for concern in our foreign
exchange situation. The increase of Rs.31.67 crores under Union Excise Duties is due
to the progressive increase in the production and clearances of a number of excisable
commodities, notably sugar. Iron and steel products and motor spirit. Better yield
from taxes paid in advance and larger collections at source on dividends, interest and
salaries account for an improvement of Rs.18.20 crores under Corporation and income
2
taxes. Of the rest of the improvement, the major increases are under Debt Services
due mainly to larger recovery from States and under the three self-balancing Items of
receipts from iron and steel surcharge, P.L.480 Grants and Emergency Risk insurance,
which are transferred to the respective funds by provision in the expenditure estimates.
7. Expenditure for the current year is also expected to go up from Rs.1381.65
crores to Rs.1522.31 crores. The biggest element in this increase is the step-up in the
expenditure on Defence Services, to which this House gave its unqualified approval
when within weeks of the wanton aggression on our borders, it voted supplementary
grants of Rs.95 crores. The revenue expenditure on Defence is now expected to go up
to Rs.451.81 crores, which is Rs.10 8.44 crores higher than the original estimate.
8. Civil expenditure, on the other hand, shows a relatively small increase of
Rs.32.22 crores over the original estimate. The principal item responsible for this
increase is the funding of receipts relating to the three self-balancing items, to which
I have just referred and which account for an increase of Rs.28.5 crores. With higher
revenue from Union Excise Duties, the States’ share will go up by Rs.10.55 crores.
The policing of border areas will require an additional provision of Rs.6.25 crores.
These increases will be partly counter-balanced by savings of Rs.1.87 crores under
Debt Services and Rs.11.48 crores under the group-head ‘Social and Developmental
Services’ excluding the provision for the transfer of surcharge on iron and steel which
is one of the self-balancing items just mentioned.
9. The net effect of these changes is to increase the revenue deficit from the
nominal figure of Rs.72 lakhs originally estimated to Rs.22.06 crores. Considering
that for Defence alone we have had to provide Rs.108 crores more than the original
estimate, the resultant position of the ‘revenue budget for the year cannot be said to be
unsatisfactory.
10. Turning to the Capital Budget, excluding the adjustment for the transfer
of assistance from the United States to the Special Development Fund, which is
notionally treated as capital expenditure, the current year’s budget provided Rs.592
crores for capital outlay. The corresponding figure now estimated is Rs.593 crores.
The increase of a crore of rupees is the net result of a large number of variations. The
Defence capital outlay will go up by Rs.20 crores. A better tempo of execution will
necessitate additional provision of Rs.21 crores for Railways, Hindustan Steel and the
Heavy Engineering Corporation. These increases will, however, be offset by savings
under numerous heads of which I would mention Rs.14 crores for food purchases,
Rs.5 crores for Oil and Natural Gas Commission, Rs.4 crores each for the National
Coal Development Corporation, Farrakka Barrage and Border Roads and Rs.2 crores
for the Fertillser Corporation.
11. In addition to direct capital outlay just mentioned, the original estimates
provided Rs.453 crores for loans to States and Rs.136 crores for loans to other parties
3
including local bodies, Port Trusts and public sector enterprises. These are now
estimated to go up to Rs.523 crores and Rs.147 crores respectively.
12. The bulk of the excess of Rs.70 crores under loans to States is attributable
to the grant of loans to seven State Governments to clear their over-drafts with the
Reserve Bank. Despite the grant of substantial assistance from the Centre for financing
their Plan and now-Plan outlays and the larger share of Central taxes and grants/
accruing to them as a result of the Third. Finance Commissions’ award, some of the
States had overdrawn their account with the Reserve Bank. While agreeing to clear
their overdrafts, I had to stipulate that the States must impose tight financial discipline,
raise additional resources and keep their expenditure within their means. I trust the
States will ensure that a similar situation is not allowed to arise in future.
13. Our borrowing programme shows a shortfall of Rs.20 crores in Small
Savings which will be more than made up by the sale of National Defence Bonds
introduced after the Emergency. The receipts from P.L.480 deposits and foreign loans
will be lower than expected by Rs.30 crores and Rs.78 crores respectively. As mentioned
earlier, the revenue deficit will go up by Rs.21 crores and loans to States and other
parties will be more by Rs.81 crores. The deterioration of Rs.210 crores will be offset
to the extent of Rs.60 crores by Improvement under several heads, of which Rs.47
crores is attributable to the receipts on account of the National Defence Fund and Rs.9
crores to the Emergency Risk insurance.
14. The net effect of all these variations will be to increase the overall, deficit
from the original estimate of Rs.90 crores to Rs.240 crores. It is not unlikely that the
actual budgetary deficit for the current year would be somewhat smaller than what I
have just indicated. But the fact remains that despite the improvement in revenues and
the sizable contributions to the National Defence Fund and the National Defence
Bonds after the onset of the Emergency, the overall deficit would show a large increase
over what was anticipated. The shortfall under Small Savings and the larger ways and
means assistance to some of the States reflecting their financial weakness are matters
of particular concern. Honourable Members, I am sure, would agree that although
prices have remained reasonably stable over the past two years, there is little room for
complacency in regard to the size of the deficit we might safely incur over the years
to come.
15. The paramount consideration in framing the Budget for 1963-64, as I
mentioned at the outset, is the need to build up the defence potential of the nation. The
House would be glad to know that I propose to provide Rs.867 crores for Defence
next year as against the Revised estimate of Rs.505 crores and the Budget estimate of
Rs.376 crores in the current, year. At the same time, I propose to provide Rs.1226
crores for Plan outlay of the Centre, including assistance to the States, as against
Rs.1107 crores provided in the Budget for the current year. It has become in recent
months a rather oft-repeated statement that defence and development are vitally inter-
4
linked. But this is one of those truths which do not become any the less true Mr being
repeated often. The investments which we have already, set in train and for which
foreign assistance is already assured must be brought to fruitful completion as early as
possible. And this consideration alone would require a significant increase in Plan
outlay next year. The Emergency has created new needs. It would not be prudent,
therefore, to provide for the paramount claims of defence by sacrificing the claims of
development. Taking defence and development, together, therefore, the Budget provision
for the next year would show an increase of Rs.610 crores over the Budget estimates
this year.
16. At this stage I should like to refer to certain changes introduced in the
form of the Demands for Grants with the approval of the Estimates Committee. With
the growth in our Plan outlays and the decision to give separate details of both Plan
and non-Plan expenditure, the size of the Demands for Grants has grown enormously
in recent years. This has had the effect of making the Demand unwieldy and difficult
to follow. It has now been agreed with the Estimates Committee that Parts III and IV
of the Demands which give details, according to different circles of account, and
which are intended primarily for the authorities controlling the Grants, may be replaced
by two new schedules. These schedules give details of Plan provision and the staff
employed under different categories. In addition, notes on Demands for Grants also
include a statement of important items of non-Plan expenditure. Arrangements will
also be made for placing in the Parliament Library copies of Parts III and IV of the
Demands which will continue to be printed for Departmental use. These arrangements
should make for the presentation of the Demands in a more concise form without
taking away any part of the, important information which is of interest to Parliament.
17. I would also like to mention the changes made in the presentation of
Demands for Defence Services. Hitherto the provision for the three Services with the
supporting details had been given separately. Following the practice adopted in the
last War, I have decided to combine the Demands for the three Services into a single
Demand but without the usual details, The combined Demand gives the provision for
the three Services at the current year’s level with a lump provision for meeting the
cost of various emergency measures. The House, I am sure, will appreciate the need
for these changes which have been made in the interest of national security.
18. For the coming year, at the existing level of taxation, I am budgeting for
a total revenue of Rs.1585.73 crores and expenditure of Rs.1852.40 crores resulting in
a deficit of Rs.266.67 crores on Revenue account.
19. The Revenue estimates next year show an improvement of Rs.85.48 crores
over the current year’s Revised. Union Excises are expected to go up by Rs.30.27
crores while the revenue from income and Corporation taxes would show a further
Improvement of Rs.15 crores. Interest receipts account for an increase of Rs.40.56
crores of which Rs.18 crores will be from Hindustan Steel, Rs.10 crores from the
5
State Governments and Rs.8.43 crores from Railways. The receipts from Emergency
Risk insurance of goods and factories, if continued at present rates, would show an
increase of Rs.27 crores. We have also decided that in view of higher costs of
Government borrowings, the Railways and the Posts and Telegraphs Department should
give, with effect from the coming year, a higher dividend to the General Revenues and
accordingly the rate will be raised from 41/4 per cent to 41/2 per cent. This will give an
additional Rs.4.43 crores. These improvements however, will on present rates be partly
offset by decreases of Rs.10.45 crores under Customs Revenue due to the Imposition
of further restrictions on imports, shortfalls of Rs.11.70 crores under iron and steel
surcharge and Rs.9 crores under P. L.480 Grants and increase of Rs.2.68 crores in the
States’ share of income-tax.
20. Of the total Revenue expenditure of Rs.1852.40 crores next year, Rs.708.51
crores will be for Defence Services and Rs.1143.89 crores under Civil Heads. As
compared with the revised estimates, the Civil expenditure next year shows an increase
of Rs.73.39 crores. The expanding volume and cost of public borrowings account for
an increase of Rs.34.21 crores under Debt Services. Administrative Services next year
will cost Rs.11.89 crores more due mainly to additional expenditure on border police.
The increase in their share of Union Excises and larger grants to States explain mainly
the increase of Rs.10.54 crores under Contributions and Miscellaneous Adjustments.
While transfers on account of Emergency Risk insurance would be more by Rs.27
crores, those in respect of iron and steel surcharge and P. L.480 Grants would be less
by Rs.11.7 crores and Rs.9 crores respectively. The remaining heads under Social and
Developmental Services win show an increase of Rs.9.84 crores, whereas absence of
provision for payment to the Reserve Bank for the withdrawal of Escudo currency
will result in a saying of Rs.9.14 crores.
21. The provision for Capital Outlay next year is estimated at Rs.827 crores,
representing an increase of Rs.234 crores over the current year’s revised requirements.
Defence Capital Outlay is responsible for an increase of Rs.106 crores. Of the other
major increases, mention may be made of Rs.35 crores for Hindustan Steel, Rs.30
crores on account of net expenditure on food purchases including internal procurement,
Rs.15 crores for Railways, Rs.13 crores for Posts and Telegraphs, Rs.15 crores for
National Highways, Rs.8 crores each for Atomic Energy and Oil and Natural Gas
Commission and Rs.5 crores for Drugs Corporation.
22. The Budget next year provides Rs.541 crores for loans to States including
Rs.100 crores as their share of market borrowings, following the decision taken by the
National Development Council to raise combined loans for the Central and State
Governments next year. The loans to other parties are estimated at Rs.175 crores. An
item of special interest which I would mention here is that during the rest of the Plan
period, a sum of Rs.9 crores is to be earmarked for giving financial assistance to
students of recognised merit and specially favourable terms will be offered to those
who enter the teaching profession.
6
 23. As 1 mentioned earlier, provision has been included in the Budget next
year for a total expenditure of Rs.1226 crores for implementing the Plan, of which
Rs.196 crores will be on Revenue account and the balance of Rs.1030 crores as Capital
outlay including Loans. In addition, Railways are expected to provide Rs.38 crores
and Hindustan Steel and other public sector enterprises Rs.37 crores from their own
resources. These estimates include Rs.400 crores as assistance to the States of which
Rs.94 crores would be on Revenue account and Rs.306 crores in the Capital Budget.
The States are expected to find Rs.350 crores from their own funds. Thus the total
State Plan outlay next year would amount to Rs.750 crores, which, with the Central
outlay of Rs.90 1 crores, would give a total Plan outlay of Rs.1651 crores in the Third
year of the Plan as compared with the current year’s budgeted Plan outlay of Rs.1465
crores. The provision for Plan outlay next year would thus amount to 22 per cent of
the total outlay of Rs.7500 crores for the Plan period as a whole, as against 19.5 per
cent for the current year and actual expenditure of a little over 15 per cent in the First
year of the Plan.
24. For the next year, the estimates take a credit of Rs.400 crores from market
borrowings including Rs.100 crores to be raised on behalf of the State Governments.
The receipts from Small Savings have been assumed at Rs.105 crores. Credit has also
been taken for Rs.462 crores from fresh foreign loans and Rs.90 crores from P. L.480
deposits including Rs.30 crores to be transferred from the moneys formerly deposited
with the State Bank of India.
25. I may now summarise the overall budgetary position next year. At the
existing level of taxation and expenditure, there will be a Revenue deficit of Rs.267
crores. Capital outlay will amount to Rs.827 crores, loans to States and other parties,
Rs.716 crores, and debt repayments, Rs.231 crores. The total disbursement of Rs.2041
crores is expected to be met to the extent of Rs.967 crores from internal and external
borrowings, Rs.248 crores from repayment of loans, Rs.90 crores from investment of
P. L.480 Funds and Rs.282 crores from Miscellaneous Debt and Deposit heads, leaving
an overall budgetary gap of Rs.454 crores.
26. Honourable Members, I am sure, would not expect me to leave this large
gap of Rs.454 crores entirely uncovered. But, before 1 come to my proposals as to the
manner and extent to which this gap should be covered, I would like to recall a point
which 1 had made when introducing my last Budget. I had emphasised that in a
planned economy taxation policy serves not only the objective of raising resources for
the Exchequer but it is also an instrument of economic policy to achieve the wider
objectives of promoting the rate of growth of the economy and of correcting Imbalances
between different sectors of It. I should therefore like at this juncture to re-emphasise
some of the points calling for special attention which emerge out of the brief review
of the economic trends and developments which 1 have already given.

7
 27. First and foremost, there is the need to increase production and accelerate
the pace of development. The growing claims of defence and development cannot be
met except on the basis of an expanding volume of production. By far the greater part
of the responsibility for increasing production rests with the private sector; and when
I refer to the private sector, I am referring not only to organised industry and labour,
but also to the millions of our peasants and artisans. We shall have to make every
possible effort to ensure that the productive potential of our agriculture and industry,
both big and small, is harnessed to the fullest extent to the task in hand. At the same
time, there should be clear recognition of the fact that given the magnitude of the task
that confronts us, we shall succeed only to the extent that we are prepared to put forth
an effort of a kind that transcends ordinary incentives and rewards. The public sector
also must make its contribution, more particularly by a speedy and efficient execution
of all projects and programmes already in hand, so that the fruits of investment we are
making begin to be available with the shortest possible delay. In most cases, external
assistance is available to cover the foreign exchange requirements of the projects in
progress. It would be false economy to allow fiscal or financial considerations to
stand in the way of the quick implementation of these projects, whether they are in the
public or in the private sector.
28. The second thing which must be evident from what I have said earlier is
the seriousness of our foreign exchange position. To the pressures on our balance of
payments arising from the requirements of development and a growing burden of
servicing foreign debt, we must now add the even more urgent requirements of Defence.
Honourable Members would, I am sure, like me to take this opportunity of expressing
the gratitude of this country to friendly foreign countries, particularly the United States
and Britain, who rushed to our assistance with military equipment and supplies in the
hour of need. But the fact that we are being helped liberally with external resources to
finance our development and our defence is a reason for us not to slacken but to
redouble our efforts to mobilise our own resources to the utmost. Not only, therefore,
has the budget to provide the rupee resources we need, but it must also help in securing
a better balance on external account. We have put the most stringent restrictions on
imports already and a stage has been reached when further restrictions would have a
serious detrimental effect both on production and on exports. There to little room left
now for drawing further upon our already depleted reserves. Greater availability of
assistance for financing imports of materials and components has, therefore, been
particularly helpful to us in the present stage of our development when our own
industries can deliver increasing amounts of capital goods, with better availability of
imported raw materials and components. While It is only proper that we should continue
to seek rational changes in the nature and scale of external assistance, we, on our part,
have to strain every nerve to increase our export earnings and to keep our requirements
of civilian consumption with in the strictest limits of austerity. As Honourable Members
are aware, we have launched on a new policy in the country to plug an important
8
source of leakage in our foreign exchange earnings. Drastic and far-reaching as this
policy is, it represents only the kind of action that we must be prepared to take on a
number of fronts if we are to achieve a position of viability in our external accounts.
29. To the already stringent measures for restricting the quantum of imports,
we must now, I feel, add more decisive restraints of a fiscal nature. It is essential for
the successful operation of direct controls that they should be reinforced by appropriate
budgetary measures and there is a strong case for diverting to the Exchequer a larger
share of the profits made by importers, whether on the direct sale of the items imported,
or on the sale of products using imported materials and equipment. Both Customs
Duties and Excise Duties have a part to play in this regard.
30. Somewhat similar considerations apply to export promotion. We have not
only to remove such handicaps as our export industries face as a result of fiscal levies
which we impose to meet our domestic requirements, but also to provide positive
financial incentives to our nascent export industries to enable them to secure a fair
share in foreign markets. The principle of protecting domestic industry in developing
countries by import duties has long been accepted as a sound economic doctrine
supported by the so-called “infant” industry argument. What is true of domestic
industries competing with foreign industries in home markets is equally true of domestic
export industries in developing countries that have to compete with well-established
exports of more advanced countries. In logic, as indeed in practical necessity or
international ethics, there would seem to be no difference between import duties to
protect domestic industry and financial incentives to export industries seeking to
compete on a more equal footing in overseas markets.
31. I have drawn attention to some of the basic economic considerations that
we must bear in mind even as we face the formidable task of providing for a sharp and
sizable increase in Defence outlay next year. The overall gap of Rs.454 crores arises
almost entirely from the increase in Defence outlay. Earlier in the year, it was my
hope and expectation that having raised taxation in the first two years of the Plan to
meet nearly 80 per cent of the target for the Third Five-Year Plan, it would be possible
to provide for all essential requirements this year without any significant additional
taxation. Bit the new threat on our borders has made it necessary for me to come to
the House with proposals for a much higher order of taxation. We cannot allow the
present cessation of active fighting on our frontiers to lull us into a sense of
complacency. No mater how great the effort, the resources that are needed to defend
the honour and integrity of the motherland must be raised. And as we prepare for this
challenge, we cannot plunge the country into the chaos of inflation by unbridled
deficit financing.
32. I am deeply conscious of the fact that the scale of taxation which I am
about to propose is going to impose an unprecedented burden. It has been my endeavour
to ensure that the additional burden is distributed as equitably as possible among the
9
different sections of the community. Honourable Members would appreciate that our
requirements are so massive that we cannot possibly meet them without expecting a
contribution even from the poorer sections of the community. The enormity of the
challenge which confronts us demands nothing less than a measure of sacrifice from
every citizen. It is all the more imperative, therefore, that considerations of equity and
social justice, which we have accepted as an integral part of our way of life, should
receive even more earnest attention now than ever before.
33. With all the effort at additional taxation I am about to propose, the need
for voluntary restraint on the part of the people would also remain as great as ever.
The response of all sections of the people in the present Emergency has been truly
magnificent. And I have every confidence that the same spirit of willing cooperation
and self-restraint will be sustained while the security of the nation is in danger.
34. By far the largest expenditure in the country is incurred by Governments
at the Centre and the States. There cannot be any question that economy and efficiency
in public expenditure are the very heart of the matter in mobilizing resources. We
have taken a number of steps at the Centre to effect economies in several directions.
But essentially, the task of achieving the utmost economy in public expenditure is not
merely a question of cutting or reducing some items of expenditure or of laying down
this or that rule of procedure. What we need is more performance with less expenditure
of resources in every sphere of public activity; and what such economy through
efficiency requires is an attitude of mind-a spirit of vigilance and responsibility-on the
part of all those who are entrusted with the expenditure of the people’s money, be they
engineers, army officers, contractors, workers, civil servants or indeed Ministers. Here
again, the task is one which is for all of us to perform incessantly and not just that
which anyone of us can lay down once and for all,

PART B
35. I now come to my proposals for raising additional resources. Before turning
to the specific measures I am proposing, I will outline briefly the broad scheme, I have
kept in view, in formulating these proposals.
(a) in view of the paramount need for avoiding any resurgence of inflationary
pressures, I have endeavoured to restrict the overall deficit in the Budget
to what I consider to be a reasonably safe limit in the present circumstances.
(b) Not all the additional resources, however, are proposed to be raised by
additional taxation. My proposals include a comprehensive scheme for
compulsory savings, the proceeds of which will be shared between the
Centre and the States.
10
 (c) Among the measures of additional taxation, I propose to raise a substantial
sum from Customs Duties. The additional Customs levies are designed to
ease the pressure on the balance of payments and to encourage domestic
production of import substitutes.
(d) I propose to supplement the present Corporate taxation by a Super
Profits-tax. I also propose to raise income-tax revenue by levying a
progressive surcharge on incomes after tax. Income-tax payers will also
participate in the compulsory savings scheme. My proposals include a
number of changes which are intended to expedite tax-collection, to curb
the growth of perquisites and other unnecessary expenses at the cost of
the Exchequer and to rationalise some of the deductions that are at present
allowed in Corporate taxation as well as the Wealth tax.
(e) The changes in taxation on Corporations provide for a measure of incentive
to exports which are also sought to be encouraged by a budgetary
contribution for market development and by a reduction in the export
duty on tea.
(f) Changes in Excise Duties are in two parts: first, a selective increase in
duties to restrain consumption especially where It aggravates the balance
of payments, and second, surcharges of a varying order on a large range
of commodities but excluding the major items of mass consumption and
a number of basic intermediate goods.
(g) I propose also to ask for powers to vary Excise and Customs duties within
limits to provide a measure of flexibility in either direction in response to
changing circumstances.
(h) Finally, my proposals include revision of Postal rates.
CUSTOMS
36. Keeping in view this broad scheme, I propose to increase import duties on
a number of articles including mineral oils, machinery, Iron and steel products, raw
cotton, rubber, palm oil, cinema films, tobacco, dyes, hardware, electrical and other
instruments and motor vehicle parts. Our Imports of kerosene and diesel oil have been
rapidly rising and have to be restricted till the growing internal production matches
demand. I propose to increase excise duty on most petroleum products substantially
and the import duty will be correspondingly increased. The general rate of duty on
machinery is being raised from 15 per cent to 20 per cent. The concessional rate of 10
per cent applicable to certain types of essential machinery is proposed to be
correspondingly raised to 15 per cent. Our machine building industries have made
rapid strides in the recent past and we want to encourage the establishment of further
capacity for the production of machinery in the country. The changes, which I am
proposing, will be in keeping with this objective. The duty on iron and steel products
11
is also proposed to be raised generally by 5 per cent. I propose to levy an import duty
of 10 naye paise per kilogram on raw cotton and to increase the duty on raw rubber
from 10 per cent to 20 per cent. On unexposed film, the increase is from Rs.6.60 to
Rs.12 per 100 linear metres and I propose to restore the duty on exposed film to the
statutory rate including the countervailing duty. The duty on palm oil is being raised
by 10 per cent which will still be less than half the statutory rate. I also propose to
increase the duty on certain varieties of tools excluding machine tools and agricultural
implements from 50 per cent to 611 per cent, and on hardware in general from 75 per
cent to 100 per cent. The duty on certain motor vehicle parts is proposed to be raised
from 25 per cent to 50 per cent. This will provide a greater incentive for indigenous
production. I also propose to increase the duty on electrical and non-electrical
instruments by 10 percent. As a result of these and other changes which I need not
detail here, there will be an additional revenue of Rs.65.98 crores in 1963-64.
37. I also propose to levy general surcharge of 10 percent on all Import duties.
This surcharge will be calculated without taking into account the countervailing duties.
So far as the latter are concerned, there will be increased revenue on account of
changes in excise, of which I shall speak a little later. Further, since an increasing
number of our Excise Duties are on an ad valorem basis, it is proposed that the
corresponding countervailing duty should be calculated on the landed cost inclusive
of basic import duties and not on the c. i. f. price of the product. The total additional
revenue next year from the Import surcharge and countervailing duties has been
estimated at Rs.26.79 crores.
38. Consistently with my objective of discouraging Imports and encouraging
exports, It is proposed to abolish the export duty on tea but to discontinue the refund
of Excise Duty on It, which is being allowed at present on its export. This will mean
a loss of Customs revenue of Rs.5.38 crores. The total effect of all the changes on the
Customs side will be an increase in revenue of Rs.87.39 crores in 1963-64.
39. Honourable Members would appreciate that enhancement of Import duties
on this scale is designed to have a decisive Impact on the demand for Imports and on
the indigenous production of competing Items. At a time when our Imports consist
essentially of developmental goods, an extensive increase in import duties cannot be
undertaken lightly. We have also to bear in mind that an expanding volume of world
trade, based on liberal trade policies all round, has a vital bearing on our efforts to
achieve a viable position in our external accounts. If I have thought It necessary,
despite these consideration, to resort to enhancement of Customs Duties on such a
large scale, it is because of the fact that our Imports have grown a great deal over the
past few years and we cannot continue to rely so heavily on the generosity of our
friends for financing imports which will inevitably increase even further with the
growth of our economy.
12
CENTRAL EXCISE
40. I have referred earlier to the need for restricting the use of petroleum
products. In order to achieve this, I propose to increase the basic Excise Duty on
motor spirit from Rs.325.10 to Rs.410, on refined diesel oil from Rs.305.25 to Rs.390,
on superior kerosene from the existing basic rate of Rs.79.88 to Rs.210 and on inferior
kerosene from Rs.64.20 to Rs.160, all per kilo litre. There will be a corresponding
increase in the duty on vaporising oil from Rs.283.95 to Rs.370 per kilo litre and on
diesel oil not otherwise specified from Rs.117.70 to Rs.195 per tonne. These increases
will yield an additional revenue of Rs.48.40 crores in 1963-64. I am aware that the
increase in duty on kerosene, which is intended to keep a check on the growth of
demand for this Item which has to be largely imported, will affect poorer sections of
the community, particularly in the rural areas. I propose to offset this partly by removing
the Excise Duty on unprocessed vegetable non-essential oil, including the ordinary
edible oils. This will mean a loss of revenue of Rs.10.25 crores per annum. I, however,
propose to increase the rates of duty on vegetable product, paints and varnishes and
soap, so that the duty hitherto paid on the oil content of these articles will be
approximately covered by the increase in the rates of duty on them. It is also proposed
to increase the rates of duty on cigarettes on a graded scale by amounts varying from
70 naye paise per thousand on the cheapest to Rs.8.70 per thousand on the costly
cigarettes. I also propose to increase the rate of duty on unmanufactured tobacco other
than flue cured and not used for the manufacture of cigarettes, biris, etc., by 40 naye
paise per kilogram. I also propose to increase duty on copper by Rs.200 per tonne in
order to restrict its use. It is also proposed to increase the duty on starwboard where
the production is more than 1500 tonnes per annum. In order to restrict the control on
re-rollers of steel whose number is large and to facilitate enforcement of Excise Duty
on Iron and steel products, It is proposed to revise the structure of duty on this Item
Without any effect on revenue. A duty of Rs.30 per tonne will be levied on blooms,
billets, slabs, steel bars, tin bars and hoe bars in addition to the duty at ingot stage but
further duty will not be charged on bars, rods, wires, forgings, strueturals and other
products If they are made from semi-finished steel which has paid this duty of Rs.31.
The duty on plates, sheets, hoops, strips and skelp will also be similarly reduced by
Rs.30 per tonne. These changes in the rates of Excise Duty will yield an additional
revenue of Rs.60.28 crores next year, out of which Rs.9.60 crores will accrue to the
States as their share.
41. I do not propose to levy any new excise this year. But in addition to the
changes in rates for the few Items I have just mentioned, I propose to levy selective
surcharges on the Central Excise Duty on several articles with a view to raising revenue
exclusively for the Centre which has to carry the burden of Defence. There will be a
surcharge of 10 per cent on the duty on synthetic dyes, printing and writing paper, jute
manufactures, glass other than plate and sheet glass, chinaware and porcelainware,
tinplate, internal combustion engines, electric storage batteries, electric bulbs, motor

13
spirit and diesel oils. There will be a surcharge of 20 per cent on tea, coffee,
unmanufactured tobacco, cigarettes, vegetable product, paints and varnishes, soap,
cohmeties, plastics, cellophane, tyres, rubber products, paper other than printing and
writing paper, cotton yarn of less than 35 counts, woollen fabrics, art silk fabrics,
cement, plate and sheet glass, electric motors, dry electric batteries, electric fans,
motor vehicles other than motor cars, films and aluminium. There will be a surcharge
of 331/3 per cent on cigars, rayon and woollen yarn, cotton yarn of 35 counts or more,
silk fabrics, refrigerators and airconditioning machinery and parts thereof, wireless
receiving sets, radiograms and motor cars. The surcharges have been so arranged as to
bear lightly on selected intermediate goods and rather heavily on luxury Items consumed
by the more well to do classes. As for articles which enter into common consumption,
such as sugar, cotton fabrics, footwear, matches and cycle parts as well as patent and
proprietary medicines, there will be no change in the excise duty. Most of the basic,
intermediate and other products such as soda ash, caustic soda, acids, gases, plywood,
asbestos cement products, pig Iron, steel ingots iron and steel products, zinc, furnace
oil, asphalt and bitumen, petroleum products not otherwise specified and electric wires
and cables are also excluded from the scope of the surcharges.
42. The total additional revenue as a result of the surcharges will be Rs.55.93
crores. For the reason I have already mentioned, It has been proposed in the Finance
Bill that the States will not share in the surcharge. The net additional revenue in
1963-64 to the Centre on the Central Excise side as a result of the changes in the rates
and the surcharges will be Rs.106.61 crores.
43. I share the anxiety of the House about the price effect of the changes in
Excise Duty. I should, therefore, like to mention the exact effect on items of common
consumption on the assumption that the entire duty is passed on to the consumer
which in actual fact should not be the case. As the duty on ordinary edible oils has
been removed, their prices should go down. In the case of matches, sugar and footwear,
where there has been no change in duty there should be no increase in prices at all.
The surcharge on cotton yarn and the import duty on raw cotton will mean increase
only of a fraction over a naya paisa per square metre in the cost of cotton fabrics and
should not call for an increase in their prices also. Increase in the duty on tea is of 3
to 9 naye paise per kilogram, varying according to its quality, while that for vegetable
product is 6 naye paise per kilogram. Increase in washing soap is of the order of 1.5
naye palse per bar of 45 tolas. The main increase which is in kerosene will be 10 naye
paise per bottle of superior kerosene and 7 naye paise for that of interior kerosene, in
order to ensure that there is no profiteering through unwarranted price increases, suitable
orders are being issued under the Defence of India Rules.
44. In our present position, it is essential to have also the authority to be able
to act at short notice in order to check profiteering and to regulate resources and
demand. Government has already powers to reduce Customs or Excise Duty. In the

14
Finance Bill, It is also proposed to take power to enhance these duties or to impose a
Customs Duty within specified limits in the course of the year. The limits proposed
are 10 per cent ad valorem for goods subject to Excise Duty and that rate or 25 per
cent of the existing statutory rate whichever is higher for import duty. Given powers
to vary Excise and Customs Duties within limits, It should be possible to adjust fiscal
policy promptly in response to changing circumstances.
DIRECT TAXES
45. In the field of direct taxes, I propose to levy an additional surcharge for
the purpose of the Union rising progressively from 4 per cent to 10 per cent on the
incomes after tax, of individuals, Hindu undivided families, unregistered firms and
associations of persons. A part of this additional liability can be discharged through a
compulsory deposit, as I shall explain later. It is also proposed to levy a surcharge for
the Union of 20 per cent on the income-tax payable by registered firms. Additional
yield of Rs.45 crores is expected from these measures in 1963-64. In regard to the
existing surcharges of income-tax and the special surcharge, I propose to abolish the
present higher exemption limits of Rs.15,000 for certain Hindu undivided families
and Rs.7,500 for individuals, unregistered firms, etc. The revenue effect of this measure
will be small but it will simplify the structure of these surcharges by removing the
complicated system of marginal relief involved in these higher limits.
46. With a view to speeding up collections, I propose to introduce a new
provision in section 141A of the income-tax Act to provide that assessees who pay the
tax assessed on them or pay the tax due on the basis of their returns before the 1st
January of the relevant assessment year will be entitled to a credit for 1 per cent of the
tax so paid by them. Correspondingly, it has been provided that assessees who do not
pay the tax on the basis of their returns by the 31st December of the assessment year
shall be liable to pay interest at 2 per cent per annum on the tax found due on the basis
of their returns. Sections 209 and 210 of the income-tax Act are also being amended
to secure that the amount of advance tax demanded by the income-tax Officer, on the
basis of the last completed regular assessment of the assessee, could be revised by him
if the income determined in a provisional assessment for a later year is higher. It is
also proposed to restrict, in the case of companies, the deduction for expenditure on
account of remuneration and perquisites to Rs.60,000 per annum for an individual
employee. Honourable Members will, I am sure, appreciate that a proliferation of
perquisites and high salaries for the privileged employees is one of those phenomena
of modern corporate life which cannot be allowed to remain unchecked. These measures
to expedite tax collection and to put a curb on high salaries and perquisites are expected
to yield a revenue of Rs.12 crores in 1963-64.
47. I also propose to amend the provisions in Sections 139 and 220 of the
income-tax Act relating to the charging of interest for delay in submission of returns
and for non-payment of tax in due time, to provide for a reduction of the amount of

15
interest in consequence of any reduction of the tax assessed under an order on appeal,
reference or revision. Regarding charging of interest for delay in filing of returns, It is
also proposed to make a provision enabling income-tax authorities to waive or reduce
the interest in cases of hardship where the return was delayed due to factors beyond
the control of the assessee.
48. It is also proposed to make some amendments to the provisions of the
income-tax Act relating to the recovery of arrear tax dues through officers of the State
Governments, functioning as Tax Recovery Officers, with a view to removing certain
difficulties and to expedite recovery of arrears.
49. I propose to withdraw the existing exemption up to Rs.25,000 allowed for
jewellery in section 5 of the Wealth-tax Act for the purpose of computing the net
wealth of assessees. At a time when we have launched on a new gold policy to reduce
the glamour for gold, an exemption for jewellery in Wealthtax would be inappropriate.
The additional revenue expected from this measure is about Rs.40 lakhs.
50. The 10-year Treasury Deposit Certificates and the 12-year National Plan
Savings Certificates which are exempt from Wealth-tax have been replaced by 10-year
Defence Deposit Certificates and 12-year National Defence Certificates. It is, therefore,
proposed to include the new Certificates also in the category of exempted assets under
the Wealth-tax Act.
EXPORTS
51. Honourable Members will recall the concession in income-tax given to
exporters last year. I propose to continue it this year also. In addition, I propose to add
to the incentive for manufacturers. This will apply to manufacturers who are engaged
in any of the industries listed in the First Schedule to industries (Development and
Regulation) Act, 1951 other than those mentioned or may be notified and who export
their goods themselves or where the goods manufactured by them are exported by the
first purchasers from them. Such manufacturers will be allowed in addition to the
existing tax rebate, a further rebate of income-tax and super-tax on a sum equivalent
to 2 per cent of the value of such exports made hereafter, subject to the limit of the tax
otherwise payable by them on their total income.
52. I have pointed out earlier the importance and necessity of helping our
“infant” industries to overcome the difficulties and obstacles which they encounter in
making themselves known in overseas markets. If we are to achieve the kind of increase
in our export levels, which we need to get over our chronic foreign exchange difficulties,
we must rely on our new industries to turn increasingly to export markets. A provision
of Rs.3 crores has been made in the budget for 1963-64 for developing new markets
including publicity, survey, research and promotion of exports. Out of this, suitable
sums will be placed at the disposal of Export Promotion Councils and other similar
bodies to help in the vital task of export promotion.
16
SUPER PROFITS-TAX
53. So far I have applied myself to practicable increases in the existing
instruments of taxation. They are, however, not enough either to raise adequate resources
or to secure an equitable distribution of the burden we have to shoulder.
54. In our system of corporate taxation, there is no correlation between the
rate of tax and the percentage of profits. This shortcoming needs to be remedied
especially at the present juncture when the corporate sector like the rest of the
community must bear its share of the increased national responsibility. Instead of
revising the present system, I propose to super-impose on it a Super Profits-tax. That
tax will operate when the income of a company after deducting the income-tax and
Super-tax payable by It exceeds 6 per cent of its capital and reserves except for such
amounts of reserves which have been allowed as deduction in computing the total
income for income-tax. The rate of tax will be 50 per cent when that income is above
6 per cent but not above 10 per cent of the capital and 60 per cent on incomes above
10 per cent. It is hoped that this tax will act as a disincentive to excessive profits and
will help to keep down the prices.
55. It is proposed to disallow expenses on commission, advertisement and
entertainment to the extent that there is reason to believe that they are inflated for
reducing profits artificially.
56. The Super Profits-tax is expected to yield a revenue of about Rs.25 crores
in 1963-64.
COMPULSORY SAVINGS
57. Apart from taxation, we have relied on the voluntary savings of the people
to meet our growing requirements of development. Voluntary savings and contributions
have an important part to play in the present Emergency also. In view, however, of the
sharp increase in our requirements, it would be appropriate to introduce a comprehensive
scheme of compulsory saving to supplement the effort by way of additional taxation
and voluntary savings. Like taxation, compulsory saving will restrain demand in the
immediate future; whereas unlike taxation, it would provide an earning asset to the
people and generally help in inculcating the saving habit in the country.
58. Accordingly, I am introducing a Bill which will enable Government to
provide for compulsory saving on the part of different sections of the people on
appropriate scales, subject to certain maxima provided for in the Bill. These maxima
are: 50 per cent of the basic land revenue on 1959-60 assessment for agriculturists; 3
per cent of the annual rental value of property for property-owners in urban areas; 3
per cent of salary for employees who earn more than Rs.1500 per annum but are not
liable to income-tax; and other comparable rates for professional and other classes. In
the case of income tax payers whose residual income after payment of tax does not
exceed Rs.6,000, an amount equal to 3 per cent thereof and in the case of others
17
having a higher amount of residual income, an amount equal to 2 per cent thereof will,
on being deposited under the compulsory savings scheme, be deducted from the new
additional surcharge payable by them. Of the total yield of Rs.45 crores under the
Union surcharge, already referred t5 some Rs.12 crores may, therefore, accrue as
compulsory deposit. Deposits under the scheme will not be withdrawable for a period
of five years and would carry simple interest at 4 per cent per annum.
59. Arrangements for collecting compulsory deposits are being worked out in
co-operation with the States which will get a share in the proceeds of the scheme.
Total collections under the scheme and its net contribution to additional resources are
difficult to estimate; but on an approximate basis, total collections under the scheme
might amount to between Rs.65 crores and Rs.70 crores. Pending arrangements for
sharing the proceeds with the States, I am taking credit for a net increase in the
Central resources of Rs.40 crores byway of proceeds of compulsory saving, including
Rs.12 crores from income-tax payers.
60. The additional resources from all the direct levies proposed, including
compulsory savings, would thus be Rs.110.4 crores, of which Rs.40 crores would be
by way of compulsory savings) Rs.33 crores by way of Union surcharge on income-tax,
Rs.25 crores by way of the super-profits tax and Rs.12.4 crores by way of measures of
rationalisation and reduction or elimination of exemptions.
POSTAL RATES
61. As the House is aware, the Postal and Telegraph branches of the Posts
and Telegraphs Department have generally been working at a loss. Many of the services
we provide on the postal side are unremunerative. The average cost of post card to the
Department is 8 nP whereas we receover only 5 nP. The annual loss on post cards
alone is over Rs.3 crores. On registered letters we lose about Rs.11/2 crores. The Posts
and Telegraphs services are being extended to remote areas by the opening of Posts
and Telegraphs offices which are not remunerative. On all these considerations, it is
proposed to raise the existing rate of 5 nP. for single and 10 nP. for reply post cards to
6 nP. and 12 nP. respectively. Local post cards as a separate category will be abolished.
For book, pattern and sample packets, the rate will be increased from 8 nP. for the first
50 grams and 3 nP. for every additional 25 grams to 10 nP. and 5 nP. respectively. The
rates on parcels will be increased from the existing charge of 50 nP to 60 nP for every
400 grams. The registration fee is proposed to be raised from 50 nP to 55 nP and the
acknowledgement fee from 6 nP to 10 nP. Certain other increases in the fees for
certificate of posting, insurance, business reply permits and post box rentals are also
being proposed. The additional revenue expected from the increase in the postal rates
will be about Rs.3.15 crores.
62. It is proposed to revise the inland telegram rates from 80 nP. for the first
8 words and 8 nP for, each additional word to one rupee for the first 10 words and 10
nP for each additional word. The charges for greetings telegrams will be raised from
18
50 nP for 6 words and 7 nP for each additional word to 75 nP for the first 8 words and
10 nP for each additional word. The rates for express telegrams will be correspondingly
doubled. The separate category of Local telegrams including greetings telegrams will
be abolished. At present, the charge for registration of abbreviated telegraphic addresses
varies with the period of validity of the registration. It is proposed to levy a uniform
fee of Rs.50 for a period of 12 months in future. These measures are expected to bring
to Rs.95 lakhs.
63. As regards trunk telephones, the concession on urgent calls during the
period the concessional rates apply, will be reduced from 50 per cent to 25 per cent
and the concession on priority calls during this period will be withdrawn. This will
yield about Rs.50 lakhs. The changes in postal, telegraph and telephone rates would in
all yield Rs.4.6 crores.
64. As the surplus of the Posts and Telegraphs Department, like the surplus of
the Railways, after payment of the dividend to the General Revenues is transferred for
credit to its Renewals Reserve Fund, It will not have any net effect on the Revenue
Budget. Credit for the transfers to the Railways and Posts and Telegraphs Funds has
already been taken into account in arriving at the overall deficit.
EMERGENCY RISKS INSURANCE
65. I had said earlier that at present rates, receipts on account of Emergency
Risks insurance would amount to Rs.36 crores in the coming year. As the premium for
Emergency Risks insurance is not meant to be a fiscal levy, it must vary from quarter
to quarter depending upon an assessment of the risk. For the quarter commencing let
April, 1963 1 propose to reduce the premia from 25 naye paise to 15 naye paise in
respect of factories and other installations and from 15 naye paise to 10 naye paise for
goods. This reduction for the quarter commencing let April 1963 would reduce receipts
for that quarter from Rs.9 crores to Rs.6 crores. As the rates for the subsequent quarters
cannot be decided upon at this stage, I am providing for the present for a reduction of
Rs.3 crores only in the receipts on account of Emergency Risks insurance, that is for
Rs.33 crores against Rs.36 crores indicated earlier.
STATE RESOURCES
66. In mobilising resources for the coming year we have also to bear in mind
the needs of the States for additional resources. In this connection, I have already
introduced a Bill to amend the Central Sales-tax Act. The amendments proposed in it
will yield a revenue of Rs.22.5 crores in 1963-64 of which Rs.1.5 crores will accrue
to the Centre from Union Territories and Rs.21 crores will accrue to the States. In a
full year the yield to the Centre and the States will be Rs.30 crores. As a result of the
changes in Central Excise Duties, Rs.9.60 crores will go as the States’ share. They
will also share in the Compulsory Savings Scheme. They will thus have a substantial
accretion to their resources in the next year as a result of the steps I have proposed.
Notwithstanding this, the States would still need to tap in a major way the resources

19
open to them. I have brought this to their notice in my discussions with the Chief
Ministers and Finance Ministers of the; States. While the burden of finding resources
for the defence of the country rests heavily on the Centre, It is the duty of the States
to find larger resources to finance their part of the Plan.
67. The taxation proposals outlined by me would yield a total additional
revenue of Rs.275.50 crores. Of this, a sum of Rs.9.60 crores will accrue to the States
and the balance of Rs.265.90 crores to the Centre, reducing the revenue deficit to
Rs.77 lakhs.
68. The Compulsory Savings Scheme is expected to bring in at the Centre an
additional sum of Rs.40 crores over and above the net realisations from Small Savings
of Rs.105 crores. The reduction in the rates of the Emergency Risks insurance for the
first quarter would reduce the credit to the Fund by Rs.3 crores. Taking into account
the amount to be realised by way of additional taxation and the net Improvement of
Rs.37, crores in Capital receipts, the overall deficit would stand reduced to Rs.151
crores, which will be met by expansion of treasury bills. Considering everything, it
would not be unreasonable to expect that deficit financing of this order will not have
any adverse effect on the economy.
CONCLUSION
69. This then is the sum total of my proposals for raising resources for defence
and development next year-a total effort of Rs.305.90 crores of which Customs Duties
account for Rs.87.39 crores, direct levies, including compulsory saving, on individuals
and companies for Rs.110.40 crores and Excise Duties and inter-State Sales-tax for
the balance of Rs.108.11 crores. It has not been an easy thing for me to contemplate
that the proposals I am called upon to make for my fifth budget add up in their
magnitude and range to very much more than the sum total of my proposals during the
previous four budgets. It would certainly not be easy for the people to accept these
proposals without a measure of privation on their part. The questions that each of us
individually and all of us as a nation have to consider, however, are: Can we afford not
to meet the challenge of the Chinese aggression? Would it be prudent to try and meet
this challenge by forsaking our aspirations for development? Or indeed, would it be
wise not to face It squarely and unleash instead the forces of inflation? It is because
I have been unable to answer these questions in the affirmative that I have ventured to
submit the proposals that I have. I have endeavoured, in doing so, to be fair and
constructive to the best of my ability. I only hope that in time, the determination of the
people in meeting the challenge that confronts us would make it possible for us to turn
our energies even more vigorously to the pursuit of peace, freedom and progress with
justice, to which this nation is dedicated.
(February 28, 1963)

20
 SPEECH OF SHRI MORARJI R. DESAI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1962-63(Final)

Sir,
A little over a month ago, I had presented in the last Session of the Second Lok
Sabha the statement of the estimated receipts and expenditure of the Government of
India for the year 1962-63 and obtained a vote on account. Today I rise to request this
House to, consider and approve these estimates, with a few small variations which I
shall explain later, for the year as a whole.
2. When presenting the interim Budget I had reviewed the economic
conditions in the year 1961-62. I had referred to the sizable increases in production,
both industrial and agricultural, the restoration of a measure of stability in the price
level, the favourable trends in external aid for the fulfilment of our plan as well as the
seriousness of our foreign exchange situation. It is not my intention to cover the same
ground again as there is relatively little that is new which I can add to what I said in
my Budget Speech last month and to what has been stated more fully in the Economic
Survey, both of which are being circulated with the budget papers today.
3. For more than a decade now, economic policy in the country has been
geared to the implementation of successive Five-Year Plans of development. In
retrospect, the First Five-Year Plan seems to have been a modest affair, but it laid the
foundation of further effort. We launched on a bigger and bolder programme in our
Second Plan with its emphasis on the development of basic and heavy industries.
Though we faced many difficulties-particularly foreign exchange difficulties-in its
implementation there is no doubt that the Indian economy has emerged greatly
strengthened by it. Indeed, the success of our efforts seems to have led to a world-wide
recognition of the value of planning as an instrument for the uplift of the less-developed
countries.
4. Our Third Plan, which was launched a year ago, aims at raising our national
income in real terms by some 30 per cent over the five years. It also has to take us
appreciably closer to the objective of a self-generating economy which can continue
to develop at a satisfactory rate without external aid. The Plan envisages an outlay of
Rs.7,500 crores in the public sector. This figure is about two-thirds higher than the
corresponding one for the Second Plan. The total investment of Rs.10,400 crores that
we seek to achieve during the Third Plan equals the actual investment undertaken
during the first two Plan periods put together. Even with this increase in the size of
our Plan, we are unable to accommodate all the legitimate aspirations of our people
1
for more schools and roads, for more power and drinking water, for more transport
and employment opportunities. Many worthwhile and desirable projects, both public
and private, cannot be taken up because we could not make provision for them in our
Plan for lack of resources. It is, therefore, of the greatest importance that we should do
everything possible to mobilise and harness the resources which will help us to reach
the goals that we, as a nation, have set for ourselves.
5. The most critical shortage which we face and which operates as a major
limiting factor in everything that we do is of external resources. The Economic Survey
has dwelt at length on our difficult foreign exchange position during the first year of
the Third Plan. Despite the availability of substantial external assistance and the
assurance of aid to cover a large part of our project requirements, the ways and means
position in regard to foreign exchange remains acutely difficult. Our foreign exchange
reserves have declined to very low levels and the need for conserving foreign exchange
by the strictest watch on imports and by limiting our demands within the resources in
sight is greater than ever today. Beyond a point, however, economy in imports of
essential requirements becomes self-defeating in that it inhibits domestic production,
raises prices, and in consequence, leads to a fall in exports. Further, shortages in the
key sectors cannot but weaken and slow down our plan.
6. The assistance which we receive from friendly countries and institutions
is therefore of critical importance. At the same time, without belittling in any way the
value of this assistance, we must recognise that ultimately it is only through increasing
our exports that we can find the external resources for our development and for repaying
the loans and credits which we receive. I shall later outline some of the fiscal measures
which I propose to adopt to help our exports.
7. It is important to remember that increased exports and economy in imports
which are necessary in view of our foreign exchange situation must mean a restraint
in domestic consumption. A degree of control over domestic consumption is implicit
in our effort to step up investment to substantially higher levels than we have achieved
in the past. In the ultimate analysis, it is not money, but men and materials which pay
for a Plan. The resources we need may be measured and expressed in terms of money,
but they represent in reality the extent to which we can employ current production for
increasing our productive capacity in the future rather than for meeting the needs of
current consumption.
8. Thus, our effort to provide resources for the Plan, the exports to earn the
foreign exchange and the saving to provide the investment, inevitably lead to a measure
of restraint in current consumption. We can achieve it somewhat painlessly through
voluntary savings. We can do it with a certain sense of social obligation through taxes.
Or we can bring it about through an inflationary rise in prices which hurts the common
man and benefits only the speculators and profiteers.
2
 9. All savings strengthen our Plan, whether they are large or small, whether
they are put in banks, or in insurance policies, or in Government securities, or in our
Small Savings Schemes, or in Provident Funds. If the volume of savings is adequate,
the task of ensuring that they are allocated between different sectors and fields of
development according to the priorities in our Plan should not be too difficult. By
controlling non-Plan investment as well as through proper fiscal and other policies,
we can channel the flow of savings into the public sector and the private sector, into
industry and agriculture, into transport and power, into education and health, according
to the priorities and allocations in the Plan. The important thing, however, is to raise
the level of savings in the country to an adequate level.
10. The banking system has an important role to play in this. A couple of
years ago, there had been signs of a lack of confidence, particularly in some of the
smaller banks. I am happy to say that as a result of various measures which we have
taken, including the scheme of deposit insurance which came into force at the beginning
of this year, our banking system stands greatly strengthened. The Governor of the
Reserve Bank, with whom I recently discussed the matter, mentioned with special
satisfaction the fact that the smaller banks will, in his judgement, continue to play a
useful and important role in our economy. The State Bank has been opening branches
in semi-urban and rural areas. The Reserve Bank is making special efforts to facilitate
the availability of credit at low rates of interest to agriculture.
11. Although considerable progress has been made in all these directions and
bank deposits are steadily on the increase, the banking system does not find it too easy
to meet all the demands for funds which are generated by our growing industries and
rising levels of production. It seems to me desirable that industry in the private sector
should exercise a greater measure of restraint in relying on bank finance. I say this not
because I want to slow down the development of the private sector which is as much
a part of our Plan as the public sector, but because private industry has available to it
another source of finance which has, in the recent past, become exceedingly important.
I refer to finance in the shape of equity capital. There was a time when it was difficult
to get a new issue subscribed and only big commercial houses could afford to set up
major enterprises. This situation is fast changing. The public at large, even people
with modest incomes, are now investing in shares. This is a healthy sign which we
must encourage. Government have, therefore been encouraging existing companies,
which wish to branch into new lines of production, to start new companies. Further, in
the floatation of new companies, there should be the maximum opportunity for public
participation. It seems also desirable that new companies should aim at raising a
larger proportion of the capital they need through equity shares, rather than by loans,
as they did in the past. The pursuit of these policies will mean that the ownership of
private industry will become more wide-based and the concentration of economic
power will be reduced.
3
 12. The banking system also provides finance to the public sector. Apart from
the investments which It makes in Government securities public sector undertakings
draw upon the banks to meet their requirements of working capital. Life insurance
like banking is yet another source of finance for our development. The Life insurance
Corporation is a major investor in Government securities. It also contributes to the
development in the private sector. It is making special efforts to popularise insurance
in the rural areas through its Janata Scheme and is using Panchayats and Co-operative
Societies in order to spread insurance in the villages.
13. In the effort to mobilise savings for the public sector, I attach the greatest
importance to the Small Savings movement. During the Second Plan period, the net
collections from small savings, including Prize Bonds, amounted to nearly Rs.415
crores, which was roughly 9 per cent of the total outlay in the public sector in the
Second Plan. The Third Plan target for net collections from small savings is Rs.600
crores. We had, accordingly, budgeted last year for a net collection of Rs.105 crores
from small savings. But judging from the progress of collections during the year,
the revised estimates presented last month came down to Rs.95 crores and 1 would
not rule out the possibility of actuals being even lower. Clearly, we shall have to
redouble our efforts to make the Small Savings Scheme a success, particularly in
the rural areas. I would invite the co-operation of every Member of this House in
this great task.
14. The Government must, of course, for its part, do a great deal too. We have
to improve our selling arrangements as well as service to the small saver. We must
devise new schemes to suit his needs. This is engaging my urgent attention at the
moment. I can make one announcement straightaway. At present, contributions to
Provident Fund and to life insurance policies are, within certain limits, eligible for a
rebate on income-tax. However, for those who are not salaried workers or wage-earners,
there is no scheme of Provident Fund. The opportunity for life insurance is also subject
to medical cheeks. To make available some kind of an arrangement analogous to a
Provident Fund for people who are self-employed and not salaried workers, I propose
to extend and modify the Cumulative Time Deposit Scheme run by the Post Offices.
At present monthly deposits can be made under the scheme for a period of 5 or 10
years. We shall now introduce, in addition, a 15-year account with a maximum monthly
deposit limit of Rs.300. The existing limit of a maximum monthly deposit in a 10-year
account will also be raised from Rs.l00 to Rs.200 per month. At the same time, the
contributions made to the 10 and 15 years accounts will be allowed to earn a rebate of
income-tax as in the case of life insurance premia and contributions to recognised
Provident Funds and subject to the same limits.
15. The Third Five-Year Plan lays considerable emphasis on realising adequate
surpluses from public enterprises and envisages a contribution of Rs.450 crores from
this source in addition to the sum of Rs.100 crores to be raised by the Railways. We
must get an adequate return on the vast amount of capital we are investing in our
4
railways, power plants, irrigation works, fertiliser plants, steel plants and the like. By
making past investments pay for future investments, the rate of economic growth can
be accelerated. This is the experience of all countries irrespective of whether they rely
mainly on the public or the private sector for development. The private sector in India
is already relying, to a considerable extent, on the ploughing back of the profits and
savings in the corporate sector for its expansion. The public sector must do the same
If it is to play an increasing role in the development of our economy. This means not
only efficient and economical operation of public sector plants, but also a policy of
charging a proper fee or price for the services and products supplied by the public
sector. Betterment levies, water rates, electricity charges, railway freights and the like
cannot be determined on the philosophy of no profit and no loss’, but on the
consideration that all these services and facilities need to be enlarged and their users
must pay more for these things today in order that there may be plenty of them tomorrow
and the day after. Our price policy must ensure that investment in key and basic
industries earns a good enough return to make higher investment possible. Situations
may, of course, arise in which a certain industry or a service needs to be subsidised.
But even subsidies can only be given out of surpluses arising somewhere else. Whenever
we accept the need for a subsidy at any one place, we should remember that it will call
for bigger surpluses elsewhere.
16. I should now like to give an account of the budget estimates for 1962-63.
17. In the budget presented on 14th March, 1962, the revenue receipts were
estimated at ‘Rs.1305.87 crores and expenditure at Rs.1369.33 crores, leaving a deficit
on revenue account of Rs.63.46 crores. As a result of the changes that have since been
made, the revenue deficit, on the basis of existing taxation, is now estimated to go
down to Rs.60.78 crores.
18. I should now like to explain briefly some of the important variations.
19. Apart from the changes which are really a regrouping of certain Demands
for grants following the recent reorganisation of certain Ministries and which have
been referred to in the Explanatory Memorandum, there are five items which account
for an increase in the estimates of revenue expenditure. The largest of these is on
account of the increase in dearness allowance. The last Pay Commission had
recommended that whenever the working class consumer price index remained, on an
average, 10 points above 11,5 for a period of 12 months, Government should review
the question of increasing the dearness allowance. As this condition was satisfied
during the period November 1960 to October 1961, it has been decided to increase the
dearness allowance of employees drawing basic pay below Rs.400 per month. The
increase will range between Rs.5 and Rs.10 with suitable marginal adjustments and
will be given with retrospective effect from 1st November 1961. As this decision was
taken only a few days ago, it has not been possible to work out the additional
requirements under each Demand. Accordingly, a lump provision of Rs.7.38 crores
5
has been included as a miscellaneous item in a single Demand which will be surrendered
at the end of the year and the Ministries will be expected to go in for supplementary
grants, to the extent necessary, during the course of the year.
20. I have already referred to the importance of increasing our export earnings.
The promotion of sales abroad is a costly business. Apart from the expenditure on
staff which Government employ, both at home and abroad, for this purpose and the
money which they spend on participation in fairs and exhibitions abroad, industry
itself must spend a great deal more for this purpose, and be prepared occasionally to
incur a loss. In deserving cases, it may be necessary for Government to provide financial
assistance to industries when they are in no position to carry the whole burden of
promotion themselves. It may also be necessary to make grants to organisations set up
by Government or industry for promoting exports. I am, therefore, providing a sum of
Rs.1 crore for export promotion and development.
21. The Government of India have been examining for some time now the
difficulties experienced by industries located at great distances from the coal fields-more
particularly industries in the southern and western regions-in obtaining adequate
supplies of coal. In addition to the measures already taken for stepping up the movement
of coal by sea to these regions, we have now decided to make available additional
import of furnace oil, to the extent possible, with our limited foreign exchange resources.
To facilitate the use of furnace oil by industries located at some distance from the
ports, we propose to make a reduction in the cost of transport of the furnace oil from
the ports to the points of consumption. The arrangement briefly will be that in accepting
consignments of furnace oil from various ports, the railways will recover from the
consignor or the consignee, as the case may be, only half the freight charges which are
leviable in accordance with the normal tariff rates in force at the time of booking,
subject, however, to the net minimum charge in force at present. The difference between
the amount recovered from the consignor or the consignee and the full freight applicable
will be made good to the railways by a subsidy. A provision of Rs.25 lakhs is being
made for this purpose.
22. An additional provision of Rs.99 lakhs has been made to accommodate
the proposals approved after the earlier estimates were framed mainly for the purchase
of stores and equipment required by the Survey of India.
23. Lastly, the estimates of Defence Services show an increase of Rs.1.7 crores
on account of the decision to revise the pay scales of Services officers with retrospective
effect from 1st April, 1960.
24. As against this increase in estimates of revenue expenditure, I propose to
transfer Rs.15 crores from the profits on coinage operations outstanding under suspense.
Prior to 1956-57, the net profit on coins put into circulation, representing the difference
between their face value and the cost of their metallic content, was kept under a
suspense head, the transfer to revenue being limited to the net expenditure in the year
6
on the running of the Mints plus a stabilised credit of Rs.45 lakhs. This arrangement
was revised in consultation with the Comptroller and Auditor-General and with effect
from 1956-57, the actual profits on coinage and loss on destruction of uncurrent coins
are adjusted directly as revenue or expenditure. The amount outstanding under the
suspense head was intended to be utilised as a deficit neutralisation reserve and
accordingly, a sum of Rs.10 crores was transferred to revenue in each of the years
1959-60 and 1960-61. The balance at credit under the suspense head at present is a
little over Rs.37 crores and I feel it would be reasonable to transfer Rs.15 crores from
the suspense head to revenue receipts. After taking this transfer into account, the
revenue deficit will go down by Rs.2.68 crores.
25. On Capital account, the estimates presented last month provided for an
expenditure of Rs.1188 crores for Capital expenditure, including loans to State
Governments and other parties. The loan requirements of Hindustan Aircraft Limited
have since been reduced from Rs.2.5 crores to Rs.1 crore, but this saving will be
offset by an increase of Rs.1.5 crores in the Defence Capital Outlay. In addition, a sum
of Rs.95 lakhs is required for the purchase of bonds of the value of 2 million dollars
to be floated by the United Nations Organisation. The original estimates had provided
for a loan of Rs.9.88 crores to the Railway Development Fund from the General
Revenues which the Railways would not now be requiring. After taking into account
the effect of the transfer of profits on coinage, the Capital budget will show a
deterioration of Rs.6.07 crores which will be counterbalanced to the extent of Rs.2.68
crores by the improvement in the Revenue budget. In the net, the overall deficit will
increase from Rs.147 crores estimated last month to Rs.150 crores.

PART B
26. I come now to, my taxation proposals. Before 1 refer to them, may I
repeat what I have stressed from time to time that taxation policy no longer serves the
sole objective of raising resources for the exchequer. In w planned economy, it must
also serve the wider objectives of augmenting savings, promoting exports, of bringing
about a better balance between the supply and demand for individual commodities
and indeed of social justice in distributing the rewards and sacrifices implicit in planned
progress. Further, all these objectives have to be reconciled with an eye not only to the
immediate future, but also to the long-term perspective we have kept before ourselves.
No less important a consideration is that the administration of the tax laws should
cause the minimum of vexation both to the tax payer and to the tax collector and one
thing that should not be taxed is people’s patience.
CORPORATION AND INCOME TAXES
27. I shall begin with the direct taxes. I propose to increase the rate of tax on
Indian companies from 45 per cent to 50 per cent while the rate of tax on foreign
7
companies will continue at 63 per cent generally. For this purpose, the rate of income-tax
applicable to all companies is being raised from 20 per cent to 25 per cent the rates of
super-tax being suitably adjusted. This will mean that the State will now get half the
profits of joint stock companies as against 45 per cent in the recent past. I, however,
propose to exclude earnings from exports from this increase. This is necessary because
profit margins on exports are relatively low and we want to give every inducement to
trade and industry to sell abroad.
28. It will be necessary, with the increase in the level of corporation tax, to
make some reduction in inter-corporate taxation because when one company pays a
dividend to another, the same profit is liable to corporation tax twice. In the case of
Indian companies the rate including super-tax applicable to dividends received from
Indian subsidiary companies registered before 1-4-1961 will continue at 30 per cent,
while that on dividends received from all other Indian companies will be reduced to
35 per cent. Indian companies in which the public are substantially interested and
whose income does not exceed Rs.25,000 will continue to get a further concession of
5 per cent. In the case of foreign companies which have not made the prescribed
arrangements for the declaration and payment of dividends within India, the rate
applicable to dividends received from Indian subsidiary companies registered before
1-4-1961 will continue at 30 per cent; on dividends received from a non-subsidiary
Indian company registered before 1-4-1959, it will be reduced from 63 per cent to 50
Per cent while on dividends received from other Indian companies, it will be reduced
from 40 per cent to 35 per cent. As a result of these changes, corporation tax will yield
an additional revenue of Rs.10.25 crores.
29. I also propose to tighten the schedule of admissible entertainment expenses
introduced last year. Though this will not bring any appreciable additional revenue, I
expect it to restrain conspicuous entertainment at company expense.
30. I have taken the opportunity of reviewing personal taxation of all kinds. I
have come to the conclusion that while the richer sections of the community must pay
more, there is room for some simplification and relief at particular points. Accordingly,
it is proposed to revise the schedule of rates of income-tax and super-tax on individuals,
Hindu undivided families and unregistered firms. The income-tax payers form a
relatively well to do section of the society. In a population of 443 millions, they are
under a million and thus are a microscopic group. It is only natural that they should
bear a share of the tax burden in keeping with this privileged position. In this context,
rates of income-taxes on corresponding incomes in different countries are often
compared. This is, however, not meaningful as conditions differ widely. In any case,
proper comparison can only be of the incidence of total tax burden on different groups
with the same relative position in each society.
31. In the revised rate structure of income and super-tax the rate at the highest
slab will be 72.5 per cent exclusive of the surcharges while the rate on incomes below

8
Rs.5000 will remain unchanged. The intermediate slabs have been suitably adjusted
to secure an even increase in rate. Honourable members will recall that various studies
have stressed the fact that at intermediate and lower levels of income, our tax rates are
comparatively low but in view of the limited span of income spread, they rise steeply.
While this is to an extent inevitable in our circumstances, the changes I have proposed
will bring about an improvement over the present position.
32. I am conscious that income-tax weighs a little more heavily on salaried
classes than on others. I, therefore, propose to reduce the surcharge on income-tax on
salaries, which also include pensions, from 5 per cent to 2.5 per cent leaving other
surcharges unchanged. The rate at the highest slab inclusive of surcharge will be 87
per cent. It is proposed to raise the exemption limit for Provident Fund contributions
and insurance premia to Rs.10,000. As I have mentioned earlier, it is also proposed to
liberalise and widen Cumulative Time Deposit Scheme with the benefit of income-tax
exemption which can be taken advantage of by self-employed and uninsurable persons.
These measures will give some relief to individuals without reducing the resources
available for development.
33. It is also proposed to revise the structure of rates of tax on registered
firms by reducing the limit of exemption, revising the number of slabs and the rates of
tax and having higher rates for firms with five or more partners.
34. All these measures taken together are expected to yield annual revenue of
a little over Rs.15
CAPITAL GAINS
35. Capital gains are already taxable under our income-tax Act. The incidence,
is, however, restricted in the case of non-company assessees to income-tax only,
calculated in the prescribed manner. In an equitable system of taxation, capital gains
realised during a short period and those not so realised require to be treated differently.
It is necessary to secure broad equity in the treatment of different categories of tax
payers. In a number of cases, it is not possible to establish certain incomes as arising
out of business but they are nonetheless of a similar nature. Gains realised through
purchase and sale of capital assets within a short period fall in this category. I have
proposed that gains which result from disposal of capital assets within a period of one
year from the date of acquisition shall be made subject to income-tax and super-tax
like other ordinary incomes. Capital gains for assessees other than companies from
assets held over a period longer than one year will be subject to income-tax at the rate
of 25 per cent or at the rate applicable as if they were short term gains, whichever is
less. Long term capital gains of companies will continue to be taxed at the rate of 30
per cent. This will yield a revenue of Rs.50 lakhs half of which is expected to be
realised from companies.
9
EXPENDITURE TAX
36. I propose to abolish the five year old Expenditure Tax with effect from
the current year. When it was introduced in 1957, it was realised that it had no backing
of historical experience. It was, however, hoped that the tax would be a potent
instrument for restraining ostentatious expenditure and for promoting savings. While
these are very desirable objectives, experience has shown that the existence of the
Expenditure Tax has contributed little to them. The revenue from this source has
remained conspicuously small. It has been argued that the incorporation of an
Expenditure Tax in the tax structure would make the administration of income-tax a
great deal more effective and would enable the rates of income-tax to be lowered
suitably. Experience has not shown this to be the case. If the working of this tax had
shown some Promising results, it would have been worth while to continue and even
extend it; but with the present experience, it is considered best not to continue a
measure which, as a source of economic restraint, has been ineffective and as a source
of revenue unattractive. The basic objectives of the tax have to be achieved in other
ways. This will mean a reduction in revenue of the order of Rs.70 lakhs during 1962-63.
WEALTH TAX
37. It is proposed to increase the Wealth Tax rates by .25 per cent and .5 per
cent on the two highest slabs and to revise the slab structure a little. It is also proposed
to discontinue the exemption on shares held in new companies during the first five
years allowed at present under the Wealth Tax Act. This is expected to yield an
additional revenue of Rs.2 crores per annum
38. The net effect of all the changes in direct taxes in a full year will be an
increase of Rs.27.2 crores in our revenue.
UNION EXCISE DUTIES
39. Turning to indirect taxes, it is only natural that a major share should come
from the Union Excise duties. I propose to revise the rates of excise duty on
unmanufactured tobacco and cigarettes which would yield a revenue of Rs.5.28 crores
in a full year. While the general rates are being increased by only small amounts, it is
proposed to re-classify tobacco granule (rawa) in keeping with its more general use
and also to re-group, cigarette price slabs.
40. I also propose to revise the general structure of duty on cotton cloth and
yarn. The present rates of duty on yarn are 10 and 15 naye paise per kilogram. The
incidence of this duty per metre of cloth is less on superfine cloth as compared to
coarse cloth. This is not an equitable position. It is proposed to revise the yarn rates
in such a way as to achieve a slight progression in the incidence of tax according to
the quality of cloth, maintaining the present duty on coarse yarn at 10 naye paise.
The differential of 10 naye paise per kilogram in favour of yarn issued in hanks will
continue. It is also proposed to step up the duty on processing of cloth, keeping in
view the improvement in quality and price of cloth as a result of processing.

10
Operations like mercerising, shrink proofing and organdie processing substantially
enhance the quality as compared to bleaching, dyeing and printing and should attract
relatively higher rates of duty. With these two aspects in view and to secure that the
common man has not to make anything more than a marginal adjustment in his cloth
bill on coarse and medium cloth which he normally uses, it is proposed to reduce
the duty on grey unbleached cotton fabrics. It is also proposed to place units with 50
or more powerlooms on the same footing as composite mills. Rates of compounded
levy on powerloom units with looms from 5 to 49 are also proposed to be increased
so as to graduate the increase in benefit with the reduction in size and to reduce the
incentive for splitting of units. Units employing 4 looms or less will be exempt. AS
a result of these changes, the annual revenue from cotton cloth and yarn will increase
by Rs.12. I crores.
41. It has been found by experience that match boxes of 50 sticks are being
sold at 6 naye paise a box. As local taxes and conditions vary a little, the actual price
to a retail dealer so works out that in several areas he cannot sell at 5 naye paise a box
without incurring a loss, whereas at 6 naye paise a box he makes an excessive profit.
In view of this, it is proposed to revise the duty fixed by notification so as to wipe out
this unintended margin, the statutory rates remaining unchanged. This will yield a
revenue of Rs.1.99 crores per annum.
42. It is proposed to convert the duty on unprocessed woolen, rayon and art
silk fabrics to a duty on yarn and processing, so as to release the powerlooms from
excise control. The loss in revenue will be made good partly by an increase in duty on
yarn and partly by a duty on processed fabrics. As a result of these changes, only a
small number of units will need excise control in future. As a fair quantity of yarn is
imported, these changes will result in a loss of Rs.50 lakhs in the revenue from excise
duty but there will be a net increase in revenue of Rs.1.16 crores on account of
increased countervailing duty on yarn.
43. The present definition of patent and proprietary medicines which
followed the Drugs Act has been producing some anomalies. The Drugs Act definition
while suitable for medical purposes excludes from the scope of patent and proprietary
medicines quite a few preparations which are sold under proprietary names and
marks and are priced accordingly. I have, therefore, proposed a more suitable
definition. With this widening of the definition I propose to reduce the incidence of
tax from 10 to 7.5 per cent by a notification and also to exempt totally certain highly
essential drugs.
44. It is also proposed to alter the tariff item of asphalt and bitumen so as to
include coal-tar, which is used for similar purposes. Coal-tar burnt in furnaces of
plants producing it will be exempted by notification. It is also proposed to revise some
of the exemptions which have either outlived their utility or have been found to be
open to abuse. It is proposed to simplify the procedure for duty on copper and other

11
alloys for convenience of smaller manufacturers. It is also proposed to increase the
duty on aluminium foil by Rs.100 per tonne in order to discourage its internal
consumption which creates a demand for the import of ingots. In order to encourage
export of tea, it is proposed to increase the duty on loose tea by 5 to 10 naye paise per
kilogram and to give a rebate of 15 naye paise per kilogram on its export.
45. These changes in the existing excise duties will give a revenue of Rs.20.74
crores in a full
46. I also propose to levy excise duty on some new items. It is proposed to
levy a duty on jute manufactures in order to restrict their internal consumption and to
encourage their exports. This will yield a revenue of Rs.3.12 crores. It is also proposed
to levy an ad valorem duty of 5 to 7.5 per cent on certain iron and steel products but
to exempt wastages arising in the manufacture of these products from raw iron or
steel. Net revenue as a result of this will be Rs.6 crores. It is proposed to levy a duty
of 5 to 15 per cent on electric cables and wires which will yield a revenue of Rs.2.1
crores. It is proposed to impose a duty on specific acids and gases which will together
yield a revenue of Rs.1.64 crores. Other items on which I propose to levy an excise
duty are plywood at the rate of 10 to 15 per cent, asbestos cement products at the rate
of 10 per cent, tread rubber and latex foam sponge at the rate of 20 per cent,
gramophones, gramophone parts and accessories and gramophone records at rates
varying from 15 to 30 per cent. These items will yield a revenue of Rs.2.30 crores. In
the mineral oil section I propose to add a levy at 5 per cent on mineral oils and mineral
oil products not otherwise specified. On the present production this will bring in a
revenue of Rs.26 lakhs. The total revenue from the fresh levies will be Rs.15.42
crores in a full year.
CUSTOMS DUTIES
47. The changes in the rates of excise duties and the imposition of fresh
duties I have just described will yield a revenue of Rs.7.25 crores on the Customs side
from countervailing duties.
48. I propose to increase import duties on certain iron and steel items and on
art silk yarn by 5 per cent. This will yield a revenue of Rs.2.16 crores. The main items
affected by the increase under iron and steel are structures, fittings for pipes and
tubes, tin plates, steel ingots and manufactures not otherwise specified. In the case of
tin plates, the increase will, however, be only 2 per cent. I also propose to impose an
import duty of 25 per cent on stainless steel plates and sheets and rods and bars. This
will yield a revenue of Rs.80 lakhs. Copra is subject to an import duty of 40 per cent
standard and 30 per cent preferential but by a notification they have been reduced to
15 per cent standard and 5 per cent preferential. It is proposed to increase the notified
rates to 25 per cent and 15 per cent which will still be well within the ceilings. It is
found that as compared to Indian copra, there is a substantial price advantage in
imported copra. It is also proposed to increase the duty on certain types of tools,

12
excluding machine tools and agricultural implements, from 35 per cent to 50 per cent.
This is in line with certain increases made last year. These two items will yield a
revenue of Rs.1.89 crores in a full year. It is also proposed to rationalise duties on a
few items which will yield a small revenue of Rs.7 lakhs only.
49. It is proposed to raise the rate of import duty on cars from 100 to 150 per
cent. The specific duty of Rs.6000 is, however, being done away with so as not to
discourage import of small or used cars in genuine cases. Though there are no regular
imports of cars, some cars continue to come into the country, on Customs clearance
permits. As their number is small, their outside value is high and when they are sold,
there are very large profits. The proposed increase in duty will reduce these profits
and will make import of cars a little less attractive. The revenue from this will be
about Rs.25 lakhs.
50. Having spoken so far about increases, I now refer to a substantial reduction.
I propose to reduce the export duty on tea from 44 naye paise to 25 naye paise per
kilogram. This will mean a loss of revenue of Rs.4.1 crores. Taken with the proposed
refund of excise duty of 15 naye paise per kilogram, this should provide a substantial
incentive for export of tea.
51. These proposals on indirect taxes side will bring in a revenue of Rs.44.5
crores in a full year. Daring 1962-63, their effect will, however, be for 342 days that
is to the extent of 93.7 per cent.
NET EFFECT OF THE PROPOSALS
52. These changes in direct and indirect taxation taken together will bring in
a revenue of Rs.71.7 crores in a full year, of which Rs.44.5 crores will be from indirect
taxation and Rs.27.2 crores from direct taxation. Both direct and indirect taxation thus
play a part in my proposals. This question of the respective roles of direct and indirect
taxation is being raised on a number of occasions. There seems to be a feeling in some
quarters that whereas direct taxes are progressive indirect taxes are regressive in the
sense that their incidence falls more heavily on the poor than on the rich. I am afraid
this view that indirect taxes are regressive is not correct in our conditions. Whether
indirect taxes hit the poor more than the rich or vice versa depends upon the kind of
commodities that are subjected to indirect taxes and the rates at which they are taxed.
No one would contend that excise duties on automobiles, refrigerators and air-
conditioners, for example, hit the poor. Quite a number of items in our range of
indirect taxes are such that they impinge more heavily on the upper middle and middle
classes. We had this whole question analysed last year and our study shows that
indirect taxes in India have been progressive in their incidence. That is to say, the
higher the total expenditure of a family on an average the higher the proportion of the
total expenditure it pays in indirect taxes. Not only that, but the degree of progression
also was shown to have increased as more and more articles not entering appreciably
in common man’s consumption were subjected to excise duty.

13
 53. Hon’ble Members would also appreciate that in a country like India, the
income-tax cannot be a mass tax. That would be administratively impossible and
indeed irksome to the vast majority of the poorer people. At the same time, we have
to tax at least to some extent even those who are not covered by income-tax, for it
would be equally impossible to meet all our requirements for both plan and non-plan
expenditures without mobilising a part of the incomes that accrue to the poorer sections
of the community. Undoubtedly, the richer sections must carry an increasingly larger
share of taxation and poorer sections must benefit progressively more through
development. That is part of our concept of a socialist state.
54. I am aware of the wide-spread desire in this House and outside that the
imposition and enhancement of excise duties should not lead to a general increase in
consumer prices. In some cases, duties are imposed as there is a large margin of profit
and it is considered desirable to reduce that margin. In others, for example, as in the
case of matches this year, the duty is meant to take away the unintended margins of
middle-men. In these cases, there should be no increase in the price to the consumer.
On the other hand in a case like that of patent and proprietary medicines, where it is
proposed to reduce the duty, there should be a reduction in prices. In the case of cloth,
a part of the increase in the rates of duty on yarn and processed fabrics can as well as
absorbed by the industry. The duty on coarse and lower medium fabrics has been
particularly so adjusted that there should be no increase in the price of such cloth.
55. As regards the impact of these duties on exports, I should like to mention
that it is proposed to give a consolidated refund of excise duties paid on the materials
and intermediates used in the process of manufacture. There is, therefore, no reason
why excise duties should impinge on export costs.
56. The taxation proposals outlined above would yield a total revenue of
Rs.68.88 crores during 1962-63. Of this, a sum of Rs.60.80 crores will accrue to the
Centre and the balance of Rs.8.08 crores to the States as their share as a result of the
recommendations of the Finance Commission accepted by Government. This share
will go on increasing from year to year. The manner in which these gains to the States
should be adjusted in keeping with the overall requirements of the Centre and the
States for fulfilling their plans is under consideration. The Planning Commission intends
to review shortly the financial position of the States during the current year in
consultation with them.
CONCLUSION
57. As a result of the tax proposals I have placed before this House, there will
be a net accretion of Rs.60.80 crores to the Centre during 1962-63. This would
completely wipe out the revenue deficit. The overall deficit will consequently be
reduced from Rs.150 crores to Rs.89 crores and will be met by the expansion of
Treasury Bills.
14
 58. I cannot say that I am happy with the gap which still remains. It is my
hope that as in the past with increased incomes and production and with a tighter
cheek on tax evasion our taxes will bring in more than we are able to foresee at
present. In this context, I would emphasise that we can no longer go along with
out-moded concept of taxation being limited to what is needed to cover the revenue
component of the budget. In the context of the major development programmes on
which the public sector is engaged and having regard to the possibilities and limitations
of borrowing from the market it is essential that the revenue budget should provide a
sizeable surplus to sustain a part of the capital budget. In fact during the Second
Five-Year Plan we achieved a revenue surplus of the order of Rs.220 crores without
which the upward pull on the price level would have been far greater. In putting
forward my tax proposals, therefore, I have paid greater heed to the over-all target of
taxation for the Third Plan which as the House is aware is Rs.1100 crores. The additional
taxation levied at the Centre last year should yield a total of about Rs.450 crores over
the Five-Year period. The taxes which I have proposed today will take us yet closer to
our goal of raising adequate resources for our Plan. It is a matter of concern to me that
progress in regard to additional taxation by the States has been slow and in 1961-62
the State Budgets provided for additional taxation with a five year yield of about
Rs.100 crores only as against the target of Rs.610 crores set in the Plan. I would
earnestly request all State Governments to ensure that this shortfall is made up with
speed and vigour.
59. Higher levels of taxation no doubt impose a burden of sacrifice on our
people. The point to remember is that there are only two alternatives to such taxation-
inflation or stagnation. Without the requisite tax effort we would have to face either
an upsurge of prices which would impose a much bigger and much less equitable
burden on the community, or a prolongation of our poverty due to a slowing down of
our development. It is against this background that I would ask the House to consider
and support my budget proposals.
(April 23, 1962)

15
 SPEECH OF SHRI MORARJI R. DESAI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1962-63 (INTERIM)

Sir,
I rise to present the budget of the Central Government for the year 1962-63. The
main purpose of this budget is to place before Parliament an account of the finances
of the Central Government for the current year and to obtain from the House a vote on
account to meet the expenditure of the Government until the new Parliament considers
the budget again.
2. The major developments in the Indian economy during the current year
have been outlined in the Economic Survey which is being circulated separately. I
shall, therefore, refer only briefly to economic conditions in the past twelve months
before going on to give an account of the Revised Estimates for 196-62 and the
Budget Estimates for 1962-63.
3. The year under review has been the first year of the Third Five Year Plan.
It is a matter of great satisfaction to me that despite the step-up in Plan outlays, which
this House approved when the budget for the year was presented, and despite the
continuing upward trend in private investment, a measure of stability has been restored
to the general price level. The more or less steady increase in the general level of
prices during the Second Five-Year Plan was a matter of major concern to the
Government as well as to this House. This upward trend has been arrested during the
current year and the general index of whole-sale prices in recent weeks has been
lower than a year ago. Since August 1961, the All India working class consumer price
index has remained stable.
4. The abatment of the pressure on prices is essentially a reflection of the
improvement in production. During 1960-61, agricultural production had increased by
8.1 per cent, an all-time record. During the first ten months of 1961, industrial
production has shown an increase of about 7.6 per cent over the corresponding period
in the preceding year. A notable feature of the year was the growth of output in some
of the new mechanical and electrical engineering industries. Steel production went up
from 2.2 million tons in 1960 to about 2.9 million tons in 1961. Significant increases
were also recorded in the production of sugar, coal, cement, export products like tea
and coffee, and in the field of chemical industries, sulphuric acid, caustic soda, soda
ash and fertilisers.
5. While improvements in supplies have undoubtedly been of major
importance in bringing about a better balance between supply and demand in the
1
economy, the part played by fiscal and monetary policy should not be overlooked. The
substantial volume of additional taxation which the House allowed me to introduce in
the last budget has contributed significantly to the enlargement of resources for
development and keeping inflationary pressures in cheek. The Reserve Bank, for its
part, has continued to pursue a policy of general restraint, with due regard to the
genuine needs of investment in productive enterprises.
6. Turning from internal to external resources, the picture which I have to
present is far less satisfactory. We had begun the Second Plan with our sterling reserves
amounting to Rs.746 crores. They were drawn down at a rapid rate throughout the
Second Five-Year Plan and we started the Third Five-Year Plan with only Rs.136
crores of sterling balances. Despite every effort to increase exports, to restrict inessential
imports and to obtain external assistance to cover the balance of our indispensable
import requirements to sustain and develop our economy, our sterling balances declined
to Rs.98 crores at the end of July 1961. One reason for this was that negotiations for
aid for our Third Five-Year Plan could not be finalised before the Plan started. To tide
over the situation and to cover the time-lag in the availability of external aid for our
Plan, we had to draw upon our second line of reserves with the International Monetary
Fund to the extent of $ 250 million or roughly Rs.119 crores, last August. Part of this
drawing was offset by repayments in respect of an earlier drawing from the Fund
during the Second Five-Year Plan and on balance, a sum of Rs.58.3 crores became
available from the Fund for augmenting our reserves during the current year. Even so,
we are likely to end the current financial year with sterling balances lower than at the
beginning of the year.
7. Our export earnings have shown a distinct improvement during the current
year. On present expectations, they would amount to something like Rs.665 crores
during 1961-62-an improvement of 5 per cent over the level in the last year of the
Second Plan. An even greater intensification of our export effort is, however, essential
if we are to achieve the Plan target of total export earnings of the order of Rs.850
crores by 1965-66.
8. Our imports during the current year have been running somewhat lower
than in the last year of the Second Plan. The fact that despite a decrease in imports and
an increase in exports our balance of payments has not improved, is due largely to a
deterioration of what is known as invisibles-repayment of loans and interest, travel
and miscellaneous remittances of all kinds. We shall have in the coming months, to
pay special attention to our receipts and payments on account of invisibles. One of the
things on which we are laying, and must continue to lay, the greatest emphasis is that
we cannot afford to use short-term credits or credits which carry a high rate of interest.
9. I am happy to say that there is now greater appreciation abroad of the
importance of giving aid to developing countries on specially favourable terms which
will not put an unbearable burden on the economy in the years to come. Mr. Black,
2
President of the World Bank, has been urging this policy upon all aid-giving countries
and the International Development Association, which is affiliated to the World Bank,
has already started making sizable loans to us which will be virtually free of interest
and repayable over 50 years. The bulk of the developmental assistance from the United.
States in recent years was repayable in Indian currency. Loans from the new U.S. Aid
Agency would be repayable in dollars; but the repayments would be spread over a
very long period and, as in the case of the International Development Association
these loans are virtually interest-free. The Soviet Union and several countries from
Eastern Europe have been making loans to us at a low rate of interest; and at the same
time increasing their purchases of Indian goods to enable us to repay these loans.
Canada, as the House knows, has been giving us substantial aid in the form of grants.
Federal Republic of Germany has lowered interest charges and lengthened repayment
schedules significantly in recent loan agreements. The United Kingdom while raising
the level of aid, has further lengthened the period of her credits. Japan has also moved
in the same direction.
10. Another favourable trend in the sphere of international aid is the growing
recognition of the fact that general support to a country’s balance of payments is at
least as important as the provision of resources for setting up individual identifiable
projects. The true measure of economic progress and development is not the number
of major industrial projects that are set up in the country, but the general increase in
levels of consumption and production, of income and saving. Increase in industrial
capacity is but one of the things through which this can come about. Increased
production from existing industrial units is no less important. In a primarily agricultural
economy like ours, an improvement in farm production through irrigation, through
fertilisers, through better transport and communications, has a much bigger contribution
to make to our development than an increase in the number of industrial projects.
11. The requirements of external assistance for the Third Plan, exclusive of
imports of agricultural products financed under Public Law 480 of the United States,
have been estimated at 2,600 crores. When we started the Third Plan, we had in hand
assistance of the order of Rs.700 crores either by way of carry-over from the Second
Plan, or by way of commitments for projects to be taken up during the Third Plan.
Subsequently, the consortium meetings arranged by the World Bank in May-June
1961 led to the provisional commitment of an additional amount of Rs.1,100 crores.
I am happy to note that the membership of the consortium is on the increase, France
having already committed assistance to us through the consortium. Outside the
consortium, we have received assistance from Italy for oil development. It has to be
remembered that just as there was a carry-forward of commitments and aid from the
Second Plan to the Third Plan, there is bound to be a similar and perhaps larger
throw-forward from the Third Plan to the Fourth Plan. This fact has to be borne in
mind in negotiating further aid during the rest of the Third Plan period.

3
 12. In allocating the aid available, we have naturally given priority to the key
sectors of our economy. Thus, it has been possible to cover the bulk of the requirements
of power projects in the Third Five-Year Plan. The expansion of the three Steel Plants
in the public sector has the promise of necessary aid from the countries with whose
co-operation they were originally set up. For oil exploration, production and refining,
all but a small portion of the Plan requirements have been provided for. In
otherimportant sectors, such as railways, ports and shipping, the coal and manufacturing
industries generally, the coverage is about one-half. The House would no doubt want
me to take this opportunity of expressing our appreciation to the International Agencies,
as well as to the individual countries who have so generously extended their assistance
to us in our great endeavour.
13. While we are receiving aid from so many countries, we are not unmindful
of the importance of making our own contribution, however humble, in this field and
have been ready to help, whenever and wherever possible, other developing countries
of the world. As a participant in the Colombo Plan., India, amongst the countries in
the areas of South and South-East Asia, is the biggest donor of technical assistance.
We have also assisted in the preparation of the Mekong River Project in Cambodia
and in giving technical assistance under the Special Commonwealth African Assistance
Plan.
14. Turning once again from external to internal matters, I should like to refer
to the Report of the Third Finance Commission which has already been placed before
both Houses of Parliament. We are accepting all the recommendations of the
Commission for the sharing of Central taxes and payments of grants-in-aid except the
one relating to statutory grants-in-aid being made to cover a part of the revenue
component of State Plans. The reasons why we have not been able to accept the
recommendations regarding the payment of a part of the Plan grants as statutory
grants-in-aid have been set out in the Explanatory Memorandum on the Report. I
would merely like to reiterate that this decision does not in any way affect the totality
of Central assistance towards the State plans which will continue to be made available
on the basis of annual reviews of the overall financial position and other relevant
factors.
15. The acceptance of the Finance Commission’s recommendations involves
an additional payment of Rs.35 crores to the States next year and with the raising of
the States’ share of income-tax and the considerable increase in the number of shareable
excises, the gain to the States in future years would be very much more. The crux of
the matter, however, is not how resources are shared, but how they are mobilised in
the aggregate; and in this great task of providing the financial resources necessary for
our Plan, the States have as important a role to play as the Central Government.
16. I would now give an account of the Revised Estimates for 1961-62 and
the Budget Estimates for 1962-63.

4
 17. The budget this year estimated the revenue receipts at Rs.1,017.95 crores
and expenditure met from revenue at Rs.1,023.52 crores. On current trends, the revenue
receipts are likely to go up to Rs.1,079.11 crores and the expenditure to Rs.1,045.15
crores, with the result that the budgeted deficit of Rs.5.57 crores will be converted
into a revenue surplus of Rs.33.96 crores.
18. The improvement in revenue receipts is mainly due to better collections
under Customs, Union Excise Duties and Corporation Tax and income-tax. Larger
imports of machinery and, mineral oils and imposition of countervailing duties on the
latter account for an increase of Rs.9.96 crores under Customs. Union Excises are
expected to be more by Rs.38.32 crores, following the general improvement in
production and clearances, increase in the duty on mineral oils and better realisations
from new excises. With the rapid growth of business and industry the revenue from
income-tax including Corporation Tax is likely to go up by Rs.28 crores. These
improvements, however, will be partly counter-balanced by the increase of Rs.13.45
crores in the States’ share of Income-tax and Estate Duty.
19. Civil expenditure this year is now estimated at Rs.743.22 crores against
the original budget of Rs.740.6 crores and Defence expenditure at Rs.301.93 crores
against the original estimate of Rs.282.92 crores.
20. The increase of Rs.2.62 crores in Civil expenditure is the net effect of
variations over a number of heads. Debt services are estimated to cost Rs.4.2 crores
more due chiefly to lower recoveries from the States and Railways. Subsidies on
sugar exports and movement of coal by sea account for an increase of Rs.S.25 crores.
States’ share of Excise Duty will go up by Rs.4.6 crores and the transfer of the grant
under P.L.480 Funds to the Special Development Fund will exceed the original estimate
by Rs.3 crores. These increases in expenditure will, however, be partly counter-balanced
by a number of savings, of which the major items ar e R s.12.06 cror es under the
group head “Social and Developmental Services” and Rs.6. I crores in the grant to the
States in lieu of their share of income-tax. The requirements of Defence Services are
now expected to exceed the original budget by Rs.19.01 crores due mainly to increase
in the provision for stores, equipment, transportation and other charges.
21. Before dealing with the estimates for the coming year, I would like to
draw attention to certain changes in accounts which will come into effect next year.
Honourable Members will recall that, in my speech last year, I had referred to the
decision taken, in consultation with the Comptroller and Auditor-General, to revise
the accounting structure and to phase the changes over a period of two years. The
changes, which are to be introduced next year, are set out in detail in the Explanatory
Memorandum. I shall refer only to two main Items. Recoveries of interest from State
Governments and Commercial Departments have hitherto been adjusted in the accounts
in reduction of interest charges. As this arrangement does not reflect the interest burden
of the Government correctly these recoveries will, from next year, be shown as interest
5
receipts. Secondly, the working expenses of Commercial Departments like Railways
and Posts and Telegraphs, which are at present booked in the accounts in reduction of
receipts, will be shown as expenditure in the future.
22. For the next year, on the ‘ basis of existing levels of taxation, the revenue
is estimated at Rs.1,305.87 crores and expenditure at Rs.1,369.33 crores leaving a
deficit of Rs.63.46 crores.
23. As compared with the current year’s Revised, the revenue estimates next
year show an increase of Rs.226.76 crores. Of this, Rs.149.57 crores are attributable
to the change in classification of interest recoveries from States and Commercial
Departments, which, as explained earlier, are being treated as interest receipts next
year. The rest of the increase is spread over a number of heads. Union Excise Duties
are expected to show an improvement of Rs.21.33 crores. Taxes on income, including
Corporation Tax, would go up by Rs.14 crores, but the States’ share of income-tax and
Estate Duty will be less by Rs.3.57 crores due mainly to absence of arrear payments
provided for in the current year. The grant from P.L.480 Funds would exceed the
current year’s level by Rs.27 crores. Other interest receipts are likely to go up by
Rs.6.36 crores. The receipts from Goa, Daman and Diu for the full year are expected
to amount to Rs.5.01 crores.
24. Of the expenditure of Rs.1,369.33 crores next year. Rs.1,028.66 crores
will be under Civil heads and Rs.340.67 crores for Defence Services.
25. Excluding Rs.151.13 crores on account of changes in accounting
classification of interest recoveries and working expenses of Commercial Departments,
the Civil expenditure next year shows an increase of Rs.134.31 crores which is
distributed over a large number of heads. The growing volume of public debt, both
internal and external, accounts for an increase of Rs.12.23 crores under debt services.
The provision for the various social and developmental services in the second year of
the Plan would be more by Rs.14.74 crores. Transfer of PL 480 grant to the Special
Development Fund will exceed the current year’s Revised by Rs.27 crores. Following
the acceptance of the Finance Commission’s recommendations, the States’ share of
Union Excise Duties would be higher by Rs.33.43 crores. Provision of Rs.5.28 crores
has been made for the requirements of the territories of Goa, Daman and Diu and of
Rs.7.5 crores for payment to the Reserve Bank for the withdrawal of Escudo currency
in these territories. Grants to States show a net increase of Rs.13.79 crores. The rest
of the increase is spread over a number of heads for which detailed explanations have
been given in the. Explanatory Memorandum.
26. The net expenditure on Defence Services in the coming year will be
Rs.38.74 crores more than in the current year. The increase occurs mainly under Army
and Air Force estimates and reflects the cost of the measures taken to strengthen the
Armed Forces. I am sure the House will support these measures which are intended to
safeguard the territorial integrity and security of the country.
6
 27. The current year’s budget provided for a total capital outlay of Rs.454
crores excluding the adjustment for the transfer of capital assistance from the United
States to the Special Development Fund which is technically treated as Capital
expenditure. The corresponding capital outlay is now estimated at Rs.427 crores
showing a saving of Rs.27 crores. This is the net result of several variations. Food
purchases would cost Rs.18 crores less mainly due to the slowing down of imports
under P. L.480. Of the other important savings, mention may be made of Rs.6 crores
under Defence Capital Outlay, Rs.9 crores by the Oil and Natural Gas Commission,
Rs.6 crores by Heavy Engineering Corporation, Rs.6 crores under Delhi Capital Outlay,
Rs.4 crores each by the National Coal Development Corporation and the Shipping
Corporation. But these shortfalls will be partly counter-balanced by the increase of
Rs.10 crores on account of Railway Capital requirements, Rs.7 crores for Hindustan
Steel Rs.6 crores for Indian Refineries and Rs.4 crores for Neyveli Lignite Corporation.
28. The corresponding provision for Capital Outlay next year is Rs.588 crores
representing an increase of Rs.161 crores over the current year is Revised. The increase
is chiefly attributable to the stepping up of Plan Outlays in the second year of the
Plan. Provision has been included for additional Capital requirements of Rs.60 crores
for Hindustan Steel and Rs.197 crores for Railways representing an increase of Rs.53
crores and Rs.27 crores respectively over the current year’s provision. Purchase of
foodgrains would cost Rs.16 crores more whereas Border Road requirements would
exceed the current year’s estimate by Rs.12 crores. Of the rest of the increases, I
would only mention Rs.14 crores for the Oil and Natural Gas Commission, Rs.7
crores for National Highways, Rs.6 crores each for Heavy Engineering Corporation
and Farakka Barrage Project R .6 crores for Defence Capital Outlay and Rs.4 crores
for Atomic Energy Research.
29. In addition to the provision for direct Capital Outlay, the estimates include
Rs.469 crores this year and Rs.453 crores next year for loans to the States against the
original provision of Rs.409 crores. The grant of ad hoc loans amounting to Rs.30
crores to four States to clear their overdrafts with the Reserve Bank at the end of the
Second Plan and larger ways and means advances to cover the temporary lag in the
resources of the State Governments explain the larger requirements in the current
year. The loans to other parties are now estimated at Rs.152 crores this year and
Rs.147 crores next year as compared with the original budget of Rs.171 crores.
30. The next year is estimates include a total provision of Rs.1,107 crores for
implementing the Plan, comprising Rs.192 crores on revenue account and Rs.915
crores as Capital Outlay including loans. In addition, Railways are expected to provide
Rs.26 crores and Hindustan Steel, Rs.30 crores, from their own resources. The estimates
include Rs.405 crores as assistance to the States, of which Rs.96 crores would be in
the Revenue budget and Rs.309 crores in the Capital budget. With the resources of
Rs.283 crores, which the States are expected to raise on their part, the total outlay on
State Plans next year would amount to Rs.688 crores. The outlay on the Central portion
of the Plan will aggregate to Rs.758 crores. The total Plan outlay for the second year
7
of the Third Plan of both the Central and State Governments together will thus be of
the order of Rs.1,446 crores. This would mean stepping up of the current year’s budgeted
outlay of Rs.1,214 crores by 19.1 per cent. Allowing for possible shortfalls, the actual
Plan outlay in the first two years of the Plan is likely to cover about, one-third of the
target of Rs.7,500 crores envisaged in the Plan.
31. The budget for the current year had estimated the overall deficit at Rs.70
crores, of which Rs.64 crores were expected to be met by expansion of treasury bills
and the rest by the drawing down of the cash balance. According to the latest assessment,
the overall gap is now expected to increase to Rs.121 crores. This means that despite
the revenue deficit of Rs.6 crores having been converted into a surplus of Rs.34 crores
and despite a saving of Rs.27 crores in capital expenditure the overall gap will be
Rs.51 crores more than our original estimate. This is mainly due to shortfalls in both
internal and external borrowings. Net market borrowings including small savings would
show a drop of Rs.38 crores, while the net borrowings from abroad would be less by
Rs.47 crores. P. L.480 deposits would also show a shortfall of Rs.36 crores.
32. For the next year, I am taking a credit of Rs.26 0 crores from market
borrowings including prize bonds and Rs.105 crores net from Small Savings. The
budget also assumes a credit of Rs.455 crores from foreign loans and Rs.90 crores
from P.L.480 deposits, including Rs.50 crores to be transferred from the moneys
formerly deposited with the State Bank of India.
33. The overall budgetary position may now be summarised. The revenue
budget is expected to show a deficit of Rs.63 crores. Capital outlay will amount to
Rs.588 crores, loans to States and other parties, Rs.600 crores and debt repayments,
Rs.227 crores. The total disbursement of Rs.1,478 crores is expected to be met to the
extent of Rs.820 crores from internal and external borrowings, Rs.218 crores from
repayment of loans Rs.90 crores from investment of P.L.480 Funds and Rs.203 crores
from miscellaneous debt and deposit heads, leaving a gap of Rs.147 crores.
34. At this stage, I would only emphasise how concerned I am over the fact
that we are ending the current financial year, despite the buoyancy of revenues, with
a bigger overall deficit than we had envisaged when the budget for the year was
introduced. We shall, therefore, need to do everything possible to enlarge our budgetary
resources, so as to ensure stability in the economy.
35. Sir, I shall now like to conclude. In the recent elections, the nation has for
the third time affirmed its confidence in our Plans and our policies. We shall have
many Plans to fulfil before we reach our goal. On the whole, the Third Plan has begun
well. There have been all-round increases in production, stability of prices and the
external aid which we have received has enabled us, despite the continuing stringency
of foreign exchange, to cover a good proportion of our developmental needs. But
there is no room for complacency. Each successive year will call for greater effort on
the part of everyone if we are to move forward as fast as we want to, indeed as fast as
we must.
(March 14, 1962)
8
 SPEECH OF SHRI MORARJI R. DESAI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1961-62

Sir,
I rise to present the statement of the estimated receipts and expenditure of the
Government of India for the year 1961-82.
2. With the close of the current year, we shall be completing a decade of
planned development and we shall be launching on the Third Five Year Plan.
Honourable Members will, I am sure, agree that the last 10 years have been a period
of striking development in almost all sectors of the economy. Large investments have
been made in agriculture, irrigation and power, major as well as medium and small
industries, transport and social services. We are perhaps too near these events to be
able to assess their full impact or significance. I venture to think that despite various
difficulties, we have succeeded in creating a new dynamism in the economy. The
public sector has gone forward and has taken on tasks which were entirely new. The
private sector also has advanced considerably. All over the country-in the cities and in
the towns as also in rural areas-one sees the beginnings of new developments in
various directions.
3. The First Five Year Plan was a relatively modest effort, both in its scope
and its dimensions. Though the Plan was fulfilled satisfactorily. It became clearer,
even as we were proceeding with it, that unless we accelerated the tempo of
development, It would not be possible to lift our people out of poverty.
4. The Second Five Year Plan was, in consequence, a bolder and more
ambitious one, It aimed at larger increases in production, investment and employment.
It was conceived in terms of a long-term strategy of development. Our objective is to
develop in the country, at as early a date as possible machine-building capacity on a
scale which would enable our development to proceed without dependence on the
import of capital goods. To achieve this progress has to be made over a wide field-in
the production of metals, particularly iron and steel, in the establishment of plants
intended to produce heavy machinery, as well as in the development of the necessary
techniques and skills. Even while we are proceeding with the development of
machine-building capacity, we have to strengthen the agricultural base and to provide
for the other basic needs of our growing population.
5. Honourable Members are aware that in the course of the Implementation
of the Second Five Year Plan, we were confronted with major difficulties in regard to
resources, particularly external resources. It became necessary for us to make certain
1
adjustments in the Plan and to confine our attention primarily to the fulfilment of
what came to be described as the ‘core’ of the Second Five Year Plan. The target of
outlay in the public sector was cut down from Rs.4,800 crores to Rs.4,500 crores. As
the Second Five Year Plan draws to a close, we expect to exceed the revised target and
to attain an outlay of Rs.4,600 crores.
6. As a result of this effort at developmental planning over the last 10 years,
industrial production has increased by about 66 per cent and agricultural production
has gone up by about 33 per cent. We have added substantially to the installed capacity
for steel and for a number of engineering industries including machine-making. The
chemical industries have also grown rapidly. At the same time, we have greatly
strengthened the basic services and amenities such as fuel, powers, transport and
irrigation which provide the foundation for rapid economic growth.
7. During the Second Plan, the total additional taxation has been of the order
of Rs.1040 crores of which nearly Rs.800 crores were at the Centre. The resources
arranged by mobilisation of private savings, mainly through loans, small savings and
provident funds have yielded about Rs.1,400 crores and the extent of deficit financing
during the Plan period is expected to be about Rs.1100 crores as compared to Rs.1200
crores originally envisaged. This is satisfactory as far as it goes. We are now embarking
on a bigger Plan and we shall have to make a greater effort to direct our resources
through channels which lead to greater development and progress.
8. The Third Plan in its final shape is expected to emerge shortly. The House
will have ample opportunity to discuss it in due course. I shall, therefore, dwell only
on some of its salient features and what it means in terms of the problem of providing
adequate resources for it. At the last meeting of the National Development Council,
we were confronted with a very difficult choice. On the one hand, our best estimates
of resources that we could hope to mobilise lead us to the conclusion that outlays in
the Plan should be limited to Rs.7500 crores. On the other hand, the programmes for
which there was necessity and readiness to proceed added up to a higher figure. The
Council has decided that for the purposes of physical planning, programmes with a
ceiling of Rs.8,000 crores should be prepared but the financial limit of Rs.7,500 crores
must be adhered to. The fact that we shall have larger programmes worked out win
enable us to start on their execution as soon as resources are in sight. At the same
time, we cannot and must not take on commitments beyond our resources. Throughout
the Third Plan we shall have to be careful to see that reliance on what is popularly
described as deficit financing is strictly limited. The size of the Plan, in other words,
will depend upon our tax effort and our ability to mobilise savings. No one would be
happier than I if we are in fact in a position to raise resources to a higher figure than
the target of Rs.7500 crores.
9. Our estimate of resources for the Third Plan postulates that the surpluses
of various public enterprises should be available for financing the Plan. Besides

2
Railways for which there are separate arrangements, Government have in the last
decade invested large sums in various industrial undertakings in the public sector. It is
of basic importance that these enterprises should function on sound commercial
principles and should make adequate profits which can be ploughed back into further
investments.
10. Apart from the limitations regarding internal finance, we have to bear in
mind the crucial significance of external finance or foreign exchange in our planning.
The requirements of external assistance for the next five years as envisaged in the
Draft Outline are of a very substantial order and we do not propose to exceed this
limit. It is essential, in this context, that we should reduce expenditure of foreign
exchange in every conceivable direction and step up the level of exports. In the detailed
phasing of the Plan, we shall have to ensure that the foreign exchange gap in terms of
actual outgoings during the Third Plan, which we expect to fill by external aid, does
not exceed the estimates set out in the Draft Outline.
11. Developmental activities of this magnitude, with all the limitations which
we face, are not an easy task. They call for sacrifices. They necessitate a willingness
to go without many things. They involve a restraint on consumption in order that more
resourcesare available for investment. The degree of hardship which this development
entails can be alleviated to some extent by external aid. Such aid has been available
to us from friendly countries in the Second Plan period and has enabled us to make
substantial progress with our ‘core’ projects, in spite of the acute position in regard to
foreign exchange with which we were faced in the middle of the Plan. I am grateful
to all those who have helped us. But ultimately it is through our own efforts and our
own sacrifices that we can build our future.
REVIEW OF ECONOMIC CONDITIONS
12. Following the usual practice, I now propose to review briefly the economic
conditions in the country during the current year. The detailed assessment of the
emerging economic trends has been made in the Economic Survey which has been
circulated along with the Budget Papers. The Survey also draws attention in broad
terms to the considerations and objectives which should guide our fiscal and monetary
policies during the coming year. I shall not, therefore, go into the details of the economic
situation but shall confine my remarks to the salient features of 1960-61.
13. During the year, the economy advanced in several respects. Investment,
both public and private, was at a high level and the upward trend in industrial production
was accelerated. The agricultural season of 1959-60 was, however, not so favourable.
This reduced the domestic availability of foodgrains and raw materials. To an extent,
the shortage was met through additional Imports. Nevertheless, there was a significant
rise in the prices of agricultural raw materials as well as in the overall level of whole-sale
prices. The outlook in respect of agricultural and industrial production in the coming
year is, however, distinctly better. There is every hope that the upward trend in industrial
production will be maintained.
3
PRODUCTION
14. Agricultural production in 1959-60 did not come up to our original
expectations owing mainly to adverse climatic conditions. Food production at about
72 million tons was about 5 per cent less than in the previous year. There was also a
substantial decline in the output of cotton, raw jute and oilseeds. Sugarcane, however,
recorded a welcome increase of 6.6 per cent.
15. For the current agricultural year, the prospects are better. The Kharif crop
is expected to be as good as, if not better than the excellent crop of 1958-59, and Rabi
sowings have also been satisfactory. The output of cotton this year will also be
substantially larger than last year. A further increase in sugarcane production is expected.
For jute and oilseeds, however, the outlook is not equally promising.
16. Industrial production in the first ten months of 1960 showed an increase
of 11.5 per cent over the corresponding period of 1959. The rate of increase is the
highest we have achieved so far. The increase has occurred in almost all industries
and it is gratifying that it has been relatively larger in the case of intermediate products
and capital goods. Marked increases occurred in iron ore, iron and steel, industrial
machinery, paper and paper board, chemicals, cement, general and electrical engineering
goods and tansport equipment. The output of mill cloth-about 5000 million yards-was
also slightly higher than in 1959, in spite of the shortage of supplies of Indian cotton.
17. There has been a substantial addition to production capacity in a number
of important industries. Industrial activity in the country is getting diversified, and I
am particularly happy to find that a large number of small and medium enterprises is
coming up to establish new lines of production and to expand the existing ones. As the
House is aware, legislation was undertaken to facilitate the introduction of a scheme
of credit guarantee in respect of loans from commercial banks to small scale units
under the aegis of the Reserve Bank of India. The scheme is making good progress
and about 300 applications have been sanctioned during the last 7 months.
18. The expansion programme of the two steel works in the private sector has
been practically completed. The three public sector steel plants have made steady
progress and the next few months will see the commissioning of all the blast furnaces,
steel melting shops and rolling mills in these plants. The production of finished steel
in 1960 was about 2.2 million tons and it is expected to reach 3.5 million tons in 1961.
The steel expansion programme, together with the development of mining and transport
constitutes the sinews of our industrial development and has been given a very high
priority in our Third Plan.
19. The production of coal in 1960 was about 51 million tons as compared to
47 million tons in 1959. Most of the new mines in the public sector are now in
production. The Oil and Natural Gas Commission has continued its search for oil in
Jwalamukhi and Hoshiarpur areas in the Punjab, in Cambay and Ankleshwar areas in
4
Gujarat and in Rudrasagar areas in Assam. On the basis of the results of exploration
in Gujarat, it has been decided to set up a large refinery, which will be financed from
the recent Soviet credit.
20. A notable new field of development, the foundations of which were laid
in the Second Plan and which will receive special emphasis in the Third Plan, is
machine-building. The first phase of the Heavy Electrical Project at Bhopal has already
been completed and orders are now being placed for its second phase by utilising
British credit. Other projects in the field of heavy machinery, which will be completed
during the Third Five Year Plan, include the Heavy Machinery Plant at Ranchi, the
Mining Machinery Plant at Durgapur, both of which are being financed out of Soviet
credits, as well as the Foundry Forge which is being set up with Czechoslovak
collaboration. The Hindustan Machine Tools Factory at Bangalore has already attained
a higher level of production than was originally envisaged and is now engaged in a
programme of expansion. Development in machine-building capacity in the private
sector is also proceeding at a satisfactory pace and considerable progress has been
made with the manufacture of the plant and machinery required by the sugar, paper
and cement industries.
MONETARY TRENDS
21. During the year, money supply with the public increased by Rs.219 crores
as compared to an increase of Rs.171 crores in 1959. A major factor in this expansion
was bank credit. Governments’s indebtedness to the banking system increased much
less than in the previous year. The expansionary effect of these developments was
countered to a small extent by a decline in the foreign assets of the Reserve Bank.
22. The deposits of scheduled banks rose in 1960 by Rs.65 crores as compared
to Rs.254 crores in the previous year. This large reduction is due in the main to the
revised procedure regarding the placement of rupee counterpart funds arising out of
P.L.480 imports. These amounts were, until last year, deposited with the State Bank of
India which used to invest them along with their other funds in Treasury Bills or dated
Government securities. The arrangement gave a somewhat distorted picture of the
volume of deposits in scheduled banks and their investments in Government securities.
It was accordingly decided, in consultation with the American authorities, that these
moneys would, with effect from the 12th May 1960, be deposited directly with the
Reserve Bank of India who would invest them in special securities of the Government
of India. Further it has been arranged that from July 1960, for a limited period, the
past accumulations with the State Bank of India would be transferred to Government
in monthly instalments of Rs.12 crores. Even after making allowance for the effect of
these revised arrangements, the rise in bank deposits in 1960 was somewhat smaller
than in 1959.
23. The expansion of bank credit by the scheduled banks was on the other
hand much larger more than twice the expansion in 1959. In consequence, the

5
credit-deposit ratio went up from 53 per cent at the end of 1959 to 62 per cent at the
end of 1960. If P.L.480 deposits are excluded, the ratio works out to 72 per cent in
December 1960 as compared to 63 per cent a year ago. This strain on the resources of
commercial banks has resulted in an increase in their borrowings from the, Reserve
Bank despite a decline in gilt-edged securities in their portfolios.
24. The upward trend in equity prices noticed since 1958 gathered further
momentum and a speculative boom developed about the middle of the year. The index
of prices of variable dividend securities moved up by about 14 per cent in the course
of the first seven months of 1960. Commodity markets were also buoyant. With a
view to check these speculative trends the Reserve Bank introduced several measures
designed to restrain the total amount of credit creation. The bank rate remained
unchanged but penal rates were imposed on borrowings by banks above certain limits.
There is no doubt that while the banks must endeavour to meet the legitimate needs of
production and trade, every care must be taken to prevent excessive credit creation.
There has been a break in share values since July 1960 partly as a result of the
tightening of credit, partly in consequence of the steps taken by the stock exchanges
themselves by adjusting their margin requirements, and partly through some changes
in the working policies of the capital issues control. The index of variable dividend
securities which had risen to 182 by the end of July 1960 stood at 165 about the end
of the year.
25. In passing I might also refer to the Refinance Corporation which was set
up in 1958 to assist banks in financing medium-sized industries. We have during
recent months substantially enlarged the scope of its operations by extending the
facilities to a larger number of banks as also to State Finance Corporations and selected
State Co-operative Banks, increasing the period of loans from 7 to 10 years, where
necessary, and giving a larger discretion to the Corporation in regard to the industries
to be assisted. These modifications, helped possibly by the stringency of funds, have
resulted in an increase in the loans disbursed from Rs.85 lakhs in 1959 to Rs.141
lakhs in 1960, while the loans advanced in the month of January 1961 exceeded Rs.70
lakhs.
26. The banking sector has a very important role to play in the mobilisation
and husbanding of resources for our developmental plans and Government are therefore
vitally interested in its health and vitality. The House is aware of the steps that we
have taken to safeguard the interests of depositors including the powers to facilitate
reconstruction or amalgamation of banks. Recently, we have promulgated an Ordinance
to remove certain difficulties experienced in their reconstruction or amalgamation
with other banks and to permit amalgamation under the Banking Companies Act with
the State Bank of India. These measures will help to strengthen some of the more
vulnerable units of the Indian banking system, which, I am convinced, is basically
strong and sound. Government are determined to take whatever steps may be necessary
for the efficient management of banks and for protecting the interests of the depositors.
6
PRICES
27. The index of whole-sale prices which was 117.9 at the end of 1959 rose
to a peak of 127.4 by the middle of October 1960, but declined to 124.3 at the end of
the year. The average for 1960 works out (at 6.5 per cent higher than for 1959, the rise
in respect of industrial raw materials, mainly oil seeds, raw cotton and raw jute, being
18 per cent, and in manufactures 11 per cent. Rice prices rose by about 7 per cent,
while wheat prices declined by 11 per cent; the index of foodgrains, taken as a group,
has shown a small fall. We have been keeping a continuous watch over the trend of
prices and in the case of specific commodities, such as, cotton, jute and groundnuts
taken suitable steps like the introduction of quota system and the enforcement of
credit restrictions supplemented by the tightening of margins in the commodity markets.
Towards the end of 1960, the price index of rice, however, fell significantly. There
was a seasonal rise in the index in the month of January which at the end of the month
stood at 126.2 as compared to 119.2 at the end of January last year. The working class
cost of living index has shown only a small increase, the index being 124 for December,
1960 as compared to 122 a year earlier.
28. The rising trend in prices has persisted almost throughout the Second
Plan. Some price increases are inevitable in a developing economy. It should, however,
be our aim to ensure that in the period of the Third Plan, the prices of the essential
goods that enter into the common man’s budget remain relatively stable. The Plan has
been drawn up with due regard to this objective. A substantial increase in food
production is the foundation on which the Plan rests, and I should like to take this
opportunity of appealing both to our farmers and to the official and non-official agencies
concerned with development in the rural areas to concentrate their effort on achieving
the target of 100 million tons set out in the Draft Outline, of the Plan.
29. Government have in hand sizable stock of foodgrains amounting to 2.5
million tons, and thanks to the agreement in respect of P.L.480 imports signed last
year with the United States, they also have an assurance of further supplies in the
coming years. While this second string to our bow is essential as well as welcome, it
should be regarded primarily as a stand-by to get over the bottlenecks which have
impeded us in the past in achieving our targets of increased agricultural production.
BALANCE OF PAYMENTS
30. The balance of payments situation during 1960-61, the last year of the
Second Five Year Plan, took a turn for the worse. The Sterling assets held by the
Reserve Bank of India on the 17th February, 1961 were Rs.157 crores which are
Rs.46 crores lower than at this time last year. A part of this decline is attributable to
the repayment of the stand-by credit from the International Monetary Fund amounting
to about Rs.11 crores. This repayment increases our borrowing capacity from the
Fund and is not therefore a matter of concern. Apart from this, however, there has
been a substantial fall in our balances on other accounts, a detailed analysis of which
is set out in the Economic Survey.
7
 31. The decline which has taken place in our foreign exchange reserves during
the current financial year gives cause for reflection and concern. First of all, it underlines
the importance of stepping up our export promotion efforts. This is not an easy task in
a developing economy where the standards of living are as low as they are in India.
But an increase in our export earnings is vital to the success of our Plan. One of the
weaknesses from which our industrial economy suffers is that, with the exception of
a few industries like jute, cotton textiles and tea, most industries look to the vast
domestic market and do not exert themselves to sell abroad. Considering that the
supply of raw materials, components, spare parts and other essentials for our industries
constitutes such an important element in expenditure of foreign exchange, it is essential
that every industry which depends on imports should endeavour to earn at least part of
the foreign exchange it spends by selling its products abroad. Greater attention to this
consideration will have to be paid in the future. Government, for its part, will stand
ready to help export industries in every way-by more liberal treatment in the matter of
foreign exchange allocations, by speedy refund of internal taxes and duties levied on
such products as are exported and in other ways.
32. We shall have to be even more careful about expenditure of foreign
exchange. There has been a considerable tightening of import control restrictions.
There are, however, various other ways in which foreign exchange is spent. One of
these is expenditure on travelling abroad for one reason or another. It has been necessary
to tighten allocations of foreign exchange for educational purposes by weeding out
tome of the less beneficial courses of study abroad. For other purposes too a stricter
policy is being followed.. There is a significant number of persons who, it appears, go
abroad without any release of foreign exchange from the Reserve Bank but who are
able to provide themselves with funds by various other devices. It is not my intention,
at this stage, to place a ban on travelling abroad by people who have not received an
allocation of foreign exchange, because there are quite a number of people who
genuinely go as guests, on scholarships, and through other legitimate means. At the
same time, the House will agree that we cannot allow the existing state of affairs to
continue. I, therefore, propose shortly to provide for the submission by persons going
abroad of a form containing information about the manner in which they are finding
the foreign exchange for themselves. Cases of a doubtful nature will, where the facts
warrant, be further pursued.
33. Our efforts to promote exports and to save on imports will not, however,
by themselves, solve our foreign exchange problem. The ultimate solution can only be
found through the efforts we are making to develop the country industrially and
economically. While we are engaged in this process, we shall need massive external
aid. We had started our Second Five Year Plan with our sterling balances around
Rs.746 crores. We are now embarking on a bigger Plan with our reserves at a much
lower level. In doing so we are appreciative of the fact that in the world outside there
is now a general recognition of the need to help us in our developmental effort and
8
there is an acceptance of the position that our aim is to achieve a rate of progress
which cannot, in any sense, be said to be over ambitious.
FOREIGN ASSISTANCE
34. During the year 1960 the World Bank sanctioned two loans-Rs.33 crores
for the development of our Railways and Rs.10 crores for the industrial Credit and
investment Corporation of India. The U.S. Development Loan Fund granted loans
amounting to Rs.107 crores for various power projects and for the construction of a
fertiliser plant at Trombay. The U.S. Export-Import Bank extended a second credit of
Rs.24 crores. The United Kingdom Government sanctioned two loans totalling Rs.20
crores to pay for capital goods purchased in that country. Of the $ 100 million aid
promised by the West German Government in 1958, $ 40 million were authorised in
1959 and the balance of $ 60 million in 1960. Among the other loans and credits
negotiated during the year were Rs.14 crores by Poland, Rs.11 crores by Switzerland
and Rs.19 crores by Yugoslavia.
35. The third meeting of the consortium of the countries helping India was
convened by the World Bank in September 1960 in Paris, chiefly for making a
preliminary assessment of our requirements for the Third Plan. Following this meeting,
the U.K. Government have offered a sum of Rs.67 crores as initial assistance for our
Third Plan and the Government of West Germany have agreed to our placing orders
in that country up to Rs.28 crores, besides consenting to the postponement of a major
portion of the repayments falling due in the current and the next year on account of
the loan for the Rourkela Project. The House will recall that in 1959 the Government
of U.S.S.R. had agreed to make available an amount of Rs.179 crores as an initial
credit towards their collaboration in the Third Plan Projects. This has been supplemented
by the offer of an additional credit of about Rs.60 crores for which an agreement was
signed last week.
36. The Commodities Agreement under P.L.480 of the value of Rs.636 crores
signed with the United States in May last provides for the import of 18 million tons of
wheat, 1 million tons of rice and also certain quantities of maize, milo, cotton, tobacco
and soyabean oil. The foodgrains imported under this agreement will enable us to
build up sizable reserves. The total value of commodities covered by the agreements
so far signed under P.L.480 amounts to a little over Rs.1096 crores.
37. We continued to receive assistance from the Colombo Plan countries, the
grants of Canada both for projects and in the shape of key commodities like non-ferrous
metals deserving special mention. We were also helped by assistance from the United
Nations and its specialised agencies and from the Ford and Rockefeller Foundations.
While we have been receiving aid from the more advanced countries, we have, for our
part, been ready and willing, within the limit of our resources, to help other countries
by providing training facilities and services of experts under the Technical Co-operation
Scheme of Colombo Plan as well as in other ways. The aid to Nepal during the current
9
and next year would amount to Rs.6 crores. In addition, we have continued to assist
our neighbours, Sikkim and Bhutan in their development plans.
38. In the five years of the Second Plan period, the total foreign loans and
credits covered by formal loan agreements are of the order of Rs.1517 crores of which
Rs.1387 crores are on Government account, including the carry over of unspent balance
from the First Plan amounting to Rs.87 crores. The total utilisations during the Second
Plan period are estimated at Rs.752 crores, leaving an unspent balance of Rs.722
crores to be carried forward to the next Plan. Of this balance, Rs.329 crores are for
credits which are intended for financing the projects included in the Third Plan.
39. We have been receiving aid from friendly countries throughout the Second
Five Year Plan. I should like, at this juncture, to pay a special tribute to the role of the
International Bank for Reconstruction and Development under the leadership of its
President, Mr. Eugene Black, in organising meetings of a consortium of countries who
have jointly been discussing the question of aid to India in a friendly and constructive
spirit.
FINANCE COMMISSION
40. As Honourable Members are aware, the award of the Second Finance
Commission for the devolution of resources from the Centre to the States covers the
five years ending 1961-62. The Second Finance Commission had, however, experienced
considerable difficulties in assessing the requirements of the State Governments as
the period covered by their recommendations extends over both the Second and Third
Plans. They had therefore recommended that the period of the Finance Commission’s
award should, in future be made to coincide with that of the Plan. The Third Finance
Commission wasp accordingly, constituted in December last and it has been requested
to give its recommendations for the four years from 1962-63 to 1965-66. As on the
previous occasions the Commission will, in addition to making recommendations on
the sharing of Taxes on income and Union Excises, advise on the grants to be paid to
the States which are in need of assistance, keeping in view the requirements of the
Third Plan and the efforts expected of them to raise additional revenues. The
Commission will also report on the changes, if any, to be made in the principles
governing the distribution of Estate Duty and the manner in which the grant payable
in lieu of States’ share of Tax on Railway Fares should be distributed amongst them.
As the Tax on Railway Fares is being abolished with effect from ist April 1961, the
recommendations of the Commission for the distribution of the grant in lieu of this tax
will take effect from the next year.
CHANCES IN ACCOUNTS
41. For some time past it has been felt that the existing accounting structure,
which has continued more or less unchanged ever since It was drawn up at the time of
the introduction of the Government of India Act, 1935, should be rationalised and
recast in the light of the subsequent Constitutional changes and the rising tempo of

10
Government developmental expenditures. The matter was reviewed in consultation
with the, Comptroller and Auditor General and It has been decided that the changes
may be phased over a period of two years. The changes introduced in the coming year
have been explained in detail in the Explanatory Memorandum.
42. I shall refer only to the important items. As Honourable Members know,
the group head “Civil Administration” includes not only budget heads dealing with
administration such as ‘General Administration’, ‘Audit’, ‘Police’ and ‘Jails’ but also
major heads pertaining to developmental activities of Government such as ‘Education’,
‘Agriculture’, and ‘Medical’. Apart from the fact that the nomenclature ‘Civil
Administration’ is somewhat misleading, the budget in its present form, does not
indicate separately the expenditure incurred by Government on its administrative
activities and on social and developmental activities. To remedy this defect the group
head ‘Civil Administration’ is being split up into two: “Administrative Services” and
“Social and Developmental Services”. The splitting up of group head “Civil
Administration” will assist Honourable Members to assess the growth of administrative
expenditure more correctly.
43. With the exception of certain statutory grants, grants-in-aid to State
Governments have hitherto been recorded subject-wise under the relevant major heads
of account and provided in the grants concerned. These grants are, however, not final
expenditures of the Central Government on those activities but are merely transfers of
resources from the Centre to the States. They are accordingly being segregated under
a separate head ‘Grants-in-aid to States’ and the provision included in a single composite
demand. The various types of grants namely statutory, plan and non-plan, will however
be indicated separately under this head according to the Ministries administering them.
This arrangement will give at one place the total of the grants from the Centre to the
States and will also facilitate integrated control on the utilisation of these grants.
44. I might also refer to another change which might be of interest to
Honourable Members. Payments to States of their share of Union Excise Duties have
so far been shown as expenditure under the major head ‘2-Union Excise Duties’.
These amounts are also in the nature of transfer of resources to the States and will
hereafter be shown under a distinct major head ‘States’ Share of Union Excise Duties’.
45. It has also been decided that expenditure on labour and employment, which
is at present exhibited under the heads ‘Miscellaneous Departments’ and
‘Miscellaneous’, should from the next year be recorded under a new major head
“Labour and Employment”.
46. I am sure the House will welcome these changes which will help to give
a clearer picture of the purposes for which sums are being provided in the budget.

11
FINANCIAL YEAR 1960-61
47. The budget for the current year, as finally approved by Parliament, placed
the revenue at Rs.919.65 crores and expenditure at Rs.980.35 crores, with the resultant
revenue deficit of Rs.60.70 crores. According to the present assessment, the revenue
now is likely to amount to Rs.923.72 crores and expenditure to Rs.957.38 crores,
leaving a deficit of Rs.33.66 crores.
48. The gross revenue shows an improvement of Rs.40.13 crores due mainly
to better realisation of Union Excise Duties and income-tax including Corporation
Tax, but these improvements will be largely counter-balanced by the increase of
Rs.36.06 crores in the States’ share of taxes. In the net, the revenue will show an
increase of Rs.4.07 crores. The receipts of Rs.163 crores from Customs are at about
the same level as estimated in the Budget. Union Excises including Additional Excises
will yield Rs.394.98 crores, an increase of Rs.15.37 crores over the original estimate.
This increase is spread over most of the items, notably, tobacco, refined diesel oil and
motor vehicles, and is attributable to improvement in production and larger clearances
during the year. The Taxes on income including Corporation Tax are expected to
increase by Rs.25 crores due mainly to the completion of a larger number of assessments
pertaining to earlier years and better realisations than originally anticipated. The share
of income-tax payable to the States will at the same time go up by Rs.34.92 crores as
a result of larger collections during the year and arrears payable for earlier years. This
will, however, be partially neutralised by a reduction of Rs.7.43 crores in the ad hoc
grants to the States in lieu of the loss in their share of income-tax following the
changes in the Company tax structure, for which provision is made in the expenditure
estimates. The surcharge on Iron and steel, which is transferred to the Iron and Steel
Equalisation Fund, is likely to yield Rs.2.1 crores less, while the grants under P.L.480
programme will drop by Rs.5 crores.
49. The revenue expenditure this year is now estimated at Rs.957.38 crores
against the original estimate of Rs.980.35 crores. Defence Services account for
Rs.266.72 crores and Civil Expenditure for Rs.690.86 crores.
50. The saving of Rs.17.43 crores in the Civil Expenditure is the cumulative
effect of changes over several heads. Debt services will show a saving of Rs.2.24
crores due chiefly to smaller issues of market loans and treasury bills, partly
counter-balanced by larger payment of interest on Post Office Savings Bank deposits
and savings certificates. The transfer of the surcharge to the Steel Equalisation Fund
and of the grant under P.L.480 to the Special Development Fund together will account
for a fall of Rs.7.1 crores. As I mentioned earlier, the ad hoc grants to the States in lieu
of income-tax will drop by Rs.7.43 crores but the grants to States for raising the
emoluments of low-paid employees will increase by Rs.2.41 crores.
51. The net expenditure on Defence Services this year is estimated to show a
saving of Rs.5.54 crores. This is mainly due to a lower expenditure on the purchase of
stores and equipment than was originally anticipated.
12
FINANCIAL YEAR 1961-62
52. For the coming year, at the existing level of taxation, I am budgeting for
a total revenue of Rs.962.92 crores and an expenditure of Rs.1023.52 crores, leaving
a deficit of Rs.60.60 crores.
53. The revenue from Customs is expected to show a modest increase of Rs.1
crore over the current year’s revised estimate, whereas Union Excises are likely to
improve further by Rs.11.26 crores and Taxes on income and Corporation Tax together
by Rs.6 crores. The contribution from Railways is expected to increase by Rs.16.23
crores due mainly to the implementation of the recommendations of the Railway
Convention Committee. The rate of dividend will increase from 4 per cent to 41/4 per
cent. Further, the Railways will be paying an additional annual contribution of Rs.12.5
crores to the General Revenues in lieu of the Tax on Railway Fares, which will be
distributed amongst the States by way of grant. The profits of the Reserve Bank will
show an increase of Rs.21 crores over the current year’s amount of Rs.40 crores and
the grant under P.L.480 is estimated to go up by Rs.5 crores. The share of income Tax
payable to the States is expected to be lower by Rs.6.19 crores next year mainly on
account of smaller payment of arrears in respect of earlier years. These improvements,
however, will be partly counter-balanced by decreases under several heads, notably,
surcharge on iron and steel which will drop further by Rs.3.4 crores as a result of the
provisional increase in the retention price of steel.
54. Civil Expenditure next year shows an increase of Rs.49.94 crores over the
current year, s revised estimates. In view of the changes in the classification of accounts
to which I have referred earlier, the figures for 1961-62 are not quite comparable with
the corresponding figures for the current year. I shall however, make allowance for the
effect of these changes under the appropriate heads while commenting on some of the
important provisions. The growing volume of internal and external borrowings accounts
for an increase of Rs.9.55 crores under Debt services. The variations in respect of the
surcharge on iron and steel and the grant under P.L.480 referred to above will also be
reflected on the expenditure side. Excluding grants to States, which will now be
exhibited separately, and transfer of the surcharge mentioned earlier, Social and
Developmental Services are expected to cost Rs.32.88 crores more next year. This
increase is spread over almost all the heads and is attributable chiefly to the
implementation of the schemes included in the Third Plan. The ad hoc grants payable
to the States in lieu of loss in their share of income-tax following the changes made in
the Company tax structure will go up by Rs.2.76 crores. Excluding the grants payable
as a result of the abolition of the tax on Railway Fares to which I have referred earlier,
the grants to the States next year will decrease by Rs.18.35 crores mainly on account
of the discontinuance of the grants for raising the emoluments of low-paid employees
which were payable only during the Second Plan period. The Third Finance Commission
is expected to take this factor into account in assessing the needs of the State
Governments for assistance from the Centre.
13
 55. The net expenditure on Defence Services next year shows an increase of
Rs.16.2 crores. Army estimates will go up by Rs.9.2 crores, whereas Navy and Air
Force together will require Rs.3.54 crores more. The Non-effective Charges also account
for an increase of Rs.3.46 crores attributable chiefly to the recent decision to extend
to the military pensioners with retrospective effect the benefit of temporary increase
in small pensions admissible from 1st April, 1958 on the Civil side. The overall increase
in Defence Estimates is due mainly to the additional commitments of Armed Forces
including the expansion of certain establishments and provision for payments to Service
Officers on the basis of the recommendations of the Pay Commission.
CAPITAL EXPENDITURE
56. Excluding the adjustment for the transfer of assistance from the United
States to the Special Development Fund, which is technically classified as capital
expenditure, the current year’s budget provided Rs.371 crores for capital outlay. The
corresponding figure is now estimated at Rs.416 crores, an increase of Rs.45 crores.
On account of larger imports, particularly of wheat, the net expenditure on the purchase
of foodgrains will increase by Rs.30.48 crores. The requirements for the construction
of border roads are likely to exceed the original estimate by Rs.13.5 crores. An additional
amount of Rs.7.94 crores will be required for exploration of oil by the Oil and Natural
Gas Commission, while payment of Rs.8.27 crores had to be made to the World Bank
under the Indus Waters Treaty. These increases will be partly counter-balanced by
shortfalls under certain other items of capital expenditure. Detailed explanations for
the variations under other heads have, as usual, been given in the notes on the Demands
for Grants and in the Explanatory Memorandum.
57. The corresponding provision for capital, outlay next year is Rs.454 crores,
showing an increase of Rs.38 crores over the current year’s revised estimate. This
increase is spread over a number of heads and reflects the additional requirements in
the first year of the Third Plan. Railways will be spending Rs.36.38 crores more for
their capital outlay but the net expenditure on purchase of foodgrains will go down by
Rs.26 crores. Of the other major increases, mention may be made of Rs.7.7 crores
under border roads, Rs.8.46 crores for industrial development, Rs.5.2 crores for the
development of land acquired by the Delhi Administration and Rs.2.83 crores for the
construction of food storage godowns.
58. In addition to the direct capital outlay just mentioned, the estimates provide
Rs.356.07 crores this year and Rs.409.22 crores next year for loans to States and
Rs.174.37 crores this year and Rs.170.60 crores next year for loans to other parties
including Port Trusts, Government-owned Corporations and foreign Governments.
59. Provision has been included in the next year’s estimates for a total
expenditure of Rs.943 crores for implementing the Plan of which Rs.181 crores
would be on revenue account and the balance of Rs.762 crores as capital outlay
including loans. In addition, the Railways will provide Rs.23 crores from their own

14
resources. These estimates include a provision of Rs.352 crores for assistance to
States, Rs.90 crores in the Revenue budget and Rs.262 crores in the Capital budget.
It is expected that the States will find Rs.200 crores from their own funds, thus
making up an outlay of Rs.552 crores for the State plans. The outlay on the Central
portion of the Plan will aggregate to Rs.614 crores. In all, the total Plan outlay in
the first year of the Third Plan both for the Centre and the States will be of the order
of Rs.1166 crores. In making these provisions, we have borne in mind the need for
proper and careful phasing. A substantial portion of the provision during the coming
year relates to the Second Plan projects which will be carried forward to the Third
Plan and a relatively modest provision has been made for the new projects which
require much preparatory work.
WAYS AND MEANS
60. The overall deficit for the current year was estimated in the original budget
at Rs.153 crores. According to the present assessment, this deficit is now expected to
come down to Rs.15 crores. The improvement of Rs.138 crores is the result of a
number of factors. The revenue deficit is now expected to go down by Rs.27 crores.
The revised procedure regarding the deposit of P.L.480 funds with the Reserve Bank
of India, to which I have alluded earlier, accounts for investments in special securities
of Rs.240 crores-Rs.108 crores on account of transfers from the State Bank of India
and Rs.132 crores due to net fresh accruals. The opening cash balance exceeded the
original estimate by Rs.19 crores. This improvement of Rs.286 crores will be partly
offset by an increase of Rs.45 crores in capital expenditure mentioned earlier, decline
of Rs.84 crores in the net internal and external borrowings and worsening to the
extent of Rs.19 crores under other debt heads.
61. The Budget had assumed credit for market loans at Rs.250 crores including
Rs.25 crores from Prize Bonds. During the year, two loans were floated: 31 per cent
Bonds, 1966, and 4 per cent Loan, 1980 for a total sum of Rs.175 crores. Conversion
facilities were also offered to the holders of 2-3/4 per cent Loan, 1960,4 per cent
Loan, 1960-70 and 21/4 per cent Hyderabad Loan, 1955-60 maturing during the year.
The total amount subscribed was Rs.180.70 crores including Rs.74.6 crores by way
of conversion.
62. The Prize Bonds are expected to yield a sum of Rs.12.5 crores by the end
of the year. As Honourable Members are aware, during the first few months of the
introduction of the scheme, the sale of these bonds was very brisk but thereafter the
demand for them has slackened appreciably. I believe, however, that these bonds have
much attraction for a large mass of the people and with more intensive and co-ordinated
efforts on the part of both non-official and official organisations, particularly in the
States, it should be possible to improve substantially on the recent performance.
63. The House will recall that in pursuance of the decision for the gradual
funding of a part of the ad hoc Treasury Bills held in the issue Department of the

15
Reserve Bank of India, Treasury Bins of the value of Rs.300 crores were converted in
1958-59 and another batch of Rs.150 crores in 1959-60, into dated securities. We have
continued this process during the current year by conversion of another batch of
Treasury Bills worth Rs.50 crores.
64. Small savings have, during the last three years, shown encouraging results.
The net collections last year aggregated to Rs.84 crores. During the first ten months of
the current year net collections have exceeded the collections for the corresponding
period last year by Rs.19 crores, and we are, for the first time, likely to end the year
with a net collection of Rs.100 crores. The co-operation and response which the large
masses of people have shown in contributing to the success of the Small Savings
movement is very heartening and augurs well for the future. I should like to take this
opportunity of expressing my appreciation of the assistance rendered in this direction
by non-official agencies-particularly the Advisory Boards at the Centre and the
States-and the official organisations under the various Ministries. I hope these
encouraging trends will receive further momentum in the Third Plan which places the
receipts from this source at Rs.585 crores. It would, however, not be wise to rest on
our oars and take the present improvement for granted. A greater intensification of our
efforts will be necessary in order to achieve that target. Development involves sacrifice
and the essence of democratic planning is that the sacrifice should be evenly spread
and should be forthcoming readily and voluntarily. I invite every citizen to participate
in this sacrifice and to save more in order to invest more in the Small Savings Schemes.
65. In the budget for the coming year, I have taken a credit for a gross market
borrowing of Rs.235 crores. For small savings, I have taken a net credit of Rs.105
crores, representing an increase of Rs.5 crores over the likely receipts this year. On
the basis of our present assessment, the foreign assistance expected during the coming
year is estimated at Rs.421 crores. The net investment of P. L.480 Funds is likely to
be of the order of Rs.96 crores including the transfer of Rs.36 crores from the moneys
formerly deposited with the State Bank.
66. I may now state, in brief, the overall budgetary position next year. The
revenue deficit at the existing level of taxation is expected to amount to Rs.61 crores.
Net capital outlay is estimated at Rs.454 crores, loans to State Governments and
others at Rs.580 crores and debt repayments at Rs.167 crores. The total outgo of
Rs.1262 crores will be met to the extent of Rs.235 crores from public borrowings in
India, Rs.105 crores from small savings, Rs.421 crores from foreign assistance, Rs.176
crores from loan recoveries, Rs.96 crores from the investment of P. L.480 Funds and
Rs.104 crores from miscellaneous receipts, leaving an overall budgetary deficit of
Rs.125 crores.
67. I shall now turn to the taxation proposals for the coming year.

16
 PART ‘B’
68. Taxation in a developing economy plays a vital part. It is more than a
mere budgetary device to pay for the cost of Administration. It is an instrument of
economic policy.
69. I have already emphasized the importance of our tax effort in raising
resources for the Plan. The Third Plan envisages an increase in tax revenue from 8.5
to 11 per cent of the national income. It is no longer a question of trying through
taxation to cover the deficit on revenue account from year to year. We have to raise
resources for the Plan as a whole. It is clear that every one must contribute towards
the task of development on which we have embarked. It has been my endeavour,
however, in framing my proposals to see that the tax burden does not fall too heavily
on any one section of the community. It has, therefore, been necessary to have a large
list of items over which the tax burden is spread. I have also aimed at securing that the
incidence of taxation on lower income groups is very small. Finally I have tried to
ensure that through our tax system we further our economic objectives.
We have to see that by our tax policies we discourage imports and encourage
exports. It is also necessary to discourage consumption and encourage investment.
70. The proposals I am about to present both for direct taxation and for indirect
taxation have these objectives in view.
CUSTOMS AND UNION EXCISES
71. In regard to Customs my proposals envisage the raising of the rates of
duty on 41 items. The changes in rates of duties have been explained in detail in the
memorandum circulated with the budget papers. I will, however, refer to some of the
important changes.
72. I propose to increase the existing duty on betelnuts by 80 nP per kilogram.
This will serve to some extent to mop up the high margin of profit on this commodity.
The proposal is estimated to yield an additional revenue of Rs.57 lakhs in a year. It is
proposed to step up the existing duty on unmanufactured tobacco by about 50 per
cent. This is likely to give Rs.89 lakh annually. The existing duty of 50 per cent ad
valorem on certain textile manufactures will be raised to 100 per cent ad valorem.
This will be consistent with the generally higher rates of duty on other textile items.
The proposal will bring in additional revenue of Rs.68 lakhs. Similarly, the duty of 35
per cent ad valorem on iron and steel manufactures is to be increased to 50 per cent
ad valorem, the extra annual yield being Rs.1 crore approximately.
73. Manufacture of machinery is developing fast in the country. As a measure
to assist its growth, it is proposed to raise the import duty on machinery and components.
My proposal for this item is two-fold, firstly to raise the statutory rate of duty from 10
per cent ad valorem to 15 per cent ad valorem, except in regard to the items on which

17
there is a commitment under the General Agreement on Tariffs and Trade, and secondly
to raise the concessional rate of duty at present applicable to certain types of machinery
exempted under executive notification from 5 per cent ad valorem to 10 per cent ad
valorem. The general policy of the Government has been to keep the duties on capital
goods as low as possible. The increase being small should, however, make little
difference to the cost of production. The proposal is estimated to yield an additional
revenue of Rs.7.76 crores.
74. I propose to increase the duty on spirits, wines and malt and to impose a
duty on hops and expect as a result an annual yield of Rs.24 lakhs.
The existing duty on electrical and other instruments, apparatus and appliances
not otherwise specified is proposed to be raised by an addition of 10 per cent ad
valorem. Itis also proposed to increase the existing duty on railway material for
permanent way and rolling stock and their component parts by 5 per cent ad valorem,
the estimated extra annual yield from these two changes being Rs.1.48 crores.
The duty on the residuary item of “all other articles not otherwise specified”
falling under entry 87 of the Tariff Schedule is to be raised by 10 per cent ad valorem,
the additional yield being Rs.2.43 crores.
75. I am also proposing a small increase in duty on newsprint. In 1937, the
statutory rate of duty on newsprint was 25 per cent. For convenience, however, the
duty was fixed by notification at certain specific rates which then worked out to about
25 per cent. The statutory rate of duty on paper including newsprint has since increased
to 40 per cent plus excise duty, whereas the specific rates on newsprint have remained
almost the same. On the other hand, the price of newsprint has increased considerably
in the interval, with the result that the ad valorem incidence of the specific rates of
duty now works out to less than 5 per cent as against the rate of 25 per cent, when it
was originally fixed. It is proposed to raise this duty to about 10 per cent ad valorem.
The change is being given effect to by a notification. The estimated yield as a result
of this change is Rs.38 lakhs a year.
76. Tea which is one of our very good foreign exchange earners has lately
been losing ground in the international market. In order to encourage its export, it is
proposed to reduce the export duty on tea by 9 nP per kilogram, that is by about 17 per
cent, resulting in a loss of Rs.2 crores.
77. The net effect of these changes will be to increase the Customs revenue
byRs.16.95 crores.
78. Following the changes in excise duties to which I shall refer presently,
provision is being made, wherever necessary, for the levy of countervailing import
duties so that the indigenous producer is not placed at a disadvantage. The additional
revenue resulting from the countervailing duties is expected to be Rs.12.32 crores
a year.

18
 79. Turning to Union Excise duties, I propose to make changes in the rates of
duty in respect of 14 commodities already subject to the levy and to impose the duty
on 18 new commodities.
80. With the object of restraining consumption of tea and assisting its export,
I propose to increase the excise duty on loose tea by 5 to 8 nP per kilogram. The rate
on package tea is, at the same time, being reduced by 6 nP per kilogram, as the present
rate of duty is leading to a shift in the customary trade. These measures will yield
Rs.1.98 crores. With a similar object, the rate of duty on coffee is also proposed to be
increased by about 33 per cent, bringing in Rs.38lakhs.
Tobacco has been one of our stable revenue earners. Major changes in its tariff
structure were made in 1957 but experience has shown the need for some simplification
and rationalisation. In order to discourage lower rated tobacco being used as a substitute
for tobacco bearing a higher rate, it is necessary to narrow the difference between the
two rates. It is also necessary to step up the duty on stalks. The structure of duty on
air and flue cured tobacco and on cigarettes and on cigars and cheroots is being
simplified. These changes will yield an additional revenue of Rs.2.58crores.
81. With the improvement in the standards of living, consumption of kerosene
has been rising and as the production of kerosene in the country falls short of our
requirements, large quantities have to be imported. It is necessary to slow down the
rate of increase in use of kerosene, particularly superior kerosene and with this in
view I propose to increase duty on it by about 46 per cent, raising the incidence of
duty to Rs.95.55 per kilolitre. This, with the existing additional duty of Rs.4.45 will
mean a total duty of Rs.100 per kilolitre. Inferior kerosene which is generally used in
rural areas, is being exempted from this increase by a notification. Additional revenue
from this will be Rs.2.84 crores.
Because of the high difference in duty between refined diesel oil and diesel oil
not otherwise specified, there is a growing tendency to use the latter in admixture with
the former. Partly to correct this imbalance, I propose to raise the duty on diesel oil
not otherwise specified by Rs.28.15 per metric tonne. This will give a revenue of
Rs.1.33 crores.
82. The rayon yarn industry is in a buoyant condition and is earning
substantial profits. I propose to step up the duty on yarn of all categories and on
staple fibre by about two-thirds. This measure is expected to yield an additional
revenue of Rs.1.69 crores.
I am also increasing the duty on vegetable product by Rs.2.80 per quintal, that
is 100 kilograms. This is expected to yield an additional revenue of Rs.80 lakhs a year.
Paints and varnishes and paper industry are now firmly established and these
commodities are in a position to contribute further to the exchequer. I propose to raise
19
the duty on paints and varnishes by about 25 per cent and on paper and paper-boards
by 36 per cent to 59 per cent. I do not, however, propose any increase in the duty on
printing and writing paper. The additional revenue from paints and varnishes and from
paper and paper-boards is estimated at Rs.30 lakhs and Rs.2.37 crores respectively.
83. The large gap in the rates of duty on fine and medium ‘A’ varieties of
cotton fabrics has resulted in a major shift in production from fine to medium ‘A’
cloth. To correct this to some extent, 1 propose to raise the basic duty on medium W
grey fabrics by 25 per cent. The excise ‘levy on processed cloth is also being increased
by small amounts. These measures are expected to yield Rs.4.72 crores.
The concession which is given at present to small units in the form of total
exemption from duty or duty at a reduced rate in respect of units employing less than
a specified number of power looms has led to abuses and difficulties in administration.
To remedy this, full exemption will be admissible only to such units as do not employ
more than 2 looms in respect of cotton, rayon and silk fabrics and one loom in respect
of woollen fabrics. The slab rates of compounded levy are also being adjusted suitably.
84. It is in the interest of development of match industry in the country that
only one size of match box should be produced for general use and the size considered
most suitable is a box of 50 sticks. To encourage this standardisation through fiscal
measures rather than compulsion, I propose to make certain changes in the pattern of
duty on matches. The ceiling rate of duty is proposed to be revised from 57 nP per
1000 sticks to 65 nP per 1000 sticks. The rates of duty on the standard boxes of 50
will, however, be kept almost at the present level and the increased rate will affect
only matches packed in non-standard boxes. At the same time, as a measure of
encouragement to the cottage sector of the industry which uses bamboo for making
splints, the concessional rates are being further liberalised. These proposals are not
likely to result in any appreciable change in revenue. To give sufficient time to the
industry to adjust itself to the new requirements it is proposed to continue the present
concessional rates on boxes of 40s and 60s for a further period of 3 months.
85. Medium and small size factories producing cycle rims which were mostly
dependent on replacement market for disposal of their products are having a difficult
time. Consistently with our policy to help smaller units, I propose to grant certain
concessions which will give relief to the extent of Rs.10 lakh s a year to them.
86. With the industrial expansion in the country it is now possible to spread
the excise net wider. I propose to impose small specific duties on soda ash, caustic
soda and glycerine, a duty of 15 per cent ad valorem on coal tar dyes, of 10 per cent
on patent or proprietary medicines not containing alcohol and of 25 per cent on certain
articles of cosmetic and toilet preparations. Patent and proprietary medicines containing
alcohol are already subject to duty under the Medicinal and Toilet Preparations (Excise
Duties) Act. These items taken together are expected to yield an annual revenue of
Rs.1.8 crores.

20
 Similarly it is proposed to levy a duty of 20 per cent ad valorem on cellophane
and on plastic powders and other semi-finished plastic material. I expect a revenue of
about Rs.50 lakhs from these.
87. It is proposed to levy a small specific duty on mill-made cotton and woollen
yarn and I hope that at least a part of the duty will be absorbed in the cost of
manufacture. This step will also bring within the excise net hosiery and certain other
fabrics which do not bear any duty at present. This duty will not, however, apply to
yarn in hanks used in weaving on handlooms such as dhoties, sarees and other common
varieties of cloth and to yarn spun from shoddy wool used in the fabrication of coarse
articles. I expect a revenue of Rs.5.55 crores from this levy.
88. My next proposal is to levy excise duties ranging from 5 per cent ad
valorem to 15 per cent ad valorem on glass and glassware and China and porcelainware
including crockery. Provision is being made for a lower rate of duty for laboratory
glassware used mostly in educational or research institutions. The revenue from these
two items taken together is estimated at Rs.1.60 crores.
The House will recall that last year a duty was levied on aluminium in certain
forms. I now propose to place two other non-ferrous metals, namely, copper and zinc,
which can to some extent substitute aluminium, on the same footing, and am accordingly
levying a duty of Rs.300 per metric tonne m sheets and circles and 10 per cent ad
valorem on pipes and tubes. I also propose to bring aluminium pipes and tubes in line
with those of copper and zinc. This proposal is estimated to yield a revenue of about
Rs.80 lakhs.
89. I also propose to levy a duty on wireless receiving sets, air conditioning
machinery and refrigerators. The duty on air-conditioning machinery and refrigerators
is proposed to be levied at 20 per cent. In the case of wireless receiving sets I propose
a ceiling rate of 20 per cent ad valorem for sets valued at more than Rs.300 each and
concessional rates for cheaper sets, these valued upto Rs.150 each will be completely
exempted from duty. I expect a revenue yield of Rs.83 lakhs from these sources.
90. My last proposal under this head is to put an additional excise duty on
mill-made silk fabrics in lieu of sales tax levied on such fabrics by the States. The
States have agreed to this proposal.
91. The net effect of all these proposals is an additional revenue of Rs.30.90
crores of which Rs.2.3 crores will accrue to the States, as their share.
DIRECT TAXES
92. I am proposing only one change in the rate structure of personal income
tax. At present earned income is taxed at a concessional rate through a scheme of
differential rates of surcharges under which earned income above Rs.1 lakh bears a
lower surcharge of 5 per cent while the whole of unearned income bears a special

21
surcharge of 15 per cent of the basic income tax and super tax. The maximum slab
rate of tax, including surcharge, on unearned income is thus 84 per cent while it is 77
per cent in the case of earned income above Rs.1 lakh. The justification for a different
treatment in favour of earned income, however, diminishes as the income and with it
the capacity to pay increase and I consider that earned incomes above Rs.1 lakh
should be subjected to tax at a rate nearer to that at which unearned income is taxed.
Accordingly, I propose to increase the rate of the present special surcharge of 5 per
cent on earned income above Rs.1 lakh to 10 per cent of the basic tax.
93. I have proposed a few changes with regard to the taxation of companies
in order to rationalise the present tax structure, and to encourage capital formation.
We are encouraging companies to have a wide equity base. Capitalisation of reserves
and of premium on shares is an important device to ensure that a company does not
dissipate its reserves through higher dividends. The super-tax payable by companies
on bonus issues has, it would appear from recent experience, discouraged this process.
Now that the tax on excess dividends has been abolished, I consider it desirable both
from the revenue point of view and from the point of view of widening the equity base
of companies to reduce the tax on new bonus issues from 30 per cent to 121 per cent.
The Controllerof Capital issues will, however, continue to ensure that bonus issues
are not sanctioned except after a careful scrutiny of the proposals.
94. My next proposal relates to the rate of super-tax payable by companies on
dividends received by them. Under the law as it stands, there is a concessional rate of
super-tax on dividends received by a parent company from its subsidiary, while
inter-corporate investment on a minority basis is taxed at a higher rate. I feel that we
should not, through our tax laws, encourage the formation of subsidiaries. Consistently
with our broad social objectives, our tax laws should help to enlarge rather than
restrict the scope for public participation in all joint-stock companies. I have one more
consideration in mind. Because of the more favourable treatment given to income
derived from subsidiaries, foreign investors in Indian companies are tempted to ask
for a majority holding. The tax on a minority share-holding by a foreign company is
substantially higher than on an Indian company with a minority investment. The
investment of foreign capital can make a major contribution to our programmes of
industrial development. We do not, rightly give any tax concessions to the foreign
investor as such. At the same time, we should not impose a higher tax on inter-corporate
investment from outside which comes in with government’s approval than on similar
Indian investment. Having regard to all these considerations, I propose that the rate of
super-tax on dividends paid on inter-corporate investment, whether Indian or foreign,
and whether on a majority basis or a minority basis, should be fixed at 20 per cent. In
order that this change does not affect investments already made under different
assumptions, the new rate of taxation will apply to investment in companies formed
after 1st April, 1961.
22
 95. My other proposal relates to the taxation of royalties received from Indian
enterprises by foreign companies. The present rate, inclusive of income-tax and
super-tax, comes to 63 per cent, which, it appears, is higher than the rate in any other
country. The incidence of this high rate of tax is borne in the last analysis by our own
industry because the foreign interest concerned naturally asks for a rate of royalty
which would give an adequate return to it after deduction of taxes in order to enable
Indian industry to secure technical collaboration on more favourable terms, I propose
to reduce the tax on royalties payable on agreements approved by the Central
Government after the 31st March, 1961, to 50 per cent.
96. During recent years, there has been a growing tendency on the part of
companies and their directors and executives to entertain on a lavish scale at the
expense of companies. While a certain amount of entertainment is unavoidable and
indeed necessary in the interest of the business of the company, such expenditure
quite often is out of all proportion to the benefit to the company. This ostentation and
extravagance have an unhealthy effect on the society and go ill with the need for
economy and our ideal of social equality. This state of affairs is partly facilitated by
the fact that such expenses are counted as business expenditure for the purpose of tax.
In order to correct the situation, without penalising expenditure on a, reasonable scale,
I have proposed that entertainment expenses in the case of companies should be
admissible within specified limits as expenditure for the purpose of tax.
97. I shall now briefly refer to the more important of the amendments which
I have proposed in the income Tax Act. At present development rebate is allowed at
the rate of 40 per cent of the cost in the case of a ship and at the rate of 25 per cent
in the case of other plant or machinery. It is proposed to reduce the rate of 25 per cent
to 20 per cent in the case of machinery or plant installed after the 31st March, 1961.
The development rebate of 40 per cent in the case of a ship will continue unaffected.
I also propose that where a company is amalgamated with another company or where
a firm is converted into a private company and machinery or plant on which
development rebate is admissible to the predecessor is transferred, the development
rebate already allowed in respect of the asset transferred will not be withdrawn and
any unutilised portion of the rebate will be available to the successor company, subject
to appropriate conditions.
98. The period of tax exemption for foreign technicians, where contracts of
service have been approved by the Central Government, varies between 24 and 36
months at present. It isproposed to make such exemption available for a uniform
period of 36 months. Further, if after this period of thirty six months, the technician’s
services are retained in India and the employer pays tax on the technician’s salary, the
amount paid as tax by the employer will not be treated as part of the employee’s
income. This concession is proposed to be given for a period of 24 months after the
expiry of the initial tax-free period of 36 months. Both these concessions will apply

23
automatically to technicians whose contracts have been approved under the existing
regulation.
99. Another amendment authorises public financial institutions, approved
by Government, which have been set up to promote industrial development by
providing long-term finance, to claim as a deduction, appropriations made to a special
reserve account, of sums not exceeding 10 per cent of the total income of each year
till the amount carried to the reserve account becomes equal to the paid-up capital
of the institution.
100. Honourable Members will be interested in another proposal which seeks
to extend the benefit of the 5 years’ tax holiday provided under section 15C of the
Income Tax Act to newly started hotels which satisfy certain conditions. The object of
this concession is to provide all incentive for the building of hotels which are intended
to cater mainly to the tourist traffic earning foreign exchange.
101. In order to stimulate construction of housing for the use of persons in low
income group, I propose to provide for a deduction of Rs.600 per annum from the
annual value of new residential units completed after 31st March, 1961. This concession
will be available for a period of three years only from the date of completion. Further,
I propose to provide for an initial depreciation allowance of 20 per cent to business
undertakings for premises constructed by them for their employees drawing not more
than Rs.200 per month.
102. I shall not take the time of the House in dilating upon the remaining
amendments to the income Tax Act as these are of a minor nature and have no revenue
significance.
103. The changes in direct taxes will bring in an additional revenue of
Rs.3 crores.
NET EFFECT OF THE PROPOSALS
104. I may briefly state the net result of my proposals. The changes in the
Customs duties will yield an additional revenue of Rs.29.27 crores. Excluding the
amount of Rs.2.3 crores transferable to the States, Union Excise duties will bring in
Rs.28.6 crores. The minor changes in income Tax and Corporation Tax are expected
to yield an income of Rs.3 crores. As a result of these proposals, an additional revenue
of Rs.60.87 crores will accrue to the Centre. This will completely wipe out the revenue
deficit and give a nominal revenue surplus of Rs.27 lakhs. The overall deficit will
consequentially be reduced from Rs.125 crores to Rs.64 crores and will be met by the
expansion of Treasury Bills.
CONCLUSION
105. The taxation proposals which I have just outlined will, no doubt, impose
an additional burden on the people, though my aim has been to minimise its incidence
24
on the weaker sections of the community. I would, however, have failed in my duty if,
on the threshold of the Third Plan, I had called for a smaller effort. We have set
ourselves the onerous task of raising the standard of living of our people and, of
speedily building up a self-sustaining economy. We are doing this with the willing
consent of the people through democratic processes. There can be no respite from
sweat and sacrifice.
106. Our efforts in mobilising resources for the Second Plan have been
impressive. By raising additional revenue of about Rs.800 crores through fresh taxation
we have, over the five year period, not only met our entire revenue expenditure from
our current income but have also financed capital expenditure to the extent of about
Rs.130 crores from current surpluses. In addition, we have assisted the States by way
of revenue grants of the order of Rs.700 crores, Over and above their share of income
Tax and Union Excise Duties. At the same time, we have kept deficit financing well
within the limits originally envisaged. I venture to submit that these are not insignificant
achievements.
107. Our objectives and targets during the Third Plan are more ambitious.
Throughout the next five years, it must be our endeavour to keep the pressure on
prices under check by raising additional revenues and mobilising savings so as to
ensure that deficit financing is kept within the limit of Rs.550 crores envisaged in the
Draft Outline. We are making a good beginning in this direction, in the first year of
the Plan.
108. We have chosen for ourselves certain social and economic goals. We must
do our utmost to achieve them. This will mean hard work and sacrifices for some time
to come. But there is promise of a rich reward in the shape of higher standards of
living, more employment opportunities and a better socio-economic system. The tasks
that we have undertaken are of great moment for the future of the country. We dare not
falter at this crucial stage.
(FEBRUARY 28, 1961)

25
 SPEECH OF SHRI MORARJI R. DESAI, MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1960-61

Sir,
I beg to present the statement of the estimated receipts and expenditure of the
Government of India for the year 1960-61.
2. The usual Economic Survey reviewing the major developments in the
economy during the current year and indicating broadly the outlook for the coming
year has been circulated along with the budget papers. I propose here to dwell only on
such aspects of the economic situation as have a direct bearing on the budget for the
coming year.
3. Agricultural production recorded a large increase in 1958-59 and there
has been a marked recovery in industrial production in recent months. Despite these
encouraging trends in production, both wholesale prices and the cost of living have
shown a significant rise. The foreign exchange reserves held by the Reserve Bank
have maintained a measure of stability during the year. There has been some
improvement in export earnings and some reduction in imports, but the major factor
in the stability of our foreign exchange position has been the larger availability of
external assistance. The trends in money supply and credit indicate that the expansionary
impulse in the economy has been fairly strong. The stock markets have been buoyant
particularly throughout the year. These pointers, taken together, indicate the need in
the coming year for active vigilance in regard to domestic price trends and continued
austerity in imports backed by accelerated effort to step up exports.
4. The investments undertaken in the last few years are beginning to yield
results and we should expect substantial increases in output in the coming years. At
the same time the demands for domestic consumption and investment are increasing
while the urgent need to build up exports remains. It is essential in this situation to
ensure to the maximum extent possible that aggregate demand does not outstrip the
supplies available. 1960-61 is the last year of the Second Five-Years Plan, and care
must be taken to see that the economy is in a state of healthy balance when the year
ends and the Third Plan commences.
PRODUCTION
5. The prospects for agricultural production in the current year are good.
Despite floods in some parts of the country and drought in some others, the Kharif
crop is expected to be about as good as last year, and the Rabi sowings so far have
been satisfactory. Food production in 1959-60 will, it is hoped, be around the same
high level as last year, although some reduction in the output of raw cotton and jute
is likely.
1
 6. Industrial production has shown an increase of about 7.4 per cent over the
first ten months of 1959. This is a substantial improvement over the rate of increase
of 1.7 per cent in 1956 and 3.5 per cent in 1957. A notable feature of the year was the
increase in the production of iron, steel and aluminium which together accounted for
over a third of the rise in the index of industrial production. Among the other industries
which recorded substantial increases in output were automobiles, diesel engines,
machine tools, sugar machinery, superphosphates, soda ash, cement and paper and
paper board. The output of mill cloth was about the same as in 1958, although the off-
take was distinctly larger partly on account of the revival of export demand. The
production of handloom and powerloom cloth went up by about 100 million yards.
The production of jute manufactures over the year was slightly lower than that in
1958, but it has been looking up since September last. Although the foreign exchange
position continues to be tight, It has been possible to ensure, by and large, that industrial
production is not hampered on that account. Actually, the increase in industrial
production has been larger than the index would suggest, as the industries which have
come into existence after 1951 are not included in that index.
7. In part, the increase in industrial production mentioned earlier has been
on account of fuller utilisation of capacity. But there has also been expansion in
installed capacity in a number of industries such as iron and steel, aluminium, paper,
basic chemicals, cement, power-driven pumps, sewing machines and bicycles. Progress
is being made in the production of finished machinery and equipment as well. The
construction of the first phase of the heavy electrical project at Bhopal is nearing
completion and it has been decided to accelerate the remaining phases of the project
and to provide for substantial expansion. The capacity of the heavy machinery project
at Ranchi is also to be expanded so as to produce 80,000 tons of machinery a year. A
number of plants for fertilisers, drugs and pharmaceuticals and intermediates are also
being established and will go into production during the Third Plan period. The
industrial potential of the country has grown considerably over the last few years, and
is becoming rapidly more diversified. Government are anxious to see this process
carried through further. Small-scale industries have also continued to receive
encouragement and support from Government, and certain steps to assist banks to
make larger loans to small industries are under consideration.
8. Indian shipping continued to expand steadily during the year. The total
gross tonnage under the Indian flag at the end of 1959 was about 7,40,000 which is
expected to reach the Plan target of 9 lakh tons by the end of 1960-61. With the
establishment of the Shipping Development Fund in the current year, Indian shipping
companies have now a permanent source from which to obtain rupee finance for their
development. In the present context of a shortage of foreign exchange, it is important
to develop the Merchant Fleet and save the large amount paid as freight in foreign
exchange. I hope that in this effort we shall receive co-operation and assistance from
foreign ship-owners, who have had an earlier start and that restrictive practices, which
hamper the full utilisation of our shipping tonnage will be given up.

2
MONETARY TRENDS
9. The rate of increase in money supply which had slowed down in 1958
picked up again in 1959, the increase in the course of the year being Rs.170 crores, as
compared to Rs.76 crores in the previous year. The increase in bank credit to
Government was smaller in 1959 than in the previous year. On the other hand, the
contractionist effect of the transactions of the private sector with the banking system
was smaller and the foreign exchange reserves which had shown a decline in the
previous year went up in 1959.
10. The deposit resources of scheduled banks increased by Rs.254 crores in
1959. The addition to the investment of these banks in government securities was
Rs.151 crores as compared to Rs.204 crores in 1958. The net borrowings of the
scheduled banks from the Reserve Bank were small and except during periods of
pressure for funds, money rates generally tended to remain at lower levels. The
maximum deposit rates fixed in October 1958 under a voluntary agreement among the
larger banks’ were lowered by 1/2 per cent in September 1959.
11. The stock markets were buoyant for most of the year and the gilt-edged
securities maintained a firm trend. Several of the new industrial issues during the year
were over subscribed. The index of variable dividend industrial securities, which had
risen by 14 per cent in 1958, rose further by about 17 per cent during 1959. While, in
a growing economy the capital markets should reflect confidence and optimism, it is
essential to keep a watch on any unhealthy speculative tendencies.
PRICES
12. The general index of wholesale prices has shown a rise of about 41 per
cent over the twelve months ending January 1960. The index for rice came down from
108 in November 1958 to 92 in March 1959, but it rose again to 112 by October.
There was a seasonal decline to around 101 by December 1959. The index was 104.3
at the end of January 1960. Wheat prices at the end of last month were about 25 per
cent lower than about a year ago. While on the whole, the indices for cereals and
pulses have shown a fall, ‘food articles’ as a group have gone up, mainly because of
the rise in the prices of edible oil, gur and tea. Industrial raw materials went up more
sharply and the index for manufactures has also shown an upward trend in recent
months. The All-India cost-of-living index for December 1959 was 124 as compared
to 122 a year earlier.
BALANCE OF PAYMENTS
13. As I mentioned earlier, the Reserve Bank’s sterling assets have been
relatively stable, their level on 19th February 1960 being Rs.203 crores, as compared
to Rs.211 crores a year earlier. During this period we made the gold payment towards
the enlargement of our quota in the International Monetary Fund and repurchased
from it rupees equivalent to $20 million. Welcome as this improvement is, it must be
borne in mind that basically our current earnings are far short of, our payments, and
the gap is being met by foreign loans and credits.
3
 14. For the year 1958-59 the current account deficit in the balance of payments
was Rs.339 crores as compared to Rs.476 crores in 1957-58. Imports were lower by
Rs.157 crores; imports on private account showing a fall of Rs.176 crores while
Government imports rose by Rs.19 crores. Export earnings in 1958-59 were about
Rs.19 crores less than in 1957-58 due mainly to recessionary conditions abroad. Receipts
on account of official donations and other invisible items were less in 1958-59 by a
crore as compared to 1957-58. The current account deficit of Rs.339 crores was met
by capital inflow of Rs.320 crores and by a drawing down of foreign exchange reserves
by Rs.19 crores. Allowing for a net outflow of Rs.23 crores on account of miscellaneous
transactions the total fall in reserves, however, came to Rs.42 crores.
15. For the first half of 1959-60 the current account deficit was Rs.142 crores
as compared to a deficit of Rs.211 crores in the first half of 1958-59. The improvement
was accounted for by an increase in export earnings of the order of Rs.19 crores and
a reduction in imports amounting to Rs.53 crores. The receipts on account of official
donations were, however, Rs.3 crores less. As against a deficit of Rs.142 crores, foreign
exchange reserves were drawn down by Rs.27 crores, the balance being met mainly
by external assistance.
16. While on the subject of the balance of payments and foreign exchange
reserves, I would like to mention that we had drawn in 1957 from the International
Monetary Fund, a credit of $ 200 million, including a stand-by-credit of $ 72.5 million.
Under the Fund rules, a stand-by-credit is repayable within three years. We have,
therefore, repaid $ 50 million during this month and propose to pay the balance of $
22.5 million in June 1960.
FOREIGN ASSISTANCE
17. As the House is aware, a Conference of friendly countries was convened
by the World Bank in March 1959 to discuss how India could be assisted to meet the
foreign exchange requirements of the current Plan. Following this Conference, the
United Kingdom Government granted a loan of £ 19 million, about Rs.25 crores. The
United States Government sanctioned a further loan of $ 20 million, about Rs.91/2
crores, from the Development Loan Fund in July 1959 for the import of steel for
projects in the private sector. An agreement under P.L.480 was signed with the United
States Administration in November 1959 for import of foodgrains, and other agricultural
commodities valued at $ 257 million, about Rs.122 crores. Canada has authorised
grants totalling $25 million, about Rs.11 crores for import of wheat, raw materials,
fertilisers and scientific equipment. During the current financial year the World Bank
sanctioned further loans totalling $ 85 million, about Rs.401 crores. Three agreements
were signed during the year with the U.S.S.R., for loans and credits totalling 1680
million roubles, about Rs.201 crores. The bulk of this assistance is towards the Third
Plan. The Government of Czechoslovakia and Yugoslavia have also agreed to extend
credits upto Rs.23 crores and Rs.19 crores respectively during the Third Plan period.

4
 18. As in previous years, we have continued to receive assistance under the
Colombo Plan from countries like Australia, Canada and New Zealand. We have
received technical assistance from the United Nations Expanded Programme of
Technical Assistance, other specialised agencies of the United Nations and the Indo-
French technical co-operation programme. We have on our side, also given assistance
to friendly countries. Our economic and technical assistance to Nepal under the
Colombo Plan is expected to amount to R9.1.33 crores during the current year. We
have provided scholarships and training facilities for overseas students and sent a
large number of experts to help the Governments of these countries.
19. I attended the annual meetings of the Boards of Governors of the Bank
and the Fund in Washington in September-October 1959. At their meeting, the Board
of Governors of the Bank adopted the U.S. proposal asking the Bank’s Executive
Directors to consider the broad principles on which an International Development
Association as an affiliate of the World Bank should be established and to formulate
the Articles of Agreement of this Association for submission to the member-
governments. The purpose of the Association would be to promote economic
development in less developed areas by providing additional finance on terms which
will bear less heavily on the balance of payments position of the borrowing countries.
The Articles of Association for the International Development Association have now
been drafted and will be considered by member-governments.
FINANCIAL YEAR 1959-60
20. I shall now deal with the revised estimates of the current year and the
budget estimates of the coming year.
21. The budget for the current year estimated the revenue at Rs.780.10 crores
and expenditure met from revenue at Rs.839.18 crores leaving a revenue deficit of
Rs.59.08 crores. On the trend of actuals the revenue is now estimated at Rs.838.66
crores and expenditure at Rs.854.05 crores, leaving a deficit of only Rs.15.39 crores.
22. The improvement of Rs.58.56 crores in revenue is due mainly to better
collections under Customs and Union Excises. Customs receipts are now estimated to
go up from Rs.132.77 crores to Rs.160 crores; our original estimate, based largely on
the trend of actuals for 1957-58, has proved to be too conservative. Union Excises
would yield Rs.350.82 crores against the budget estimate of Rs.324.32 crores. With
the progressive increase in production the revenue has shown an all round improvement,’
notably under steel ingots, cement and tyres and tubes. The enhancement in the duty
on mineral oils during the year has also contributed to this improvement. The revenue
from income Tax including Corporation Tax is likely to go up by Rs.5 crores but the
yield from Wealth Tax, Expenditure Tax and Gift Tax taken together, will be less by
Rs.1.6 crores. The surcharge on iron and steel which is transferred to the Iron and
Steel Equalisation Fund, is likely to yield Rs.9 crores more while grants from the U.
S. Government under the PL 480 programme will be Rs.13 crores less.
5
 23. Civil Expenditure this year is now estimated at Rs.610.35 crores against
the original budget of Rs.596.50 crores and Defence Expenditure at Rs.243.70 crores
against the original estimate of Rs.242.68 crores.
24. The increase of Rs.13.85 crores in Civil Expenditure is the net effect of
variations over a number of heads. Debt services are now estimated to cost Rs.7.26
crores more due chiefly to larger payments for interest on external loans. Transfer to
the Steel Equalisation Fund of the surcharge on Iron and steel accounts for an increase
of Rs.9 crores. Expenditure on displaced persons is more by Rs.5.48 crores due to the
conversion of certain outstanding loans into grants and to larger provision for transfer
of sale proceeds of evacuee property, which are taken in reduction of the Capital
expenditure on the payment of compensation to displaced persons. Payment of States’
share of Union Excise Duties is now expected to exceed the budget provision by
Rs.2.30 crores following the expansion of revenue. Provision has also been made for
payment to the States of a grant of Rs.3.46 crores to compensate them for the loss in
their share of income-tax following the changes in the company taxation this year.
These increases would be partly counterbalanced by a drop of Rs.13 crores in the
grants from U.S.A. under P.L.480 programme to be transferred to the Special
Development Fund
25. The revised estimate of the net Defence expenditure on revenue account
during the current year shows an increase of Rs.1.02 crores over the budget. This is
made up of an increase of Rs.6 crores under the Air Force, offset by reductions in the
Navy and in Non-effective charges and by a slight increase under “Receipts and
Recoveries”. The increase in the Air Force budget is mainly due to liabilities carried
over from 1958-59 m stores purchased from abroad and new proposals sanctioned
during the course of the year. The reduction in expenditure on the Navy is mainly due
to less expenditure m stores. The provision made for temporary increases in pensions
of Service personnel under “Non-effective Charges” is unlikely to be required this
year and has been included in the budget for the next year.
FINANCIAL YEAR 1960-61
26. Before dealing with the estimates for the coming year, I would like to
mention one or two matters which affect the estimates of that year. The first relates to
a major change in the financial arrangements between General Revenues and Posts &
Telegraphs. The surplus of Posts and Telegraphs Department, after payment of interest
on the capital at charge, has so far merged in the General Revenues. Part of the
surplus is treated as an outright contribution to General Revenues and the balance is
retained pro forma by the Department on which an abatement of interest is allowed.
These arrangements were recently reviewed particularly against the background of the
need to encourage the Department to build up adequate reserves against its growing
capital investment. With rapid expansion and technological advantage, the pace of
capital investment of the Department has increased considerably in recent years, the

6
total capital at charge having risen from Rs.38 crores in 1948-49 to Rs.121 crores at
the end of last year. But the accretions to the Renewals Reserve Fund have not been
adequate with the result that replacements have to be partly financed from interest-
bearing capital. It has, therefore, been decided to place the P&T Department with
effect from next year in the same position as the other great commercial department of
Government, viz. Railways vis-a-vis General Revenues. The Department would in
future pay a dividend to the General Revenues at the rate in force from time to time
for the Indian Railways on the mean capital at charge during the year. The balance of
the surplus after payment of the dividend, will be retained by the Department for
strengthening its Reserves, particularly the Renewals Reserve Fund.
27. The second matter concerns the Central Pay Commission. The Commission
which was appointed in August, 1957, to enquire into the structure of emoluments and
conditions of service of Central Government employees submitted its Report in August,
1959. The decisions of Government on some of the major recommendations of the
Commission were announced in Parliament on the 30th November, 1959. The other
recommendations of the Commission are being examined and Government’s decisions
thereon will be announced as early as possible. The annual expenditure for Government
as a whole on the Implementation of the recommendations of the Commission, including
the interim relief already granted, is of the order of Rs.44 crores, which is likely to
rise ultimately to Rs.55 crores roundly per annum. The recommendations of the
Commission accepted by Government take effect from the 1st July, 1959, but no
provision is being made in the revised estimates for the current year on this account
as the payments will all be made in 1960-61. The budget for that year thus includes
more than a year’s provision for this expenditure.
28. Honourable Members had expressed some concern last year about the
growth of Civil expenditure. The question of securing maximum possible economy
consistent with efficiency and avoiding wastage in public expenditure has continued
to receive close attention. The reports of the various teams of the Committee on Plan
Projects and the Special Re-organisation Unit of the Ministry of Finance have been
made available to Parliament from time to time. A continuous watch over the growth
of expenditure, particularly non-developmental expenditure, is kept by the Central
Economy Board and the Internal Economy Committees set up in the various Ministries.
Studies of particular sections of activity in each Ministry have been initiated with a
view to improve the methods of work and secure economy with efficiency. Government
have imposed a ban for one year m the creation of fresh posts and the filling up of
vacant posts unless they are related to the Plan or are required for security purposes.
Ad hoc cuts have also been made in the provision for travelling allowances.
29. For the next year, on the basis of existing taxation, the revenue is estimated
at Rs.896.45 crores and expenditure at Rs.980.35 crores, leaving a deficit of Rs.83.90
crores on revenue account.

7
 30. The revenue from Customs has been assumed at the same level as the
current year’s revised estimate of Rs.160 crores. Union Excise Duties are estimated at
Rs.358.91 crores, an increase of Rs.8.09 crores over the revised estimate, which allows
for the progressive increase in production and a full year’s revenue from the increases
levied during the current year. The receipts from income Tax and Corporation Tax are
likely to improve by Rs.10 crores. Revenue from Wealth Tax will decline by Rs.5
crores due to the merger of the tax on companies in their income tax. Apart from the
increase of Rs.1.43 crores in the sale proceeds of opium, the revenue from the other
principal heads is not expected to differ materially from the current year’s revised
estimates. Interest receipts would go up by Rs.7.44 crores mainly due to the anticipated
receipt from two steel companies and the Khadi and Village industries Commission.
Of the other major variations, mention may be made of an increase of Rs.7 crores. In
the receipt from the surcharge on iron and steel and Rs.8 crores in grant from the
U. S. Government under the P. L.480 programme. But these increases will be partly
set off by a drop of Rs.4 crores in the contribution from the Posts & Telegraphs
following the revised arrangements mentioned earlier. The share of income-tax payable
to the States next year shows a decrease of Rs.27.26 crores as a result of the merger
of company income tax in Corporation Tax, but as I mentioned in my speech last year,
it is the intention to make good the loss to the States by a specific grant till the next
Finance Commission reports on the allocation of income-tax and necessary provision
is being made in the expenditure estimates for this purpose. The profits of the Reserve
Bank have been taken at Rs.40 crores, the same as in the current year.
31. Expenditure nextyear is estimated at Rs.980.35 crores of which Rs.272.26
crores will be on Defence Services and Rs.708.09 crores under the Civil heads.
32. Civil Expenditure next year shows an increase of R9.97.74 crores over
the revised estimates. Expenditure on Debt Services is likely to be Rs.9.45 crores
more on account of the progressive increase in the internal and external debt.
Development and Social Services, including Community Development, are expected
to cost Rs.27 crores more in the terminal year of the current Five Year Plan. The two
self-balancing items of surcharge m iron and steel and grants from the U. S.A. under
P.L.480, for which corresponding credits are assumed in the revenue estimates, account
for an increase of Rs.15 crores. Ad hoc grants to the States to compensate them for
the’ loss in their share of income tax next year would be Rs.28 crores more. The rest
of the increase is spread over a number of heads. Detailed explanations for these
variations have, as usual, been given in the Explanatory Memorandum.
33. Defence expenditure next year is estimated at Rs.272.26 crores against
the revised estimate of Rs.243.70 crores, an increase of Rs.28.56 crores. Army estimates
show an increase of Rs.26.75 crores and Navy estimates Rs.3.46 crores, while the
expenditure on Air Force will be Rs.2.94 crores less. Non-effective charges show an
increase of Rs.1.29 crores. The overall increase in the Defence expenditure is mainly
due to the additional commitments of the Armed Forces, the further expansion of the
8
Territorial Army and the National Cadet Corps and the provision for increased payments
to Defence personnel on the basis of the recommendations of the last Pay Commission.
As I have mentioned elsewhere, the provision included in the current year under non-
effective charges for an increase in the rates of small pensions to Service personnel
has been carried over to the coming year. The reduction in the Air Force estimates is
mainly due to the inclusion in the current year’s revised of substantial amounts m
account of liabilities carried over from the previous year.
34. The estimates of the Defence Services have been prepared against the
background of the present threat to our borders and I am sure the House will not
expect me to dilate at any length on the measures which have been taken and are
under consideration for safeguarding the territorial integrity of the country. It may be
that later in the year, if circumstances necessitate It, I may have to come before this
House for additional funds; but I have no doubt that Government will have the support
of all sections of this House in taking all the measures necessary for ensuring the
security of the country.
CAPITAL EXPENDITURE
35. I shall now give a brief account of the provision made in the estimates for
capital outlay. The current year’s budget provided for a total capital outlay of Rs.420.14
crores, excluding the adjustment for the transfer of capital assistance from the United
States to the Special Development Fund which is notionally treated as capital
expenditure. The revised capital requirements are now estimated at Rs.362.85 crores,
a decrease of Rs.57.29 crores. The savings occur mainly under two heads. The Railways
now expect to spend only Rs.85.03 crores against the original estimate of Rs.121.81
crores. Net expenditure on purchase of foodgrains shows a fall of Rs.21.01 crores due
mostly to larger sale proceeds and recoveries.
36. Against the revised estimate of Rs.362.85 crores for capital outlay this
year, the next year’s provision stands at Rs.370.84 crores. If the special item of Rs.95.24
crores in the current year for payment of additional subscription to the International
Monetary Fund is excluded, the capital requirements next year exceed the current
year’s revised estimate by Rs.103.23 crores. This increase is spread over a number of
heads and reflects the additional allotments to fulfil the Plan targets during the last
year of the Plan. Outlay on industrial development, mainly on coal and oil development,
would cost Rs.30.56 crores more. The Railways and Posts and Telegraphs would also
be spending Rs.35.78 crores and Rs.3.60 crores more respectively than in the current
year. Foodgrains transactions would also involve an increase in the net outlay of
Rs.19.41 crores.
37. In addition to the direct capital outlay just mentioned the estimates provide
Rs.283.18 crores this year and Rs.331.51 crores next year for loans to States and
Rs.221.74 crores this year and Rs.176.74 crores next year for loans to other parties
including Port Trusts, Government owned Corporations and foreign Governments.

9
 38. Next year’s estimates include a total provision of Rs.889 crores for
implementing the Plant Rs.173 crores in the revenue budget and Rs.716 crores in the
Capital budget. Out of this provision, Rs.64 crores in the revenue budget and Rs.175
crores in the capital budget are for assistance to the States. In addition, the Railways
will be spending Rs.34 crores from their own resources and the States Rs.251 crores.
Thus the total Plan outlay in 1960-61, including interest on loans on river valley
projects which are added to capital during the period of construction and short-term
loans, will amount to Rs.1,174 crores.
39. During the three years ending 1958-51 the total Plan outlay by ‘ the Central
and State Governments together was of the order of Rs.2,450 crores. The budget
provision on this account for the current year is Rs.1,121 crores and the next year’s
outlay as mentioned already is estimated at Rs.1,174 crores. After allowing for the
usual shortfall in expenditure, the actual outlay in the public sector over the five-year
period will be near about Rs.4,600 crores. Investment in the organised private sector
is expected to reach the total envisaged in the Plan; it may even slightly exceed this.
In irrigation, power, industry, mining and transport as also in the field of social services,
the achievements will, I feel sure, be impressive.
WAYS AND MEANS
40. The current year’s budget provided for a net expansion of treasury bills of
Rs.237 crores of which Rs.15 crores were expected to be issued to the public. On the
latest trends, the net expansion is now estimated at Rs.190 crores. The improvement
of Rs.47 crores is due to several factors.The revenue deficit is now expected to be
Rs.44 crores less than estimated. Capital expenditure, as explained earlier, will show
a saving of Rs.57 crores and other debt heads an improvement of Rs.32 crores. This
improvement of Rs.133 crores will be partly counter balanced by a decrease of Rs.71
crores in external loans and additional provision of Rs.15 crores required to raise the
closing cash balance to the normal level of Rs.50 crores.
41. The borrowing envisaged by the budget was carried through successfully.
In the budget I had taken credit for a market loan of Rs.225 crores; the actual receipts
amounted to Rs.229 crores. Two loans were floated in July 1959; the 31/2 per cent
Bonds 1969 at an issue price of Rs.98.85 and the 4 per cent Loan 1979 at par.
Conversion facilities were offered to the holders of the 3 per cent Second Victory
Loan 1959-61 and the 21 per cent Hyderabad Loan 1954-59 which were due for
repayment during the year. The total subscriptions to these loans amounted to Rs.184
crores, of which Rs.89 crores came by way of conversion. Later, to meet the demand
for investment from the market, it was decided to create further issues of 3J per cent
Bonds 1969 for Rs.25 crores at Rs.99.4 and of 33/4 per cent Loan 1974 for Rs.20
crores at Rs.99.65. In accordance with the usual practice, these issues were taken over
by the Reserve Bank on its investment portfolio for being sold in the market later.

10
 42. Hon’ble members will recall that in the Budget Speech for 1958-59 mention
was made of the proposal for the gradual funding of a part of the Treasury Bills held
in the issue Department of the Reserve Bank. A beginning was made in July 1958
when, in consultation with the Reserve Bank, Treasury Bills of the value of Rs.300
crores were funded. This process was continued during the current year when a further
Rs.150 crores worth of Treasury Bills were funded into dated securities.
43. Small Savings have shown a steady Improvement in recent years. The
net collections of Rs.78 crores during 1958-59 were the highest reached so far. This
year they are expected to go up to Rs.82 crores against the budget estimate of Rs.85
crores. While the response has been encouraging, the collections are still far short
of the average of Rs.100 crores a year envisaged in the Plan. The Small Savings
movement is more than a routine device for mobilising savings. It has a great
psychological appeal in providing an opportunity for the ordinary man and woman
to participate in the national effort for development. I would, therefore, appeal to
every family in this country to save more and contribute its share in making the
movement a greater success.
44. I may mention, at this stage, certain steps taken by Government during
the year to popularise the savings movement. The House will remember that in the
last session, legislation was promoted to provide the facility of nomination to depositors
in the Post Office Savings Bank and holders of Savings Certificates. A new Pay Roll
Scheme has been introduced for the benefit of the employees in large establishments
and factories which permits deduction to be made from the wages, with the consent of
the employees, for investment in Small Savings. The National Savings Advisory
Committees at the Centre and in the States have been merged with the Savings Boards
of the Women’s Savings Campaign and constituted into composite Boards, one at the
Centre and one in each State, with adequate representation of women workers. The
various agency systems for the sale of Savings Certificates have been reviewed and
rationalised and a standardised agency system, both for the urban and rural areas is
expected to be introduced shortly. The Commission due to the agents is at present
claimed and disbursed through the treasuries which are always not easily accessible,
particularly in the rural areas. To meet this difficulty, the responsibility for the payment
of the commission is proposed to be transferred to the post offices in the coming year.
45. In response to suggestions made from various quarters from time to time,
Government have decided to issue Prize Bonds. The notification setting out the terms
will issue tomorrow and the Bonds will be placed on sale from the 1st April next. The
issue will be in the form of bearer bonds in two denominations of Rs.100 and Rs.5.
The bonds will not carry interest and will be repaid after five years but the holders
will participate in quarterly drawal of prizes, which will be free of income tax. The
total number of prizes to be awarded every quarter will be 40 in respect of each series
of one lakh units of Rs.100 bonds, the prizes ranging between Rs.25,000 and Rs.500.

11
In the case of each series of ten lakh units of Rs.5 bonds, the number of prizes offered
every quarter would be 278, the prizes ranging between Rs.7,500 and Rs.50.
46. For the next year’s budget, credit has been taken for a market borrowing
of Rs.250 crores including the receipts from the prize bonds which I just mentioned.
The net credit from Small Savings has been taken at Rs.90 crores allowing for a
small increase of Rs.8 crores over the likely receipts this year. According to the
latest information available, foreign assistance next year is expected to amount to
Rs.362 crores.
47. The overall budgetary position next year may now be summarized. At the
existing level of taxation, there will be a revenue deficit of Rs.84 crores. Capital
outlay will amount to Rs.371 crores, loans to State Governments and others to Rs.531
crores and debt repayments to Rs.140 crores. This total disbursement of Rs.1.126
crores will be met to the extent of Rs.250 crores from market borrowing, Rs.90 crores
from Small Savings, Rs.362 crores from foreign assistance, Rs.128 crores from loan
recoveries and Rs.119 crores from miscellaneous receipts, leaving a deficit of Rs.177
crores, which will be met by the expansion of treasury bills.
DEVELOPMENTAL PLANNING
48. Before I deal with the problem of covering the large revenue deficit in
sight, I should like to say a few words on the implications of planning for development;
for, It is in relation to these that all our budgets have to be framed. The essential
objective of our plans is to lift the economy from stagnation and to get it moving
forward to higher levels of production and better standards of living. We embarked on
this task some ten years ago, and we shall be completing the Second Plan by the end
of the next fiscal year. In this period, our economy has made notable advances in
several directions. One has only to look at the major industrial projects which are
coming up and see something of the varied programmes of rural development that
have been and are being implemented to realise the growing dynamism of the economy.
Economic development is not, for us, a vague or remote ideal; it has to be part of our
daily thought and work. Undoubtedly, we have had our share of difficulties, and, I
have no doubt, we shall continue to have some hereafter. These difficulties and stresses
and strains are a part of the process of economic and social growth.
49. At the end of the Second Plan the country would have reached a level of
development at which it can hardly afford to halt. It is vital that the pace of development
is not merely maintained but accelerated. This is the essential task of the Third Five
Year Plan. The first pre-requisite of success for this is increased agricultural production.
This is axiomatic and we cannot afford, even for a moment, to lose sight of it. But,
other sectors of the economy, like industry, mining, power, transport and
communications have also to be developed rapidly if the economy is to grow at a
rapid enough pace over the next 10 or 15 years. The Third Five Year Plan has to keep
this perspective in view.

12
 50. It is perhaps a platitude to say that in this country we face all the time a
crisis of resources in developing our economy. But I would be failing in my duty if I
do not stress the point that mobilising the resources required for this is not going to be
easy and will entail progressively harder work and larger sacrifices by all sections of
the community. There will be need also for substantial external assistance. We are
anxious to make the period of dependence on special external assistance as short as
possible. I am not referring here to the normal flow of external capital, this, I hope,
will continue. Private capital is apt to flow in more readily when the foundations of
development have been well laid out. The scope for foreign investment in India will
thus grow. But, our aim is to get as early as possible to a stage where the bulk of our
investment programmes is based on the domestic output of capital goods and equipment.
How far we can advance in this direction depends upon a number of factors, of which
the availability of sufficient foreign exchange in the next few years is the most crucial.
I feel I am right in saying that the needs of developing economies are now increasingly
appreciated in the more advanced countries, and I am confident that, provided we as
a nation put in the best effort we can, the necessary support from abroad will be
forthcoming. What is vital, at this stage, is a clear recognition of the urgency of
economic development, for preserving and strengthening the democratic values we
cherish and the realisation that such development is not possible unless some restraint
is kept on consumption and we submit ourselves to a high degree of fiscal and monetary
discipline.
51. I now turn to the proposals for dealing with the revenue deficit for the
coming year.

PART B
52. Honourable Members may recall that while presenting the budget proposals
for the current year, I placed before the House certain broad considerations which
Government took into account in deciding the extent to which the revenue deficit of
a year should be covered by additional taxation. I suggested that the long era of
revenue surpluses was perhaps coming to a close; for the first time the actuals for
1958-59 have disclosed a small revenue deficit of Rs.5 crores. I also suggested that
exceptional circumstances affecting the deficit of a year should be taken into account
in deciding upon the extent to which the deficit should be covered and that due regard
should be given to the amount of additional taxation raised in recent years. I also
ventured to underline the need for the continuous mobilisation of resources for financing
the increasing needs of planned development. The considerations I placed before the
House last year apply with equal force to the budget of the coming year and although
the large revenue deficit next year is due, in the main, to larger outlay on development
in the last year of the present Plan and the increased requirements of Defence in the
interests of national security, I am convinced that a part of the deficit should be

13
covered by additional taxation. As in the current year, I propose that about a fourth of
the deficit in sight, may be covered by new taxation.
53. In framing the taxation proposals for the coming year, I have had in mind
something more than the immediate needs of that year. I mentioned earlier the
continuous need to raise additional resources for development. In the context of planned
development, it is essential, in dealing with the budgetary needs of each year, to think
in terms of broadening and adjusting the bases of taxation so that the revenue raised
continues to expand with the years. The proposals for the coming year, particularly
those widening the base of taxation, have been formulated with the needs of the Third
Plan in view. While direct taxation will be kept under constant and continuous review
so as to make it yield the maximum resources, the bulk of the expansion in taxation
will have to come from indirect taxation.
INDIRECT TAXATION
54. In the field of indirect taxation, my proposals cover both the adjustment
of rates of existing taxes and the levy of taxes on certain new commodities. The
proposals are explained in detail in the memorandum circulated with the budget papers
and I propose to mention them only briefly.
55. My first proposal is to levy a duty of Rs.200 per metric tonne on tin plates
and tinned sheets. Suitable adjustments would be made where duty paid steel is used
in their manufacture. The yield in a full year is estimated at Rs.208 lakhs.
56. My second proposal is to impose a small duty of Rs.10 per metric tonne
on pig iron. Pig iron used in the manufacture of steel will be exempted from the duty,
which is expected to yield Rs.60 lakhs a year.
57. My third proposal is to levy a duty of Rs.500 per metric tonne on aluminium
steets and circles and Rs.300 per metric tonne on aluminium ingots. Necessary
adjustments will be made in the duty on circles, sheets, etc., when duty paid ingots are
used in their manufacture. The estimated yield is Rs.86 lakhs.
58. My next proposal is to levy a duty of 10 per cent ad valorem on all types
of internal combustion engines used as prime movers for transport vehicles. A lower
rate of 5 per cent ad valorem will be charged on stationary types of these engines
which are generally used in industry and for agricultural purposes. The yield is estimated
at Rs.107 lakhs a year.
59. I also propose to levy a small tax m certain essential cycle parts. A duty
of Rs.2 on each free wheel and Rs.4 on each rim will be levied. This will ensure the
realisation of Rs.10 of each completed cycle without bringing into the excise net a
large number of small assemblers of cycles and manufacturers of cycle parts. The
annual yield is estimated at Rs.100 lakhs.
14
 60. Electric motors and parts thereof are not now subject to tax. It is proposed
to levy a duty ranging from 5 per cent to 15 per cent ad valorem on various types of
motors used for different purposes., The revenue from this is estimated at Rs.46 lakhs
a year.
61. A duty on exposed cinematograph films is also being levied. It will vary
from 10 naye paise per metre to 50 naye paise per metre depending on the type of the
films. News reels and shorts would be subject to the lower rate of duty. The yield from
this is estimated at Rs.75 lakhs.
62. My last proposal for new excises relates to silk fabrics m which a duty of
30 naye paise per square yard will be levied. The handloom sector will not be affected
by this measure which is expected to yield Rs.30 lakhs.
63. I shall now turn to the readjustments in the existing rates of duty on
certain commodities.
64. The House will remember that in 1956 an excise duty was levied on the
larger passenger motor cars while all commercial vehicles and small and medium
cars, motor cycles and scooters were not taxed. I now propose to levy a duty ranging
up to 15 per cent ad valorem on all types of motor vehicles. The total revenue is
estimated at Rs.625 lakhs.
65. Refined diesel oil was made subject to duty in 1956 when a tax at 25 naye
paise per imperial gallon was levied. Although the tax has since been raised to 80
naye paise per imperial gallon, the consumption of this commodity has been increasing
rather rapidly. The growing imbalance between the internal production and consumption
of this commodity is causing a considerable drain on the foreign exchange resources
of the country. I, therefore, propose to raise the basic rate of duty by a further 25 naye
paise per imperial gallon. This will bring in a revenue of Rs.504 lakhs a year.
66. Complete footwear manufactured in power operated factories was subjected
to an excise duty in 1955 but a large number of small scale units were kept out of the
scope of the taxation. Some of the larger units are reportedly adopting a deliberate
policy of decentralisation to evade taxation. Mainly to protect the revenue, I propose
to levy an excise duty on machine made soles and heels made of materials other than
leather or wood. The rate of duty win be 15 per cent ad valorem and will yield a
revenue of Rs.20 lakhs a year.
67. In the field of textiles, I propose to make two changes with some revenue
significance. I propose to remove the existing total exemption on fabrics produced
from staple fibre yarn and cut pieces of cotton textiles, the so-called fents. The former
win now be treated on par with artificial silk fabrics. In the case of cut pieces, the
present definition is being revised and small specific duties, at levels substantially
below the fabric rates, will be levied. These changes are estimated to yield Rs.195
lakhs a year of which Rs.65 lakhs will accrue to the States.

15
 68. Electric fans, bulbs and batteries were first made subject to excise in
1955 and no change has since been made in the rates of duty on these commodities.
The production trends indicate that these lines are expanding and they can bear an
increase in taxation. I propose to raise the existing duties by 50 per cent with a suitable
increase in the duty on components. These changes will yield a revenue of Rs.90 lakhs
a year.
69. The tea industry has been complaining of the difficulties caused to it by
the imposition of a number of taxes at various stages by different agencies. We propose
to explore the possibility of removing this hardship by a suitable readjustment of the
excise duty, bearing in mind the financial interests of the State Governments concerned,
and the need to secure that their resources are not adversely affected. To enable this to
be done, we are raising the permissible maximum limit of the excise duty from 19
naye paise to 30 naye paise per lb. This is merely an enabling measure and does not
involve any change in the effective rates of the duty now imposed ranging, as the
House is aware, from 2 naye paise to 12 naye paise per lb.
70. A few other minor readjustments are also being made about which 1 need
not weary the House. The total financial effect of these changes is to bring in an
additional revenue of Rs.27 lakhs a year of which Rs.5 lakhs will accrue to the States.
71. The net affect of the various measures which I have mentioned is to increase
the revenue by Rs.21.73 crores, of which Rs.70 lakhs will accrue to the States.
72. With regard to customs duties, I propose to make no change except for an
increase in the duty on wines and spirits and other alcoholic liquors. Following the
changes in excise duties, provision is being made, wherever necessary, for the levy of
a countervailing import duty, so that the indigenous producer is not placed at a
disadvantage. The changes in the customs levy are estimated to yield a revenue of
Rs.2.5 crores in the coming year.
DIRECT TAXATION
73. I now turn to direct taxation. I do not propose to make any change in the
rate structure of personal income tax. With regard to company taxation, steps are
being taken to implement in its entirety the new scheme of company taxation introduced
in the current year’s budget. Formal action is being taken to abolish the Wealth Tax on
companies and the tax relating to excess dividends with effect from the financial year
commencing on the lst April, 1960.
74. The House will remember that last year, for purposes of advance payment
for the assessment year ending the 31st March, 1961,1 had provisionally adopted a
rate of 45 per cent for company taxation. We have not had sufficient experience of the
effect of this rate. I do not, therefore propose to make any change in this rate but to
adopt it as the final figure. Smaller companies with a total income not exceeding
Rs.25,000 will continue to be assessed at a figure 5 per cent less. Last year I had
16
promised to consider certain matters connected with the new system of company
taxation, and I am making two provisions in the Finance Bill, one relating to the
assessment of dividends paid out of profits taxed in the past and the other relating to
taxes on companies holding less than 50 per cent share in the capital of another
company, and have taken them into account in my estimates of revenue.
75. I propose to make two changes in regard to the deduction of tax at
source. The House will remember that it was decided last year that tax should be
deducted at source at a rate of 30 per cent on dividends paid to resident individuals
and at 45 per cent on dividends paid to Indian companies. It has been represented
that this difference in the rate of deduction at source has given rise to some difficulties.
I therefore, propose to apply a uniform rate of 30 per cent for deduction of tax from
both the individuals and companies. In order that this change may not affect the
revenue receipts, I propose to amend Section IBA so as to enable Government to
collect from Indian companies the remaining 15 per cent as advance tax on the
dividends received by them.
76. The existing provision with regard to the deduction at source from
dividends paid to preference shareholders also appears to be causing some difficulty.
The amount of the dividends which companies are required to pay to the shareholders
is governed by the terms of their contract with them and Government would not like,
as the current Finance Act implies, to make any assumptions regarding such amounts.
I accordingly propose in the Finance Bill to provide for the deduction at source from
the payments to these shareholders as in the case of any other dividends, leaving the
actual amounts of these dividends for the companies themselves to decide.
77. I would now briefly refer to a few other proposals to amend the income-
tax Act. The period for which exemption is available under section 15C to new industrial
undertakings is proposed to be extended by a further five years. The limit up to which
donations for charitable purposes qualify for exemption from tax is proposed to be
increased from 5 per cent of total income or Rs.1,00,000 whichever is less, to 71 per
cent of total income or Rs.1,50,000 whichever is less. At present, the amounts paid to
scientific research associations and educational institutions to be used for scientific
research are allowed as deductions in computing the business income of the donor if
the scientific research is related to the class of business carried on by him. It is proposed
to allow this deduction even if the scientific research is not related to such business.
In respect of properties constructed before 1st April, 1950, the full amount of taxes
levied by a local authority and borne by the owner, is proposed to be allowed to be
deducted in computing the taxable income from the property, as against half the amount
of such taxes allowed at present. My next proposal is with regard to the taxation of co-
operative societies. At present, the business income of such societies is exempt from
tax. This exemption is justified having in view the objective of the Co-operative
Societies Act of 1912, namely, to facilitate the formation of co-operative societies for

17
the promotion of thrift and self-help among agriculturists, artisans and persons of
limited means. However, as the House is aware, of late, co-operative societies have
widened their fields of activity and are carrying on substantial business involving
transactions of a large scale with non-members. There is no justification for a complete
tax exemption of business profits in their case. It is, therefore, proposed that while the
business incomes of co-operative societies connected with agriculture, rural credit
and cottage industries should continue to be wholly exempt from tax, the business
incomes of other societies should be exempt only up to a sum of Rs.10,000. These
proposals will not materially affect the revenue.
78. A few amendments of a comparatively minor character are proposed to
Expenditure Tax and Gift Tax Acts. The amendments to the Expenditure Tax Act
provide for allowances for expenditure incurred on leave travel in India as well as
education of children in India. It is also proposed to allow in full the taxes paid by an
assessee to a foreign government instead of only a portion as at present. The amendment
to the Gift Tax Act provides that the advance tax payable will be at the same rate as
the tax payable on regular assessment. These changes are not expected to have any
significant effect on revenue.
NET EFFECT OF PROPOSALS
79. I may now summarise the net effect of the budget proposals. The changes
in the Union Excise duties, exclusive of the revenue accruing to the States, are expected
to bring in an additional revenue of Rs.21.03 crores. Changes in the customs duties,
largely consequential on the changes in Union Excises, are expected to bring in Rs.2.5
crores. The total additional revenue would thus stand at Rs.23.53 crores, reducing the
revenue deficit from Rs.83.9 crores to Rs.60.37 crores and the overall deficit from
Rs.177 crores to Rs.153 crores. I propose to leave the revenue deficit uncovered; the
overall deficit will be met by the expansion of treasury bills.
CONCLUSION
80. Next year’s budget would cover the last year of the current Plan and 1
would like to mention briefly what the position at the end of that year would be so far
as the implementation of the present Plan is concerned. In an earlier part of my speech,
I mentioned that at the end of the budget year, the total Plan outlay would have
reached a figure of about Rs.4,600 crores. During the current Plan period, we have, at
the Centre, raised substantial sums of revenue for meeting our Plan commitments
including the assistance provided to the States from the revenue budget. Over the
period of five years covered by the Plan, I expect that we would have an accumulated
revenue surplus of over Rs.50 crores, after meeting all our commitments for the Plan
and providing very substantial assistance to the States for implementing their Plans. I
know that there has been some criticism about the extent to which we have had to
resort to deficit financing for meeting the capital expenditure of the Plan. Even here,
I venture to suggest that our record has not been as bad as some of our critics make

18
out. In the first three years of the Plan, the total amount of deficit financing amounted
to Rs.885 crores or so. In the current year, assuming that the State Governments do
not contribute to this in any significant measure and they are unlikely to do so, the
amount of deficit financing is likely to be Rs.190 crores. Taking a figure of Rs.153
crores for the coming year, the total amount of deficit financing during the Plan period
would have amounted to only a little over the sum of Rs.1,200 crores envisaged in the
Plan. Although our performance in the matter of savings has not been as, good as we
could wish, our record in the matter of raising resources and limiting deficit financing
to the minimum amount possible and practicable, has, I think, been quite good.
81. There is, however, no reason to take a complacent view of the situation.
The end of the Second Plan merely marks the beginning of the Third Plan which will
require greater efforts and larger sacrifices on the part of the community if the country
has to sustain, as it inevitably must, a larger Plan. The path of our progress is bound
to be difficult until our economy gets over the hump and becomes self-generating.
Until this position is reached, which one might hope may be at the end of the next
Plan, we shall have to strain every nerve to mobilise the maximum resources, from
both taxation and savings, to enable the country to make the progress that is imperative
to our survival. It is perhaps a truism to say that no one, much less an under-developed
country like ours, can stand still or stay stagnant. We have to move forward and make
whatever sacrifices are necessary for this. I have no doubt that this will be done and
I would ask the House to consider the budget, which I am placing before it, against
this background.
(FEBRUARY 29, 1960)

19
 SPEECH OF SHRI MORARJI R. DESAI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1959-60

Sir,
I rise to present the statement of the estimated receipts and expenditure of the
Government of India for the year 1959-60.
2. A detailed review of the major developments in the economy during the
year now drawing to a close and an assessment of the emerging trends is given in the
Economic Survey which is being circulated along with the budget papers. I shall
confine myself to a brief review of the economic situation and draw the attention of
the House to those of the important aspects of the situation that merit special attention.
3. The drop in agricultural production last year, which was the lowest in
record since 1953-54, affected the availability of foodgrains and other agricultural
products during the current year. The rate of growth of industrial production also
slowed down while prices showed an upward trend through a major part of the year.
There was continuing pressure on the balance of payments in the first half of the year.
The situation has eased somewhat in recent months. The kharif crop has been good
and the prospects of the rabi appear to be fair. There has been some fall in prices and
the decline in foreign exchange reserves has been halted; indeed there have been
small accretions to these reserves in recent weeks but the overall shortage still remains.
The requirements of foreign exchange for the remaining period of the Plan are sizeable
and the current account in the balance of payments is likely to show continuing deficits.
On the whole the economic situation is somewhat better than it was a few months ago;
we are sensing the effect of the various corrective measures we have taken.
PRODUCTION
4. Agricultural production this year is, as I have just said, expected to be
distinctly better both in regard to foodcrops and commercial crops. Industrial production
also increased during the year but at a somewhat lower rate than in 1957. In some
industries such as cotton textiles, finished steel, automobiles, power transformers and
vanaspati, there was, however a decline in output. The production of mill cloth, in
particular, showed & sharp drop, the output declining from 5,317 million yards in
1957 to 4,900 million yards in 1958. Some industries have been handicapped by
restrictions arising out of the current shortage of foreign exchange. On the other hand,
there have been significant increases in production in a wide range of industries such
as coal, pig iron, diesel engines, electricity, machine tools, newsprint and a number of
chemical and engineering industries. These increases have been made possible partly
by the better utilisation of existing capacity and partly by increases in capacity resulting
1
from the expansion programme undertaken earlier. Among the industries whose capacity
increased in 1958 may be mentioned cement, caustic soda, sulphuric acid, super
phosphates, oxygen gas and refractories. In the public sector the steel programme is
proceeding more or less according to schedule. A significant step was taken during the
year in the manufacture of heavy machinery in the country by the formation of the
Heavy Engineering Corporation which will set up a heavy foundry, a forge, a heavy
machine building shop and a factory for the manufacture of mining machinery.
Construction of the plant at Bhopal for the manufacture of heavy electrical goods is
also proceeding apace.
MONETARY TRENDS
5. A significant feature in the monetary situation during the year was the
decline in the rate of increase in the money supply. The expansionary impact of
Government transactions on the economy was mitigated by the contractionist effect of
a decline in the foreign exchange reserves and a fall in the indebtedness of the private
sector to the banking system. While in 1956 the increase in the money supply was
Rs.131.5 crores and in 1957 Rs.96.3 crores, it dropped to Rs.74.9 crores in 1958.
Deposits with the banks continued to increase but the expansion of bank credit has
been relatively smaller. Banks have, therefore, been able to reduce their credit deposit
ratio, from 62.7 per cent at the end of 1957 to 55 per cent at the end of 1958. Borrowings
of scheduled banks from the Reserve Bank have gone down while there has been
substantial increase in the holding of Government securities by the Banking system.
Easy conditions prevailed in the money market until almost the end of 1958 when the
onset of the busy season led to a hardening of interest rates.
6. The stock markets have shown a marked improvement as compared with
the previous year. The index of variable dividend industrial securities rose from 120
at the end of 1957 to 145 by the end of September 1958. There has been some decline
since then but, over the year as a whole, it has registered an improvement of about 14
per cent Prices of securities have remained fairly firm despite large borrowings both
by the Centre and the States.
PRICES
7. The index of wholesale prices has risen from about 106 a year ago to 112
or so, the peak level of 116.5 having been reached last September. This rise in the
wholesale index largely reflects the increase in the prices of foodgrains consequent on
the shortfall in production. The index of prices of cereals rose from 98 in December,
1957 to 105 in December 1958 and the food articles from 104 to 113 over the same
period. The other components of the wholesale price index, such as industrial raw
materials and manufactures have remained practically steady. The working class cost
of living index (all India) rose from 113 in December 1957 to 122 in November 1958
but declined to 119 in the following month with food items coming down. The price
indices in the current year are, to some extent, distorted by the rise in food prices due
largely to the poor crop of the previous year.
2
BALANCE OF PAYMENTS
8. I shall now give a brief account of the balance of payments position of the
country and of the steps taken to ease the difficulties which we have been facing since
the beginning of the Second Plan. It is not necessary for me to give more than a
factual account of the recent developments because this problem which has been
engaging the continuous attention of Government has been considered by Parliament
more than once in some detail. From almost the commencement of the Second Plan,
we have been drawing rather heavily on our reserves and between April 1956 and
February 1959 they dropped by Rs.535 crores, from Rs.746 crores to Rs.211 crores,
despite substantial foreign assistance and drawals from the International Monetary
Fund. The reasons for this are well known. The decline was very largely due to larger
imports, in the main, of plant, machinery and industrial raw materials for development,
though imports of foodgrains and Defence equipment and the decline in export: earnings
also contributed to it. A number of measures were taken to cut down foreign expenditure
to the minimum necessary to maintain the economy and implement the projects in the
‘core’ of the Plan and to promote exports under difficult trading conditions in the
world as a whole. As a result of these measures and the arrangements made to obtain
credits and loans from friendly foreign countries and the World Bank, the rate of
drawals from the reserves declined appreciably from the third quarter of 1957-58. The
average monthly drawal was Rs.23. 3 crores in 1956-57 and Rs.34.7 crores during the
first half of 1957-58; in the following six months the rate of drawal dropped to Rs.14.2
crores a month. There has been a further improvement since then. During the first six
months of the current financial year the reserves have fallen at a monthly rate of
Rs.13.9 crores. In the third quarter there has been a slight increase in the balances.
Ignoring fluctuations our reserves have more or less maintained their level in the last
six months.
9. The year 1957-58 ended with a current account balance of payments deficit
of RS.451 crores. The payments deficit during each of the 4 quarters of the year was
Rs.150 crores, Rs.148 crores, Rs.72 crores and Rs.81 crores, respectively. Imports
during the year reached a record level of Rs.1,175 crores, showing an increase of
Rs.79 crores over the previous year. This increase in imports, despite the efforts to
conserve foreign exchange, partly reflects the heavy backlog of past commitments
which came in for payment during the year and partly the massive import required for
implementing the core of the Plan. The year witnessed larger imports on Government
account, which rose from Rs.201.5 crores in 1956-57 to Rs.492.8 crores in 1957-58.
Private imports during the year declined by Rs.122.3 crores to Rs.682 crores as a
result of the strict import control measures adopted since the beginning of 1957. Total
exports during the year amounted to Rs.594.5 crores, about Rs.40 crores less than in
1956-57. A general weakening of foreign demand and a fall in the prices of primary
commodities in foreign countries account for this decline.
3
 10. The adverse trend in the country’s balance of payments has continued in
1958-59. During the first two quarters of the year the payments deficit on current
account was of the order of Rs.120 crores and Rs.91 crores respectively. As against a
total deficit of Rs.210.8 crores on current account during the first half of 1958-59, the
foreign exchange reserves fell by Rs.86.3 crores; the balance was made up by foreign
loans and credits and other capital transactions.
11. In recent months the Sterling Area, of which India is a member has grown
further in strength and its gold and dollar reserves rose to $3215 million at the end of
November, 1958 - the highest level attained since September, 1951. During December,
1958 the reserve declined by $146 million to $3069 million but this was due to the
payment of $196 million on account of end year service on the U.S. and Canadian
loans, but for which there would have been a small rise in the reserve. As the House
is aware, some of the West European countries, including the United Kingdom,
announced further relaxation of restrictions on convertibility of their currencies with
effect from December 29, 1958. From that date sterling held or acquired by non-
residents of the Sterling Area has become freely transferable at the official rate of
exchange. Honourable Members will recall that, at the Commonwealth Trade and
Economic Conference held at Montreal in September, we, in common with other
participating countries, had affirmed that it remained our objective to work for full
sterling convertibility as soon as the necessary conditions can be achieved.
FOREIGN ASSISTANCE
12. In the statement I made in this House on November 19, 1958, I had referred
to the conference convened by the World Bank in August, 1958 to discuss India’s
foreign exchange situation and the manner in which India could be helped. Following
the conference, the participating countries and the World Bank announced their intention
to provide further assistance to India totalling $ 360 million (Rs.171.4 crores) during
the current financial year. Canada would give a grant equivalent to seventeen million
dollars, West Germany a loan equivalent to forty million dollars, Japan a loan equivalent
to ten million dollars, the United Kingdom an advance payment under the pension
settlement of ten million pounds and a loan of £ 28.5 millions, the United States a loan
of $100 million from the Development Loan Fund and the World Bank a loan of $ 85
million for the Railways. The procedure for operating the above loans and grant have
since been settled and agreements signed with the countries concerned where necessary.
13. During the current financial year, the World Bank sanctioned four loans
aggregating $ 153 million (Rs.72.9 crores) for the development of the Calcutta Port,
the Madras Port, the third D.V.C Project and the third Railway Development
Programme. The World Bank has played a most helpful role both by sanctioning loans
for individual development projects and by mobilising a cooperative effort by some of
its member countries to help us meet our essential foreign exchange requirements.
The Bank proposes to convene another similar conference next month to explore how

4
India could be helped in meeting her foreign exchange requirements for the next two
years of the Plan. It is expected that negotiations with the World Bank for further
loans for the Royna Project and the Railway development programme will take place
in the near future.
14. An important outcome of the last annual meeting of the Boards of
Governors of the International Monetary Fund and the International Bank for
Reconstruction and Development was the decision to increase the resources of these
institutions. A general fifty per cent increase in the quotas of members of the Fund has
been made with special ad hoc increases in the quotas of some of the members whose
currencies it will be advantageous for the Fund to hold in larger amounts. Our quota
in the Fund will be raised from $ 400 million to $ 600 million. We have to pay a fourth
of this increase in the form of gold and the balance in rupee securities and necessary
provision is being made in the budget for this purpose. So far as the World Bank is
concerned, it is raising its capital stock by $ 10 billion and its authorised capital by $
1 billion. Our subscription will be raised from $ 400 million to $ 800 million, but this
will not involve any payment on our part as the general increase in members subscription
is to remain ‘uncalled’, the object of the increase in capital stock being only to enhance
the borrowing power of the Bank.
15. I referred earlier to the assistance provided by the countries which
participated in the conference sponsored by the World Bank last August. In addition to
this assistance we have also received in the current year financial and technical
assistance from the United States, Colombo Plan countries and the Ford and Rockefeller
Foundations. Two agreements were signed this year with the United States Government
under the P.L. 480 program e for the import of foodgrains valued at about Rs.140
crores. This will raise the total amount of supplies under this programme to us to
about Rs.313 crores, of which Rs.183 crores will be made available to us as loans and
Rs.43 crores as grants, for expenditure on mutually agreed development projects. The
United States Government have also agreed to defer the payments due to them on the
1951 wheat loan for the next nine years giving us a relief of $7 million a year and to
give a loan of $20 million for the integrated project for export of iron ore to Japan, for
which the Japanese Government will provide a yen loan of $ 8 million for the
development of iron ore mines. Assistance has also been provided for the purchase of
fertilisers and tube well equipment abroad and for the eradication of malaria, aggregating
in all to $14.2 million. Canada has made a special grant of wheat worth $ 8 million
and sanctioned two loans amounting to $33 million for the purchase of wheat. Australia
and New Zealand have also continued their assistance.
16. Other friendly countries have also continued to help. Negotiations are in
progress with the U.S.S.R. who are already assisting us for the Bhilai Steel Plant and
for certain other industrial projects, for a credit for establishing a new project for
drugs. An agreement has been entered into with the Government of Rumania who will

5
provide machinery and technical skill costing about Rs.5.2 crores on deferred payment
for an oil refinery to be set up in Assam. The Government of Czechoslovakia have
also signed an agreement for establishing a forge foundry costing about Rs.8.5 crores.
17. I should like to express the gratitude of the Government of India to all the
countries and institutions which have given us economic assistance so valuable and
timely for our development.
18. We on our part have also continued our contribution of technical aid
under the Colombo Plan. Up to September 1958, we had arranged for the training of
1086 persons from the South and South East Asia Region. We made available seven
experts this year to Burma, Ceylon and Vietnam. We have continued to assist Nepal
and the expenditure incurred by us on development schemes to assist Nepal and the
provision of technical personnel to that country is expected to be Rs.1.38 crores this
year.
CHANGES IN THE BUDGET
19. Before I deal with the estimates of revenue and expenditure, I would like
to mention certain changes which have been made in the budget documents presented
to the House. For some years it has been the practice to present the Demands of
Defence Services and the Posts and Telegraphs Department in separate self-contained
publications. The question of extending this arrangement to other Ministries has been
under consideration for some time and, more recently, the Estimates Committee also
suggested that the estimates relating to individual Ministries should be presented in
self-contained volumes. This suggestion has been accepted and the Demands for Grants
for the budget year are being presented by individual Ministries to Parliament. Along
with the Demands for Grants, the notes on the expenditure estimates and on the
important schemes under the control of each Ministry will also appear together with
the accounts and balance sheets of industrial undertakings. The Explanatory
Memorandum on the Budget will now be confined to a general review of the revenue
and expenditure estimates and the Capital Budget and will contain various annexures
of general and financial interest dealing with the budget as a whole. Opportunity has
also been taken to transfer to the Economic Survey, presented along with the Budget,
data and statistics of economic interest which used to appear in the Explanatory
Memorandum. I am sure the House will welcome the revised arrangement which, for
the first time in the history of Government, will bring together for each Ministry the
estimates relating to it and will facilitate the disposal of these estimates by the House.
We are also giving, for the first time, the estimates relating to Plan expenditure
separately from the estimates on non-Plan items in the Demands for Grants. This
segregation of Plan expenditure in the Accounts and Estimates will, I feel, make for a
more efficient control of expenditure on the Plan. While making these changes, care
has been taken to see that, as far as possible, the material now available to Parliament
in the Hindi version of the Budget, is not curtailed in any way.

6
FINANCIAL YEAR 1958-59
20. Against the budgeted revenue of Rs.767.99 crores the actuals this year are
likely to amount to Rs.728.20 crores while the expenditure met from revenue is placed
at Rs.788.15 crores against the original estimate of Rs.796.01 crores. In the result the
deficit of Rs.28.02 crores provided in the Budget is likely to rise to Rs.59.95 crores.
21. The increase of Rs.31.93 crores in the revenue deficit for the year is
entirely due to a fall in the anticipated revenue, mostly in the revenue from Customs.
The total revenue for the year is now expected to fall by Rs.39.22 crores. Customs
duties are expected to show a drop of Rs.34 crores; the effect of restrictions on imports
on revenue appears to have been far more rigorous and the backlog from past licensing
not as much as was originally anticipated. Also during the year adjustments were
made in export duties on a scale not visualised when the Budget was framed. The
revenue from Union Excises is now placed at Rs.3.61 crores less while the yield from
the Wealth Tax, the Expenditure Tax and the Gift Tax will together be Rs.5.3 crores
less than anticipated. A drop of Rs.13 crores is anticipated in the grants from the U.S.
Government under the P.L.480 programme and of Rs.1.86 crores in the receipts from
Currency and Mint, but these will be more than off set by larger receipts of interest,
sale proceeds of evacuee property and an increase of Rs.3.04 crores in the contribution
from the Posts and Telegraphs Department.
22. Civil Expenditure this year is now estimated at Rs.521.28 crores against
the original budget of Rs.517.87 crores and Defence Expenditure at Rs.266.87 crores
against the original estimate of Rs.278.14 crores.
23. The increase of Rs.3.41 crores in Civil Expenditure is the net result of a
number of increases and decreases. Debt Services are expected to show an increase of
Rs.2.06 crores, reflecting the growing volume of the public debt, Currency and Mint
Rs.64 lakhs owing to increased provision for the loss on the destruction of uncurrent
coin, States, share of Union Excise duties Rs.4.2 crores, reflecting the increase in the
revenue from the shared duties during the year and a small carry over from last year,
and Miscellaneous Expenditure Rs.11.34 crores due mostly to an increase of Rs.6
crores in payments to State Governments to assist them to meet the additional
expenditure on the raising of the emoluments of the low paid employees and Rs.4.27
crores in the provision for the transfer of the sale proceeds of evacuee property which
is taken in reduction of the capital expenditure on the payment of compensation to
displaced persons. A part of the additional expenditure will be counterbalanced by a
saving of Rs.13 crores in the provision for the transfer to the Special Development
Fund of the grant received under the P.L. 480 programme for subsequent use on
development plans; and a shortfall of Rs.2.73 crores in expenditure under various
heads grouped under Civil Administration.
24. The decrease of Rs.11.27 crores in Defence Expenditure occurs largely in
the Army and Air Force estimates. The expenditure on the purchase of stores is likely
7
to be less than estimated; in the case of the Air Force, the decrease is also due to the
fact that payments on account of purchase of aircraft and other equipment from abroad
are expected to be less than was anticipated when the budget was framed.
FINANCIAL YEAR 1959-60
25. For the coming year, at the existing level of taxation, I am budgeting for
a total revenue of Rs.757.51 crores and an expenditure of Rs.839.18 crores, leaving a
deficit of Rs.81.67 crores.
26. With the continuing restriction on imports the downward trend in the
revenue from customs is likely to continue and for next year I am taking credit for a
sum of Rs.130 crores against the current year’s revised estimate of Rs.136 crores. The
revenue from Union Excise Duties next year is likely to show an improvement of
Rs.5.85 crores and the receipts from Corporation tax, and income-tax an improvement
of Rs.6.50 Crores. Under the other principal heads of revenue, the receipts next year
will be more or less the same as in the current year. The principal heads as a whole
will thus show an improvement of Rs.7.2 crores. Receipts under other heads next year
will in all be Rs.25.26 crores more than in the current year. This is the result of three
major changes. Firstly, the grants under the P.L.480 Programme are expected to amount
to R.s.15 crores against Rs.1 crore this year. Secondly, the profits from the Reserve
Bank next year have been placed at Rs.40 crores against Rs.30 crores this year. This
is a purely temporary arrangement; the stabilised amount that should be paid by the
Reserve Bank in subsequent years will be discussed during the course of next year.
Thirdly, the profits from the circulation of coin for which credit has been taken next
year amount to Rs.13.15 crores against Rs.2.75 crores this year. This increase is mainly
due to the transfer of Rs.10 crores from out of the accumulated surpluses in the past
on the circulation of rupee and small coins which had been kept under suspense. Tin
1956 the practice had been to keep all profits from the circulation of rupee coin,
whether silver or nickel, in suspense and also to accumulate under a suspense head the
net profits on the circulation of small coin, the transfer to revenue being limited to the
net expenditure in a year on the running of the Mints plus a fixed sum of Rs.45 lakhs.
This later arrangement was introduced during the last World War so as to even out the
impact of the fluctuating profits on circulation on the revenue budget. These accounting
arrangements were reviewed in 1956 in consultation with the Comptroller and Auditor
General and it was decided that with effect from 1956-57 the actual profits on coinage
and the loss on the destruction of uncurrent coin should be adjusted directly as revenue
and expenditure. The accumulated sums held in suspense which amounted to a little
over Rs.50 crores were to be treated as a deficit neutralisation reserve and, although
the original intention was to draw upon this reserve in the course of the year, I have
decided, in view of the size of the revenue deficit, to take credit for Rs.10 crores from
this source in the budget itself. These increases will be partly balanced by a drop of
Rs.4.41 crores in the receipts from the surplus cement account of the State Trading
Corporation and Rs.3.31 crores in the receipts on account of Steel Equalisation Fund.

8
The contribution from the P & T Department will be Rs.1.18 crores less. The
contribution from the Railways creditable to revenues will also be Rs.42 lakhs less.
As Hon’ble Members are aware, the Railways pay General Revenues dividend at a
fixed rate of 4 per cent on the Capital at charge, which is partly adjusted as revenue
but mostly taken in reduction of expenditure under interest. Next year’s dividend from
Railways will amount to Rs.54.41 crores against Rs.50.03 crores this year. Of this,
Rs.48.43 crores will be taken in reduction of the expenditure under interest and the
balance of Rs.5.98 cores taken as revenue.
27. Payments to State Governments on account of their share of income-tax,
estate duty and tax on railway passenger fares next year, on the estimates of revenue
taken for these taxes, will amount to Rs.92.22, crores against Rs.89.07 crores in the
current year. Provision for the States’ share of divisible excises is made in the
expenditure estimates.
28. Civil expenditure next year will amount to Rs.596.5 crores and expenditure
on Defence Services to Rs.242.68 crores.
29. The main reasons for the increase of Rs.75.22 crores in civil expenditure
may be briefly mentioned. The grants received under the P.L.480 programme and
initially credited to revenue have to be transferred to the Special Development Fund
and used through it for subsequent expenditure. The provision for this transfer next
year, following the estimates adopted on the revenue side, is Rs.15 crores against Rs.1
crore in the revised estimates this year. Expenditure on debt services which rise with
the growing public debt, will absorb Rs.15.82 crores more than in the current year.
Expenditure on administrative services, such as on General Administration, Audit,
Administration of Justice, Jails, Police, External Affairs and so on, is likely to amount
to about Rs.21/2 crores more in all. Under heads covering Development and Social
Services, which include substantial provision on Plan outlay, the total expenditure
next year is estimated at Rs.168 crores roundly against Rs.145 3/4 crores this year. The
provision for Community Development will also be Rs.6.17 crores more than in this
year. Increased provision has also been included in the budget for grants to States for
the welfare of Scheduled Tribes and areas and Backward classes amounting in all to
about Rs.51 crores. These increased provisions mainly account for the rise in Civil
Expenditure. Detailed explanations for other minor variations are given in the notes
on the expenditure estimates circulated with the Demands for Grants.
30. The not expenditure m Defence Services in the coming year will be
Rs.24.19 crores less than in the current year. This improvement is the result of a
reduction in the gross expenditure by Rs.19.55 crores and an increase in receipts and
recoveries of Rs.4.64 crores.
31. The expenditure on the Army will be roughly on the same scale as in the
current year, but credit has been taken for a special item of Rs.5 crores on the receipt
9
side. A sum of Rs.14.56 crores representing the custodial charges recovered on Defence
surplus Stores borne on capital has been lying in suspense. This sum which is actually
of the nature of reimbursement of expenditure incurred from revenue is properly
creditable to revenue and not to capital. It has been decided to write it back to revenue
in three instalments, commencing with the budget for next year and a round sum of
R9.5 crores has been taken m this account.
32. Navy estimates show a small increase of Rs.1.34 crores for normal
development. The real saving occurs in Air Force estimates which show a drop of
Rs.23.84 crores due to reduced provision for payment on account of the purchase of
aircraft spares and other equipment, as a substantial portion of the payments for this
purpose would have been made in the current year. Expenditure m service pensions
will be Rs.2 crores higher as it is proposed to sanction to military personnel drawing
small pensions an increase on the analogy of that sanctioned to civil pensioners this
year.
CAPITAL EXPENDITURE
33. I shall now give a brief account of provision included in the budget for
capital outlay.
34. Excluding the adjustment for the transfer of capital assistance from the
United States to the Special Development Fund which is technically treated as capital
expenditure, the current year’s budget provided Rs.412 crores for capital outlay. The
corresponding figure is now expected to amount to Rs.395 crores. The Railways are
expected to draw Rs.18 crores less for their capital requirements which are not met
from their Development and Depreciation Reserves. Investment in the three Steel
projects will be Rs.14 crores less as the total equity investment of Rs.300 crores in
Hindustan Steel Limited would have been complete with this reduced investment; the
balance of the finance required by the Company will be, provided in the form of
loans. Food purchases are likely to involve a net additional outlay of Rs.24.26 crores.
The total capital outlay would have been higher than the figure mentioned by me but
for the receipt of an additional sum of Rs.13.33 crores (E 10 million) from the U.K.
Government as advance payments under the Sterling Pensions Arrangement.
35. The corresponding provision for capital outlay next year is Rs.420 crores.
It includes a sum of Rs.95.24 crores for the payment of the additional subscription to
the International Monetary Fund which I explained in some detail earlier in my speech.
The Railways will be drawing Rs.122 crores next year against Rs.121 crores this year
while Defence capital outlay is estimated at Rs.32.74 crores, an increase of about Rs.5
crores over the current year. Capital outlay on Posts and Telegraphs is expected to be
Rs.41/4 crores more and the net capital outlay on food purchases may be Rs.2 crores
higher. Increased provision has been made for investment in the various industrial
concerns and for Civil Aviation, Civil Works, the Dandakaranya Project and
development grants. The total provision which is mostly for development schemes or

10
for inescapable expenditure would have been much higher but for the fact that, as
explained earlier, the entire requirements for the steel plants will be met by loans.
36. To complete the picture of the capital requirements of Government, mention
should be made of the provision for loans and advances. In the coming year, loans to
State Governments, mostly for enabling them to finance their development schemes,
will amount to Rs.313 crores against Rs.327 crores this year. In addition, loans to Port
Trusts, Statutory Corporations, Government companies, etc., will absorb Rs.123 crores
this year and Rs.212 crores next year. Provision has been made for the grant of a loan
of Rs.52 crores to Hindustan Steel this year and Rs.122 crores next year. The Railways
will also take a loan of Rs.10.98 crores this year and Rs.10.88 crores next year for
their Development Fund to be repaid later. Details of the various loans proposed to be
given are shown in the Explanatory Memorandum.
37. The House may like to have some idea of the total provision included in
the budget for the implementation of the Plan and the magnitude of the total Plan
outlay next year. The budget includes a total provision of Rs.843 crores for
implementing the Plan, Rs.150 crores in the revenue budget and Rs.693 crores in the
capital budget. Out of this, Rs.63 crores from the revenue budget and Rs.195 crores
from the capital budget will be given as assistance to the States. In addition, the
Railways will be spending Rs.39 crores from their own resources and the States Rs.239
crores. Thus, the total Plan outlay, including interest on loans on River Valley Projects
which are added to Capital during the period of construction and short-term loans will
amount to Rs.1,121 crores.
38. As Hon’ble Members are aware, in view of the strain on resources, internal
and external, it has been decided to limit the five year outlay on the Plan to Rs.4,500
crores. The estimated expenditure in the first three years of the Plan is about Rs.2,450
crores, leaving a balance of Rs.2,050 crores to be incurred in the next two years. The
budget provision at the Centre and in the States is, as I explained just now, of the order
of Rs.1,120 crores. The resources position for the next two years will continue to
remain difficult and a considerable further effort to augment the resources available
for development will be necessary. With all the effort we have made, the proportion of
the national income accruing to the public exchequer still remains small. While with
the substantial external assistance we have been receiving the bulk of the Second Plan
will go through, we have to remember that we shall have sizeable repayments to make
in the period of the Third Plan. This underlines the necessity for a determined effort
to increase production and savings.
39. Thinking has already started on the Third Plan. It is obvious that the
objective should be to accelerate as much as possible the tempo of development the
country would have reached by the end of the Second Plan. It is, in my view, premature
to speculate on the size of the Plan; questions regarding the overall size, the allocations,
methods of raising resources, the quantum of external assistance required and likely

11
to become available are interlinked and are all under study. But it is clear that we
should explore every avenue to ensure that the Third Plan does take us decisively
forward and not keep the country at the level of development it has reached. We have
to aim at creating within the economy conditions which will make the process of
growth continuous and self-supporting.
WAYS AND MEANS
40. The overall deficit for the current year is now estimated at Rs.255 crores
against Rs.200 crores assumed in the budget. The increase of Rs.55 crores is the result
of a number of factors. The Revenue deficit is now expected to be Rs.32 crores more
than was estimated at the time of the budget, reasons for which I have given in the
earlier part of my speech. Foreign loan assistance for a variety of reasons is actually
likely to be Rs.46 crores less than the amount for which credit had been taken. We had
to give to the States additional loans amounting in all to Rs.42 crores, mainly arrears
of loans promised to them, and Rs.52 crores to Hindustan Steel. Food debits are also
expected to be higher by Rs.24 crores than the sum provided in the budget. The total
increase of Rs.126 crores on these accounts will, however, be partly counter-balanced
by some savings in the loan provision for miscellaneous loans, increased receipts
from internal borrowing and by probable shortfalls in expenditure spread over a large
number of heads. In the result, the net deficit to be covered by the expansion of
Treasury Bills is likely to amount to Rs.255 crores.
41. Public borrowing in the current year has been far more satisfactory than
in the last two or three years. The budget had assumed a market loan of Rs.145 crores
but the actual loan receipts amounted to Rs.202 crores. During, the year three new
loans were floated, the 31/2 per cent Bonds 1963, the 3-3/4 per cent National Plan
Bonds (Fifth Series) 1968 and the 4 per cent Loan 1973, the maturities offered having
a sufficient spread for meeting the varying requirements of the market. The total
amount offered for all the three loans was Rs.135 crores but the subscriptions accepted
amounted to Rs.142 crores. The market demand for investment, however, continued
and in August, 1958 we issued a new 31/2 per cent Loan 1968 for Rs.30 crores and
created a further issue of the 31 per cent National Plan Bonds 1967 for another Rs.30
crores. These securities were, in accordance with the usual practice, issued to the
Reserve Bank to be sold by them to the market. The net receipts from regular loans
this year will be Rs.181 crores against the original estimate of Rs.125 crores.
42. There was a welcome revival in the market demand for short-term
investment through treasury bills. In July last, the Reserve Bank of India renewed the
weekly auctions of treasury bills after a lapse of over two years. They also revived the
practice of selling intermediate treasury bills to the market, an operation which had
been in abeyance for over fifteen years. It is expected that the total outstanding treasury
bills with the public at the end of the current year would amount to Rs.25 crores.
12
 43. Under Small Savings, the Budget had taken credit for a net receipt of
Rs.100 crores. This has turned out to be over-optimistic and, although there has been
an improvement in the collections this year as compared with the previous year, the
net collections are not likely to be anywhere near the figure taken in the Budget. The
net collections from Small Savings have been steadily rising from a figure of Rs.37.57
crores in 1951-52 to a figure of Rs.69.6 crores in 1957-58. In the first ten months of
the current year, the net collections have amounted to Rs.47 crores against a little
under Rs.38 crores in the corresponding period of the previous year. In the last two
months of that year, the collections were somewhat exceptional owing to the special
drives undertaken by some of the State Governments. After allowing for this and on
the trend of actuals this year, I do not think it wise to take credit for more than Rs.75
crores for this year. Postal Savings Banks are still not doing as well as in the past, but
there has been an improvement in the sales of National Plan Savings Certificates and
Treasury Savings Deposit Certificates.
44. While on this subject. I should like briefly to mention the various steps
taken during the course of this year for intensification of the savings movement. To
revive the popularity of the postal savings banks facilities for withdrawal by cheques
which, were tried out as an experiment in Bombay are being extended to a large
number of post offices at a number of big towns, the intention being to provide the
facility in all post offices as early as possible. It has been decided to allow sales of
Treasury Savings Deposit Certificates through agents on a commission basis. The
National Savings Certificates Rules have been rationalised and re-issued and a
concentrated drive for the recruitment of more authorised agents and the formation of
more savings groups undertaken. Publicity has been largely decentralised in consultation
with the State Governments who will now be in charge of this work in the States
except, to a limited extent, where it has been found desirable to retain the work with
the Centre. Publicity will now be largely in the regional languages at the State level
and this should assist in the further development of the movement. The question of
replacing the multiple agency system which has grown up with years by a uniform
system is also under consideration. Government have accepted the principle of allowing
investors in small savings to nominate the persons to whom the investment should be
repaid on the lines of the assignments made of insurance policies and the necessary
legislation to permit this will be undertaken shortly. The progressive diversification of
investment has been taken a step further by the introduction, with effect from the 2nd
January this year, of the Cumulative Time Deposit Scheme under which small monthly
payments can be accumulated at post offices for periods of five or ten years at attractive
rates of interest.
45. The National Savings Organisation has been keeping in close touch with
the State Governments in developing the savings movement. The State Governments’
interest in the movement has been further emphasised by a modification in the
arrangement for the sharing of the net receipts with them. When the States’ share was

13
raised to two-thirds, a condition was laid down that, in any year in which a State
Government floated a market loan, it should surrender to the Centre one-third of the
loan proceeds. This condition has now been withdrawn so that the States now receive
two-thirds of the net receipts from small savings while retaining the whole of their
market borrowing.
46. For next year’s Budget, I have taken credit for a market borrowing of
Rs.225 crores, I taking into account the fact that the market will receive a repayment
of Rs.110 crores from the maturing 3 per cent Second Victory Loan-1959-61. I have
also taken credit for a further small expansion of Rs.15 crores in the treasury bills
with the public. For Small Savings I have taken a net credit of Rs.85 crores, a
modest increase of Rs.10 crores over the likely receipts this year. On the best estimate
that can be made at present, I expect that foreign assistance next year would amount
to Rs.337 crores.
47. I may now summarise the overall budgetary position next year. At the
existing level of taxation and expenditure, there will be a revenue deficit of Rs.82
crores. Capital outlay will amount to Rs.420 crores, loans to State Governments and
others to Rs.525 crores and debt repayments to Rs.130 crores. This total outgo of
Rs.1,157 crores will be met to the extent. of Rs.111 crores by repayments of loans
to Government, Rs.240 crores from public borrowing in India, Rs.85 crores from
small savings, Rs.337 crores from foreign assistance, Rs.95 crores from the issue of
special securities to meet the payment of the additional subscription to the
International Monetary Fund and Rs.44 crores from miscellaneous receipts under
Debt and Deposit heads, leaving a deficit of Rs.245 crores which will be met by the
issue of treasury bills.
48. I now come to my proposals for dealing with the revenue deficit for the
coming year.

PART B
49. The deficits in the current and the ensuing years are somewhat exceptional,
the significant contraction of revenue coinciding with an increase in. the quantum of
development expenditure met from revenue. Although in the past we have been realising
surpluses on revenue account every year, I feel that it would be unwise to leave the
deficit in the coming year wholly uncovered. In past the comfortable revenue position
was partly due to the resilience of revenue and partly to shortfalls in expenditure
inevitable while the country is in the process of gearing its administrative machinery
to implement an expanding development plan. Both these factors are ceasing to operate.
The buoyance of revenue in the past was mainly under Customs but because of the
drastic cuts in imports and the progressive freeing of our exports from export duty,,
Customs revenue has suddenly contracted and is likely to remain static for some
14
years. The administrative machinery is now better equipped for implementing the
Plan and budgetary provisions are likely to be spent more fully than in the past. For
all these reasons I think that a part of the deficit next year would have to be covered.
This would also be consistent with our policy of continuously mobilizing additional
resources for the Plan.
50. In determining the extent to which the prospective deficit should be
covered, I have taken into account the amount by which taxation has been increased
in the last two years. Our record in the matter of raising additional resources by way
of taxation for the Plan has, I venture to think, been quite impressive since the Second
Plan came into operation. In 1966-57, taking the proposals in the original and the
supplementary budgets together, the total taxation raised was of the order of Rs.80
crores. In the following year, we did even better and touched nearly a hundred crores.
In the current year, the net additional taxation was not significant but, taking the three
years of the Plan together, the additional taxation has been quite substantial. Having
this in mind, I propose to cover only about a fourth of the anticipated deficit of Rs.82
crores in the coming year.
51. The next problem is how to distribute this additional taxation between
direct and indirect taxes. We have only just achieved an integrated scheme of direct
taxation and I think that for the present we should concentrate on improving the
administrative machinery, simplifying the existing procedures and plugging loop-holes.
By these methods we should be able to improve our revenue from these sources
without many major changes. They cannot, however, produce immediate results and,
although my proposals include certain changes in the rates in this field also, the bulk
of the additional revenue next year will, I fear, have to come from indirect taxes. I
shall first deal with indirect taxation and then proceed to direct taxation.
INDIRECT TAXATION
52. In the field of indirect taxation my proposals are mostly by way of
readjustments of rates and concessions in the existing duties of excise. These are
described in some detail in the memorandum circulated with the budget papers and I
shall only mention them briefly here.
53. The duty on refined diesel oils and vapourising oil is being raised from 40
naye paise per imperial gallon to 80 naye paies. There is at present a price advantage
in favour of diesel oil of which we have to import substantial quantities. Both as a
measure of increasing revenue and conserving foreign exchange the proposed increase
is justified. As a consequential adjustment, the rate of duty on low-speed diesel oil is
also being increased from Rs.40 per ton to Rs.50 per ton. The total yield from these
two measures will be Rs.7.85 crores a year.
54. The duty on art silk fabrics is being raised from 6 pies per square yard to
8 naye paise per square yard. Simultaneously the, exemption in the present form in
15
respect of products of the first nine looms will be reduced to four looms. The increased
levy is amply justified by the large profits which are made by the industry. The estimated
yield will be Rs.1 crore a year. The lowering of the exemption will also bring in Rs.2p
lakhs by way of additional duties which accrue to the States.
55. The effective rates of duty on rayon yarn and staple fibre are also being
raised by 60 per cent to yield an additional Rs.50 lakhs.
56. The duty on motor vehicles tyres is being raised from 30 per cent ad
valorem to 40 per cent ad valorem. There will be no change in the rate of duty on
cycle tyres. The additional revenue is estimated at Rs.1.75 crores.
57. An increase is also being made in the duty on vegetable product which
will increase from Rs.7 per cwt. to Rs.8.75 cwt. with a corresponding adjustment in
the exemptions in favour of the small producers. The additional revenue will be
Rs.95 lakhs.
58. Vegetable non-essential oils were first subjected to excise in 1956, but
some preference to medium and small scale producers was given by exempting
production up to 125 tons per annum on a slab basis. In 1957 the free slab was
brought down to 75 tons and a lower rate of duty levied on production between 75
tons and 125 tons. These concessions have been reviewed and it is now proposed to
withdraw the exemption from all power driven units and limit the concessional levy to
only the first 75 tons of production. These changes, which will be made by notification
and will not affect village ghanis in any way, are expected to yield Rs.4.4 crores.
59. Khandsari sugar is now exempt from excise duty but pays the usual sales
taxes. There has always been a fiscal preference in favour of this sugar but, with the
recent substantial increases in the duty on crystal sugar, this preference has further
widened resulting in the shift of production to this form of sugar. There are cogent
reasons for reducing the margin and this is being done by the levy of the basic duty of
Rs.5.60 per cwt. with an additional duty of 70 naye paise in replacement of the sales
taxes. The basic duty will yield Rs.1.82 crores and the additional duty which will
accrue in its entirety to the States, Rs.25 lakhs.
60. Certain adjustments are also being made in the duty on various kinds of
cigarettes involving an increase of 16 per cent in the level of duties for cigarettes
taken as a whole. These adjustments are expected to yield a revenue of Rs.1.5 crores.
61. Incidentally, the present tariff on unmanufactured tobacco has led to some
diversion to biri-making of tobacco which was previously used for hookah. I am
taking powers to assess at the higher rate such varieties of tobacco as may be specially
notified and as are actually used for the making of biris.
62. The incidence of excise and export duties on tea has been under continuous
review. It has been decided to readjust the rate of excise duties on the teas grown in
16
certain areas of the country and to reduce, at the same time, the effective rate of export
duties from 26 naye paise per lb. to 24 naye paise per lb. These changes will result in
an additional revenue of Rs.58 lakhs under Union excise and a reduction of Rs.93
lakhs in the yield from the export duty. In the net, the industry will benefit to the
extent of Rs.35 lakhs.
63. The total additional revenue from the various measures I have just
mentioned will amount to Rs.20.35 crores from the basic duties and Rs.45 lakhs from
the additional duties in replacement of sales taxes which accrue to the States. As
Hon’ble Members are aware, the basic duties on tobacco, vegetable product, tea,
sugar and vegetable non-essential oils are shared with the States in accordance with
the award of the last Finance Commission. Twentyfive per cent of the net additional
revenue from these commodities will have to be distributed to the States, after deducting
the cost of collection. This payment will be of the order of Rs.2.27 crores. Allowing
for this and for the additional duties to be paid to them, I am taking the net additional
revenue from changes in Union excise duties at Rs.18.08 crores.
64. I propose to make no major change in regard to customs duties. But there
will be a countervailing increase in the import duties on the commodities on which
excise duties are being increased an)d this by itself will bring in an additional revenue
of Rs.3.65 crores. The reduction in the export duty on tea will, however, involve a
drop of Rs.93 lakhs in revenue as I have mentioned earlier. I propose to make a small
increase in the duty on unexposed cinema films to yield Rs.5 lakhs a year for the
benefit of the Film Finance Corporation which is being set up. With this small addition
the net additional yield from customs duties next year will amount to Rs.2.77 crores.
DIRECT TAXATION
65. I propose to increase, with effect from 1959-60 the Wealth tax payable by
individuals and Hindu undivided families by half a per cent at each slab. The new
rates of Wealth tax on individuals will be 1 per cent on wealth in excess of Rs.2 lakhs
but upto Rs.12 lakhs, 11/2 per cent on the excess between Rs.12 lakhs and Rs.22 lakhs
and 2 per cent on any excess above that. For Hindu undivided families, corresponding
changes will be made. The extra revenue on this account will be Rs.2.5 crores.
66. The revenue from Expenditure tax has been quite disappointing this year.
It is a new tax, not tried anywhere else in the world, and in the first year of its
imposition in our country, it is only right that we should have proceeded cautiously. I
think, however, that the time has come to tighten the existing law to some extent. I
propose, therefore, to withdraw some of the exemptions now available and, in particular,
to provide that the husband, wife and minor children should be regarded as one unit
for the exemption limit of Rs.30,000 in the matter of non-taxable expenditure and not
as separate assessees if they have incomes in their individual rights.
67. Coming to income tax, I propose to make no change in the present rates
and structure of personal income tax. I have, however, some proposals for changing
17
the present system of taxation of company profits and dividends. At present, an Indian
company is generally required to pay income tax at 30 per cent plus a surcharge of 1.5
per cent and super tax at 20 per cent on its total income. When dividends are declared
out of the balance after payment of these taxes, a portion of the income-tax paid by
the company is deemed to have been paid by the shareholders themselves. In the
assessments of the latter, the dividends received by them are included in their income
after being “grossed” and they are credited with the amounts deemed to have been
paid by the company on their behalf. This process of grossing is somewhat complicated.
For one thing, the rate of grossing depends on the effective rate at which the company’s
profits are initially subjected to tax. The effective rate in its turn depends upon the
composition of the income of the company. The dividends themselves may be paid out
of reserves accumulated over some years, which again complicates the determination
of the effective rate at which the profits have been taxed. Further, the assessments of
shareholders have to await the completion of the assessments of the companies. All
these lead to considerable inconvenience to all concerned, and the scheme I propose
seeks to avoid this.
68. The main points of this scheme are briefly these. The legal fiction of
deeming the income-tax paid by the company as having been paid by the shareholder
and the complicated process of grossing the dividends received by the latter will be
abolished. The overall tax rate hitherto applicable to Indian companies will be so
fixed that the yield will be equal to the present annual gross yield less the annual
credit now given to the shareholders. The tax liability of the shareholders will no
longer be related to the tax borne by the companies. So far as the shareholders are
concerned, companies will deduct tax at a prescribed flat rate and credit it to
Government. This tax will be re-imbursed to the shareholders at the time of their
assessment as is done today in the case of interest on Government securities. I hope to
devise a scheme for issuing exemption certificates for small shareholders so that the
question of re-imbursement does not arise in their cases.
69. The scheme will be implemented in two stages. In the first stage, that is,
during 1959-60 income-tax will be deducted by the companies at the same rate as for
Government securities from dividends distributed by them but only from dividends
declared for the year the profits of which will be assessed to tax in 1960-61; for
example, dividends declared for the year ending 30th June, 1959. Dividends declared
for any earlier year, the profits of which are assessable in 1959-60 (for example,
dividends for the calendar year 1958) will not be subject to this deduction and will
continue to be assessed under the existing provisions. During the second stage, that is
during 1960-61, the overall tax rate applicable to the companies under the scheme will
come into operation. The present scheme of grossing of dividends will cease to operate
from 1st April, 1960 in respect of dividends declared for the accounting year relevant
to the assessment year 1960-81 and subsequent years.
18
 70. As part of the scheme of simplification of company taxation, I propose to
combine in the income tax and super tax rates of companies, the net incidence of the
present taxes on income, excess dividends and wealth. For purposes of advance payment
of tax by companies under Section 18-A of the income Tax Act, I propose a rate of 20
per cent, for income tax and 25 per cent for super tax, that is to say, a total of 45 per
cent. This rate will secure the same revenue as is at present derived from the taxes on
the wealth and profits of companies and I propose, therefore, to abolish the Wealth
Tax on companies and the Excess Dividends Tax.
71. The changes in company taxation will not effect the divisible pool of
income tax in the coming year. In 1960-61 a part of the tax now accruing to the pooI
may not, for technical reasons, be treated as divisible. It is Government’s intention to
secure that, until the matter has been examined by the next Finance Commission, the
State Governments continue to receive as their share of income tax about the same
amount which they would have received had this change not been made.
72. Foreign companies which declare dividends outside India will, of course,
not be subject to the scheme I have described. However, some adjustment is necessary
in the rates applicable to them on account of the withdrawal of the Wealth Tax on
companies. The present rate applicable to such companies is 61.5 per cent and I
propose to raise it to 63 per cent with effect from 1960-61.
73. Before leaving the subject of company taxation, I should like to mention
one further change. While ordinary bonus issues are subject to tax, bonus issues which
are made out of share premium accounts are not now taxed. With effect from 1960-61,
I propose to subject these issues also to taxation like other bonus issues.
74. A few more changes in the income Tax Act will be necessary as a corollary
to the new scheme. I will not, however, tire the House with a detailed description of
these changes. They are incorporated in the Finance Bill and are explained in the
Memorandum on the Bill circulated with the Budget papers.
75. The Finance Bill also contains some other minor changes. These have no
significant effect on revenue and I would like to mention to the House only two of
them; one of them withdraws the concessions now available to incomes earned abroad
but not remitted to India upto a limit of Rs.4,500 and the other provides for certain
allowances to be given in pursuance of the agreement entered into with an oil company
for the exploration of oil in the West Bengal area.
NET EFFECT OF PROPOSALS
76. I would now summarise the net effect of the taxation proposals. The
changes in the Union excise duties, excluding the shares that accrue to the States,
will yield Rs.18.08 crores. The changes in Customs duties will bring in Rs.2.77
crores and the increase in the Wealth Tax Rs.2.5 crores, a total of Rs.23.35 crores.
This will reduce the deficit an revenue account from Rs.81.67 crores to Rs.58.32
19
crores, about the same amount as in the current year which I propose to leave
uncovered. The overall budgetary deficit will also be reduced from Rs.245 crores to
Rs.222 crores.
CONCLUSION
77. The annual budget is now something more than a simple account of
Government’s housekeeping. Each budget marks a stage in the country’s continuous
development and has to be judged by the contribution it makes to this development. In
a sense therefore, the stage that has been reached in the implementation of the Plan
conditions this budget. So far as the Plan is concerned, I think it is accepted by every
one that subject to such minor adjustments as may be necessary and were made at the
time of the recent reappraisal by the National Development Council, we have to go
forward with the Plan. For me, as for my predecessors in this place this has been the
major factor round which the budget has to be built. In doing so, I have kept
continuously in mind the main considerations necessary for the successful
implementation of the Plan. If I may repeat them, these are the maximum mobilisation
of resources by taxation and borrowing, firm control over the growth of non-
development expenditure and minimum recourse to borrowing from the central bank
for the finance required for development. In regard to the raising of resources, although
the quantum of additional taxation next year is moderate compared to what was raised
in the first two years of the Plan, it is still substantial. As regards the growth of
expenditure, Hon’ble Members will notice that the next year’s budget provides for a
substantial drop in Defence expenditure and that the bulk of the increase in Civil
expenditure is on account of larger provision for development. We are doing our best
to see that there is no avoidable increase in non-development expenditure and in the
Finance Ministry and in the Planning Commission, we have machinery for securing
economies in non-Plan and Plan expenditure. An account of the work of the economy
units is given to Parliament from time to time and I need not dilate on it here. I would,
however, assure the House that I am fully conscious of the imperative need for tightening
control over such expenditure and it is our constant endeavour to achieve the utmost
economy without sacrifice of efficiency or output. As regards borrowing from the
central bank, although the overall budgetary deficit for the coming year is smaller
than in the current year and very much smaller than the deficit in 1957-58, it is still
somewhat higher than I myself would have wished and Government had in mind some
months ago. The House will appreciate that to a large extent this deficit reflects the
outlay on the Plan-which cannot be cut down without accentuating unemployment
and leading to stagnation. Nevertheless, I may assure the House that Government do
not take a complacent view of the situation and it is my intention to see how far the
deficit could be reduced by appropriate measures during the course of the year.
78. In recent months, we have been passing through a difficult period and as
the Prime Minister summed it up so aptly when he presented the budget last year, our
20
crisis is a crisis of development, a crisis of resources. I feel we have passed through
the most difficult phase and that there is no reason for taking a pessimistic view of the
situation. Many of the major development schemes will be completed in the course of
the remaining period of the Plan and will start yielding results. The country’s foreign
exchange difficulties are being steadily surmounted and the overall budgetary deficits
have started moving down significantly. Although the price situation is still a matter
of some concern, there is no reason to doubt the inherent soundness of the country’s
economy and its ability to weather the current difficulties. These difficulties are purely
transitional and should act as a spur to greater effort on the part of the community.
There can, in any case, be no question of looking back or of slowing down the country’s
economic development. This would require greater production, greater saving and
more restraint in consumption - in other words, greater efforts and more sacrifices by
the community for ensuring a better future for the country. I am certain that these
efforts and sacrifices would be forthcoming and that we could go forward with a stout
heart and with confidence in our high destiny.
(February 28, 1959)

21
 SPEECH OF SHRI JAWAHAR LAL NEHRU
PRIME MINISTER AND MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1958-59

According to custom, the Budget statement for the coming year has to be
presented today. By an unexpected and unhappy chain of circumstances, the Finance
Minister, who would normally have made this statement this afternoon, is no longer
with us. This heavy duty has fallen upon me almost at the last moment.
2. The times are not propitious in many ways and within the last few days
all of us here and the entire nation has suffered a grievous loss by the passing away of
a leader of our people who had been a tower of strength to all of us both in the days
when we were in the wilderness and when, a measure of fulfilment came with its new
problems and burdens. So I stand before this House today with a sense of desolation
and a feeling of unfitness for the task that fate and circumstances have thrust upon me.
I seek the indulgence of this House.
3. Last year, my distinguished predecessor in this office presented a Budget
statement which, in some respects, was unusual and which involved substantial additions
to taxation. Some novel taxes were introduced and an attempt was made to bring
about gradually a reorientation of the tax structure of the country. I believed then, and
I believe now, that this was right direction for us to travel and that we should continue
to pursue this path. With experience we may no doubt make changes here and there
and advance further in that direction, but I think that the major steps that we had taken
last year have to continue. The times we live in and the problems that our country has
to face do not permit a static or complacent approach or any avoidance of the burdens
which inevitably accompany an attempt to advance with some speed. Our objective of
striving peacefully and cooperatively towards the realisation of a socialist pattern of
society also prevents us from thinking or acting along the old grooves, or seeking
some present respite by slowing down or halting development. While we should always
be prepared to reconsider the methods we adopt, should this become necessary, we
h4Ve to strive with all our strength for our planned development by conserving all our
resources, increasing production and trying to ensure progressively a more equitable
distribution, and thus to raise the standards of the great mass of our people.
4. In the circumstances that we face today, I can only present before this
House what might be called a pedestrian Budget statement, which is in the main a
continuance of things as they are, with relatively minor changes, or such changes as
naturally flow from what we did last year. This statement relates to the estimated
receipts and expenditure of the Government of India for 1958-59.
1
REVIEW OF ECONOMIC CONDITIONS
5. Following the usual practice I propose to review briefly the economic
conditions in the country during the current year against the background of which the
budget has to be considered. An economic survey, covering the major developments
in the economy during 1957-58 and explaining the impact of the various measures
adopted, is being circulated to Honourable Members along with the Budget papers. I
propose, therefore, to review only briefly the main trends in the economy.
6. There has been some improvement in the economic situation in recent
months. Prices have tended to come down and the decline in foreign exchange reserves
has slowed down markedly. The money market is easier and expansion of money
supply and bank credit have been brought under control. The measures adopted to
cheek inflationary pressures and correct the strain an the balance of Payments are
proving effective.
PRICES
7. Wholesale prices were comparatively stable in the early months of the
year, but there was a sharp rise between May and August when the index went up
from 107 to 112. After August, prices have tended to fall. In recent weeks, the index
has been around 105, which is slightly lower than the level about a year ago. The
index for cereals which had gone up from. 97 in December 1956 to 106 in March
1957 was again at 98 in December 1957. The improvement has been due to the various
measures taken to hold the price level, including controls at particular points and
restraints on bank credit; it is also a reflection of the improved supplies position. This
latter is, however, due to large imports which the country can hardly afford.
PRODUCTION
8. Agricultural production in 1956-57 recorded a rise, of some 6 per cent
over the previous year’s level, the improvement being shared by both foodgrains and
other crops. The output of foodgrains in 1956-57 was 3.4 million tons more than in
1955-56. This year, however, there have been droughts over considerable areas in the
country, and the supply position is difficult.
9. Industrial production has continued to expand, but the rate of expansion
this year has been much more modest than in the last few years. There have,
nevertheless, been significant increases in certain lines, both in the, capital goods as
well as in. the consumer goods categories, and further additions to production capacity
are being made.
MONETARY SITUATION
10. In the stock market, there was a declining trend in both prices and turnover.
The prolonged period of boom which started in 1953 ended in 1956. The decline in
equity prices, as measured by the Reserve Bank’s index of variable dividend industrial
securities was 16 per cent in 1957and 25 per cent as compared to August 1956.
2
 11. The gilt-edged market was weak in the early part of the year. There has,
however, been a revival, in recent months, in the demand for investment, especially in
short-dated securities. Since September last, the stringency in the money market has
been less acute, t and investments of scheduled banks in Government securities
increased by Rs.67 crores between September and December. State loans have also
improved slightly and there has been sustained buying in some of them. The net
decline in the prices of Government securities in 1957 has been 0.7 per cent.
12. A noticeable feature in the monetary situation in 1957 has been the smaller
expansion in money supply and in bank credit in 1957 as compared to the previous
year. Money supply with the public increased by Rs.97 crores in 1957 as compared to
Rs.132 crores in 1956 and Rs.215 crores in 1955. The expansion of bank credit was
Rs.80 crores i.e., less than half the expansion 4n the previous year. The time deposits
with the banks increased by Rs.201 crores during the year. This has eased the strain on
the banks’ resources.
BALANCE OF PAYMENTS
13. Honourable Members are aware of the continuous strain on our balance
of payments since the beginning of the Second Plan. The Reserve Bank’s foreign
assets which, at the end of 1956, stood at Rs.530 crores dropped to Rs.453 crores at
the end of June 1957 despite the drawal of Rs.95 crores from the International Monetary
Fund during that period. Between July and December 1957 the foreign assets declined
by a further Rs.155 crores to Rs.298. crores. As a result of the remedial steps taken by
Government, the rate of net withdrawal has perceptibly fallen in recent months. The
monthly average rate of withdrawal came down from Rs.36 crores in the second
quarter of 1957 to Rs.18 crores in the last quarter of that year. In recent weeks, it has
been below Rs.3 crores a week.
14. The House will recall that the last year of the First Plan closed with a
balance of payments surplus on current account of Rs.17 crores, including credits
totalling to Rs.42 crores on account of foreign assistance. During 1956-57 the position
was reversed and a current account deficit of about Rs.292 crores emerged, after
taking credit of Rs.40 crores of foreign assistance. The payments deficits during each
of the quarters of that year was Rs.44.5 crores, Rs.81.4 crores, Rs.84.8 crores and
Rs.81.8 crores respectively. For the quarter ending June 1957, the deficit was Rs.149.7
crores and it was also about the same - Rs.148 crores - for the quarter July-September.
These large deficits in the balance of payments have been due to a substantial increase
in imports and a slight decline in exports, and the bulk of the increase in imports has
been in respect of capital goods and industrial raw materials required for development.
15. The improvement in the balance of payments, to which I referred earlier,
thus relates to the period after September. Satisfactory as this latest trend is, it will be
necessary to continue and accelerate the effort we are making, both in the matter of
keeping down imports and of increasing exports, in order to bring the balance of
3
payments position to a satisfactory state. The problem is no longer one of reducing
payments in terms of a particular currency or group of currencies, but of securing an
all round improvement.
16. The House is aware of the steps that have been taken to meet the difficult
balance of payments position. Drastic cuts have been made in the imports of consumer
goods, and strict vigilance is being exercised in respect of the licensing of imports
including imports of capital goods. Efforts are being made simultaneously to secure
external assistance and deferred payment terms for projects in both the public and
private sectors having high priority and likely to save foreign exchange.
FOREIGN ASSISTANCE
17. In the current year the International Bank for Reconstruction and
Development assisted in financing the country’s development projects by sanctioning
loans of Rs.43 crores for railway development, Rs.15 crores for the expansion of the
Tata Iron & Steel works and Rs.5 crores for the construction of the Trombay Thermal
Station in Bombay. Negotiations are under way for obtaining loans from the Bank for
the development of ports, the Koyna Hydro Electric Project and the Damodar Valley
Corporation. In the last two or three months there have been various offers of assistance
from friendly foreign countries for the economic development of this country. Last
month the Government of the United States offered a loan of approximately $ 225
million (about Rs.107 crores) from out of the currently available resources of the
United States Export Import Bank and the President’s Development Loan Fund. An
official mission from this country is now negotiating details of the utilisation of this
offer. The United States Government are also considering as a matter of high priority,
further measures to assist us in getting over the present shortage of foodgrains. The
measure of assistance promised by the United States is expected to help us significantly
in financing our imports of essential capital goods over the next fifteen months.
18. The question of obtaining a postponement of certain payments which will
fall due in the next three years or so in respect of the Rourkela Steel Plant has been
under discussion with the West German Government. The deferring of these payments
has been agreed to in principle by that Government and the details are now the subject
of negotiation with the authorities in that country.
19. On the 4th February 1958, an agreement was signed with Japan under
which Japan would make available to India a sum of 18 billion yen (roughly Rs.24
crores) through the Export Import Bank of Japan to enable Government or parties
recommended by Government to make purchases from Japan. This line of credit will
be used for the purchase of Japanese goods including mostly industrial plant, machinery
and equipment. The loans will be repaid within a period of ten years and the rate of
interest will be decided on the basis of rate charged by the International Bank for
Reconstruction and Development.
4
 20. The Government of the U.S.S.R. also offered us a credit of 500 million
roubles (about Rs.60 crores) to be used in the form of technical assistance and
equipment. This will be used for the setting up of a heavy machine building plant, a
plant for the manufacture of coal mining machinery, an optical glass factory and a
thermal power station and for the development of the Korba Coalfields. This credit,
like the one given by them for the Bhilai Steel Plant, carries interest at the rate of 2.5
per cent per annum and is repayable in 12 equal annual instalments.
21. The United Kingdom Government have also offered to assist us by paying
in advance, on the 1st April 1958, three annual instalments of £ 4 million each due
from them under the arrangements made in 1955 for the transfer of sterling pensions.
22. We have recently signed an agreement with the Government of France for
economic and technical cooperation between the two countries. Under it the French
Government will facilitate the financing of the manufacture and supply of capital
goods for which orders are placed by Indian purchasers with French suppliers in the
twelve months following the date of signing of the agreement, up to a total amount of
25 billion francs (about Rs.28 crores). The terms of each contract would be settled
separately with the approval of both the Governments.
23. The total economic assistance made available to this country by friendly
foreign countries up to the end of March 1957 amounted to Rs.463 crores, out of
which Rs. 219 crores had been utilised by that date. The balance of about Rs.244
crores has mostly been committed for the supply of equipment and commodities.
During 1957-58, Canada has authorised 21 million dollars as assistance to this country
under the Colombo Plan. In addition, Canada has made a special grant o f 7 million
dollars for the purchase of wheat. She has also agreed to supply an additional quantity
of 400,000 tons of wheat on reasonable terms of credit to meet the food shortage,
The Ford Foundation has continued its assistance by a further allocation of 6.2
million dollars.
24. Under the various programmes of assistance already in operation or in
sight, the total foreign assistance to this country in the coming year is estimated at
Rs.325 crores for which credit has been taken in the budget. This assistance would
materially help in the implementation of the Second Five Year Plan and I am sure the
House would join me in expressing our appreciation to our friends who have come to
our assistance.
25. India, on her part, has continued to provide economic and technical
assistance to neighbouring countries particularly under the Colombo Plan. In Nepal,
where we have undertaken to provide aid upto Rs.10 crores, the expenditure in the
coming year has been estimated to be Rs.2.2 crores. We also promised to give a loan
of Rs.20 crores to Burma, of which Rs.15 crores will be, paid this year and the balance
next year.
5
FINANCIAL YEAR 1957-58
26. The Budget for the current year, as finally approved by Parliament, placed
the revenue at Rs.708.03 crores and expenditure at Rs.672.29 crores, leaving a surplus,
on revenue account, of Rs.35.74 crores. On present estimates, revenue is now likely to
amount to Rs.724.63 crores and expenditure to Rs.719.58 crores resulting in a small
surplus of Rs.5.05 crores. The drop of Rs.30.69 crores in the surplus is largely the
result of the additional transfer of Rs.341/2 crores to the States as a result of the
Finance Commission’s recommendations which have been accepted by Government.
27. I shall first briefly mention the important variations in the revenue estimate.
The revenue from Customs is now expected to be Rs.183 crores against the budget
estimate of Rs.167.6 crores. Excluding the additional duties levied on sugar, cloth and
tobacco, which accrue to the States, Union Excise Duties are now expected to yield
Rs.252.45 crores against the budget estimate of Rs.259.57 crores. The decrease of
Rs.7.12 crores is mainly due to a fall in the revenue from cloth and motor spirit. This
is partly counter-balanced by increased revenue from cement and diesel oils. No change
is anticipated in the budgeted figure of Rs.206.40 crores for Corporation Tax and
income Tax, but the share of the States will increase from Rs.65.98 crores to Rs.73.43
crores, as a result of the Finance Commission’s Award. The revenue from Wealth Tax
this year is now put at Rs.9 crores, a drop of Rs.3.5 crores in the original estimate due
to the time taken in obtaining necessary statements from assessees. The tax on Railway
fares is now expected to yield Rs.4.84 crores against the original budget of Rs.7
crores. The revenue from Posts and Telegraphs is likely to drop by Rs.2.72 crores to
Rs.1.23 crores, due partly to a fall in traffic and partly to the interim relief to low paid
employees granted recently. The dividend from Railways is now estimated at Rs.44.24
crores against the budget figure of Rs.43.79 crores. Of this sum, Rs.37.91 crores,
representing the interest element, is taken in reduction of interest payments on the
expenditure side and the balance credited as contribution to revenue. The variations
under other heads do not call for any special mention.
28. The expenditure this year is now estimated at Rs.719.58 crores-Rs.266.05
crores on Defence Services and Rs.453.53 crores under Civil heads.
29. The revised estimate of the net Defence expenditure is placed at Rs.266.05
crores against the budget estimate of Rs.252.71 crores. The increase is largely accounted
for by an additional provision of Rs.6.86 crores for the Army and Rs.6.80 crores for
the Air Force. The increase in the Army estimate is due mainly to the purchase of
additional stores, rise in prices, grant of additional dearness allowance and certain
other concessions allowed to personnel; and that in the Air Force Estimate, almost
entirely to the purchase of aircraft and equipment, mostly for replacement.
30. Civil expenditure shows an increase of Rs.33.95 crores over the budget
estimate of Rs.419.58 crores. Payments to States on account of their share of Union
Excise Duties and of grants under the substantive provision of Article 275(l) of the
6
Constitution have increased by Rs.39.90 crores as a result of the Finance Commission’s
award and the levy, of certain additional duties, in replacement of sales tax. There is
an increase of Rs.1 crore on account of additional dearness allowance granted during
the course of the year and an increase of Rs.21/2 crores in interest charges, due to
larger expansion of Treasury Bills than anticipated in the Budget. A provision of Rs.3
crores has also been made for writeback to revenue of losses on the Food Trading
Account. It will be recalled that a. Food Subsidy Fund of Rs.25 crores was intended
to be built up from the additional taxation levied this year, which if, unspent, would
have been available for the current and future years. But since the revenue surplus this
year, has been more or less absorbed by the transfer of additional resources to the
States under the Finance Commission’s award, it has not been possible to meet the
entire subsidy from revenue. The amount of this subsidy this year, will be Rs.30
crores and next year Rs.20 crores and it is proposed to write this back to revenue over
a period of 10 years. The increases I have mentioned amount in all to Rs.461/2 crores
roundly but they have been offset by savings under other heads of Rs.121/2 crores.
Thus there is a saving of Rs.5 crores under Education; Rs.1 crore under Community
Development; Rs.2 crores under Scientific Departments; Rs.1 crore in the grant to
States for development of backward classes and Rs.2 crores in respect of grants to
States towards expenditure necessitated by natural calamities. The balance of the savings
is spread over a number of heads.
FINANCIAL YEAR 1958-59
31. For the next year, on the basis of existing taxation, the revenue is estimated
at Rs.763.16 crores and expenditure at Rs.796.01 crores, leaving a deficit of Rs.32.85
crores on revenue account.
32. The revenue from Customs has been placed at Rs.170 crores, the decrease
of Rs.13 crores as compared with this year’s Revised estimates reflecting the effect of
the restrictions on imports, Excise duties are expected to yield Rs.260.45 crores,
excluding Rs.41.48 crores from additional duties on sugar, cloth and tobacco which
accrue in almost their entirety to the States. This is an improvement of Rs.8 crores
over the current year’s Revised estimate. Under income tax the revenue is placed at
Rs.217 crores, allowing for a normal expansion in revenue of Rs.101/2 crores over the
current year’s revised estimate. The Wealth Tax is expected to yield Rs.12.5 crores,
the tax on Railway fares Rs.9.22 crores and the Expenditure Tax Rs.3 crores. The
revenue from Posts and Telegraphs is estimated at Rs.2.34 crores against Rs.1.23
crores this year. The dividend payable by Railways next year is estimated at Rs.49.58
crores of which Rs.7.04 crores will be taken as contribution to revenue and the balance
of Rs.42.54 crores in reduction of interest payments on the expenditure side. The
surplus profits of the Reserve Bank next year have been placed at Rs.30 crores, the
same as in the current year. A credit of Rs.7.34 crores has also been taken on account
of the surplus of the cement account of the State Trading Corporation to be transferred
to Government. This amount will be utilised on the development of national highways.

7
The share of income tax payable to States next year will be Rs.76.97 crores against
the current year’s Revised estimate of Rs.73.43 crores.
33. Expenditure next year is estimated at Rs.796.01 crores of which Rs.278.14
crores will be on Defence Services and Rs.517.87 crores under the Civil heads.
34. Estimates for Defence Services show an increase of Rs.12.09 crores
over the Revised estimate for the current year. The increase is wholly in the Air
Force estimates mostly for the purchase of stores for replacement. The Navy estimates
show an increase of Rs.1.46 crores but this is offset by a reduction in the provision
for the Army.
35. Civil Expenditure next year shows an increase of Rs.64.34 crores over the
Revised estimate. Of this increase, payments to States of the proceeds of the additional
excise duties on sugar, cloth and tobacco account for Rs.27.96 crores. The greater part
of the balance is due to larger provision for nation-building development and social
services. A detailed account of individual items is, as usual, given in the Explanatory
Memorandum and only the more important items need be mentioned here.
36. The provision for expenditure on nation-building and development
services under Civil Administration amounts to Rs.130.09 crores as compared with
Rs.109.62 crores during the current year. The provision for Education at Rs.29.63
crores is higher by Rs.5.48 crores and includes Rs.11.97 crores for grants to States,
Rs.2.51 crores for scholarships and Rs.4.32 crores for grants to the University Grants
Commission. For expenditure on Medical and Public Health, the provision has been
increased from Rs.10.43 crores this year to Rs.16.03 crores next, year and for
agriculture and allied services, the provision made next year is Rs.17.64 crores
against the current year’s Revised estimate of Rs.16.85 crores. The provision for
Scientific Research has also been stepped up by Rs.3.7 crores and that for industries
and Supplies by Rs.1.62 crores.
37. Larger provision is also being made for Community Development and
National Extension Service and for welfare of Scheduled Tribes and development of
Backward Areas and for Employment Exchanges, the increase next year over the
current year’s Revised estimate being Rs.3.86 crores.
38. The estimates also include a provision of Rs.6 crores for grants to States
to help them to raise the emoluments of their low paid employees, the corresponding
provision for 1957-58 being Rs.5 crores. The newly constituted Naga Hills and
Tuensang District will cost about Rs.3.64 crores next year. Gross interest charges will
increase by Rs.17.60 crores of which Rs.15.04 crores will be recovered from the
commercial departments and the State Governments.
39. The rest of the increase in Civil Expenditure is spread over a number
of heads.
8
CAPITAL EXPENDITURE
40. The current year’s budget provided for a capital outlay of Rs.455 crores,
excluding an adjusting item of Rs.95 crores in respect of loan assistance from the
U.S.A. Government, which is transferred, to the Special Development Fund by debit
to capital. The Revised estimates provide for an outlay of Rs.427 crores, a reduction
of Rs.28 crores. Owing to better availability of materials, particularly steel and track
materials, following the special arrangements made for the procurement abroad and
the extension of the scheme of electrification to certain sections, Railways are expected
to spend Rs.14 crores more than estimated. Against this increase under Railways, a
saving of Rs.29 crores is expected in the provision of Rs.157 crores for steel projects,
Rs.11 crores on food purchases and Rs.2 crores under other heads, leaving a net
saying on capital account of Rs.28 crores.
41. Capital expenditure in the coming year is estimated at Rs.412 crores
excluding a formal adjusting debit of Rs.7 8 crores in respect of loan assistance from
the United States Government mentioned earlier. The drop of Rs.15 crores over the
Revised estimate is due to a reduction of Rs.38 crores in the net outlay on food
purchases and the special receipt of Rs.16 crores from the United Kingdom as advance
payments on account of sterling pensions which is taken in reductions of expenditure,
partly offset by increases under other heads. An increased provision of Rs.31 crores
has been made for the steel plants and Rs.10 crores for industrial development. Details
of the provision under the various heads are given in the Explanatory Memorandum.
42. In addition to the provision for direct capital outlay by the Centre just
mentioned, the estimates include Rs.288 crores for loans to State Governments and
Rs.71 crores for loans to Port Trusts, Statutory Corporations, foreign Governments
etc. in the current year against an original provision of Rs.238 crores and Rs.86 crores
respectively. The increase in the loans to State Governments is largely due to ways
and means advances and payments on account of their share of the net collections
from small savings. In recent years the State Government have been receiving a portion
of these collections in their States as loans from the Centre. This share was raised
during the current year from about 1/4th of the net collections to 2/3rds. Some arrears
were also due to the States in respect of the previous year which have been paid to
them. Savings of Rs.15 crores are, however, expected in the provision for other loans
despite the fact that the Government of Burma are drawing an additional sum of Rs.5
crores against the loan assistance of Rs.20 crores promised to them some time back
and an increase of Rs.5 crores is also expected in the loans to the Industrial Finance
Corporation. The provision of Rs.15 crores made in the budget for loans to the Refinance
Corporation is not likely to be required this year. For the next year a total provision of
Rs.362 crores has been made for loans, of which Rs.284 crores will be for State
Governments and Rs.78 crores for others. Broad details of these loans are given in the
Explanatory Memorandum.
9
 43. Before passing on to a consideration of the ways and means position, an
account may be given of the total provision included in the estimates of the coming
year for the execution of the Five Year Plan and the magnitude of the total Plan outlay
in the coming year. The Budget now presented to the House includes a total provision
of Rs.743 crores for the implementation of the Plan -Rs.122 crores in the revenue
budget and Rs.621 crores in the capital budget. Out of this provision, Rs.53 crores
will be provided from the revenue budget and Rs.178 crores from the capital budget
for assistance to the States. In addition to this, the Railways will be spending Rs.93
crores from their own resources on the Plan and the States Rs.181 crores. The total
plan outlay in 1958-59, including interest on loans on river valley projects treated as
capital outlay and short term loans, will amount to Rs.1017 crores.
WAYS AND MEANS
44. The current year’s budget provided for an overall deficit of Rs.284 crores,
of which Rs.275 crores were expected to be covered by the issue of Treasury Bills and
the balance by drawing down the cash balances. The Revised estimates place the
overall deficit at Rs.380 crores which will be met entirely by the expansion of Treasury
bills. This deterioration in the ways and means position is due mainly to three factors.
First, the anticipated revenue surplus of Rs.3 6 crores has, as explained earlier, been
mostly absorbed by the additional payments to the States as a result of the
recommendations of the Finance Commission. Secondly, the net yield from small
savings has been below estimate, and a drop of Rs.20 crores is now expected in the
budgeted receipt of Rs.80 crores. Thirdly, external assistance, for which a credit of
Rs.150 crores was taken in the budget, is now expected to amount to only Rs.105
crores, the balance being carried over to the coming year. Part of the shortfall will,
however, be met by savings in the capital outlay under a number of heads so that the
net deterioration in the position is not likely to be more than about Rs.95 crores.
45. In the current year Government floated two new loans, the 31/2 Per Cent
National Plan Bonds 1967 at an issue price of Rs.99.5 and the 4 Per Cent Loan 1972
at par. Conversion facilities were offered for the 3 Per Cent Victory Loan 1957 and
the 3 Per Cent Loan 1958 which was due for repayment in the following year.
Subscriptions to the new loans amounted to Rs.10 6 crores, of which Rs.45 crores
came by way of conversion. Later in the year, when a demand for more investment
developed in the market, a re-issue of the 31/4 Per Cent Loan 1962 was made through
the Reserve Bank. The entire sum of Rs.30 crores of this re-issue has been absorbed
by the market. The outstanding balance of the 3 Per Cent Victory Loan 1957, which
was not converted into the new loans, was repaid in cash. The net market borrowings
this year have thus amounted to Rs.68 crores, the sum for which credit was taken in
the budget.
46. Mention was made earlier of the decline in the receipts from small savings.
For some months the net receipts have been much smaller than in the past particularly
under Postal Savings Banks. In the first ten months of the current year the net receipts
10
amounted to Rs.37.6 crores against a sum of Rs.44.8 crores in the corresponding
period of last year. The deterioration is wholly due to a drop in the receipts from
Savings Banks which are Rs.14 crores less than in the previous year. In recent weeks
there has been a slight improvement and it is hoped that collections will increase
steadily in the future.
47. The intensification and development of the Small Savings movement have
been under the constant consideration of Government in consultation with the State
Governments who have now a predominant interest in the net proceeds from this
source. The House will remember that as part of the programme for attracting larger
investments the rate of interest on Postal Savings Banks was raised by 1/2 per cent and
the yield on the 12 Year National Plan Savings Certificates and Treasury Saving
Certificates was increased with effect from the 1st June 1957. Since then, the yield on
the 15 year annuities has also been raised to the same level as the yield on the 12 Year
National Plan Certificates. The increase in the yield has had a good effect on the sale
of Certificates bit the heavy withdrawals from Postal Savings Banks are somewhat
disquieting. The introduction of a scheme of recurring monthly deposits which will
assist persons with small regular incomes to accumulate savings for meeting expenditure
such as on the marriage and education of children is under consideration and it is
hoped to introduce this shortly.
48. The National Savings Organisation, in cooperation with State Governments,
has been making continuous efforts to improve collections of small savings. Internal
agents are being appointed in both Government and non-Government institutions for
securing regular investments from their fellow employees through organised savings
groups. The recent amendment of the Payment of Wages Act permitting voluntary
deduction at source for purposes of investments in small savings is likely to assist in
the mobilisation of savings in industrial establishments. State Governments are
undertaking intensive campaigns in the rural areas and special attention is being given
to the Community Project areas and National Extension Service blocks. The procedure
at Post Offices, through which the bulk of the small savings is collected, is also being
simplified wherever possible and a special Small Savings Board consisting of
representatives of the Posts and Telegraphs Department, the Accountant General, Posts
and Telegraphs, the Finance Ministry and the Reserve Bank of India has been constituted
for this purpose.
49. In the budget for the coming year credit has been taken for a net receipt
of Rs.125 crores from market borrowing and Rs.100 crores from small savings. Market
conditions in the last two or three months have been easier and If these continue, as
may be reasonably expected, the target of Rs.125 crores is likely to be reached. For
small savings although the net receipts this year have been disappointing, it may be
hoped that, with the more intensive development of the movement with the cooperation
of the States, the net collections next year will show a substantial improvement. As
mentioned earlier, foreign assistance next year is likely to amount to Rs.325 crores of
which Rs.40 crores will be by way of grants and the balance by way of loans.
11
 50. The overall budgetary position next year may now be summarised. At the
existing level of taxation and expenditure there will be a revenue deficit of Rs.33
crores. Capital outlay will amount to Rs.412 crores, loans to State Governments and
others to Rs.362 crores, and debt repayments to Rs.28 crores. This total disbursement
of Rs.835 crores will be met to the extent of Rs.75 crores from repayments of loans by
State Governments and others, Rs.145 crores from market borrowings in India, Rs.100
crores by Small Savings, Rs.285 crores from foreign loans and Rs.25 crores from
miscellaneous receipts under debt and deposit heads, leaving a deficit of Rs.205 crores
which will be met by the issue of Treasury Bills.
51. On the basis of the above estimates the total amount of outstanding Treasury
Bills at the end of 1958-59 will be a little over Rs.1400 crores, the bulk of which will
be held by the Reserve Bank. The expansion of Treasury Bins has been not merely to
meet the internal requirements but also for the replacement of the external assets held
by the Reserve Bank, which have been drawn down mostly for development purposes
in the last two or three years. The Treasury Bills represent, something more than mere
floating short terms debt and will gradually be funded into loans of appropriate maturity.
52. I now turn to the proposals for dealing with the anticipated revenue deficit
of Rs.32.85 crores in the coming year.

PART B
53. Less than ten months ago Parliament approved proposals involving very
substantial additions to taxation of a magnitude rarely equalled in peace time. These
covered not merely the extension of existing taxes but the levy of new taxes such as
the tax on wealth and the tax on expenditure. All these measures resulted in a major
reorientation of the tax structure of the country. I do not propose to make any major
modification in it but to confine myself to making such improvements as are necessary
to make the present pattern of taxation an integrated one, and to plug any loopholes in
taxation.
DIRECT TAXATION
54. I shall first deal with direct taxation. My first proposal is to introduce a
tax on gifts which will fill a gap in the scheme of direct taxation and would not only
make evasion or avoidance difficult but also spread the tax burden more equitably.
55. The idea of a Gift Tax is not new. Many Honourable Members have stressed
both in this House and the other House the need for introducing such a measure at an
early date. The transfer of properties through gifts to one’s near relations or associates
is one of the commonest forms of avoidance of not only the Estate Duty but also of
Income-tax, Wealth Tax and even the Expenditure Tax. The only way of effectively
checking this practice is to levy a tax on gifts. Such a tax is already being levied in
other countries, for example, U.S.A., Canada, Japan and Australia. The Taxation Enquiry

12
Commission also had accepted the Gift Tax as theoretically an attractive proposition.
56. It is proposed to levy a tax on gifts by whomsoever made, the only
exceptions being charitable institutions, government companies, corporations
established by Central or State Acts and public companies whose affairs are controlled
by six persons or more. The tax will be levied on the donor on the value of all gifts
made by him during a year but for the purpose of determining the rate of duty, the
gifts made during the four years preceding the year will be aggregated. Such aggregation
will, of course, be made only in respect of gifts made after the date this tax comes into
force. Gifts upto a total value of Rs.10,000 in any one year will be exempt and if the
value of gifts made during any year exceeds this sum, only the excess will be subjected
to tax. This basic exemption of Rs.10,000 will be reduced to Rs.5,000 if gifts to any
one individual donee during a year exceeds Rs.3,000. In addition to this basic
exemption, there are other exemptions, important among which are:-
(a) gifts to Central and State Governments, Local Authorities and charitable
institutions:
(b) gifts to female dependants on the occasion of marriage upto Rs.10,000 in
each case;
(c) gifts to one’s wife upto a total limit of Rs.1 lakh;
(d) gifts to dependants of policies of insurance upto Rs.10,000 for each.
The rates of tax will be the same as for the Estate Duty, the only difference
being that the first slab of Rs.50,000 will not be exempted from the tax. The rates of
tax range from 4 per cent on the first slab to 40 per cent on gifts over Rs.50 lakhs. The
administrative set up and the procedure for assessment, appeal and collection of tax
will be the same as for income-tax, Wealth Tax and Expenditure Tax.
57. The main object of this tax is to plug a loophole in the other tax statutes.
Its importance cannot, therefore, be adequately measured in terms of the amount of
revenue it brings directly. We have no reliable data for making an estimate of the
yield, and on a rough guess the yield from the Gifts Tax has been placed at Rs.3
crores. A bill for the levy of this tax is being introduced separately.
58. My second proposal is to make certain amendments in the Estate Duty
Act. The actual collections of Estate Duty have fallen short of even the modest
expectation we had at the time of passing that measure. This is partly due to the
practice of making large gifts inter vivos which will, hereafter, be checked by the levy
of the Gift Tax. It is also partly due to the numerous concessions provided in the Act
itself, and I propose to reduce some of them. The important changes are:-
(a) The exemption limit will be reduced from Rs.1,00,000 to Rs.50,000.
(b) Only one-half of the probate duty or court fees paid on succession
certificates will be allowed as a deduction from estate duty instead of the
full amount as at present.
(c) Gifts to other than those for charitable purposes made within a period of

13
 two years prior to death are now subjected to estate duty. It is proposed to
increase this period to five years, as recommended by the Taxation Enquiry
Commission. Gifts on which gift tax has been paid will not be taken into
account.
(d) The value of coparcenery interest in Hindu Undivided Families will be
taxed at the rate applicable to the value of the estate of the branch of the
family concerned.
The effect of these changes will be to increase the revenue by Rs.50 lakhs
which will accrue wholly to the States.
59. Honourable Members are aware that the Estate Duty Act has departed
from the other fiscal statutes in vesting the appellate powers with the Central Board of
Revenue. Now that we have gained some experience in the working of this Act, it is
proposed to bring the appellate procedure in line with the provisions in the income
Tax, Wealth Tax and Expenditure Tax Acts. A bill amending the Estate Duty Act is
being introduced separately.
60. So far as income Tax is concerned, no major change in the rate structure
is proposed to be made. For the next financial year the basic rates of tax, together with
the special surcharges in operation for the current financial year, will continue. The
only change which I propose to make is in regard to the excess dividend super-tax
payable by Section 23A companies. At present, the excess dividend tax rates for all
companies are 10 per cent 20 per cent and 30 per cent on the slabs of dividends over
6 per cent, 10 per cent and 18 per cent, respectively, of capital. For the financial year
1958-59, I propose to fix the excess dividend tax rates for Section 23A companies
only in two slabs, 10 per cent on the slab of dividends over 6 per cent, of capital and
20 per cent on the slab over 10 per cent, of capital. This change is desirable as under
the Act these companies are required to distribute the whole or a large proportion of
their profits to the shareholders. It is not possible to estimate the loss of revenue in
this proposal, but it is likely to be very small.
61. I also propose to make a change in the substantive income-tax. law in
regard to “Development Rebate”. At present, this rebate is allowed uniformly at 25
per cent of the cost of the new machinery or plant and is available for ships as well.
While this, rate of 25 per cent is adequate for new plant and machinery in general, I
think some further concession is necessary for the shipping industry. I propose, therefore,
to increase the rate of development rebate for ships to 40 per cent Simultaneously, the
conditions for the grant of development rebate will be tightened as some instances of
abuse of this concession have come to notice.
62. In addition to these, the Finance Bill contains some amendments relating
to income-tax law, some of which are intended to check evasion while some others are
only of a clarificatory nature. To mention the more important of them, the definition
of ‘technician’ is proposed to be made stricter to ensure that the exemption is not
14
secured to a person who is not legitimately entitled to it. It is also proposed to confer
on the Central Board of Revenue the power to make rules laying down the basis for
valuing perquisites in kind, like rent-free quarters, free use of conveyance, etc., so that
some uniformity is secured in the basis of assessment.
63. Before leaving the subject of income-tax. I should like to mention a change
in regard to the exemption from tax of payments made to employees for leave passages.
Such exemption is now granted only, if the payments are made under certain rules,
framed by Government. This leads to a large volume of administrative work not
commensurate with the results and these rules are proposed to be withdrawn.
64. In regard to the Wealth Tax, the only change proposed is to exempt a
foreign citizen from payment of the tax on his foreign wealth, even though he may be
resident or ordinarily resident in India. This was the intention of the Select Committee
when the provisions of the Bill were discussed by them but the intention has not been
secured by the language of the provision as it now stands.
INDIRECT TAXATION
65. I now turn to the field of indirect taxation. In regard to Union Excise
Duties the only major change I propose is the increase in the rate of duty on Cement
from Rs.20 per ton to Rs.24 per ton. This increase will not, however, raise the issue
price of cement as it is proposed simultaneously to withdraw the surcharge at present
levied by the State Trading Corporation. The additional revenue of Rs.2.24 crores will
be utilised for road development.
66. Certain minor amendments, mainly of a clarificatory nature, are also being
made and I need not dilate on them here. I should, however, refer to two changes
which are being made immediately by notification. Firstly, for powerlooms producing
cotton textiles it is proposed that the concession of paying duty at compounded rates
should no longer be available to establishments having more than 100 looms.
Simultaneously, the compounded rates applicable to units having 25 to 100 powerlooms
are being suitably enhanced in two stages, This would bring in an additional revenue
of Rs.83 lakhs. Secondly, the rate of duty on vegetable products is being lowered for
the first 3000 tons cleared by each factory. This would give substantial relief to the
smaller producers and will cost the Exchequer Rs.24 lakhs per annum.
67. Coming to Customs Duties, only a few minor adjustments and verbal
changes are being made in the Tariff Schedule to remove some anomalies or doubts.
The only change of any significance is the introduction of the alternative ad valorem
rate of duty in respect of expensive varieties of artificial silk yarn, like nylon, perlon,
etc., so far as the other yarns, such as viscose, are concerned, the rate of duty is being
left unchanged. The financial effect of these changes will be negligible.

15
NET EFFECT OF PROPOSALS
68. The net effect of the taxation proposals may now be summarised. The tax
on gifts will bring in Rs.3 crores, the changes in the Estate Duty Rs.50 lakhs, the
increased duty on cement Rs.2.24 crores and the adjustments in the excise duty on
cloth Rs.83 lakhs, a total sum of Rs.6.57 crores, of which Rs.50 lakhs will accrue to
the States. The reduction in the excise duty on vegetable products will involve a loss
of Rs.24 lakhs leaving the net additional revenue at Rs.5.83 crores. This will leave a
final deficit of Rs.27.02 crores which I propose to leave uncovered.
CONCLUSION
69. The coming year, which will be the third year of the Plan, is bound to be
one of difficulty calling for a considerable measure of sacrifice on the part of everyone.
It is unnecessary to reiterate that the plan of development the country has set before
itself has to be implemented whatever the sacrifice that may be called for because
without economic development we cannot bring relief and prosperity to the millions
of our countrymen who have suffered for so long from the curse of poverty. The crisis
through which we are passing is a crisis of development,) a crisis of resources. We
must try to produce more, export more and save more to find the resources for
implementing the Plan. In the budget for the coming year we have set ourselves high
targets for both taxation and borrowing. I have no doubt in my mind that these targets
are not beyond our capacity provided there is a sense of discipline and a sense of
urgency in the country. I am sure the effort to realise the resources planned for the
coming year will be forthcoming.
70. We live in an age of revolutionary changes when the development of
science and technology has opened out vast avenues of human progress. We live also
at a time when a great part of the resources of the world are being directed to
preparations for war and the production of terrible weapons of mass destruction. While
space travel beckons to us and the vast expanses of the universe almost appear to be
in our reach, the horizon of our minds is limited by fear and the shadow of terrible
disaster hangs over us. How can we and others raise ourselves above fear and hatred
and the petty conflicts that are so out of place in the new world that is taking shape?
How can we in India function with courage and unity and grasp with strong hands and
stout hearts at this future? It has been given to us of this generation to face mighty
problems and to achieve great results. We can only serve our own people or the world
if we hold to our ideals and live up to them
71. This budget statement is a minor event in our march forward. We have to
look at it in the perspective of what we have to do and what we have to achieve,
Above all, we have to realise that our success depends on ourselves and not on others,
on our own strength and wisdom, on our unity and cooperation and on the spirit of our
people whom we are privileged to serve.
(February 28,1958)

16
 SPEECH OF SHRI T.T. KRISHNAMACHARI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1957-58 (FINAL)

Sir,
In March last I presented to the predecessor of this House an interim budget for
the year 1957-58 in order to obtain a vote on account to meet Government’s expenditure
until the new Parliament assembled. The expenditure estimates I am presenting today
are more or less the same as the ones I presented in March. They have, however, been
reclassified in terms of the reorganised Ministries, and there are a few new items to
which I shall refer in the course of my speech.
2. A White Paper reviewing the major economic developments in the economy
during 1956 and outlining the perspective against which policies for the current year
have to be formulated was circulated along with the Budget papers in March last.
Copies of that White Paper are being made available to Hon. Members. The broad
analysis of economic trends given in the White Paper needs little modification in the
light of subsequent data. I shall, however, review briefly the latest available economic
indicators and attempt an assessment of emergent and prospective trends.
3. Before I do so, I would say that the economic classification of the budget
as it is now being presented will be issued in 2 or 3 days’ time. We attempted this
reclassification for the first time in March last, and we propose to continue the practice.
But, the document will have to be released after the short time-interval needed for
working into the tables the proposals I am now placing before the House today.
PRICES
4. The White Paper of March last gave an analysis of the factors responsible
for the upward pressure on prices during 1956. In recent months the index of wholesale
prices has remained stable around 420. For the week ending April 27, it was 423.5,
which is a rise of 8.5 per cent over the level a year ago. Rice prices are now at633 and
wheat prices at 581; they are 14.1 per cent and 16.4 per cent respectively above the
level that obtained a year ago. Prices of industrial raw materials have risen by 9 per
cent during the year, of semi- manufactures by 5.3 per cent and of manufactures by
2.4 per cent. The rising price trend is due in part to the insufficiency of food production
in relation to the demand, and in part it is attributable to certain external factors. There
are, however, clear signs of demands in the economy tending to outstrip the supplies
available. If unchecked, these trends cannot but get reflected in further increases in
the cost of living and in the cost structure of industries.
1
PRODUCTION
5. The latest available estimates of agricultural Production indicate that the
fall in production in 1955-56 was somewhat smaller than had been estimated earlier.
The output of rice is now estimated at 26.8 million tons, as compared to the earlier
estimate of 25.5 million tons and the estimate for the total foodgrains output for the
year has now been revised upwards from 63.4 million tons to 64.8 million tons. Even
so, the year shows a shortfall of some 4 million tons as compared to 1953-54 and
some 2 million tons as compared to 1954-55. The decline in foodgrains output in
1955-56 was mainly in respect of coarse grains, while the output of rice was higher
and that of wheat only slightly lower than in the previous year.
6. The output of commercial crops shows no significant change relatively to
the estimates given in the White Paper issued in March. The over all index of agricultural
production, taking food crops and commercial crops together, would still show a fall
of about 2 per cent in 1955-56 as compared to 1954-55.
7. The estimates of the likely level of agricultural production in 1956-57
indicate that the out turn should, on the whole, be somewhat better than the previous
years. The production of rice is expected to be around 28 millions tons, that is, about
1.2 million tons better em in 1955-56, and of wheat about 8.6 million tons as compared
to 8.3 million tons in 1955-56. The output of coarse grains and pulses is estimated at
about the same level as in 1955-56. Among commercial crops, latest reports indicate
that the production of cotton has increased by 20 per cent, groundnut by 6 per cent
and sugarcane by about 17 per cent. Nevertheless, reports on the food situation in
recent weeks indicate difficult conditions in some of the States. I would not like to
minimise the gravity of the situation as it obtains in these pockets. But statistically, it
does seem that if at all there is an overall shortage, it is of a marginal character. With
the arrangements that have been made for the import of foodgrains from abroad to
meet our normal needs and with the availability of additional supplies under the P.L.
480 agreement, it should be possible to ensure adequate supplies to enable us to hold
the price line. I would however concede that the situation will need, careful watching
and the apparatus necessary to deal with the situation as it develops from time to time
would have to be kept in readiness.
8. Industrial production has continued to rise at an annual rate of about 8
per cent, the newer industries, both in the capital goods and in the consumer goods
sector advancing more rapidly than the older industries. The pace at which industrial
development has been proceeding is encouraging. In that process, it generates heavy
demands on our foreign exchange resources for import of capital goods as well as
raw materials. The immediate difficulties in respect of foreign exchange
notwithstanding, it would be reasonable to hope that the rate, of progress in the
industrial sector will be maintained.
2
 9. The overall position that emerges from the review of production trends so
far is that the supply of domestic goods and services has, on the whole, shown only a
modest improvement over the previous year and that the rise in prices during the year
reflects the pressure of a shortage in supplies relatively to the strength of the
expansionary factors in the economy generated by the rising levels of both public and
private investment.
MONETARY FACTORS
10. Considered by itself, the increase in money supply over the last 12 months
or so is not very large. Between the 13th April, 1956, and the 12th April this year, it
increased by about Rs.132 crores. This increase, it must however be remembered,
occurred in spite of the large balance of payments deficit which resulted in a precipitous
fall in the Reserve Bank’s foreign exchange holdings. The increase in rupee securities
held by the Reserve Bank works out at Rs.273 crores over the past twelve months.
This is, clearly, an expansionary factor which reflects, in the main, the growing
borrowings of Government from the Reserve Bank; in part, it arises from the pressure
on commercial banks to replenish their resources by selling securities. Scheduled
bank lending to the private sector was up by Rs.147 crores during the year. The
liquidity of the banks has in the process been strained and money rates have hardened.
Stringency in the money market has continued. This stringency is a usual
accompaniment of a phase of economic boom when investment tends to outturn savings;
it is not an indication of an insufficiency of the monetary media. Ali abatement of
monetary stringency has at this stage to be sought not through a general increase in
the supply of credit but through measures to prevent an excessive diversion of credit
to less essential uses and through the creation of special institutions or facilities for
supplying selectively the type of credit needed for priority developments.
FOREIGN EXCHANGE
11. The major problem before the country is the large and continuing strain
on foreign exchange resources. Since the beginning of the fiscal year, 1956-57, there
has been a persistent pressure on the balance of payments resulting in a draft on the
country’s foreign exchange resources of about Rs.300 crores. Since, during this period,
a credit of Rs.60.7 crores was obtained from the International Monetary Fund, the fall
in the Reserve Bank’s holdings amounted to about Rs.240 crores.
12. The balance of payments for the first quarter of 1956-57 showed a current
account deficit of Rs.44.5 crores; the deficit widened to Rs.81.4 crores in the second
quarter. For the third quarter for which data are now available, there was a further
increase in the deficit which worked out at Rs.84.8 crores. Excluding ‘official donations’
which enter into the current account, the deficits for the three quarters were Rs.54.1
crores, Rs.89.9 crores and Rs.92.4 crores. Since January, 1957, further foreign exchange
resources of the order of Rs.86 crores have been used up. The foreign, assets of the
Reserve Bank now stand a little below Rs.500 crores. Despite the measures already

3
taken to restrict imports, there is no indication yet of an abatement in the rate of
drawals which averages Rs.5 to 6 crores a week. This embarrassing ‘lag’
notwithstanding the steps we have already taken and the further steps we shall take as
necessary will, it is believed, begin to produce their effect before long.
13. On a rough estimate, imports for the year, 1956-57 will aggregate to over
Rs.1000 crores, while exports will be around Rs.650 crores. The bulk of the additional
imports received during the year is for developmental purposes and should help
strengthen the economy in due course. It is, however, obvious that foreign exchange
expenditure has to be limited to the availability of resources, and the present imbalance
in the country’s external account rectified. The various corrective measures adopted
during the year were reviewed in the March White Paper; further action in the same
direction which is necessary will, as I have just said, be taken.
14. There is hardly any, cushion left in our foreign exchange reserves to permit,
a further significant draft on them. The level of imports hereafter has necessarily to be
regulated in the light of our current earnings and the inflow of supplemental resources
we can secure from abroad and should be closely related to essential requirements of
the high priority projects in the Plan. The import policy for the second half of 1957-
58 is being formulated with the objective of scouring a further sizeable saving on
imports. The large volume of imports of capital goods and of developmental
commodities that has already come in should make it possible for investment within
the economy to go forward for a time at a satisfactory rate and care will be taken to
allow such imports as are necessary for getting the benefit of whatever equipment has
been obtained and for maintaining production at a reasonable level. It would, however,
be idle to pretend that all hardship can be avoided. The exigencies of the situation
require that a balance on external account must be restored as early as possible, and
the necessary price has to be paid.
15. An improvement in the balance of payments situation is, I should add,
largely conditional upon the adoption of domestic policies designed to hold inflationary
pressures in check. An excess of purchasing power within the economy raises internal
prices; it also reduces the availability of supplies for export and pushes up the demand
for imports. It is, therefore, necessary to orient fiscal and monetary policies to the
keeping down of domestic consumption and to the diversion of a part of the domestic
output to export markets. I may mention in this connection that the exports of cotton
textiles in the first three months of 1957 have reached a total of 260 million yards,
which gives an annual rate of over 1,000 million yards. The increase in excise duty on
cloth in September last has it seems succeeded in one of its objectives without raising
prices in the process. We should constantly be on the watch for similar opportunities
to enlarge our foreign exchange earnings.
16. After this broad review of the latest economic trends, I should now like to
give an account of the budget estimates for 1957-58.
4
 17. In the estimates presented on the 19th March, 1957, revenue was taken at
Rs.636.22 crores and expenditure at Rs.66 3.09 crores, leaving a deficit, on revenue
account, of Rs.26.87 crores. As a result of certain modifications which have since
been found to be necessary, revenue deficit on the basis of existing taxation, to now
estimated to increase by Rs.6.25 crores. This is as a result of a reduction of Rs.1.25
crores in the net contribution of the Posts and Telegraphs Department to General
Revenues and an increase in expenditure of Rs.5 crores.
18. The reduction in the Posts and Telegraphs contribution is due to an
additional provision of Rs.1.25 crores for the Renewals Reserve Fund. Abroad
examination has revealed that the provision made in recent years for depreciation and
replacement of assets has been very inadequate and that at least 2.75 per cent of the
capital at charge should be provided as a depreciation reserve. Provision made this
year amounts to Rs.1.25 crores which represents only 1.25 per cent on the capital at
charge of about Rs.100 crores. Pending a detailed examination, the provision is now
being doubled for the current year.
19. The increase in expenditure is accounted for by three items. The first is a
provision of Rs.3.12 crores for grants to the Khadi and Village industries Commission
for development of Ambar Charkha. A programme for the introduction of 75,000
Ambar Charkhas was started last year. The results of this programme have been
reviewed recently and it has been decided to continue and expand it further daring
1957-58. For the present the expanded programme provides for the introduction of an
additional 90,000 Ambar Charkhas. The total cost of this programme, during the current
year, is, estimated at Rs.10.09 crores of which Rs.3.12 crores will be by way of grants
and the balance by way of loans to the Commission.
20. The second item is a grant of Rs.1.55 crores to the Government of Assam
towards the extra expenditure which they have had to incur recently for the maintenance
of law and order as a result of the disturbances in certain border areas. The State
Government have had to incur large expenditure on providing relief to the affected
population, borrowing police forces from other States and constructing roads and
bridges to facilitate, communications. This abnormal expenditure has caused a great
strain on the State’s resources and the Government of India have agreed to meet 50
per cent of the cost of relief measures and of roads and bridges and the entire
expenditure on the police borrowed from other States.
21. The last item to a provision of Rs.33 lakhs for incidental expenditure on
transport etc., in connection with the return of Lend-Lease silver to the Government
of U.S.A. During the last War, the U.S. Government leased 226 million fine ounces
of silver to the Government of India to be returned five years after the termination
of the emergency. The liability for the return of this silver was divided between
India and Pakistan, India’s share being approximately 172 million fine ounces. It
has now been agreed that the Government of India would make immediate
5
arrangement for the shipment of 50 million fine ounces of silver and that the balance
of 122 million fine ounces should be made available in the form of quaternary alloy
coins. The cost of shipment of fine silver would be borne by the Government of
India while the alloy silver would be delivered in India and the U.S. Government
would meet all cost of handling, transport and refining and also retain the metals
recovered in the refining process.
22. On the capital account, the estimates presented in March last provided for
an outgo of Rs.772.21 crores for capital expenditure and loans to State Governments
and others. As stated earlier, an addition of Rs.6.97 crores is now required for loans to
Khadi and Village industries Commission for the Ambar Charkha programme.
23. A provision of Rs.15 crores is being made for loans to the Refinance
Corporation which is proposed to be constituted shortly. The Agricultural Commodities
Agreement between the Government of India and U.S.A. under American Public Law
480 provided, among other things, that a sum of about Rs.26 crores would be reserved
for re-lending to private enterprise in India through established banking facilities. As
a result of subsequent discussions with the U.S.A. authorities, a scheme has been
evolved, for channelling these funds through a Refinance Corporation, which will
provide re-lending facilities against loans given by Indian Banks. The Corporation is
proposed to be constituted as a joint stock company under the Companies Act, 1956,
initially with an ordinary share capital of Rs.12.5 crores to be subscribed by the Reserve
Bank of India, the State Bank of India, the Life insurance Corporation of India and
about 14 from amongst the larger scheduled banks in India. It is anticipated that the
Corporation will require loans from the Government of India out of the earmarked
funds relating to the P.L.480 Agreement, to the extent of about Rs.15 crores during the
current financial year.
24. Another provision of Rs.50 lakhs is being made for investment in the
share capital of the Export Risk Insurance Corporation. The Corporation will be
registered under the Indian Companies Act as a Private Limited Company with an
authorised capital of Rs.2.5 crores and paid-up capital of Rs.50 lakhs. The maximum
risks which the Corporation should carry will be 10 times the subscribed capital and
the reserve built by it. In setting up the Corporation to introduce a scheme of export
risk insurance in India, the Government of India have been actuated by the desire to
place the Indian exporter on even terms with exporters of other countries, who are
aided by similar schemes in their countries.
25. These three items on Capital account will aggregate Rs.22.47 crores.
Against this Capital receipts are now expected to improve by Rs.25.83 crores. Of this
increase, Rs.9.56 crores represent the additional contribution to the Railway
Development Fund which has been announced in the Railway Budget presented on
the 14th May, 1957, and Rs.1.27 crores the additional contribution (inclusive of interest)
to the Post and Telegraphs Renewals Reserve Fund mentioned earlier. The balance of
6
Rs.15 crores is on account of assistance under the Agricultural Commodities Agreement
with the U.S.A. which is now estimated at Rs.65 crores against the credit of Rs.50
crores assumed earlier, the total foreign aid thus amounting to Rs.150 crores. In the
result, there will be a net receipt of Rs.3.36 crores on Capital account.
26. Taking the Revenue and Capital accounts together, the over-all
deficit of Rs.365 crores estimated earlier will now increase by Rs.2.89 crores to
Rs.367.89 crores.
ASSESSMENT IN BRIEF
27. The review of economic conditions and of the financial position as it
emerges for the budget year shows clearly that while more resources are required
for meeting the increasing demands of the investment programme, both public and
private, the economy is not generating the necessary savings. Budgetary deficits,
rapid expansion of Bank credit continued pressure on prices and a large balance of
payments deficit-all these taken together connote a deficiency of voluntary savings
relatively to the size of the investments being undertaken. Further, the emerging
pressures have to be judged in relation to the requirements over the entire Plan
period. Expenditure on the Plan has inevitably to be stepped up year by year, and
the strain on the country’s resources will grow in the period that must elapse before
the investments being made come to fruition. These demands on the economy can
be met successfully only by sustained effort at increasing productivity and mobilising
savings on a national scale. Simultaneously, it is essential that the pace of investment,
both in the public and private sectors is kept in reasonable relationship to the progress
made in enlarging domestic savings and securing an inflow of external finance
adequate to meet the foreign exchange requirements of the programmes in hand.
This is the setting against which the policies and proposals that I propose to place
before the House have to be judged.
CREDIT POLICY
28. The first item of policy I wish to consider is credit policy. I referred
earlier to the expansion of bank credit that has taken place over the last twelve months
and the consequent strain this has imposed on the liquidity of the banking system. In
the last few years the tempo of investment activity in the private sector has been
steadily rising, and more recently there is evidence of a marked quickening of this
tempo. This has entailed larger demands on the banking system by trade and industry.
The credit advanced by scheduled banks rose during the year 1956 by Rs.153 crores
to a record level of Rs.788 crores, and in the first four months of this year, it has risen
by another Rs.119 crores. The deposit resources of banks have not gone up to a
corresponding extent. As a result, there has been an acute stringency of funds in the
money market and an appreciable increase in the call money rate and the lending and
deposit rates of banks. Considering the over all trends in the economy, the remedy for
a situation of this nature is not an out-right increase in the supply of money and credit

7
to the extent of the demand but a cautious and orderly expansion to meet genuine
needs, accompanied by measures to prevent an excessive diversion of credit to less
essential uses.
29. Against this background the Reserve Bank has been pursuing a policy
designed to moderate the inflationary possibilities of a large credit increase through
general and selective credit restraint- without at the same time denying credit to essential
lines of activity. This policy of judicious restraint took the form of an increase in the
bank’s lending rates; the rate on advances under the bill market scheme was raised in
two stages in March and November, 1956 from 3 to 31/2 per cent and in February this
year by an enhancement of the stamp duty on usance bills which increased the effective
rate of borrowing by banks to 4 per cent. Simultaneously, the bank increased its rate
on advances against Government securities to 4 per cent in addition, as it appeared
that speculative trading, particularly in essential commodities in short supplies like
foodgrains, absorbed some portion of bank credit, the Reserve Bank issued directives
with a view to regulating advances against such commodities.
30. These measures have generally been effective. In the busy season now
coming to a close credit extended has been of a somewhat smaller order than in the
last busy season. The technique of selective control has had some effect on the level
of bank credit; it has restrained the rise in prices in the sectors to which it was directed
and has helped in channelling resources to more desirable outlets. It must be emphasised
that the Reserve Bank’s policy has not been one of mere restriction of overall credit;
in fact, it has been one of ensuring controlled expansion- a process which has been
helped in particular by the liberalisation of the bank’s credit facilities under the bill
market scheme and also through its open market policy. The expanded facilities under
bill market scheme could be availed of by banks on a larger scale by a greater accretion
to their deposit resources. Some progress has been achieved in this respect, but, I feel
that a greater effort on the part of the banks to attract resources especially by reaching
classes which have not yet developed the banking habit is called for.
31. In view of the increasing tempo of developmental activity programmes
for the current year and in the succeeding years, I am convinced that credit policy
should continue to be directed towards moderating the pressure of demand for funds
without at the same time hampering essential lines of productive activity. It is in this
context that the Reserve Bank has been continuously keeping its bank rate under
review. Earlier today, the bank announced an increase in the bank rate from 31/2 to 4
per cent. As the effective lending rate of the Reserve Bank to scheduled banks has
been 4 per cent for some months now and the markets have had sufficient time to
adjust themselves to this rate, this seems an opportune moment for rationalising the
lending rate structure of the Reserve Bank by raising the bank rate itself. There are
other considerations also which indicate the desirability of making this adjustment in
the bank rate at this stage. I am not unaware of the limitations of the bank rate as an

8
effective weapon in a developing economy. Nevertheless, an increase in the bank rate
should assist the Reserve Bank in its task of moderating the pressure of demand for
credit. While the Bank’s latest decision might appear to be only a formal recognition
of a de facto situation, it is an action in keeping with the analysis of the economic
situation I have presented today, to curb the inflationary potential in the economy. In
view of the increase in the bank rate, there is no longer the need to keep the stamp
duty on usance bills at existing, levels, and I am therefore reducing it with immediate
effect to 50 Naye Paise per Rs.1,000 for three months.
32. I may mention, once again, in this context, the steps we are taking to set
up a Refinance Corporation to cater to medium term needs of industry. This Corporation
will in time, I hope, fill a lacuna in our existing system of industrial financing. This is
an instance of the positive aspects of the policy of controlled expansion which I have
mentioned a little while ago.
INCENTIVES FOR SMALL SAVINGS
33. This brings me to my next point, which relates to small savings. In the
ultimate analysis, the limit to expansion in the economy is set by the availability of
savings, and in a country like ours where the banking habit is undeveloped, small
savings have a special role to fill. Taking the first Plan period as a whole, the progress
of the small savings movement has been encouraging. The target for the Second Plan
requires substantial stepping up of collections year by year and I am anxious to ensure
a sufficient incentive for the investor in small savings in all forms. The small savings
movement is to my mind more than a way of collecting money; it is a scheme for
spreading the habit of thrift and of encouraging participation by the common man in
the Plan effort. I wish to take this opportunity to appeal to every family whether in the
urban or in the rural areas to save more and make the small savings movement a
success.
34. While the campaign for small savings has to be intensified, I propose also
to increase the rate of interest on small savings investments with effect from the 1st of
June 1957. Briefly, I have decided to increase the rate of interest on Post Office
Savings Bank accounts by 1/2 per cent and to have a new series of 12 years certificates
to be called National Plan Savings Certificates in replacement of the present National
Savings Certificates and National Plan Certificates. The interest on Savings Bank
accounts will now be 21/2 per cent on balances upto Rs.10,000 and 2 per cent, on
balances in excess up to Rs.15,000 in the case of individuals and 2 per cent on balances
in the public accounts. There will be only two types of savings certificates hereafter:
(1) the National Plan Savings Certificate with a maturity of 12 years and (H) the
Treasury Savings Deposit, Certificate with a maturity of 10 years. The yield on both
these will be increased; for the former to 4.25 per cent compound interest, at the end
of 12 years and for the latter to 4 per cent at the end of 10 years. Both these
certificates will be tax-exempt. For people who hold these certificates for periods less
than 12 years the yield will be suitably adjusted. For example, Rs.100 invested in
9
National Plan Savings Certificate will become Rs.127 at the end of 7 years, Rs.148 at
the end of 10 years and Rs.165 at the end of 12 years. In the case of the Treasury
Savings Deposit Certificates interest is paid every year but an adjustment is made in
the event of the holder deciding to encash it before maturity. In the case of National
Plan Savings Certificates the period of non-cashability will be fixed at 12 months. The
further issue of National Plan Certificates and 7 years National Savings Certificates
will be discontinued.
FOREIGN EXCHANGE POLICY
35. Fiscal and monetary policy at this juncture has to be designed in a way
that will make it clear beyond doubt that we on our part, are determined to do our best
to implement the Plan as fully as possible. We have to make the fullest effort to raise
the domestic resources required and I shall come presently to my tax proposals -which
reflect this determination. It is clear, however, that the problem is not merely one of
raising more domestic resources but also of finding ways and means firstly to conserve
and secondly to augment our foreign exchange resources in keeping with the large
requirements of the Plan. The steps we are taking in the field of domestic economic
policy will it is hoped, react beneficially on our foreign exchange position as well, but
this latter is, admittedly, a more difficult problem. What we can earn by way of foreign
exchange on our exports is not a matter entirely in our hands; it depends on the trend
of world prices and demands. Similarly, the prices we have to pay for our imports are
beyond our control and all that we can do is to limit the volume of our imports. Here
again, there are problems. The cuts we impose on imports become effective only after
a time lag. Moreover, a developing economy needs increasing imports and there is
danger, in a restrictive import policy, of impending the flow of imports needed for the
very purpose of development. Foreign exchange policy is thus a matter of delicate
balancing and it is a balancing If I may say so, in which a favourable turn of the wind
could make a material difference.
36. In the March White Paper the various measures taken to save and conserve
foreign exchange have been listed. The import programme for the first half of this
year involved considerable cuts in imports, and the process will, I am afraid, have to
be carried considerably farther in the import programme for the second half of the
year. Government have already announced their policy in regard to licensing of capital
goods imports. Private investors are being encouraged to seek medium term credits
from abroad and to invite foreign enterprise to associate itself increasingly with Indian
enterprise. We have in front of us a rather difficult period and we will have to exercise
the utmost caution and vigilance in the matter of imports while taking every possible
step to increase our export earnings. The fact that in the last twelve months the level
of imports has been exceptionally high warrants the presumption that the economy
can put up with sizeable import cuts for some time to come without serious dislocation.
At any rate, I wish to reiterate the Government’s determination to restore a position of
better balance in external account as early as possible.
10
 37. An under-developed economy which launches upon programme of
industrialisation suffers from the inevitable handicap of having to import from abroad,
all or practically all, of the equipment and capital goods that it needs to make the right
start. Nevertheless, a start has to be made and in the process risks have to be undertaken.
In the nature of things it is not possible to chalk out the course of policy and action in
the field of foreign exchange with the same precision of detail as in case of domestic
policy. The second five year plan involves heavy foreign exchange expenditure and
the estimated gap in the balance of payments has widened partly because in some
respects the initial estimates were on the low side and partly because of the rise in
prices abroad. This gap is by no means easy to fill. We shall have to make our best
effort along the lines I have mentioned. At the same time, we must recognise that
external resources on a considerable scale will be necessary in order to enable us to
see through the developmental tasks we have taken in hand. Given reasonable effort
all along the line on our part, we shall, I am confident, get over the transitional
difficulties that are confronting us at present.
THE PLAN
38. The estimates of required outlay have gone up since the Plan was
formulated. The fulfilment of the Plan to schedule postulates, inter alia, the availability
of external resources on a considerable scale, and the need for these resources is the
greatest in the earlier part of the Plan. Evidently, shortfalls in this respect cannot be
made good by a draft on domestic resources. We have this aspect of the problem under
continuous review. It is not possible to say at this stage to what extent the progress of
the plan will be affected because of foreign exchange shortage. The core of the Plan
is steel, coal, transport and ancillary power. With the external assistance that has been
already promised and with further support from the International Bank and other
sources, we shall, I think, be able to carry through the projects in this “core”. This
group of programmes has the highest priority in view of its bearing on further
development. But, in regard to other projects, especially those for which no external
resources are specifically forthcoming, and which are not otherwise of high priority,
it would be prudent for us not to make fresh commitments for some time until the
outlook becomes clearer and we have more assurance of our being able to find the
foreign exchange resources needed for them. Some rephasing of the Plan is thus,
inevitable, but, if, as I hope, the balance of payments situation takes a turn for the
better before long and if we succeed in securing adequate external resources, the
achievement on the Plan should not fall much behind schedule.
39. Even if the Plan did not encounter difficulties in certain sectors-which it
does-a rephasing of it might be necessary in certain parts. The rapid development of
the country in the last few years has made it incumbent on our part to give closer
attention to the socio-economic objectives of the Plan. The Plan has set to itself the
objective of increasing national income progressively over a period of 15 to 20 years.
The urgency of development is related to the need for raising living standards all
11
round and for creating an environment in which democratic values and ways of life
take root and gather strength. To those who regard the Plan as too ambitious, I would
respectfully submit that they should take a good look at the living conditions of the
bulk of our people. If they would only do this, I am sure they will, along with me, be
able to see the several directions in which the Plan is inadequate. In the last few years
there has been some visible improvement in the standards of nutrition and probably,
of clothing. The housing conditions and environmental hygiene in urban and rural
areas of the low income groups are deplorable; the slums in our cities are a disgrace
to any society which claims to be considered civilised. I am deeply anxious to see that
the Plan is strengthened in this respect.
40. Let us not forget that the very fact that a measure of success has been
achieved already in raising living standards makes it all the more urgent that the
process be carried forward with vigour and determination. The millions in India have
woken up to new desires and new wants for the first time in many generations. With
knowledge that a better future for all is possible has come the aspiration that the
desired improvements should take place without delay. Whether it is the demand of
industrial labour for higher wages and better housing conditions, or of low-paid teachers
and government employees for a fair deal and greater security-all these are but
manifestations of the new awakening and of the new striving for an economic future
which is consistent with the dignity of the citizens of a free society. One cannot
merely shrug one’s shoulders in the midst of such a situation and say that all these
things must wait till somehow or other the financial situation in the country improves.
Whatever the difficulties of the moment, the demands of the people-especially of the
low-income groups-must be assessed carefully and met to the maximum possible extent.
Admittedly, there has to be some order of priorities in dealing with the legitimate but
innumerable claims of the people. Even among the less fortunate sections of the society,
there are at present wide disparities in income- and it is essential that the needs of
some should take precedence over those of others. The employees of State Governments
and local bodies, for example who are also doing great national service enjoy conditions
of service which are less favourable than those for Central Government employees. I
would humbly venture the claim that the Central Government have taken a lead recently
in bettering the conditions of these people; but in view of the somewhat strained
finances of many States, we have not been able to make much headway. The point
remains that in attempting to improve the living conditions of the people, every care
has to be taken to make a beginning where it is most needed. I am also aware that the
claims of investment should not go overboard in attempting a speedy improvement in
the living conditions. But when all the concessions to reality are made, the fact remains
that to pronounce that our present plan is too ambitious would be a declaration of
defeat in advance. The tasks we have in hand are worthwhile. Their successful
completion will make a significant contribution to further development. There should
be no stinting of effort or sacrifice in the furtherance of these tasks.
12
 41. The Plan is the main theme and the dominant concern of all our thinking
and policy formulation. It could not be otherwise in a country which accepts
development as its topmost priority. The Plan has run into difficulties, but I see no
warrant for alarm or panic. What is required is preparedness to make the necessary
sacrifices, and courage and resourcefulness in handling the problems that arise in the
course of its implementation.
TAXATION POLICY
42. This brings me to the most crucial aspect of economic policy, viz., taxation.
I should like first to enumerate briefly the objectives of our taxation policy before I
come to taxation proposals for the year. Taxation policy and Proposals at this juncture
have to be shaped in the light of the following criteria:-
(a) They must produce a sizeable addition to public revenues;
(b) they must, provide incentives for larger earnings and more savings;
(c) they must restrain consumption over a fairly wide field so as to keep in
cheek domestic inflationary pressures and to release the resources required
for investment; and
(d) they must initiate such changes in the tax structure as would make tax
yields progressively more responsive to increased incomes and facilitate
an orderly development of the economy with due regard to the social
objectives we have adopted.
43. As I stated in my Budget speech in March last, the overall budgetary
deficit of Rs.365 crores which I left uncovered then is too large in the context of the
present economic situation. The changes which I am now incorporating in this Budget
leave this initial deficit practically unchanged, and I think it is vital for us to find ways
and means of bringing down this deficit significantly. The other criteria of policy
which I have just mentioned need hardly be elaborated but their application, I hope,
will be clear as I proceed with the elucidation of my tax proposals for the year.
INDIRECT TAXATION
44. I might begin first with my proposals in the field of indirect taxation.
Taking Customs first, it will be appreciated that the scope for raising additional revenues
from, them is limited. Hon’ble Members are aware of the severe restrictions we have
imposed on imports in order to curtail our foreign exchange expenditure. Moreover,
import duties on most of the so-called luxury articles are already fairly high and the
duties on capital goods and industrial raw materials have necessarily to be kept as low
as possible. The proposals I have made envisage the raising of the rates of duty by
small amounts on about 90 items. I have also taken this opportunity to rationalise the
rates in the Customs Tariff which run into several hundred items. There is considerable
diversity in these rates which is of no real significance and is in fact administratively
cumbrous. I have tried to give the tariff rates a simpler form and in this process the
13
surcharges have been merged into the basic rates. I have also availed myself of this
opportunity to convert the rates of duty both in the import and export tariff in terms of
decimal coverage. No other change is being made in the export duties. Altogether, my
proposals in respect of import duties will yield a revenue of about Rs.6 crores spread
over a large number of items, too numerous to mention here.
45. (Excise Duties) - I now come to Union Excise Duties. I may say at once
that I have fairly substantial proposals under this head, and in doing so, I have in mind
the double objective of restraining consumption and of giving a fillip to exports. I
propose the following increases:-
(i) (Motor spirit) - The existing excise duty which works out at 96 N.P. per
Imperial Gallon inclusive of surcharge be raised to 125 N.P. per Imperial
Gallon. This will yield an additional revenue of Rs.6.65 crores in a full
year.
(ii) (Refind Diesel Oil) - The existing duty of 25 N.P. per I.G. be raised to 40
N.P. per I.G. This is estimated to yield Rs.1.90 crores in a full year.
(iii) (Diesel oil, not otherwise specified) - The duty be raised from Rs.30 per
ton to Rs.40 per ton, the additional yield from which over a year is estimated
at Rs.35 lakhs.
(iv) (Kerosene) - The existing duty of 18.75 N.P. per I.G. be increased
fractionally to 20 N.P. per 1.G. This will yield Rs.2 0 lakhs in a full year.
(v) (Cement) - The existing duty of Rs.5 per ton be raised to Rs.20 per ton,
the estimated annual yield being Rs.6.7 crores.
(vi) (Steel ingots) - The existing duty of Rs.4 per ton be raised to Rs.40 per
ton, yielding on an annual basis Rs.5.7 crores.
(vii) (Sugar) - The existing duty of Rs.5.62 per cwt. be raised to Rs.11:25 per
cwt. This will yield Rs.18.55 crores in a full year.
(viii) (Vegetable non-essential oils) - The duty of Rs.7 0 per ton be raised to
Rs.112 per ton. This will mean an increase from about 3 N.P. to 5 N.P. per
lb. The estimated yield on this account is Rs.3.15 crores in a year.
(ix) (Tea) - The duty be raised as follows:-
(a) loose tea-from 6.25 N.P. per lb. to 10 N.P. per lb.
(b) package tea converted from duty paid loose tea-from 18.7 5 N.P. per
lb. to 35 N.P. per lb.
(c) package tea-from 25 N.P. per lb. to 45 N.P. per lb.
This will yield an additional revenue of Rs.2.45 crores in a year.

14
 (x) (Coffee) - The existing duty be raised from 18.75 N.P. per lb. to 35 N.P.
per lb., the estimated additional yield being Rs.80 lakhs.
(xi) (Unmanufactured tobacco) - The duty be raised as under:-
(a) if other than flue-cured and used for the manufacture of cigarettes or
smoking mixtures for pipes and cigarettes-from 56 N.P. per lb. to 75
N.P. per lb.
(b) if not flue-cured and not actually used for the manufacture of cigarettes
or smoking mixtures for pipes and cigarettes and such tobacco cured
in whole leaf form and packed or tied in bundles, hanks or bunches or
in the form of twists or coils-from 37 N.P. per lb. to 50 N.P. per lb.
(c) if other than flue-cured and not otherwise specified-from 87 N.P. per
lb. to 10 0 N.P. per lb.
The additional yield from these increases aggregates Rs.6.15 crores in a full
year.
(xii) (Matches) - The existing duties be raised so as to permit of sale of
match boxes at 6 N.P. and 4 N.P. per match box of 60’s and 40 is
respectively. The gain to revenues in full year by these increases is
estimated at Rs.6.2 crores.
(xiii) (Paper) - My proposals involve an increase in the existing duty on various
types of paper the aggregate additional yield being estimated at Rs.2 crores
on an annual basis.
46. These proposals in respect of Central Excise Duties are estimated to yield
Rs.60.80 crores in a full year. For the remaining part of the current year, their yield is
estimated at Rs.53.20 crores, out of which the share of the States will be about Rs.4.2
crores in respect of tobacco and matches.
47. In recommending these increases, I have kept in mind the need for a
balanced increase among the various items I have listed. The increases proposed in
respect of cement and steel are large, but they are warranted by the rapid increase in
the demand for them within the economy and the situation of growing shortage and
the consequent increase in retail prices which we are facing. The increase in the duty
on sugar has the same objective as the increase we made last year in the excise duty
on cloth, namely, to restrain domestic consumption in the interest of larger exports. In
the case of matches, the existing duties were fixed with a view to ensuring sale at 3
piece per match box of 60’s and 2 piece per match box of 40’s. Under the decimal
coinage system the equivalent of these pr ices comes to 4.7 N.P. and 3.1 N.P. respectively
and this would have meant in effect a retail price of 5 N.P. and 3 N.P. respectively.
With the increase in the excise duty now proposed, the retail price will be 6 N.P. and
4 N.P. respectively.
15
 48. As regards tobacco, it is known that a Tobacco Expert Committee was
appointed in January, 1956 under the chairmanship of Shri Raghuramiah, M.P., to
review the procedure adopted in applying the criterion for assessment of
unmanufactured tobacco. The Committee after careful consideration of the problem
has recommended that the criterion of ‘capability’ of use for manufacture of bidis
should be revised by the criterion of ‘physical form’ of tobacco other than flue-cured
for purposes of assessment. Accordingly, such tobacco is proposed to be reclassified
on the basis suggested by the Committee. For revenue purposes, the rates of duties on
such tobacco are also being somewhat enhanced. With the proposed increase in the
rate of duty on these two types of tobacco the rate of excise duty on unmanufactured
tobacco for use in the manufacture of cigarettes is also being proportionately raised.
49. The tariff relating to paper has been re-arranged with a view to greater
rationalisation and to absorb the higher profit margins now developing in the retail
trade and the rates of excise duty which had been kept deliberately low in the initial
stages are being enhanced.
50. Finally, following the increases in the rates of excise duty on vegetable
non-essential oils and strawboards and millboards, the existing slab exemption in
favour of small producers of these commodities are being suitably revised by executive
notifications.
DIRECT TAXATION
51. I turn now to direct taxation. Firstly, I propose to make certain adjustments
in personal income-tax and super-tax rates. Till now, these changes have followed a
standard pattern which, I think, needs a fundamental change. It is necessary to recognise
that the basic rates should apply to the person who earns his income, that is, sweats
and tolls for it, and that others who derive their income from property and investments,
that is, without making any direct effort should be made to pay more by a surcharge.
Under the present system there is no provision for earned income allowance for super-
tax. For income-tax there is an allowance of 20 per cent subject to a maximum of
Rs.4,000.for earned incomes not exceeding Rs.25,000. For incomes in excess of this
amount, the allowance of Rs.4,000 is reduced at the rate of 20 per cent of the excess
over Rs.25,000 so that for an earned income of Rs.45,000 the allowance is reduced to
nil. I now propose to change this system altogether, applying a standard schedule of
rates to all earned incomes and imposing a higher surcharge on unearned incomes. I
have come to the conclusion that our existing rates of direct tax at top levels deprive
the tax structure of all flexibility. It is said that they tend to diminish the incentive for
work but I am aware that they encourage large scale evasion. It is now recognised that
the very high rates of direct taxation in the top income brackets in many countries of
the world are in practice tolerated or tolerable only because of considerable evasion
that takes place. In other words, the high rates tend to be applied to a corroded tax
base. I now propose a revised schedule of these rates and introduce a new scheme of
surcharge levy which will mean that the total of the income-tax, super-tax and surcharge
16
for the highest slab will be brought down from the existing level of 91.8 per cent to
84 per cent for unearned and 77 per cent for earned incomes. The surcharge will be 5
per cent on the tax computed at the standard schedule rates for earned incomes up to
Rs.1 lakh and 10 per cent on incomes in excess of that sum, For unearned incomes,
there will be a uniform surcharge of 20 per cent over the standard schedule rates.
When a person’s income is partly earned and partly unearned, the unearned income
will he considered to belong to the slab in which the earned income ends and to higher
slabs where necessary. The rates for, the lower slabs have been adjusted in keeping
with this change in respect of top slabs. To provide relief to the middle classes, I
propose that no surcharge on unearned income be levied where the total income does
not exceed Rs.7,500. The reduction in the rates of direct taxation will cost Exchequer
Rs.71/2 crores. This reduction should, however, be judged in the light of the other
changes in direct taxation which I mention later.
52. I propose also to widen the present income-tax base by reducing the taxable
minimum from Rs.4,200 to Rs.3,000. The minimum limit had been raised over the
past few years mainly for administrative reasons. An income of Rs.4,200, modest
though it is in absolute terms, is quite a large multiple of the average level of incomes
in the country. It is reasonable to expect that those with an income over Rs.3,000
should also make their contribution, however small, to the public exchequer, and
should come within the range of direct taxation. As development proceeds, there will,
I expect, be a large and progressive increase in the number of incomes within this
range and I think it is essential if the Exchequer is to benefit proportionately from the
expansion i of incomes consequent on development, that these incomes are brought
within the income tax range. I, therefore, propose to place the exemption limit now at
Rs.3,000 for individuals and Rs.6,000 for Hindu Undivided Families. I propose,
however, to couple this with an increased allowance for married people. The extra
tax-free slab of Rs.1,000 which at present applied to married people will now be
raised to Rs.2,000. The wider coverage of income-tax consequent on this set of proposals
will bring in about Rs.5 crores this year.
53. My next proposal relates to the taxation of Companies. I propose to raise
the income-tax payable by Companies from the present level of 4 annas in the rupee
to 30 per cent and the Corporation Tax from the present level of 2 annas 9 pies in the
rupee to 20 per cent. As Hon. Members are aware, shareholders of Companies are
entitled to credit of income-tax paid on their behalf by the Company. The net effect of
the proposal to increase income-tax on Companies will, therefore, not be very
significant. It will to some extent help us to cheek tax evasion.
The need for corporate savings is as great as ever. In view, however, of the
increase proposed by me in the rate of Corporation Tax, I propose to reduce the
Excess Dividends Tax -
to 10 per cent on distribution of dividends between 6 per cent and 10 per cent
of the paid-up capital,

17
 to 20 per cent on distribution between 10 per cent and 18 per cent of the paid-
up capital, and
to 30 per cent on the balance.
During the debate on the Finance (No.3) Bill introduced by me last December,
reference was made by certain Members to the stimulus that my proposals were likely
to give to bonus share issues. I was aware then that with the increase in the rates of
Excess Dividends Tax and the introduction of the Capital Gains Tax, there should be
some change in the rates of tax on bonus issues. I have considered this matter and
propose to raise the tax thereon from the present level of 121/2 per cent to 30 per cent.
54. At present, rates of super-tax for inter-corporate dividends are about 17
percent for Indian Companies and 20 per cent for foreign companies. With increase in
the basic rates of Corporation Tax, these rates require adjustment. I propose accordingly,
to reduce the rate of inter-corporate super-tax to 10 per cent for both Indian and
foreign companies on dividends received from Indian subsidiaries. The effect of this
will be that, so far as foreign companies working through subsidiaries are concerned,
the total tax payable by them will remain practically unaltered. Similarly, for foreign
companies operating through branches and earning other incomes, the rate of
Corporation Tax will be reduced from 36 per cent to 30 per cent. I expect that, with
these changes, there will be some encouragement to the investment of foreign capital
in India.
55. My next proposal with regard to Companies relates to the tax on
undistributed profits of companies in which the public are not substantially interested.
This tax has frequently been the subject matter of considerable argument. The principle
on which the tax is based is unexceptionable, namely, that individuals having income
in the higher brackets should not be allowed to avoid payment of super-tax by forming
close corporations and not distributing their profits in such corporations. However, in
the context of our development plans, we have to balance against the need to prevent
super-tax avoidance the needs of companies for funds required for expanding industrial
activities. I propose to reduce to 45 per cent the minimum percentage of available
profits which an industrial company of the above type should distribute in order to
avoid the penal consequences of inadequate distribution; for non-industrial companies
the percentage will continue to be retained at 60 per cent. For a company which
derives profits partly from industrial activities and partly from other activities, the
minimum distribution required will be 45 per cent of available industrial profits and
60 per cent of other available profits. Investment companies will be required to distribute
100 per cent as usual. In cases where the accumulated profits and reserves are not less
than the paid-up capital or the value of the fixed assets, the minimum percentage
required to be distributed is at present 100 per cent for all companies. I propose to
reduce the percentage to 45 per cent for the industrial companies and 90 per cent for
others. With these reductions in the minimum amount required to be distributed, it
18
will be unnecessary to continue the present scheme of adjudication by the
Commissioner of income Tax and the Board of Referees on the business needs of
companies seeking total or partial exemption from the operation of the provisions
relating to minimum distribution.
56. There are certain other minor changes proposed upon which I do not wish
to dilate here. These relate to exemption from income-tax of employers’ contribution
to a recognised provident fund, increase in the percentage of the income that will
qualify for rebate of income-tax If saved in the provident fund or insurance, limitation
on the carry-forward of losses etc. I have also taken the opportunity of redrafting the
provision relating to deposits to be made by companies of a portion of their undistributed
profits and development rebate and depreciation allowances so as to bring out the
Government’s intention more clearly.
57. Altogether, the changes I propose in the taxation of Companies will bring
in additional receipts amounting to Rs.71/2 crores.
58. I come now to two new tax measures designed to alter the tax structure in
a way that will ensure a more effective and at the same time a more equitable basis for
taxation. My first proposal is to levy a Tax on Wealth. It is recognised that income as
defined by existing income Tax laws and practice is not a sufficient measure of tax
paying capacity and that the system of taxation on incomes has to be supplemented by
taxation based on wealth. This is more equitable and it also promises, over a period,
to reduce the possibilities of tax evasion. I mentioned earlier the reliefs in income-tax
at top levels of income which I am introducing this year. These reliefs are meant as an
encouragement to larger effort and greater initiative on the basis of which alone a
healthy and progressive economy can be built up. It is necessary at the same time to
adopt other measures which are egalitarian in intent but which do not have a disincentive
effect. The Tax on Wealth that I am now proposing is one such measure. This tax will
be payable by individuals, Hindu Undivided Families and companies. In the case of
individuals, values up to Rs.2 lakhs and in the case of Hindu Undivided Families
values up to Rs.3 lakhs will be exempted. In respect of wealth exceeding that amount
the rate will be 1/2 per cent for the first Rs.10 lakhs, 1 per cent for the next 10 lakhs
and 11/2 per cent on the balance. This will thus be a progressive tax which, together
with the surcharges I have recommended in respect of income-tax on unearned incomes,
will contribute towards a more effective taxation of the richer classes without
diminishing incentives to earn in the process.
59. In the case of Companies, there will be no tax on assets up to a value of
Rs.5 lakhs; on values beyond that the rate will be 1/2 per cent. The Wealth Tax is
intended primarily as a measure of personal taxation but in the peculiar economic
structure of India I consider it advisable not to exclude Companies from the purview
of this tax. However, the rate of tax has to be low. This is why I have proposed a flat
rate of only 1/2 per cent on assets above the exemption limit I have just mentioned.

19
 60. Certain properties will be exempted from this tax., Some of these are:-
Agricultural properties;
Properties belonging to charitable or religious trusts;
Works of art;
Archaeological collections not intended for sale;
Balances in recognised provident funds and insurance policies;
Personal effects including furniture, care, jewellery, etc., up to a maximum of
Rs. 25,000; and Books and publications not intended for sale.
With a view to achieving simplicity in the procedure for evaluating the various
kinds of assets which form part of a business undertaking, it is proposed as far as
possible to treat the business undertaking as a whole as a single unit for valuation.
Other assets will be taken at their market value. The yield from this tax is estimated
at about Rs.15 crores.
The imposition of this tax as also the other measures now proposed should help
in checking evasion. I am taking credit of Rs.5 crores on this account.
61. Broadly speaking, the administrative set-up and the procedure for
assessment and appeal will be the same as for income-tax. With regard to valuation of
immovable non-agricultural property, the assessee will be given a right of reference to
an arbitration committee against the decision of the first appellate authority. This
committee will consist of a valuer appointed under the Estate, Duty Act and another
non-official member drawn from a panel of persons familiar wit) local property values.
62. The other proposal I make is the introduction of a Tax on Expenditure.
This is a form of taxation which has no backing as yet of historical experience. It is
however, a tax which. given effective administrative arrangements, can be a potent
instrument for restraining ostentatious expenditure and for promoting savings. In the
present circumstances, I think all we can do is to make a small beginning. I propose
to levy this tax only on individuals and Hindu Undivided Families whose income for
income tax purposes is not less than Rs.60,000 a year. The tax will be imposed on all
expenditure incurred, from whatever source it may be, in excess of certain sums which
will vary with the size of the family. The amounts excluded are:-
A basic amount of Rs. 24,000 for an assessee and his wife; and Rs. 5,000 for
each dependent child.
The rate of tax will be based on a slab system, the rate for each slab increasing
progressively with the increase in the level of expenditure. Thus, for excess expenditure
up to Rs.10,000 the rate will be 10 per cent and for higher slabs the rate will increase
progressively. As in the case of Wealth Tax, the administrative set-up and the assessment
20
and appellate procedure will be the same as for Income-Tax. I propose to make this
tax applicable from the financial year 1958-59 and therefore take no credit for any
receipts in 1957-58.
63. I propose to levy a tax on railway passenger fares. The rate of tax will be
5 per cent for distances up to 30 miles, 15 per cent for distances between 31 miles and
500 miles and 10 per cent for longer distances. No tax will be levied on season tickets.
The yield of this tax is expected to be Rs.14 crores in a whole year. In the current year,
the yield will be about Rs.8 crores. The proceeds of it less the amount attributable to
Union Territories will have to be distributed entirely to the States. The States need
more resources and railway travellers, like consumers of other commodities, should,
under present conditions, make a contribution. I propose to seek the advice of the
Finance Commission before I bring forward proposals before Parliament in regard to
the actual distribution of the proceeds of this tax.
CHANGES IN POSTAL RATES
64. The Postal and Telegraph Branches of the Posts and Telegraphs Department
are working at a loss. Except for unregistered letters and inland letter cards practically
all items of postal traffic are carried at a loss. On a number of items like post cards,
money orders, registered newspapers etc. the rates charged have, for many years, been
substantially less than the cost of providing the service. For example, it has been
estimated that the average cost of carrying a post card is 7.24 naye paise as against the
present postage of 5 naye paise. This results in an annual loss of over Rs.155 lakhs.
Every increase in traffic in these items- and traffic has been increasing- results in an
increase in the losses. With the progressively increasing expenditure on construction
of staff quarters and the provision of other amenities for the staff, the existing postal
rates are bound to prove even more uneconomic. The opening of unremunerative Post
Offices and Telegraph Offices as part of the Department’s expansion schemes under
the first and second five year plans has contributed to the loss in the Postal and
Telegraph Branches. The Department has also been building up its capital assets at a
fairly rapid rate, the total capital outlay at present being about three times what it was
before independence. The annual provision, from revenue, for depreciation and
replacement of these assets, as I have said before, is at present only Rs.1.25 crores,
and it has been decided to increase this provision to Rs.2.50 crores during the current
year in anticipation of a detailed examination of the whole question. In response to a
demand which had been widely and persistently voiced by the book trade, both in and
out of Parliament, Government had appointed a Committee to examine the question of
charging a concessional rate of postage on bonafide books as compared with other
items chargeable as packets so that the cost of sending books to rural areas which
could be reached only through Post Offices might not be unduly increased. After
considering the Book Committee’s Report, it has been decided to allow a concessional
rate of postage on books. All these measures, however, inevitably result in reducing
the surplus earnings of the Department and of increasing the losses of the Postal and
21
Telegraph Branches. To ensure the financial stability of the Department, it has become
necessary to raise some rates. On post cards, the existing rates of 5 naye paise for
single and 10 naye paise for the reply post cards will be raised to 6 naye paise and 12
naye paise respectively. Postage on local, post cards will be raised similarly from 3
naye paise for single and 6 naye paise for reply post cards to 4 naye paise and 8 naye
paise respectively. For packets containing bonafide books only, the postage on the
initial weight slab of 5 tolas will be reduced from the existing rate of 6 naye paise to
5 naye paise but on other packets the existing rate of 6 naye paise will be raised to 8
naye paise. The postage on additional weight slabs, in both these cases, will remain
unchanged. In spite of these adjustments in the book, sample and pattern packet rates,
the traffic in this category of articles will continue to result in a loss of over Rs.8 lakhs
per annum. The rates on parcels will be increased from the existing level of 50 naye
paise for every 40 tolas or fraction thereof to 60 naye paise for the 1st 40 tolas or
fraction thereof and 50 naye paise for every additional 40 tolas or fraction thereof. On
inland telegrams, the charge for every additional word over the minimum of 8 words
will be raised from 7 naye paise to 8 naye paise for ordinary and from 14 naye paise
to 16 naye paise for express telegrams. The additional revenue expected in the current
year from these increases is Rs.85 lakhs.
RECAPITULATION
65. I must now recapitualate briefly the proposals I have made so far:-
(i) Firstly, my proposals involve small increases of import duties on a number
of articles, the additional yield from which during the year is estimated at
about Rs.6 crores.
(ii) Secondly, the proposals I have made in respect of excise duties involve an
enhancement of the rates of duty on various items such as motor-spirit,
refined diesel oils and vaporising oil, diesel oil not otherwise specified,
steel ingots, cement, sugar, matches, unmanufactured tobacco other than
flue cured, vegetable non-essential oils, and paper. The additional revenues
on this account are estimated at Rs.53.20 crores for the remaining portion
of the current financial year but Rs.4.2 crores will be payable to the States
as their share of the additional duties on tobacco and matches.
(iii) Thirdly, the proposals I have made in regard to personal income-tax and
super-tax are estimated to bring in Rs.25 crores in the current year of
which the share of the States on account of income-tax will come to Rs.3
crores. The reduction in incomer-tax and super-tax rates involve a loss of
Rs.7.5 crores. The lowering of the exemption limit is estimated to yield
Rs.5 crores. The adjustments in Company taxation will yield about
Rs.7.5crores. The Tax on Wealth is estimated to yield Rs.15 crores, and to
this I add Rs.5 crores by way of better collections of income-tax reflecting
a reduction of tax evasion. The changes I have suggested in direct taxation
22
 do not make a big addition to public revenues this year but I expect that
they will make an increasing contribution to the Exchequer as we get
more experience with the new forms of taxation I have proposed and as
the machinery for assessment and collection gets geared to its new tasks.
(iv) Fourthly, I have proposed a tax on fares payable by passengers travelling
by Railway. This will yield Rs.8 crores which will be distributed entirely
to the States.
(v) Fifthly, I have proposed changes in postal and telegram rates which are
expected to yield a revenue of Rs.85 lakhs.
(vi) Sixthly, I have proposed an Expenditure Tax which will be effective from
1958-59 but will apply to expenditures incurred in 1957-58.
66. The net accretion to the Central revenues as a result of these proposals
will amount to Rs.77.85 crores and the revenue budget will now show a surplus of
Rs.44.73 crores. Ordinarily the over-all deficit would, as a consequence, amount to
Rs.290 crores, if the additional revenue of Rs.15 crores which would be passed on to
the States as a result of these proposals is not taken into account. As Hon. Members
will observe from the White Paper, Central assistance to the States for financing the
Plan during 1957-58 has been placed at Rs.278 crores. As a result of the additional
revenue accruing to the States, there will therefore be a corresponding reduction in
this figure, the reduction being taken in the provision for loans to the State Governments.
The overall deficit will thus amount to Rs.275 crores and will be met by expansion of
Treasury Bills.
TAXATION AND DEVELOPMENT
67. I would like to say a few words about the import of these proposals. We
are pledged to move in the direction of a socialist society. This means that we wish
to develop an efficient system of production and an equitable pattern of income and
wealth which will ensure well balanced progress. Such a system requires a
strengthening of incentives to work and to save. This is the rationale of my tax
concessions in earned incomes. A standard rate of tax on earned incomes, and a
differential rate for taxation of unearned incomes, coupled with a tax on wealth and
a tax on expenditure, will give us a better basis for assessment of tax liability,
especially in respect of higher income ranges, and will help us to close progressively
the loop-holes for tax evasion and corrosion of the tax base. If I have brought down
the exemption limit for tax liability it is, firstly, because the present limit is too high
in relation to the average, level of incomes in the country, and secondly, because I
am of the view that the ground must be prepared from now on for bringing into tax
net the increases in incomes which will take place in these ranges in the coming
years. All my proposals in the field of direct taxation form an inter-related whole,
and should, I suggest be judged as such.

23
 68. My proposals in respect of company taxation are designed not merely to
increase revenues but also on balance, to encourage the ploughing back of profits
through a cheek on dividend distribution. These measures are not intended to curtail
genuine investment in the private sector, though it would not be unreasonable to
assume that a slight slowing down for a short period will not, in present circumstances
be undesirable. There are, however, other devices to regulate private investment. I
wish, therefore, to retain the bias in the tax structure in favour of corporate investment.
It is for this reason that I have left untouched the existing liberal depreciation allowances
and the system of development rebates, which it is recognised on all hand, are a
powerful incentive for investment. I have also as I mentioned earlier, re-adjusted the
tax rates to encourage foreign investment. I recognise that the shareholder or the
investor expects to get a reasonable return on his capital, but I also think that under
modern conditions there is even greater need for providing incentives for those who
work and manage concerns and thus fall within the category of earned income earners.
69. My proposals involve a raising of burdens on the near necessities of the
common man. This is inevitable in the present circumstances, These burdens, large as
they may look in the aggregate, have a low average incidence. A process of development
in a country where most incomes are low cannot be financed without calling for
sacrifices from all sections of the community, and there are special reasons at this
juncture for applying some restraint on consumption in order to cheek inflationary
pressures and to stimulate exports. I recognise, at the same time, the need in particular
sectors may well be from time to time to assist in maintaining consumption at a
reasonable level in terms of the minimum nutritional standards, and to this end, it may
be necessary to subsidise food. My intention, therefore, is to build up from out of the
additional receipts of taxation a food subsidy fund of the order of Rs.25 crores. This
fund will be used to keep down food prices, particularly for the mere vulnerable areas
and would I think prove a valuable instrument in the hands of my Honourable colleague,
the Food and Agriculture Minister.
70. The proposals that I have made will still leave the overall deficit for the
year at a level somewhat higher than I would consider safe; but it is not unwise in my
judgement to run a measure of risk especially If by doing so the expansionary impulse
in the economy can be maintained at a reasonably high level. A budgetary deficit
involves creation of fresh purchasing power in to the hands of the public than it
withdraws from it. The stresses and strains that have developed in the economy are a
warning against unrestricted deficit financing. I am not against deficit financing as
such; I recognise it can play a role in promoting development. But it is a medicine to
be taken in small closes; it is not food that would sustain the system. On the whole, I
doubt If we shall be able over the Plan period to undertake deficit financing of the
order indicated in the Plan, and this means we have to raise more resources by taxation,
loans and small savings. Considering the needs not only of the current year but also of
the next few years in terms of the second five year Plan, I am convinced that the
measures I have placed before the House today are essential and salutary.
24
 71. Indeed, I feel confident that over a period, they will help us in getting out
of the stagnancy of public revenue relatively to national income, which is a bottleneck
from the point of view of further developmental planning. The ratio of public revenues
to taxation in India is low, even by the standards of relatively under-developed countries.
The way to raise it is to initiate structural changes in the tax system so as to make it
more progressive in terms of returns. The emphasis of my proposals is on this aspect
of the tax problem. The propriety of the changes I have suggested should be judged in
this light rather than in terms of their immediate yield. I have in effect, outlined the
tax structure for the Plan period. There will, undoubtedly, have to be some adjustments
in this structure from year to year, but I expect that these adjustments will be relatively
small, and of a marginal character. For the rest of the Plan period, our aim will be to
watch how the changes I have initiated this year work in practice and how the system
can be improved upon-to the benefit of the tax payer no less than in the interest of the
tax-receiver. Within this broad framework, I believe, all concerned can proceed with
their plans with confidence and assurance of sympathetic consideration by Government
of any genuine difficulties.
CONCLUSION
72. This brings me to the end of my story; I am aware that the policies and
proposals I have placed before you add up to a varied and somewhat formidable bill
of fare. But the exigencies of the situation demand nothing less. There are moments in
the history of every nation when it must advance on a great many fronts at the same
time. The task before us is not merely one of raising resources for the immediate
needs of the Plan. We have also to attempt at the same time a rationalisation of the tax
structure so that it can sustain a mounting crescendo of developmental effort in CW
years to come. I am one of those who also believe that the greatest advances towards
economic equality and positive social improvement are made in difficult times when
the conscience and the solidarity of a people are raised to the highest pitch. This I
believe is one of the chief lessons of the second world war. Sacrifice on a nation-wide
scale and injustice or excessive inequality go ill together. And that is why I have
endeavoured in the present budget to snatch from the needs of the moment an
opportunity for imparting a new turn to our tax structure towards greater efficiency
and I hope greater equity. A heavy responsibility rests on us all at this juncture, and I
have presented to the House an approach in terms of policies and of proposals which
is to the best of my judgement appropriate to this responsibility. I hope when the time
comes for someone to judge whether we rose to the occasion or not, we shall have to
our credit a record worthy of this House and of the nation.
(May 15, 1957)

25
 SPEECH OF SHRI T.T.KRISHNAMACHARI MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1957-58 (Interim)

Sir,
I rise to present the budget of the Central Government for the year 1957-58. In
1952, under similar circumstances, my predecessor presented an interim budget. Its
main purpose is to place before Parliament, an account of the finances of the Central
Government for the current year and to obtain from the House a vote on account to
meet Government’s expenditure until the new Parliament considers the budget again.
2. The White Paper on the budget which is being circulated separately
attempts to give a review of major economic developments during the year. It is,
therefore, not necessary for me to cover the whole ground over again.
3. The year under review has been a year of some strain from the point of
view both of internal and of external resources. Domestic prices as well as the balance
of payments have been under, pressure, mainly as a result of the growing tempo of
developmental activity. The, decline in agricultural production in 1955-56 and external
factors, such as the closure of the Suez Canal have added to the strain on the economy.
The White Paper mentions the various measures we have taken in the last few months
to bring the situation under control, and I have every hope that these measures will
prove effective in due course.
4. The outlook on internal prices depends considerably on the level of
agricultural production, and Government are fully seized of the urgency and Importance
of achieving better results in this sphere. Price stability also requires control over
credit and a budgetary policy which restricts the purchasing power in the hands of the
public. We have taken steps recently to apply selective credit controls. while taking
care at the same time not to cut down unduly the supply of credit needed for the
expansion programmes in the private sector. Basically, what we need is more savings,
not less investments. In the matter of budgetary policy, I must say I am not happy with
the size of deficit to which I shall presently be referring. In this context, the increasing
demands being made on our resources by Defence requirements cannot be lightly
passed over. The increase under this head as you will see, is the major element in
widening the deficit on revenue account in the coming year. The overall deficit in the
budget, viz., Rs.365 crores is, I am afraid, somewhat large considering the economic
situation. There is certainly no slack in the economy at present which would permit a
complacent view of the budgetary deficit. Defence is hardly an item on which we
should like to spend more either in terms of domestic currency or of foreign exchange.
If, however, the exigencies of the situation make such increases inevitable, the necessary
sacrifices have to be made.
1
 5. The crucial problem at this juncture, however, is that of foreign exchange.
The Second Five Year Plan with its emphasis on the development of industry, mining
and transport has a large foreign exchange component, and it now appears that the
deficit in the balance of payments over the Plan period will be larger than was originally
estimated. This is due both to the increase in the prices abroad and to the expansion
of the projects included in the Plan. In fact, the draft on our foreign exchange resources
has already been heavier than we had expected; since April 1956, this has amounted
to about Rs.260 crores. This strain on the balance of payments has necessitated the
stiffening of import policy which was announced in January.
6. The foreign exchange situation as I now see it for the Plan period is
briefly as follows. The total, deficit in balance of payments over the Plan period is
likely to be about Rs.400 crores more than was envisaged in the Plan. Taking into
account the external finance that might be available for our various projects and the
balance available from the authorisations of the First Plan period, we have in hand
foreign exchange of the order of Rs.450 crores to meet our requirements. With this,
and assuming the continuance of aid from the U.S.A. and Colombo Plan countries
more or less on the present scales and allowing for a moderate amount of private
foreign investment coming in, we may take the total of resources in sight at about 50
per cent of the total requirements. We are at present negotiating with the International
Bank for Reconstruction and Development in respect of loans to cover the foreign
exchange needs of several of our development projects. We are also exploring
possibilities of deferred payments in respect of our Imports of capital goods from
various countries. On the whole, the prospects of our being able to raise the foreign
exchange resources for the Plan are not altogether discouraging. This, of course, is not
to say that the task is by any means easy.
7. For tiding over the period which must necessarily, elapse before the
new Import policy becomes effective, we have obtained accommodation totalling in
all $200 million from the International Monetary Fund. The problem, I must
emphasise, is not one of achieving a balance in our external accounts by just cutting
down Imports. The task is twofold. Firstly every care has to be taken to phase Plan
expenditure in a manner that will not Impose an excessive strain on the balance of
payments. This requires adherence to a strict system of priorities within the general
framework of the Plan. Secondly, we have to find ways and means of financing the
large Imports that will still be essential for the Plan, and this calls for sustained
effort along several lines. The first essential step is to increase exports so as to
enlarge our foreign exchange earnings and to cut down imports to the extent possible.
Neither of these is possible without a sacrifice, but the sacrifice has to be made in
the interests of planned development.
8. The Second Five Year Plan, needless to say, will strain the economy.
But, I think at this stage it is important to think of how best to meet this strain rather
than to question the basic assumptions or postulates behind the Plan. The path of
development does not always run smooth. The experience of recent months only
2
reinforces the well-known fact that the balances implicit in a Five Year programme
of development have to be checked and rechecked continually in the light of
experience. The balances between investment and consumption, between available
external resources and the claims on them, between the final flow of goods and
services and the materials required for their production can hardly be estimated
precisely in advance, and unforeseen factors do arise which upset these balances
from time to time. It was in recognition of this fact that the Second Plan report laid
considerable emphasis on flexibility. In planning and on the machinery of annual
plans to provide for the necessary adjustments.
9. For the immediate present, the need is for giving top priority to schemes
which increase export earnings and reduce Import needs without making an excessive
claim on foreign exchange resources in the immediate future. Schemes which contribute
most to an early increase in agricultural production also deserve high priority; schemes
which have already been commenced and on which considerable expenditure has
been incurred claim, in any case, a considerable proportion of the resources available.,
Government intend to be guided strictly by such priority considerations In determining
the phasing of Plan expenditure; first things must necessarily come first. At the same
time, we have to ensure to the extent possible that development programmes which
are calculated to contribute most to an increase in the productive capacity of the
country and a strengthening of the long-term balance of payments do not suffer unduly.
While a review and adjustment of priorities and strict adherence to them are essential
in view of the limitation of resources, every care is being taken to see that the momentum
gathered by the Indian economy in the last three or four years is kept up. In the
making of our budgets-which are essentially development-oriented-and in the
formulation of policies, this positive aspect & the tasks in hand is being constantly
kept in mind.
10. I would now give a brief account of the Revised Estimates for 1956-57
and the Budget Estimates for 1957-58.
11. The current year is Budget provided for a deficit of Rs.18.04 crores on
revenue account after allowing for the modifications in the Finance Bill accepted by
Parliament. I now expect that the year will close with a surplus of Rs.37.94 crores.
The Improvement is largely due to better collections of revenue under Customs and
Union Excise duties, the increase in the latter representing, in the main, the yield of
the additional duty on cotton cloth Imposed during the year. There has also been some
saving in expenditure. Revenue, as a whole, is now placed at, Rs.571.49 crores, an
increase of Rs.44.10 crores over the Budget Estimates, and expenditure at Rs.533.55
crores against the Budget figure of Rs.545.43 crores.
12. Taking the Revenue and Capital Budgets together, the overall deficit this
year is now placed at Rs.216 crores against Rs.356 crores assumed in the original
Budget. This is the result of the Improvement in the revenue account I have just
referred to and a saving of about Rs.64 crores in the provision of Rs.386 crores made
for Loans and Advances to the State Governments and other parties.
3
 13. For the year 1957-58, I estimate revenue, at this existing level of taxation,
at Rs .636.22 crores and expenditure at Rs. 663.09 crores, leaving a deficit on
revenue account of Rs.26.87 crores. These figures are inclusive of certain self-
balancing items, aggregating Rs.38 crores, which appear on both sides and do not
affect the Revenue Budget as a whole. There is thus an increase of Rs. 26.73 crores
in revenue and of Rs. 91.54 crores in expenditure as compared with the Revised
Estimates for the current year.
14. Of the increase of Rs. 26.73 crores in revenue next year, Rs. 8 crores
represent the estimated yield of the Capital Gains Tax and the additional super-tax on
companies which take effect from the lot April 1957, and Rs. 12.4 crores the full
year’s effect of the increase in the duty on cotton cloth, the new duties on rayon,
synthetic fibres and yarns and motor-cars levied during the year. The revenue from
Customs duties will drop by Rs. 9 crores as a result of the cuts on Import quotas
which have been imposed to conserve foreign exchange, but, against this, surplus
profits of the Reserve Bank are expected to increase by Rs. 10 crores.
15. The total expenditure next year, excluding the self-balancing items, is
estimated at Rs. 625.09 crores, of which Rs. 252.71 crores will be on Defence Services
and Rs. 372.38 crores under Civil heads. The provision for Defence Services shows
an increase of Rs. 49.76 crores which represents mainly purchases of essential stores
for the Army and the Air Force. Civil expenditure also shows an increase of Rs. 41.78
crores over the current year’s Revised Estimate, the increase being mainly in respect
of nation-building, development and social services. Hon’ble Members will find the
main items mentioned in the White Paper and a fuller explanation of variations in the
Explanatory Memorandum circulated with the Budget papers and I need not repeat
them here.
16. The provision for Capital expenditure and Loans to State Governments
and others next year is placed at Rs. 772.21 crores against the current year’s Revised
Estimates of Rs. 636.15 crores. The increase is accounted for entirely by larger provision
for the three steel plants and for Railways.
17. I have taken credit in the next year’s estimates for a market Loan of
Rs.100 crores; for small savings collections of Rs.80 crores; for foreign assistance of
Rs.135 crores and for transactions under other miscellaneous Debt, Deposit and
Remittance heads of Rs.119 crores. Allowing for these credits, the next year’s Budget,
taken as a whole, leaves an overall deficit of Rs.365 crores.
18. I have mentioned earlier that I do not feel happy about a deficit of this
order. The objective must be to reduce it to the extent possible by increasing the
resources accruing to the public exchequer. May I, therefore, in conclusion, reiterate
the point that considering the immediate requirements as well as the fact that Plan
expenditure will have to be stepped up year by year, public revenues have to be
enlarged steadily, and both the Centre and the States have to exert their utmost towards
this end.
(March 19, 1957)
4
 SPEECH OF SHRI C.D. DESHMUKH MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1956-57

Sir, I rise to present the statement of the estimated receipts and expenditure of the
Government of India for the year 1956-57.
2. I have had the privilege of presenting so far five annual Budgets of the
Central Government, which reflected to a very large extent the financial implementation
of the First Five Year Plan. There has been considerable transfer of revenue resources
from the Central Government to the States, both on the recommendation of the Finance
Commission and as statutory or discretionary grants. Moreover, loan assistance given
by the Central Government to the States towards their capital expenditure has been
progressively increasing. The Central Government has been enabled to do this by the
discriminating approval of Parliament to the Taxation measures put forward by
Government from year to year, as also by the judicious augmentation of our financial
resources by the creation of credit supplemented, and indeed facilitated, by the assistance
so generously and understandingly extended to us by friendly foreign countries or bodies
and international institutions. In the context of our Plans the Central Government’s
budgets have thus come to possess a significance far exceeding that suggested by the
respective constitutional spheres of the Central Government and the States.
3. Thanks to the encouraging response of the people of this country themselves,
in addition to external assistance, the First Five Year Plan will, by the end of the current
financial year, have been fulfilled generally to a satisfactory extent. I shall not take up
the time of the House to recount the main features of the results achieved, the more
important of which have already been referred to in the President’s address. It is enough
to state broadly my view that by means of the First Five Year Plan we have laid sound
foundations for a more massive superstructure in building up the country’s economy.
4. The present Budget relates to the first year of the Second Five Year Plan
which will during this Session be submitted to the Parliament for approval. A draft
outline of it has already been published, and in due course the House will have an
opportunity of discussing it fully, At this stage only a few general observations by me
are called for so that the background to the Budget that I am presenting may be
understood.
5. The Plan envisages a total outlay of Rs. 4,800 crores on development and
investment in the Public sector. It has not been possible to satisfy all the pressing demands
from the Central Ministries and from the States. I can only say that, considering all the
circumstances, a Plan of Rs. 4,800 crores, with possibilities of unavoidable marginal
increases, and corresponding financial resources not fully within sight, is in my opinion

1
(which is shared by most of the leading economists of the country) about the utmost
that the country can, with realism, adopt. It is indeed a bold and ambitious Plan that we
shall be undertaking, requiring great and sustained efforts, and it will be, therefore, a
matter of pride and gratification if we can successfully implement such a Plan within
the Five Year period. If some Central Ministries and States are disappointed, I can only
assure them that the Planning Commission has tried to equalise dissatisfactions at the
margin.
6. A plan for a five year period has necessarily to be flexible. It has to be
adapted from time to time to changing circumstances. There are uncertainties inherent
in any forecast or preview of the future and it is unrealistic to claim any immutability
about allocations, targets and the implicit assumptions in the Plan. The plan has to be
regarded as a framework or a map which indicates in which directions development is
to proceed, in what measure and through what techniques of resource mobilisation.
Such a map may not be complete in all respects. For some purposes, even a five year
framework or map is not sufficient and it may be necessary to think in terms of a longer
perspective of, say, 15 or 20 years. Each step forward in the development of the economy
brings into view new horizons or at least throws up new problems, and we have constantly
to redraw the map in the light of developments within the economy and to adjust the
perspective in which we are projecting our programmes.
7. A plan is not merely a programme of expenditure to be incurred by
Government. It is a co-ordinated effort by all sections of the community to attain certain
results through the use of defined resources and by defined stages. At each stage in the
process there must be a balance between demands and supplies not only in the aggregate
but also by sectors. Real resources must move in conformity with the plan, for, as is
well known, even a small bottleneck in the availability. of a vital raw material, or of
power, or of transport, or of foreign exchange, can have adverse repercussions upsetting
the whole programme. A great deal of work of a technical character will be continuously
necessary in order to ensure the co-ordinated development and use of resources as the
plan proceeds. From this point of view, no less than from the point of view of the
uncertainties I mentioned earlier, it is essential to view the plan as a broad framework
within which more concrete and detailed plans for each year may be worked out and
implemented.
8. The Second Five Year Plan is a bolder step forward in the direction of
developing the economy. It involves an increase in the rate of investment from the
present level of about 7 per cent of the national income to something like 12 per cent.
This order of effort is feasible only if the necessary restraint in the matter of consumption
is forthcoming on the part of all sections of the community, each according to its capacity.
With a rising national income keeping ahead of the growth in population there need be
no question of a reduction in the existing average living standard. This has to rise. That
is the very object of planning. Neverthless, there is in the short term a choice between
an increase in consumption and an increase in investment which would bring in larger
2
returns in the future. To the extent that a plan succeeds in drawing upon unutilised
resources, it makes possible a simultaneous increase in the production of investment
goods as well as consumption goods. It is not necessary, therefore, in an underdeveloped
economy to regard an all round reduction in consumption as a condition precedent to an
increase in investment, although it is possible that the current consumption standards of
the more fortunate sections of the community will be unfavourably affected. There is,
all the same, need for relative restraint, difficult as this is in a country which starts with
exceedingly low levels of consumption. And fiscal policy has to be, geared to this
objective. Whatever the rise in money incomes, the community’s expenditure on
consumption must be limited to the level which buys off currently available supplies of
consumer goods at more or less constant prices.
9. I shall not at this stage review the entire financial prospect in relation to the
Plan. I must, however, stress the fact that a plan of the dimensions proposed will require
the utmost effort by way of mobilising the resources needed. The financial resources
obtained from abroad can only help within limits and at the margins. This help is
undoubtedly, of great significance and value, and it is most welcome. However, the
bulk of the effort has to come from within the country. In this context a progressive tax
system, that is, a system which augments tax resources proportionately or more than
proportionately to the increase in national income has an important role to play. It is
important also to encourage and mobilise the savings of the community with far more
intensive official and non-official efforts than have hitherto been made. As both these
can only be achieved progressively, the implementation of the Plan has to be phased
with care.
REVIEW OF ECONOMIC CONDITIONS
10. A correct appraisal of current economic trends and situations is notoriously
difficult, but as far as such an appraisal is feasible, we should, in my view, be justified
in believing that we are embarking upon our Second Plan in reasonably favourable
economic climate. In retrospect it seems clear that economic conditions in the country
changed for the better in 1953 and 1954 and the Indian economy achieved greater strength
and vigour in the course of 1955. The decline in agricultural prices which set in after
August, 1953, was halted by May, 1955 and over the remaining part of the year an
upward trend was registered. In most industries production reached significantly higher
levels, and, aided by favourable factors, the performance in regard to agricultural
production was satisfactory. The rate of planned outlay was stepped up considerably
without apparently releasing inflationary pressure. Aggregate demand and supply tend
to balance at a higher level. The slack in the economy which came into evidence after
the collapse of the Korean boom has virtually disappeared. The First plan has thus
strengthened the economy a great deal and stage is now set for more rapid development.
11. In 1954-55 the overall index of agricultural production reached 113.9, almost
on level with the preceding year when it had touched the record figure on 114.1. The
output of foodgrains during the year amounted to 65.8 million tons, which, though a
3
little lower than in the previous year, was yet in excess of the Plan target by just over 4
Million tons. The easy supply position of foodgrains enabled the Government to remove
the last remnant of controls on the 18th March, 1955, when the inter-zonal restrictions
on movement of wheat were removed.
The general crop prospects for 1955-56 are considered to be satisfactory. They
would have been better still but for the calamitous floods in the North and the devastating
cyclones in the South that occurred during the year.
12. The production of commercial crops showed further improvement in the
current year. Oilseeds output at 5.9 million tons and raw cotton at 4.3 million bales
have exceeded their targets under the First Five Year Plan by 4 lakhs tons and about 1
lakh bales respectively. The production of sugar touched the record level of 15.9 lakh
tons as compared to 10.01 lakh tons in 1953-54, while that of jute, which remained
depressed during the last two years, has shown a significant increase of about 12 lakh
bales during the 1955-56 season as compared to the last.
13. The upward trend in industrial production has persisted through 1955. A
revised index of industrial production is now available. The new series has a larger
coverage-88 items as against 35 items in the old interim index. According to this series
the index of industrial production(1951=100) for the first 10 months of 1955 works out
at 125.7 as against 112.9 for the whole of 1954. This represents an increase of some 11
per cent over the preceding year. This increase in production was shared by almost all
the important industries. The output of finished steel at 1.26 million tons was higher
than the record of 1.243 million tons achieved in 1954. The production of mill cloth
which stood at 5,087 million yards in 1955 was 89 million yards higher than the
production of 1954 and exceeded the target fixed under the First Five Year Plan by 387
million yards. The production of handloom cloth has also increased considerably during
the year and at 1,450 million yards was the highest since independence. Cement
production during the year reached 4.5 million tons, again the highest since 1947. In
jute, chemicals and paper too, the performances were high. Considerable strides have
also been made by the engineering industry.
14. Special steps are being taken to plan and execute large scale development
of the chemical industry in diverse fields. Manufacture of paper and pulp from bagasse
is under investigation. An expert committee has recently been appointed to go into the
question of existing capacity for the manufacture of different types of machine tools
and to recommend measures required for the rapid development of this basic industry.
The National industrial Development Corporation has in hand a number of projects
including the establishment of heavy foundries, forges and gear-cutting and structural
fabrication shops. These will lay the foundations of the heavy machine-making industries.
The two major producers of steel have undertaken substantial expansion of their capacity
which will relieve the shortage of steel during the Second Five Year Plan. Licences
have also been given during the year to raise cement output to 11.59 million tons in the
next five years.

4
 15. Special measures were taken during the year for the promotion and
development of small industries. A National Small industries Corporation has been set
up and four regional Small industries Service institutes opened. A number of schemes
for the development of various small industries in co-operation with the State
Governments have been approved. Technical assistance to help small industries in
improving output has been extended and special experts are being brought in from
abroad to help in this task. A scheme for setting up industrial Estates in various important
centres in the country is under implementation. Financial assistance on a greatly enhanced
scale is also being given through the State Governments. The development of the Khadi
and village industries and handicrafts continued to receive systematic assistance from
Government through grants and loans to the respective Boards and State Governments.
16. Industrial enterprises in the public sector have also advanced to higher
levels of performance. The Sindri Fertiliser Factory has exceeded the planned target by
producing 3,22,000 tons of ammonium sulphate during 1955. The Hindustan Cable,
Factory which began production in September, 1954, has stepped up its output
considerably and during the current year is expected to exceed the target of production
of 470 miles of cables per annum envisaged for this factory. The Penicillin Factory
started working in 1954 and has already left far behind the planned target of manufacture
of 4.8 million mega units. The Machine Tool Factory at Bangalore and the integral
Poach Factory at Perambur have commenced production.
Government have decided to increase the production capacity of the D.D.T. factory
in Delhi, which commenced production only in 1955, to 1,400 tons and also to set up a
second factory in Travancore-Cochin with a similar capacity. Among the more important
now projects that win be taken up during the coming year is the setting up of a Heavy
Electrial Equipment Factory in the public sector for the manufacture of electric
generators, transformers, switch gears, turbines for river valley projects and traction
equipment for railways. The House is aware of the creation during the year of the
Ministry of Iron and Steel to deal exclusively with the setting up of steel plants in the
public sector. The final project report for the first of the three steel plants which it has
been decided to set up, viz., that at Rourkela, has recently been approved and work at
site is progressing satisfactorily. Decision on the project report for the second plant at
Bhilal has been taken and here too, a Project Division set up at the site has been making
fair progress. Arrangements in regard to the third steel plant at Durgapur are progressing
satisfactorily and meanwhile, a field office, headed by an administrator, has been
established.
17. It is evident that the industrial base of the economy is being broadened year
after year, and to this progress the private as well as the public sector has made a
significant contribution.
18. The downward trend in wholesale prices which began in 1953 and gathered
momentum in, 1954, was halted by May 1955 when the wholesale price index reached

5
a low of 342. Since then the index has been rising continuously and in December 1955
it reached 368.4, more or less on par with the level in December, 1954. The prices of
food articles advanced from 276.1 in May to 323.7 in December and of industrial raw
materials from 3b6.4 to 438.3. On the other hand, prices of manufactured articles
remained virtually unchanged over the year. The fact that prices in general did not
record any net rise over the year as a whole is significant in the context of the considerable
expansion that has occurred in money supply with the public which recorded a rise of
about 200 crores or 11 per cent during 1955 as against a rise of about 120 crores in
1954.
19. The movement of wholesale prices is reflected in the cost of living. The
all-India index of cost of living moved down from 97 in December 1954 to 92 in May
1955, mainly due to a fall of about 7 per cent in the food index. By October, 1955, the
general index had again moved up to 97. Later figures indicate that cost of living indices
have moved up in the last quarter of the year, in keeping with the general trend of
wholesale prices. The average level of 1955 as a whole, however, is lower than that for
1954.
20. Government took several measures to arrest the downward trend of
agricultural prices which caused some anxiety early last year. Purchases of wheat and
coarse grains were made at selected centres and larger exports of several agricultural
commodities were permitted. These measures, together with the increased tempo of
development, arrested the fall in prices, and an upward trend is now in evidence. In
order to prevent an undue rise in prices as a precautionary measure Government have
been releasing stocks of wheat for sale at selected centres. These price movements only
high-light the importance both of Government keeping a continuous watch on the price
level and also holding at its disposal sizeable stocks of foodgrains on which it can
operate. A little countervailing action in time may save more extensive and varied
measures later.
21. There is another aspect of the problem which may be mentioned in this
context. Experience has shown that measures for imparting relative stability to
agricultural prices cannot be fully effective without properly organised and integrated
facilities for credit and marketing. Accordingly, in the light of the findings of the Rural
Credit Survey Committee, an integrated programme of co-operative development
covering all important aspects of rural economic life, viz., credit, marketing, processing,
warehousing and storage has been formulated. The main features of this programme
are the participation of the States in the share capital of the co-operative institutions at
all levels, re-organisation of the agricultural credit structure with larger organised primary
units and strong Central and Apex Banks, organisation of marketing societies closely
linked with credit co-operatives establishment of warehouses provision of better storage
facilities to co-operatives and the setting up of institutes or schools for the training of
co-operative personnel. The Government and the Reserve Bank have already

6
implemented a number of recommendations of the Rural Credit Survey Committee in
this respect. Thus the Imperial Bank of India has already been converted into the State
Bank of India and the Reserve Bank of India Act has been amended so as to enable them
to expand and augment credit facilities in rural areas. Only with progressive
implementation of the Committee’s recommendations will the requisite institutional
framework for an effective application of policies in relation to agriculture be established.
22. Notwithstanding the progress achieved in different sectors of the economy,
the employment situation in the country remains a matter of concern. Several ad-hoc
employment surveys in different parts of the country have been carried out, but they
cannot easily be used to assess the overall situation or assist in formulating policies and
plans for meeting it. The measure of unemployment and under-employment in an
undeveloped economy presents difficult problems of definition and procedure. The
Central Statistical Organisation and the National Sample Survey have been devoting
some attention to these problems, but it will be some time before comparable and
comprehensive data on a continuing basis become available. Meanwhile, from the rather
inadequate data furnished by the employment figures, it would appear that unemployment
in the urban areas is increasing. The number of persons on the live registers at the
various Employment Exchanges rose from 6.1 lakhs at the beginning of the year to 6.92
lakhs at the end, i.e., by about 13 per cent. This increase in registrations may however
be due in part at any rate to greater tendency or readiness to register, as in part it is also
due to some movement of people from rural to urban areas. However that may be the
need for stepping up the pace of development and for diversifying the economic structure
of the country is obvious.
BALANCE OF PAYMENTS
23. Honourable Members will recall that when we started the First Five Year
Plan we anticipated a large deficit in our overall balance of payments. But it has not
materialised to the extent we originally feared. Due very largely to the great increase in
our food production, which has resulted in a very substantial reduction in our food
imports, as wen as to the aid we have received from foreign countries over these years,
the total reduction in our sterling balances during these five years has been about Rs. 150
crores only. Lately, the improvement in the domestic economy has made itself felt
somewhat in our external trade. The country’s balance of payments on current account
for the first nine months of 1955 showed a surplus of Rs. 25 crores and the year as a
whole may show a surplus of about Rs. 35 crores as compared with a deficit of Rs.4
crores in the previous year.
24. The level of our sterling balances reflects the overall balance of payments.
At the beginning of the year 1955, these stood at Rs. 731 crores and at the end at Rs.
735 crores. That they have risen only by Rs. 4 crores as against the much greater surpluses
on current account is due to a substantial deficit in capital account. The House will
recall that India repurchased her obligations from the International Monetary Fund to
the extent of Rs. 22.2 crores in 1954. A further sum of Rs. 19.3 crores was repurchased
during 1955, reducing India’s liability to the Fund to about Rs. 6 crores only.
7
 25. Our dollar position has also improved. During the first three quarters of
1955 there was a substantial surplus on current account of Rs. 31 crores as against Rs.
3 crores in the corresponding period of 1954. As a result of the improvement in the
dollar balance of payments, India made a net contribution of $ 53 millions to the Central
Reserve in 1955 as compared with a net withdrawal of $ 15 millions in 1954. During
the year further progress was made towards liberalisation of dollar imports. This is in
line with the policies followed generally by members of the Sterling area. Further
reduction of the discrimination against dollar imports or liberalisation of dollar payments
will obviously depend on the overall position of the Central go1d-dollar reserves.
26. The improvement in the payments position was achieved at a higher level
of trade than in the preceding year. The total value of imports during 1955 was higher
by Rs. 28 crores as compared with 1954. Exports recorded an even larger increase, the
actual figure being Rs. 41 crores. Of the items which have contributed to the general
increase in exports, special mention may be made of vegetable oils, jute manufactures,
raw cotton and shellac.
27. Despite the satisfactory payments position at present, the projected increase
in the pace of development in the country will necessarily put a heavy strain on our
payments position in future. Government are taking active measures to promote exports.
Export promotion Councils and Commodity Boards have been set up, greater emphasis
is being laid on the value of standardisation and quality control and participation in
international fairs and exhibitions is being increased. The institution of an Export Credit
Guarantee Scheme is under consideration and a Committee has recently been appointed
to formulate proposals in this regard. In spite of all this, there is little doubt that, if the
Second Five Year Plan proceeds according to schedule, not only shall we not be able to
achieve any surplus in our external accounts but we are also likely to be faced with
fairly substantial deficits. These deficits may be greater than they otherwise would
have been because we have to contend with certain adverse factors. Tea prices have
fallen and export trade in our other major items, jute and cotton textiles is becoming
increasingly competitive. We have therefore to take urgent and effective steps to
modernise and rationalise these industries, so as to make them capable of withstanding
foreign competition. Our import requirements on the other hand must necessarily
continue to rise as the tempo of our development programme increases. It is in this
context that the importance of making all-out efforts to encourage export industries and
otherwise to save or earn foreign exchange becomes apparent.
28. During the year under review, we have not taken any loan from the
International Bank for Reconstruction and Development. 1ndia’s net total borrowings
from the Bank during a period of six years remain at about $ 125 millions, of which
$ 64 millions have actually been drawn so far. However we expect the Bank to play a
still more significant part in the financing of the foreign capital requirements of the
Second Five Year Plan. In order to enable it to assess our requirements and to determine
what projects in the Plan it could finance, we have invited the Bank to send a Mission
8
to visit us and we expect that it will be here shortly. Another development in the foreign
financial field is the establishment of the International Finance Corporation which will
start functioning during the course of the next few months and which, we as a member
country hope, will add to the flow of further funds to this country.
29. India continued to receive economic assistance from friendly countries,
mainly from the U.S.A., Canada, Australia and New Zealand. The total amount of foreign
aid estimated to be utilised from April, 1951, to March, 1956, is of the order of Rs.200
crores, the total authorisation of funds so far being Rs.300 crores. For the year 1955-56,
a sum of $ 50 millions has been authorised by the U.S. Government as development
assistance to India, of which it has been agreed that $ 37.5 millions or its rupee equivalent
will be a loan. The Government of Canada provided during 1955-56 an amount of $ 13
millions, as usual, and a special allocation of $ 7 millions for the NRX Reactor for the
Atomic Research Station at Bombay. The Government of Australia have agreed to provide
an additional 1000 wagons and some equipment for the All-India Radio at a cost of
approximately Australian £ 1.8 million. Similarly, the Government of New Zealand
have intimated that an additional amount of £ 400, 000 would be available for being
utilised on dairy development schemes. Assistance from the Ford Foundation for the
projects undertaken in the previous years was continued. Under the Colombo Plan, we
a: e also providing assistance to some of our neighbour countries. In the course of 1956-
57, the value of external assistance expected to be received by India under the Colombo
Plan, including assistance from the U.S.A. is expected to amount to Rs.75 crores. We
shall be spending approximately Rs.1.5 crores on aid to other countries. We shall also
be receiving from the Government of the USSR a credit equivalent of about Rs.10
crores during the year in respect of the supply of plant and equipment for the Bhilai
Steel Project. Such assistance from outside, freely given and received without inhibitions,
plays a valuable role in our endeavours to develop our economy, and I feel sure that it is
greatly appreciated by the vast majority of the people of this country.
30. The Government of India have continued, as in the past, to maintain their
close economic link with the Sterling Area. India was represented at the Commonwealth
Finance Ministers’ Conference in Istanbul in September last when common problems
facing the Sterling Area were discussed and the need for the continuance of sound
internal economic policy was recognised. The Conference also reviewed the difficulties
that had been facing sterling in the recent past and determined on measures to restore
its position in the markets of the world.
31. We have also continued to follow our traditional policy of close co-operation
with our neighbouring countries in economic matters. We participated in the Asian-
African Conference in Bandung in April, 1955, where a number of resolutions were
passed dealing with economic matters designed to promote economic co-operation among
the countries in Asia and Africa. In accordance with the resolutions of that Conference,
we have appointed a liaison officer to examine and pursue policies conforming to these

9
resolutions. We also agreed to grant a loan of Rs. 20 crores to the Government of Burma
to help them tide over certain temporary difficulties.
32. This review of the last year of the First Five Year Plan shows how far the
country has progressed during the period covered by it. What has been achieved in the
past few years gives reason for hope that given the will and determination to put up
with the necessary sacrifices, the further progress of the country can be assured. The
spell of stagnation has been broken. Total national income over the First Five Year Plan
period will have increased by some 18 per cent as against the 11 per cent increase
envisaged in the Plan. The productive capacity of the economy has been significantly
enlarged. And these results have been achieved consistently with the maintenance of
economic and financial stability. In the course of the First Plan, there have been
inflationary or deflationary forces in evidence from time to time, but on the eve of the
Second Plan, the situation appears to be more or less one of balance, with slight pressures
which, if not kept under observation and cheek, might in the context of the greatly
increased rates of further expenditure contemplated hereafter become inflationary.
FINANCIAL YEAR 1955-56
33. I shall now deal with the revised estimates for the current year and the
budget estimates for the coming year.
34. The House will remember that the Budget for the current year placed the
revenue at Rs. 481.58 crores and expenditure at Rs. 498.93 crores, leaving a deficit
on revenue account of Rs. 17.35 crores. On the basis of the latest available information,
I now expect that the year will close with a surplus of Rs. 12.31 crores. This
improvement is due to a rise in revenue of Rs. 20.09 crores and a shortfall in expenditure
of Rs. 9.57 crores.
35. The revenue from Customs is now taken at Rs. 165 crores which is almost
the same as the budget figure of Rs.164.5 crores. During the year a number of export
duties were abolished or reduced in the interest of our export trade. Thus the duties on
jute manufactures, black pepper, coffee, and iron and steel manufactures were abolished
while the duties on oils and oil cakes, raw cotton etc., were reduced. The average rate of
the export duty on tea was also less than the rate of As. 10 per pound assumed in the
budget. The net result has been a reduction of Rs.11 crores in the revenue from export
duties. This reduction however has been offset by an equal Improvement in the import
duties on various items, such as motor spirit, machinery and iron and steel. Union Excise
duties are now estimated to yield Rs. 140 crores against Rs. 132.27 crores taken in the
budget. Of the improvement of about Rs. 8 crores, petrol and kerosene oil account for
Rs. 1 crore, cloth Rs. 2 crores, sugar Rs. 1.75 crores, and the new excise duties introduced
in the last budget Rs. 2 crores. For revenue from income Tax, the budget figure of Rs.
173.7 crores has been repeated. The Estate Duty collections are now estimated at Rs. 2
crores only against the budget estimate of Rs. 3 crores, but this revenue accrues almost
entirely to the States and the reduction does not affect the Central Budget. The revenue

10
from Posts & Telegraphs is expected to increase from the budget estimate of Rs. 70
lakhs to Rs. 2.27 crores as a result of better traffic; the share of States in income Tax is
now placed at Rs. 55.16 crores against the budget figure of Rs. 56.97 crores; there is a
formal increase of Rs. 11.2 crores on account of sale proceeds of evacuee property
which is offset by a corresponding transfer to the compensation pool on the expenditure
side; and other heads show a fall of Rs. 2.64 crores representing largely a throwforward
to the next year of a part of the profits from the sale of sugar imported on Government
account.
36. The expenditure this year is now estimated at Rs.489.36 crores of which
Civil expenditure will amount of Rs. 304.29 crores and expenditure on Defence Services
to Rs. 185.07 crores.
37. In Civil expenditure there is a saving of Rs.3.16 crores, excluding the self-
balancing item of Rs. 11.2 crores which I have mentioned earlier. This is the net result
of a number of variations, of which I need mention only the major ones. Assistance to
States towards relief and repair of damage caused by natural calamities is expected to
increase by Rs. 4 crores to Rs. 7 crores as a result of serious floods in certain parts of
the country. The expenditure on displaced persons has increased by about Rs. 3 crores
over the budget figure of Rs. 10.37 crores. On the other hand, expenditure under
Education shows a shortfall of Rs. 3 crores due to slower progress of schemes, particularly
the Centrally assisted State schemes, and there are similar savings of Rs.1 crore each in
grants to the Central Social Welfare Board and for village and small scale industries.
Interest charges are expected to be less by Rs. 1.4 crores and there is a similar decrease
under Civil Works.
38. Under Defence Services the revised estimates show a net decrease of
Rs. 17.61 crores. This is mainly because expenditure on stores was less than was
anticipated owing to difficulties in procuring supplies.
FINANCIAL YEAR 1956-57
39. For the coming year, I estimate the revenue, on the basis of existing taxation,
at Rs. 493.6 crores and the expenditure at Rs. 545.43 crores leaving a deficit of Rs.
51.83 crores on revenue account.
40. The revenue from Customs next year has been placed at Rs. 150 crores
against the current year’s revised estimates of Rs. 165 crores. The drop of Rs. 15 crores
is due, firstly, to the full year’s effect of the abolition of export duties made this Year;
secondly, to the cessation of Imports of sugar and, thirdly, to a similar reduction in the
imports of motor spirit as a result of increase in indigenous production. The yield from
Union Excise duties is taken at Rs. 145.45 crores as compared with the current year’s
revised estimates of Rs. 140.00 crores, the increase being largely due to an improvement
of Rs. 4 crores in motor spirit and of Rs. 1.2 crores in tobacco. Under Income Tax, the
revenue next year is placed at Rs. 180 crores, an increase of Rs. 6.3 crores over the
current year’s revised estimates. The revenue from Posts and Telegraphs is estimated at
11
Rs. 65 lakhs only against Rs. 2.27 crores this year. The dividend payable by Railways
next year is estimated at Rs. 39.66 crores, an increase of Rs. 3.5 crores over the
current year’s revised estimate. Of this amount Rs. 33.09 crores will represent the
interest element taken in reduction of the interest payments on the expenditure side
and the balance as contribution to revenue. The estimate of Estate Duty collections
next year is Rs. 2.5 crores, most of which will accrue to the States. Sale proceeds of
evacuee property will drop by Rs. 6.2 crores, but this, as explained earlier, will have
no net effect on the revenue budget. The only other item which needs mention is the
share of income Tax payable to States which will amount to Rs. 53.35 crores as
compared with Rs. 55.16 crores, the reduction being due to adjustments of over-
payments made in the previous year.
41. I am budgeting for a total expenditure of Rs. 545.43 crores during the next
year of which Rs.203.97 crores will be on Defence Services and Rs.341.46 crores under
Civil heads.
42. The estimates of Defence Services show an increase of Rs. 18.90 crores
over the revised estimates of the current year. The increase is mainly due to the normal
expansion of the Navy and Air Force. The Army budget also shows an increase, due to
the carry-over to the next year of demands of stores which have not materialised during
the current year. Some increase is also expected in the manufacture in India of stores
required for the Services.
43. Civil expenditure next year shows an increase of Rs.43.37 crores, exclusive
of the self balancing item in respect of evacuee property mentioned earlier. The bulk of
the increase is on account of the rising tempo of development expenditure. I need not
weary the House by giving a detailed account of all the individual variations. As usual,
full particulars are given in the Explanatory Memorandum and I shall mention here
only the more important items.
44. The total expenditure on nation-building and development services under
Civil Administration, excluding Rs.3.6 crores transferred from other heads, amounts to
about Rs.92 crores as compared with Rs.69 crores during the current year. Provision for
Education increases by Rs.6.4 crores to Rs.21.6 crores which includes Rs.10.4 crores
for grants to States for basic, social and secondary education, Rs.3.5 crores for University
Grants Commission, and Rs.1.5 crores for scholarships to students of scheduled castes,
scheduled tribes and other backward classes. For expenditure on Medical and Public
Health an additional sum of Rs.4 crores has been provided; Agricultural and allied
services will cost Rs.4 crores more, and, similarly, development of village and small
scale industries Rs.1.3 crores more. Provision for scientific research has been increased
by Rs.2 crores and for coal and mineral prospecting by about Rs.1 crore. For development
of Khadi and handloom industries a total provision of Rs.6.1 crores has been made; in
the revenue budget but this will be met from the fund created out of the special cess on
mill-made cloth.

12
 45. In addition to the increase of Rs.23 crores I have just mentioned, the
provision for Community Development and National Extension Service has been raised
by Rs.1.4 crores to Rs.12.9 crores; and that for the welfare of scheduled tribes, scheduled
castes and backward classes by Rs.3.4 crores to Rs.10.2 crores. The grant to the Central
Social Welfare Board and expenditure on Social and Moral Hygiene will cost Rs.1.6
crores more. Other increases are Rs.50 lakhs for grants to States for Primary Education
under the Finance Commission’s Award and Rs.1.8 crores for expenditure on Forest
Development.
46. Of the rest of the increase in Civil expenditure, a sum of Rs.2.7 crores
represents additional expenditure on displaced persons due largely to the continued
influx from East Bengal, and Rs.1.4 crores on Elections, the balance being the net
result of variations under other items.
CAPITAL EXPENDITURE
47. The current year’s budget provided for a capital expenditure of Rs.223.3
crores. This was inclusive of Rs.29 crores for State Trading schemes, mostly in regard
to foodgrains. These schemes are now estimated to yield a net credit of Rs.11 crores
owing largely to reduced imports of wheat and sugar. Capital outlay in respect of Railways
is now expected to be Rs.72 crores against the budget figure of Rs.66 crores, but this
increase has been more than offset by a shortfall in expenditure under a number of other
heads. Thus cash compensation to displaced persons shows a saving of Rs.6 crores in
the budget provision of Rs.15 crores. The revised estimates of capital outlay for the
current year now stand at Rs.170 crores.
48. For the next year, capital expenditure is estimated at Rs.316.7 crores
including Rs.9.5 crores for Government Trading schemes, mostly for our normal
purchases for the Central Reserve of foodgrains.
49. Provision for the capital outlay of Railways amounts to Rs.113 crores against
Rs.72 crores in the current year. Provision for the three steel plants at Rourkela, Bhilai
and Durgapur amounts to Rs.44 crores. A provision of Rs.5 crores has been made for
investment in the Life insurance Corporation which is being set up following the decision
to nationalise life insurance. Cash compensation to displaced persons is estimated at
Rs.20 crores. There is also an increase of Rs.6 crores on the capital outlay on Defence
next year.
50. In addition to the provision for capital outlay, the estimates include, against
the original Budget provision of Rs.355 crores for the current year, a revised figure of
Rs.327 crores this year for loans to State Governments and others, mostly for the
execution of projects in the Plan. The provision made for the next year on this account
is Rs.386 crores. Honourable Members will find the broad details of these loans in the
Explanatory Memorandum.

13
 51. With the large and growing outlay in the context of the Plan, both on revenue
and on capital account, the question of securing the maximum possible economy and
avoiding wastage owing to delays and, inefficiency assumes added importance.
Honourable Members have naturally been taking keen interest in this question and the
Taxation Enquiry Commission had also stressed the need for a thorough and careful
enquiry, both in the Central Government and in the States, into the whole question of
public expenditure. As I have explained on various occasions we are keeping a continuous
watch over the growth of expenditure and securing economy, wherever possible, as part
of our day to day control over expenditure. We have an Economy Unit set up under the
Home and Finance Ministries continuously re-assessing the staff requirements of various
Central Ministries and an Organisation and Methods Division in the Cabinet Secretariat
engaged on a continuous review of organisation and methods of work in the various
Central Offices, so that wastes resulting from uneconomic methods are avoided. We
have also the assistance of the Estimates Committee in the pursuit of economy. Any net
reduction in the administrative expenditure in the Centre or in the States can hardly be
expected during the course of implementation of the Second Five Year Plan. Nevertheless,
this very tempo of rising expenditure during the next five years would open up many
possibilities of extravagance and waste and it is necessary to keep a still closer watch
over such expenditure to ensure that the tax-payer gets the maximum benefit out of the
planned outlay. We have been in consultation with the Planning Commission and have
come to the conclusion that the best way of dealing with this matter would be to set up
a special high-powered committee of Ministers and the Deputy Chairman of the Planning
Commission at the Centre to organize a thorough investigation, including inspection in
the field of the Important projects in hand both at the Centre and in the States (with the
approval of the National Development Council), through specially selected teams. These
teams will be composed of officials as well as non-officials specially selected for each
group of related investigations and may be assisted by outside experts. As the results of
each investigation are received, the High-powered Committee at the Centre win examine
them with a view to formulating proposals for effecting economy to be implemented by
Central Ministries or in the States, as the case may be. The orders of the Cabinet or
guidance from the National Development Council will be obtained wherever this is
considered necessary. Such proposals may conceivably include the setting up of economy
units for different categories of projects, preferably in the Planning Commission.
52. This brings me to the somewhat related question of the resources of the
States for financing the Plan. It is of great importance that the revenue budgets of the
States, as, indeed of the Centre, should be balanced. While it is reasonable to borrow
for investment outlay and for a time even some measure of deficit financing may be
necessary for financing such outlay, ordinary prudence demands that current expenditure
should be met by taxation. Capital expenditure has also to be phased so that it corresponds
to the results of special efforts to increase resources for development. The States have
been advised to bear these considerations in mind in framing their budget estimates for

14
1956-57. Some measure of relief to the revenue budget of most of the States may result
from a re-classification of expenditure between revenue and capital. This question was
examined carefully by us in consultation with the Comptroller and Auditor General
and, with a view both to uniformity and also because of the large and abnormal
expenditure necessitated by the Plan, we have suggested to the States that certain items
of expenditure might appropriately be transferred from revenue to capital, as for example,
expenditure on permanent assets of a concrete nature costing Rs.20,000 and over. The
Centre has also been able to make grants to the States over and above the transfer of
resources, which it had to make as a result of the last Finance Commissions’s Award,
but the Centre’s ability to make such grants is conditioned by its own revenue position.
In any case, the allocation of revenue resources between the Centre and the States is a
matter for the Finance Commission for which the Constitution specifically provides.
For the year 1956-57, Central assistance towards the schemes falling on the revenue
budgets of the States is being continued on the current pattern, although part of this
assistance will necessarily have to be reallocated among the re-organised units which
will come into existence later in the year as a result of the decisions on the
recommendations of the States Re-organisation Commission. The year 1956-57 will be
the last of the quinquennium covered by the Award of the first Finance Commission.
How far the Centre can continue or increase the present scale of assistance to the States
will depend on the Award of the next Finance Commission. The President has approved
the appointment of Shri K.Santhanam as the chairman of the next Finance Commission.
Other members of the Commission will be appointed shortly and the Commission is
expected to start its work in the near future. The Commission will have to consider the
finances of the re-organised States and its recommendations would normally take effect
from the year 1957-58. In addition to its normal duty to make recommendations about
the distribution of Central taxes and of Central grants, it is proposed to seek its advice
on a few other important subjects. The first of these, as was indicated in the last Budget
Speech, is the distribution of proceeds of Estate Duty in respect of which we are, at
present, tentatively following the last Finance Commission’s formula about income-
tax. Another subject is the terms which can appropriately be fixed for different kinds of
loans to the States. A large number of loans are being and will continue to be sanctioned
to the States for financing their Plan. The terms of each loan have so far been fixed ad
hoc and it is possible that, in some cases, they have proved onerous. An independent
body which will go into the question of the finances of State Governments would be
able to make a proper assessment of the burden of these loans on the States and also to
advise upon their appropriateness. Whatever relief these adjustments and the Finance
Commission may bring to them, It is clear that the States have to raise additional revenue
to cover the growing recurrent liabilities which the present and the next Plans will
involve on their revenue budgets. In this they may have to go beyond the lines
recommended by the Taxation Enquiry Commission which was visualising a much
smaller Second Five Year Plan.

15
 WAYS AND MEANS
53. The current year’s budget provided for an overall deficit of Rs.327 crores
to be met by expansion of treasury bills. On the basis of the revised estimates, the
overall deficit is now expected at Rs.222 crores. As the opening balance of the year was
about’Rs.18 crores less than the minimum of Rs.50 crores the expansion of treasury
bills will amount to about Rs.240 crores.
54. Unlike the previous year when a combined loan was floated to cover the
requirements of both the Central Government and the State Governments, this year the
normal procedure of separate loans by the Centre and the States was followed. The
Central Government floated a 10-year loan, the 31% National Plan Bonds-Second Series.
This loan which was for Rs.100 crores was fully subscribed, the amount accepted being
Rs.103.7 crores. Small Savings have shown substantial improvement, the collections
now expected being Rs.65 crores against Rs.52 crores in the budget. While the response
so far has been encouraging, the task set for the next Plan is much bigger. As Honourable
Members will have seen from the Draft Outline of the Plan, Small Savings are expected
to yield Rs.500 crores during the next Plan, which is more than double the target for the
current Plan. Government have been taking various steps to intensify the Small Savings
movement. In the rural areas, the agency of Panchayats, Union Board Presidents and
Village Teachers is being utilised. The Women’s Savings campaign under the Central
Advisory Committee has been maintaining Ate progress and over 150 voluntary social
and women’s organisations have been appointed as agents for the sale of Certificates.
The State Governments are co-operating in the movement and some of them have created
special offices to intensify the small savings drives in co-operation and co-ordination
with the National Savings Organisation. Advisory Committees are being formed, both
at the State and the district level, to assist the movement and a system of Savings Groups
is proposed to be introduced in all offices and organisations. The higher target for the
next Plan can only be achieved, however, if there is full and whole-hearted co-operation
on the part of every citizen of the country. This is a task of vital national interest about
which there can be no two opinions and I hope that the fullest co-operation will be
forthcoming freely from all. I, therefore, renew once again my appeal for greater effort
on the part of every one to save and invest in Small Savings and thus contribute towards
the successful implementation of the Plan.
55. The improvement in the Ways and Means position this year is due largely
to the surplus in the revenue account and the savings in the capital expenditure and
loans to State Governments and others which I have mentioned earlier. Foreign aid this
year is now expected to amount to about Rs.56 crores against Rs.74 crores in the budget,
but this has been more than offset by improvement in other heads. Two loans which fell
due for repayment this year were duly repaid, the amount involved being Rs.69 crores.
56. The overall deficit next year is estimated at about Rs.390 crores. This follows
the larger provision for development expenditure in the revenue and capital budgets.
Credit has been taken for a new loan of Rs.100 crores next year. Small Savings next
16
year may amount to Rs.70 crores and foreign aid Rs.85 crores. There is no loan maturity
next year. Allowing for other miscellaneous transactions under Debt and Remittance
heads, it will be necessary, on these estimates, to expand treasury bills by Rs.390 crores
to cover the overall deficit.
57. I might summarise the Ways and Means position for the coming year.
Government need Rs.52 crores for meeting the revenue deficit and Rs.703 crores for
financing the capital outlay and loan requirements of State Governments and others.
Against this, they hope to raise Rat 100 crores from the market loan and Rs.70 crores
from small savings. Foreign aid expected next year amounts to Rs.85 crores and other
miscellaneous Debt and Remittance transactions may bring in Rs.110 crores. This will
leave a gap of about Rs.390 crores in the available resources to balance the budget.
58. I now turn to the budget proposals for the coming year.
59. The position for the coming year is briefly that the deficit on revenue account
is estimated at Rs.51.83 crores and the overall deficit at Rs.390 crores. The immediate
question is how much of this deficit should be covered by additional taxation.
60. I referred earlier to the question of re-classification of expenditure between
revenue and capital. At the Centre, Honourable Members will recall, we are already
taking to capital temporarily a number of grants to States and there is not much scope
for further transfers from revenue to capital without straining unduly the rules of
classification. I believe also that, with the administrative machinery both at the Centre
and in the States getting increasingly geared to the execution of the Plan, shortfalls in
expenditure of the order which have occurred in recent years will tend to diminish. The
estimates for the coming year have been framed with as much care as possible; in
particular, substantial reductions have been made under heads which have shown
persistent savings and the provision for grants to States for various development schemes
has been based on a proper assessment of the ability of the States to find their share of
the resources required to finance those schemes. Although, therefore, it is not possible
to say categorically that the shortfalls will he entirely eliminated, or that there will be
no variations in estimates of revenue the margin of fluctuations is likely to be narrower
than in the past. Indeed, it may be said that the cuts that have been made in some of the
demands for next year may prove to be too fine. I cannot but stress again the principle
that current expenditure should, as far as possible, be met from current taxation. It is,
therefore necessary to cover the gap on revenue account in the coming year, If not
wholly, at least substantially. My proposals for additional taxation are related to this
objective.
CHANCES IN CUMSTOMS DUTIES
61. I shall first deal with the changes I propose to make in Customs Duties.
62. In regard to Import duties, a number of minor changes are being made and
I need only mention a few of them. The duty on liquid gold for glass making is being
17
raised from its present level of 311/4 per cent to 621/2 per cent. The duty on flash-lights
and flash light cases is being raised from 39-3/8 percent to 51 percent. These changes
will help the indigenous industries in these goods. Certain changes are also being made
in the items in the Import Tariff affecting mineral oils, mainly with a view to rationalising
the existing headings. The existing item in the Import Tariff relating to spectacle frames
and parts thereof is being amended so as to include complete spectacles within that
item. The net effect of the changes proposed will be an addition to revenue of about
Rs.1 crore.
As regards export duties, the only change I propose to make is by way of affording
relief to the Tea Industry. The House will recall that a slab system of export duty on tea
was introduced last year. It is too early to say how that system has worked. In the
meantime, however, our exports of tea have suffered a setback during 1955 as a result
of a number of factors, including a comparatively high production and keen foreign
competition. In order to afford some relief to the industry and to step up our exports of
medium teas, I propose that the existing duty for the slab relating to the price range of
Rs.3-4-0 to Rs.4/- per lb. be reduced by two annas per lb., that is, from eight annas per
lb., which is the present rate, to six annas per lb. The effect of this will be that all teas
ranging in price from Rs.2/8/- to Rs.4/- per lb. will bear a uniform duty of six annas per
lb. The change is being given effect to by a notification which is being issued immediately.
On the basis of the present scale of exports, the loss of revenue involved is expected to
be about Rs.1 crore.
UNION EXCISE DUTIES
63. Turning to Excise, I shall first deal with changes in the existing duties. My
main proposal is to raise the duties on all categories of Cotton Fabrics by 6 pies per sq.
yd., except on Dhoties and Sarees of the coarse category the duty on which would
remain unchanged. The Taxation Enquiry Commission had recommended enhancement
of the excise duties on all varieties of Cotton Fabrics and I had accordingly proposed in
last year’s Finance Bill an increase in the duties on medium and coarse Cotton Fabrics
from 6 pies per sq. yd. to one anna per sq. yd. It was, however, then represented that
prices of agricultural commodities, had been falling for some time, and the purchasing
power of the rural population was low. The off take from the mills had also declined at
the time and the mills were carrying large unsold stocks. The proposals were accordingly
withdrawn. Conditions have since noticeably Improved. Although mill production of
Cotton Fabrics has reached a level higher than ever before, the off take from the Mills
has steadily risen. In the context of an expanding demand for cloth, this position is
likely to improve still further. The prices of agricultural commodities have also risen.
After the most careful weighing up of all relevant factors, I have come to the conclusion
that an increase in the Excise Duty on medium and coarse cotton cloth is fully justified.
The yield expected from the proposed increase is Rs.141/2 crores.
I also propose to make minor changes in the existing duties in respect of Soap,
Strawboard and Art Silk Fabrics.
18
 The duty on Soap is at present confined to soap produced with the aid of power.
Since this duty was first Imposed year before last, surveys conducted have shown that
the non-power operated units are producing substantial quantities of soap. Some of the
larger units amongst these are offering appreciable competition to the smaller power
operated units. I have accordingly proposed new excise duties for non-power operated
units at somewhat lower rates than the existing rates for power operated units. In the
matter of exemptions to the small-scale units also, it is proposed to put the non-power
operated unit in a slightly better position that the power operated units.
Strawboard at present enjoys an exemption from excise duty. Enquiries have
shown that this exemption is hardly justified. Strawboard and cheap Millboard compete
with each other. A substantial proportion of Strawboard is actually produced by well
organised units which hardly need any special protection. I accordingly propose to tax
Strawboard at the same rate as that at present applicable to Millboard, namely, 6 pies
per lb. As a measure of relief to the small producer, I also propose to give, by executive
notification, an exemption for the first 500 tons of Strawboard and the cheaper varieties
of Millboard cleared by any manufacturer during the financial year.
In regard to Art Silk Fabrics, it has been found that the exemption given to units
employing not more than 24 looms has placed them in a position considerably more
favourable than the small units in the sister industries producing cotton or woollen
textiles. This has further enabled them to offer unfair competition to the taxed sector of
the industry. I haves therefore, proposed the abolition of this exemption in its present
form. It is being replaced by an executive notification, in a modified form, exempting
the production of the first 9 looms by any manufacturer.
The total revenue effect of these small changes is an increase, of Rs.50 lakhs.
64. For new excise duties, I propose only two items, namely, Vegetable Non-
essential Oils, and all kinds of Diesel 011, Vapourising 011 and Furnace Oil.
Vegetable non-essential oils figure in the list of commodities recommended by
the Taxation Enquiry Commission for an excise duty and I propose a duty of half an
anna per pound on all such oils. This, duty will be levied only on factories operated by
power. Even, among these, it is proposed to grant exemption by notification for the first
125 tons per year cleared for home consumption from any factory. This will ensure that
all ghanies and other small units are exempted from the duty. The yield expected is
Rs.51 crores.
Production of diesel oil and other fuel oils at the new Refineries at Bombay is
soon expected to outstrip the internal requirements for such oils. The import duty on
these oils should, therefore, be replaced by an excise duty. The excise duties I propose
are 4 annas per gallon on High Speed Diesel Oil and Vapourising Oil used primarily in
driving heavy motor vehicles, and Rs.30 per ton and Rs.15 per ton, respectively, on
other Diesel Oils and Furnace Oils. These new duties are expected to yield Rs.41 crores.
19
 Countervailing Customs Duties will be imposed wherever necessary.
The net additional revenue from the changes in Excise Duties will amount to Rs.
25 crores.
INCOME TAX
65. I now come to income Tax. The only change I propose in personal taxation
is a slight adjustment upwards of the super-tax payable on incomes above Rs. 70,000.
With this adjustment, the rate of tax on the highest slab of income, that is, above
Rs. 1,50,000 will be 91.9 per cent against the present figure of 88.6 per cent. The extra
revenue on this account will be about Rs. 1 crore.
In this connection, I may mention that the Taxation Enquiry Commission had
recommended that the tax on the highest slab of income should not be more than about
86 per cent. They had, however, recommended that, in addition to this rate of tax, there
should be a surcharge cum compulsory deposit at a graduated rate on incomes above
Rs.25,000 the maximum being 5.6 per cent as Surcharge, and the same amount as deposit.
Their scheme envisaged, however, that against the surcharge a long-term loan, say, for
45 years, might be given at a nominal rate of interest under certain conditions and that
the deposit should be repayable with interest after 45 years. The net additional amount
that the tax-payer would have to pay in any year is thus represented by only one of
these. Considered purely as a tax burden, the effect of the Commission’s recommendation,
is thus a tax of 86 plus 5.6 per cent, that is to say, about 92 per cent, on the highest slab
of income. This will also be the position under my proposals in respect of these incomes.
I propose also to introduce a tax on Registered Firms. The income Tax Act
recognises two kinds of Partnership Firms; those which are registered and those which
are not registered. In the case of the former, no tax is Imposed on the firm as such but its
profits are taxed in the hands of the partners according to their respective shares and at
rates applicable to them individually. In the case of the latter, that is, the unregistered
firms, the tax is Imposed on the firm as such at rates applicable to personal incomes.
The registered partnerships, therefore, enjoy an advantage over the unregistered
partnerships, and they do not also pay any Corporation Tax which is payable by
Companies. I think there is adequate justification for Imposing a small tax on the
registered firms as such. I propose that the rate of such tax should be nine pies per rupee
up to Rs.75,000 one anna up to Rs.1,50,000 and one anna six pies for incomes above
this figure. The partners of the firm will get abatement on their proportionate shares of
this tax for the purpose of income-tax, but not for super-tax. In order that small
partnerships may not be affected by this, I propose to exempt incomes upto Rs.40,000.
In other words registered firms whose income is Rs.40,000 or less will not be required
to pay this new tax. The extra revenue from this tax is expected to be Rs.1 crore.
66. The other field of direct taxation is the taxes on corporations. About half of
our direct taxes comes from this source and there has been no change in Company
taxation during the last five years. In view of the large development expenditure that
20
has taken place in the First Plan Period and the even larger expenditure contemplated in
the next Plan, I think there is adequate justification for putting a small extra burden on
Companies. I propose, therefore, to effect three changes. First, the rebate of one anna of
income-tax at present given to non-Section 23-A Companies in respect of undistributed
profits will be withdrawn. Second, while the rate of super-tax payable by Indian
companies will remain, unchanged, there will be levied, in addition, a super-tax at a
graduated rate on the dividends declared by them above a certain limit, namely, 6 per
cent. This rate I propose to be 2 annas in the rupee on the amount distributed in excess
of 6 per cent, but up to 10 per cent of the paid-up capital. On distributions above 10 per
cent of such capital, the extra super-tax will be 3 annas in the rupee. Third, there will be
a tax of two annas on bonus issues. I have taken due notice of the recommendation of
the Taxation Enquiry Commission that there should not be any tax, on bonus shares. I
consider, however, that there is adequate justification for imposing such a tax and, in
any case, such tax is an integral part of the scheme I have proposed.
Incidentally, I am also taking this opportunity of completing the process which
we started in 1953 of equating the tax payable by a foreign company operating through
a branch and that payable by another company operating through a subsidiary Indian
company which remits the whole of its profits as dividends to the foreign parent company.
The net effect is that the tax payable by a foreign company operating through a branch
will go up from 53 per cent to 62 per cent.
Another change I propose is an increase in the penal super-tax payable by a Section
23-A company which deals wholly or mainly in investments. I propose to raise it from
the present figure of four annas in the rupee to eight annas in the rupee on the amount of
undistributed profits. The rate applicable to other Section 23-A companies will remain
unchanged.
The net effect of all these changes in corporate taxation will be an increase in
revenue of about Rs.8 crores. I also hope that the scheme proposed will have some anti-
inflationary effect.
67. In addition to these, the Finance Bill Contains several other proposals some
of which give relief to the tax-payers and some others which are int6nded to plug
loopholes. In general, they are in Implementation of some of the recommendations of
the Taxation Enquiry Commission. I do not propose to weary the House with the details
of these amendments and for this convenience of the Members I have appended to the
Budget papers a Memorandum explaining in details the provisions of the Bill.
At this stage, I should like to refer to only one of these amendments. The House
will remember that, shortly after Section 5 (4) of the investigation Commission Act had
been declared invalid by the Supreme Court, we issued an Ordinance on the 17th July
1954 enacting a new Section 34(1A) in the income Tax Act to enable us to take over the
cases which had been started under the provision declared invalid. Under this Ordinance,
which was subsequently ratified into law by Parliament, we took powers to reopen all
cases of tax evasion during the war years of more than Rs.1 lakh. As the law stands, this

21
power can be exercised only up to the 31st March 1956. There have been, since then,
two other judgements of the Supreme Court, one in October 1954 declaring Section 5
(1) of the investigation Commission Act invalid from the 17th July 1954 and another in
December 1955 declaring that Section invalid from the 26th January 1950. This means
that the Department will now have to take over again a large number of cases previously
dealt with by the investigation Commission. We have carefully reviewed the position
arising out )f the judgments of the Supreme Court in consultation with our legal advisers.
As a result, it is now proposed to have a redraft of the existing provisions of the law
enabling the Department to reopen old cases. Substantially, the position remains
unchanged the only difference being that, while the existing law lays down a time limit
up to the 31st March 1956 for the exercise of the Department’s powers to reopen cases
of concealment beyond eight years, the proposed amendment fixes no time limit. This
is being done for three reasons; firstly, the latest judgment of the Supreme Court having
been given only in December, 1955, it is not possible for the Department to issue all
notices within the short period of three months left since then; secondly, the validity of
the new Section 34(1A) is itself being challenged in several High Courts and it is not
known when we shall get a final decision on this point; and finally, the Taxation Enquiry
Commission have recommended that, as in other countries, there should be no time
limit to the reopening of cases of fraudulent tax evasion. This is a desirable. reform
which has been long overdue. The power of reopening cases beyond eight years will
not be exercised unless the amount of total tax evasion exceeds Rs.1 lakh and then only
with the sanction of the Central Board of Revenue. This will ensure that the powers are
exercised after proper scrutiny and only in cases of substantial evasion. It is also proposed
to give the Department powers of search and seizure of accounts and documents which
the investigation Commission had and which; the Taxation Enquiry Commission have
recommended the Department should have. The experience of the last year and a half
has shown-that unless the Department is armed with these powers, it is not possible
effectively to investigate cases of tax evasion. I have no doubt that the House will give
its whole-hearted support to measures taken to prevent and detect large-scale tax evasion
and it may take my assurance that the new powers taken now will not be exercised
unless they are absolutely necessary.
68. The net effect of these changes in income-tax is an increase of Rs. 10 crores,
of which the States’ share will amount to Rs.1.8 crores.
CHANGES IN POSTAL RATES
69. The Postal and Telegraph branches of the Posts and Telegraphs Department
have been working at a loss for some years. The net loss during the three years ended
the 31st March 1955, was Rs.222 lakhs in the Postal Branch and Rs.65 lakhs in the
Telegraph, and the losses during the current year in respect of these two Branches are
estimated at Rs.49 lakhs and Rs.82 lakhs, respectively. The main reasons for the losses
are the opening of unremunerative post offices and telegraph offices as part of the
Department’s expansion schemes under the First Five Year Plan on the one hand and
the charging of uneconomic rates on the other. The rates charged at present are, in many
cases, well below the cost of the service. A review of the existing postal and telegraph

22
rates has, therefore, been carried out with reference to the cost of the service, and, as a
result of the review, it has been decided to increase the fee for registration on postal
articles and the rates for inland telegrams. The existing registration fee of As. 6 per
article will be raised to As. 8 and on inland telegrams the minimum charge will be
raised from As. 12 to As. 13 for “Ordinary” and from Rs.1/8/to Rs.1/10/- for “Express”.
These enhanced rates for telegrams are the same as those that were in force prior to the
1st April 1950. The additional revenue expected from these increases is Rs.95 lakhs.
NET EFFECT OF THE PROPOSALS
70. The net effect of the proposals may now be summarised. The changes in
Customs Duties will not have any net effect on revenue. The new and increased Excise
Duties will yield RS.25 crores. Changes in income tax will result in an additional revenue
of Rs.10 crores of which the States? share will amount to Rs.1.8 crores, and changes in
postal rates will yield Rs.95 lakhs. In the result, Central revenues will increase by
Rs.34.15 crores.
71. My taxation proposals will still leave a deficit of Rs.17.68 crores on revenue
account. This is a large amount, but unforeseen marginal Improvement in revenue and
savings in expenditure may yet be possible, and I propose to leave it uncovered. I must
repeat, however, that additional taxation is inseparable from a bolder plan of economic
development. The Taxation Enquiry Commission had in mind an order of expenditure
on the Plan amounting to Rs.3,500 crores. The size of the Plan is now larger and a
correspondingly larger tax effort is necessary. The findings of the Commission have
shown that in real terms, there has been little addition to the national tax effort relatively
to national income over the last two or three decades. Even to maintain the proportion
of tax revenues to national income more or less constant, additional taxation of the
order of Rs.350 crores over the five year period would be necessary at the Centre and in
the States. This proportion has, however, to be raised, moderately. What I have proposed
this year by way of tax effort is, in my judgment, the minimum that must be attempted
in view of the requirements of the Plan.
72. Including the additional taxation, the overall deficit for the year will stand
at Rs.356 crores. I think it is Important to bear in mind the limitation I mentioned earlier
in regard to deficit financing. There is not, at the moment, any great slack left in the
economy which would justify anything more than a reasonable amount of deficit
financing. Up to a point deficit financing is not only permissible, but even desirable in
a developing economy. Experts differ as to the permissible limit, but it would be quite
unrealistic to assume that deficit-financing of this order can be maintained for any
length of time, without inviting inflation. The road to inflation is easy enough, but it
opens flood-gates which it would later be impossible to close. We are, in fact, taking a
measure of risk with the deficit financing proposed for 1956-57 and we shall have to
watch its effects carefully and adjust subsequent programmes in the light of these effects.
73. The budget I place before you is, as I have said, the first step towards the
Implementation of the Second Five Year Plan. A big Plan requires a big effort, and to
make a good beginning with it will be, to vary the old adage, almost to ensure its
accomplishment. The objective we have set to ourselves is that primary and ineluctable
23
duty of every modern Government, namely to raise the living standards of the people
and to create in the process a progressive and equitable economic and social order. This
objective, moreover, is to be attained by democratic means. The sanction behind the
Plan is not the will of Government (¶ÉɺÉxÉ ¶ÉÉÎBÉDiÉ) but the will of the people (VÉxɶÉÉÎBÉDiÉ)
Democracy is for us a means as well as an end. It defines our objective, and it indicates
the approaches and techniques to be adopted for the fulfilment of the objective.
The problem is not merely one of raising the statistical average of per capita
incomes which could easily be a will of the wisp; it is one of raising the lowest incomes
and of opening out to the younger generation avenues of growth and advancement that
will bring out the best in them. For this, the present generation has to make sacrifices. It
has to work harder and it has to abstain from asking for immediate returns. A plan
verily, is a Vajan. This is the essence Þ+ÉxÉäxÉ |ɺÉÉÊ´É-ªÉv´ÉàÉä-É ´ÉÉä+ÉÉκi´É-]BÉE BÉEÉ àÉvÉÖBÉEÂÞ of the process
of capital formation, of building up the infrastructure of development and of equipping
the community with the tools and implements needed for increasing the national product.
We shall succeed in this task to the extent that we bring to bear 11 on it injudicious
proportions all the idealism and all the practical realism that we possess.
The Second Five Year Plan will be followed by several other Plans and it is only
after we have fulfilled, shall I say, the Third Five Year Plan that we shall see a marked
and unmistakable improvement in living standards all round and in the capacity of the
country to go ahead more rapidly on its own momentum. The burdens that the Plan
Imposes upon the people are by no means light nor can their weight be mitigated by any
assurance that they are temporary. On the other hand, our people stand, so to say, on the
threshold of a golden age; we have to build well and truly for them; and we have to
raise, ungrudgingly and unhesitatingly, all the moneys necessary therefor. Money is,
after all, mainly a measure of effort; and the success of our monetary calculations,
whether for our taxation measures, or for our deficit financing, or for anything else for
the matter of that, depends vitally upon the measure of productive effort put forth in the
community. It is the responsibility, If I may with all respect say so, of every member of
this honourable House and of similar chambers all the country over, to adjudge every
proposal on this basis, that is, not of what Government seek to take from this sector or
from that (indeed Government cannot take anything for itself) but of what that proposal
in terms of mobilising the real efforts of the country means and of whether by any
alternative proposal we could call forth equal effort without greater sacrifice.
The success that has attended on the first Plan makes it clear, I believe, that the
people of this country are capable of, and willing to put forth, the effort necessary to
achieve bigger things and to make for themselves and for their children an India befitting
of her great heritage. Our destiny is now in our hands. Our people have throughout
history been known for their almost infinite patience and perseverance. Given the
leadership, they have never failed to respond in more than adequate measure. It is these
people, sir, that have now girt their loins and stand ready to launch forth on their new,
and so far their greatest, endeavour. They can rightfully expect us, their chosen leaders
and representatives, to give them of our best counsels, loyal guidance and informed
direction.
(February 29, 1956)

24
SPEECH OF SHRI T.T. KRISHNAMACHARI ON ECONOMIC SITUATION
AND TAXATION PROPOSALS (1956-57)

Mr. Deputy-Speaker, Sir, I am taking the liberty of encroaching on the valuable

time of the House to make a statement because I propose to ask for the leave of the
House to introduce two Bills.
2. Ordinarily, a speech is not necessary on the occasion of introducing a Bill.
As the titles, however, indicate these two Bills are Finance Bills; and although they are
being presented in the form of two separate Bills, they represent a set of connected
proposals.
3. Sir, the economic situation was reviewed in detail in September last in
connection with the debate on the Plan. My main conclusion then was that while there
were yet no signs of a general inflationary situation, there were vital points in the economy
which were under pressure. That broadly is a correct characterisation of the present
situation although the strain on the economy may well increase in the coming months
because of the gathering tempo of the Plan and of the international situation.
4. The index of wholesale prices remained more or less steady for about eight
weeks since early September but there has been a rise of some ten points in the last two
weeks. It is too early to say whether prices are about to resume an upward trend or
whether they will keep around the level they have maintained over the last two or three
months. The outcome depends partly on the crops and partly on international
developments. It is clear, however, that the price situation will have to be watched
closely and every effort made to ensure that the pressure of demand on available supplies
does not go too far. Money supply in the hands of the public is now Rs.147 crores more
than what it was twelve months ago and the level of bank credit outstanding is higher
by Rs.163 crores as compared to the level about this time last year. During the current
slack season, money supply declined much more than in the previous slack season, but
the major contractionist factor has been the large Import surpluses we have been having
of late. The demand for funds has continued unabated and the resources of the banking
system are fully strained. Government are anxious to ensure that the legitimate needs of
trade and industry do not suffer on account of the present tightness in the money market.
It is necessary at the same time, in view of the price trends mentioned above, that credit
creation by the banking system is kept within reasonable limits. These are matters of
day-to-day monetary management and I need hardly dilate on them at any length at
present.
5. There is, however, an aspect of the economic situation to which special
attention is necessary I mean the foreign exchange situation. Since the end of March

1
1956, the foreign exchange reserves held by the Reserve Bank have declined from
Rs.746 crores to Rs.543 crores—a fall of over Rs.200 crores. Although this decline has
taken place as a result of the large Imports required for the Plan, and not because of any
unplanned Imports, it is obvious that this rate of drawal cannot be sustained for any
length of time. We are now fairly close to the minimum level of reserves we ought to
maintain and I must tell the House, and the public at large, that a most determined effort
to conserve and augment our foreign exchange resources is now called for. This
consideration must, in my judgement, be given higher priority than the consideration
regarding internal prices, although the latter is Important. The requirements of foreign
exchange for the Second Five Year Plan are proving even larger than were estimated,
and it would be necessary not only to economise on Imports and to increase our exports,
but also, in addition, to take active steps to secure the necessary quantum of supplemental
resources from abroad.
6. This brings me to the international situation which has taken a turn for the
worse in the last few months. The House is aware of these developments and I need
hardly dilate on them. What started as action to keep the Suez Canal open has resulted
in closing it completely. On the most optimistic estimates it will take anything between
three to six months for the Canal to be opened again. The work of clearing up the Canal
has not yet started, and, on the whole, I should think we would be wise in assuming that
it will take almost a year before normal traffic on the Canal is resumed. Even before the
outbreak of hostilities in that area, a shortage of shipping was developing and this has
now been accentuated. The shortage of shipping is, of course, not confined to the areas
or routes affected; it has and will become more and more a global shortage. We are
taking measures to ensure that the available shipping space is utilised for bringing in
our priority Imports. A certain lengthening of shipping schedules is, of course
unavoidable, and freight rates and insurance charges have already gone up. If, as may
be hoped, the closure of the Canal is not too prolonged, we expect to be able to face the
temporary difficulties I have mentioned above without any serious dislocation to our
Plan. But it would hardly be proper at this stage either to take an optimistic or a pessimistic
view of the future in this matter. All I should like to say is that for the next few months
we shall have to exercise the fullest vigil not only in regard to our internal situation but
also in respect of developments abroad.
7. I come now to the more immediate problem in hand, namely, taxation.
Taxation policy at this stage has to be determined in the light of two main considerations:
(a) the requirements of the Plan, and (b) the general economic situation. As regards the
former, the position needs only to be briefly stated. The Plan requires mobilisation of
financial resources on a scale not attempted hitherto. The Planning Commission has put
forward a target of Rs.850 crores by way of additional taxation over the five-year period.
The outlay required for carrying through the development programmes incorporated in
the Plan will, it is now estimated, require Rs.400 to Rs.500 crores more than the total of
Rs.4,800 crores envisaged in the Plan document. This is partly because some of the

2
financial provisions in the Plan were inadequate; partly, the higher estimate reflects the
increased cost on account of higher domestic or external prices. The domestic effort for
raising resources will, in consequence, have to be larger.
8. The general economic situation has also altered somewhat since the Plan
was formulated. Prices have registered an almost continuous upward trend-the index is
now 430-and the danger of inflationary pressures getting the upper-hand has to be
safeguarded by taking steps to mop up a part of the purchasing power now with the
public. This is evidenced by the fact that the demand for food, for cloth,) for steel and
for cement has been rising rapidly. In a sense, the creation of new demands all along the
line is of the very essence of developmental planning. An under-developed economy
suffers from insufficient demand, insufficient investment opportunities and insufficient
production. The vicious circle has to be broken at various points, that is, by a simultaneous
expansion of demand and of production. There is danger of inflation when demands
grow more rapidly than supplies. One part of the economic policy for the plan period is
to increase production, in the short run especially of articles of general consumption
like food and cloth; the other part is an appropriate tax policy aimed at regulating the
flow of purchasing power so as to ensure that development proceeds under conditions
of economic stability.
9. In the last session of Parliament, the excise duty on cloth was raised with a
view to checking a situation of developing scarcity and consequent windfall profits for
the producers or traders. The time has now come for some increase in direct taxation
which will on the one hand restrain non priority spending and on the other afford some
corrective to inequalities of income and wealth. This is the two-fold objective behind
the proposals now being made.
10. The Indian tax system has got into a settled groove. It does not bring into
the public ex-chequer even a constant proportion of national income. If a development
programme of the dimensions we have in hand is to be carried through successfully the
tax system has to be made more elastic. It is hardly possible to do this by stepping up
any further the rates of direct taxation, which has now reached a stage when a
straightforward increase in the rates would yield poor results. It is necessary now to
increase the coverage of taxation by reaching a class of incomes which has hitherto
been kept out of the purview of the income taxation - I mean capital gains. Capital gains
are an important factor in aggravating economic inequalities, and there is no justification
for regarding capital gains as a species of income not liable to taxation. This is a lacuna
in the tax system of most countries, a lacuna, one dare say, they will have to rectify in
due course. For a developing economy like ours, it is necessary to take early action as
the Implementation of our programmes is certain to create conditions, if it is not already
doing so in which assets of all kinds will appreciate. It is only fair that the exchequer
should get a proportion of these incomes when realised in the form of capital gains.
11. Secondly, the problem of raising resources for investment has to be looked

3
at both from the point of view of the public sector and of the private sector. Just as an
increase in public saving is necessary for financing the investment in the public sector,
an increase in corporate saving is required for meeting the needs of the private sector.
Personal saving is undoubtedly important, but the larger-scale investment that is needed
for the private sector can hardly be found by individuals. There is a trend in the
industrially advanced countries of Western Europe towards greater reliance on corporate
savings. The main source of capital for private enterprise in these countries is savings
effected by industry itself, supplemented by funds obtained from other institutions in
the field of industrial finance. We have increasingly to look to these institutional sources
for finding funds for the development of industry. Suggestions have been made on the
floor of the House from time to time for dividend limitation, Imposition of excess profits
tax and the like. These are devices which have been tried in the past but with no great
success. In the last budget, a tax on dividends was introduced and a further tightening in
the same direction is now called for. This is a better course of action than limitation of
dividends by law to a prescribed maximum. It is administratively simpler and it leaves
discretion regarding dividend policy to the company or corporation concerned subject
to the tax liability it has to meet.
12. The ploughing back of profits which it is sought to encourage will enable
companies to build up larger reserves. It is important that these reserves are used in
pursuance of the investment policies laid down in the plan. It would, of course, be
wrong to Impede in any way the utilisation of these reserves for the legitimate purposes
of expansion or modernisation for the unit or for the industry concerned. Every facility
should, in fact, be given to encourage such use and to direct the balance of reserves for
the time being unutilised towards channels in which investment is called for in order to
promote the pattern of development envisaged in the plan.
13. I have mentioned earlier the rapid drawing down of our sterling reserves in
the last few years. Although this drawing down is a reflection of the genuine increasing
needs of the economy for our development programmes and it would be wrong to take
an alarmist view of the situation, it is necessary at the same time to make the utmost
effort to conserve and develop our foreign exchange resources. One plank in this
programme has to be export promotion, but this is a theme on which I do not propose to
dwell in the present context. The other plank is restraint in the matter of Imports. The
proposals that I am now making are intended to facilitate this latter process. A tighter
policy on Imports will reduce available supplies and tend to push up prices to the
maximum that the consumer will pay. In these circumstances, If there is a large difference
between the landed price of the article and the price which the consumer is prepared to
pay, the profits will go entirely to the trader. The Import duties now proposed will serve
to mop up a portion of these unmerited profits. I should stress here that the articles in
question are of a luxury character and the raising of Import duties does not in any way
Impinge on the consumption of the mass of the people.

4
 14. I now come to my detailed proposals. I am circulating to Hon.Members
two memoranda explaining the provisions of the Bills, but I may briefly refer to them
here. Dealing first with direct taxation, my first proposal is to Impose a tax on capital
gains made on or after the 1st April, 1956. As Hon. Members are aware, a tax on capital
gains forms part of our existing income-tax Act, but it was, in operation only for a short
period, that is, in respect of capital gains which arose during the period 1st April, 1946
to 31st March, 1948. In the present Bill, I have somewhat altered the existing provisions.
15. The definition of “capital gains” remains unchanged, but some of the existing
exemptions are proposed to be withdrawn. These are capital gains arising on transfers
of property on compulsory acquisition; capital gains arising on distribution of assets on
dissolution of partnerships or on liquidation of companies, capital gains arising on the
sale of residential property possessed by the taxpayer for seven years, etc. Such gains
will now be subjected to tax.
16. Under the existing law, capital gains up to Rs. 15, 000 are not subject to tax
in the case of individuals. This limit is proposed to be reduced to Rs. 5,000, but an
additional concession is proposed to be given to persons in the lower income groups in
that no capital gains tax would be chargeable If the total income, including the capital
gains, does not exceed Rs. 10,000. I am also considering some concession for small
people making gains by the sale of small and medium-sized houses. Under the existing
law, capital gains are to be taxed on the basis of slab rates. This, however, bears no
relation to the other income of the person making the gains. It is now proposed that the
rate of tax to be charged on capital gains should be the income-tax rate applicable to the
other taxable income of the assessee increased by one-third of the capital gains he
makes in the relevant year. In the case of companies, the rates of tax will be the usual
income-tax rate.
17. Another Important change is that the assessee has the option to have his
gains worked out either on the basis of original cost or on the basis of its value on the
1st January, 1954.
18. My second proposal is to increase the rates of super-tax payable by
companies which declare dividends in excess of six per cent of paid-up capital. For the
current financial year, such super-tax is two annas and three annas in the rupee in respect
of dividends declared between six per cent. and ten per cent., and above ten percent.,
respectively. I propose that for the financial year 1957-58, the rates of super-tax should
be two annas per rupee for dividends between six per cent and ten per cent., four annas
per rupee on dividends between ten per cent and eighteen per cent and six annas per
rupee on dividends in excess of eighteen per cent.
19. My third proposal is not a direct taxation measure, but relates to a proper
control over the depreciation and other reserves of companies. Such control becomes
Imperative when the effect of tax on dividends is to increase the resources of the company.

5
At present large deductions are made in the computation of profits and of gains of a
business by way of development rebates and depreciation allowances. These deductions
are related to buildings, plant, machinery and other assets used in the business and are
permitted on a consideration of the unduly high cost of acquisition of capital goods, of
the possible wear and tear which these assets may suffer by their use in the business and
of the need to enable the undertaking to build up adequate funds internally for
rehabilitation of its assets from time to time. In the interests of the industrial, development
of the country, it is necessary that these tax-free reserves are utilised for purposes
conducive thereto and not frittered away in other ways. Once we accept the policy of
discouraging the distribution of profits, it is essential simultaneously to ensure that the
retained profits are put to uses which promote industrial development in accordance
with the plan. I propose, therefore, that in the case of companies, depreciation allowances
and development rebates due will be added back in the computation of the income,
unless a certain amount is deposited with the Government or with the Reserve Bank of
India, as Government might determine, before the 30th June of the relevant assessment
year. The amount to be deposited will be partly a certain percentage of the excess of the
available current profits after payment of taxes and of distribution of dividends over
one lakh of rupees and partly a certain percentage of the past accumulated profits and
reserves which are not represented by fixed assets in the business. The Bill provides
that the percentages will be subject to the ceiling of 75 per cent as regards the current
profits and 25 per cent as regards the past accumulated profits and reserves. It is, however,
my present intention to fix the former at 50 per cent of the current profits only. The
deposits will carry interest and will be refundable wholly or in part on request by the
company If the Government is satisfied that the amount refunded will be used by the
company in the business for purposes approved by Government in furtherance of the
objectives of the plan. It is proposed to constitute a Board of Referees to advise
Government on this matter. While it is our intention that a large part of these deposits
has to be utilised for the development of industries envisaged in the plan, such residue
as is left over from year to year will cumulatively add to the resources of the plan.
20. My last proposal relates to Section 23A companies. At the present moment,
a Section 23A non-investment company, which has failed to make the minimum of 60
per cent distribution of dividends to its shareholders, is required to pay an additional
super-tax on the whole of its undistributed profits at the rate of four annas in the rupee,
while an investment company in a similar situation pays eight annas in the rupee. In
view of the proposed increase in the rate of super-tax on dividends, it is felt that the rate
of four annas for a non-investment company will be low and it is, therefore, proposed to
raise the rate of additional super-tax for such cases from four annas to six annas. However,
it is necessary to give some encouragement to industrial companies to retain their profits
for expansion and development. I propose, therefore, to reduce the minimum distribution
for a Section 23A industrial company from 60 per cent to 50 per cent. The procedure for
exempting companies from the operation of the provision in industrial concerns which
fall within the scope of Section 23A in deserving cases will be continued.

6
 21. Coming now to Customs Duties, suitable increases in the import duties are
proposed on certain selected articles. These fall broadly into three groups.
22. There are, firstly, a number of articles ordinarily used by the more well-to-
do section of the population. Notable among these are wines and spirits where the
duties are being raised approximately from 25 to 50 per cent. so as to produce about
Rs.70 lakhs annually. Another Rs.50 lakhs are expected from the increased duties on
motor cycles and scooters and clocks and watches.
23. The second group of articles comprises items like coal-tar dyes and certain
types of machinery where, on the one hand, the existing duties are low, and on the other
indigenous manufacture has made fair progress. The increases proposed are to be effected
partly by changes in the Bill and partly by withdrawal of concessions at present given
by executive Notification. While these will have, a negligible effect on costs of consumer
goods, they are expected to produce an annual yield of about Rs.180 lakhs.
24. Lastly I propose an increase in the import duty on artificial silk yarn. With
the shortage in supplies of cotton cloth, the art silk industry has been doing quite well
of late. There has been a substantial increase in production of art silk fabrics, and since
these fabrics compete to some extent with fine and superfine cotton fabrics, they are in
a position to bear higher taxation than they do at present. However, having regard to the
somewhat fluctuating conditions which have prevailed in the art silk industry in the
past, I consider it desirable, that, while the tariff rate should be pitched at a certain
maximum level, Government should fix the effective rates from time to time, according
to current needs, by executive Notification. The import tariff rate I have proposed is
Rs.3 per lb., but the immediate effective rates will vary from Rs.1-4-0 to Rs.2/- per lb.
according to deniers. I expect an annual yield of Rs.160 lakhs from these duties.
25. I am suggesting a corresponding change in the excise side by proposing the
Imposition of a Central Excise duty on indigenous art silk yarn. With the protection
afforded by a high duty on imported art-silk yarn, the restrictions on imports, and
increasing demand, the indigenous producers of art silk yarn have been making substantial
profits. The excise duty I have proposed is again a ceiling rate of Rs.1-8-0 per lb. which
is being brought down by executive Notification to 4 annas Per lb., and 8 annas per lb.
according to deniers. These effective rates generally maintain the measure of protection
enjoyed by the indigenous products against the imported product. The annual yield I
expect from these rates is Rs.70 lakhs.
26. A low excise duty of 2 annas per lb. is being provided, by Notification, for
staple fibre and staple fibre yarn.
27. I have also proposed an excise duty of Rs.3,000 each on the more expensive
types of motor cars made in India. This duty will not fall on trucks or on small cars and
is expected to yield about Rs.80 lakhs in a year. To the extent it discourages the production

7
of big cars, we will have diverted valuable foreign exchange to objects of greater utility.
28. It is somewhat difficult to make an estimate of the actual yield of Customs
duties. On the basis of current Imports, the yield should be about Rs.9 crores per year.
As, however, there is likely to be a substantial reduction in the quantum of Imports, the
actual extra revenue may well be about Rs.6 crores in a full year.
29. Thus, the cumulative financial effect of my income-tax, Customs and Excise
proposals would be about Rs.16 crores per year, or Rs.64 crores during the plan period.
30. I propose also to increase substantially the stamp duties on the Bills of
Exchange. As the House to aware, there are certain slab rates prescribed in the Stamp
Act which go up to 15 annas per Rs.1, 000 in the case of bills payable not more 6= a
year after they are drawn. By a Notification issued in 1940, these slab rates were
substituted by a flat rate of two annas Per Rs.1, 000. It is now proposed to increase the
statutory rate to Rs.10 per. Rs.1, 000 for such bills with proportionate reduction for
bills of shorter duration. These are intended to be ceiling rates and it is my present
intention to operate on the basis of half these rates. This increase of duty is, it will be
appreciated; a fiscal measure with a monetary intent. The additional revenue resulting
from the increase will accrue to State Governments. There is thus no effect on Central
revenues.
31. Proposals regarding Customs and Excise Duties will take effect immediately.
Those relating to direct taxation are in respect of current profits and gains but can be
assessed only in the next financial year. Changes in Stamp duties win come into force
when the law is passed.
32. This brings me to the end of my proposals for the day. These measures
have to be judged not only from the point of view of their immediate yield but also in
the light of the requirements by way of financial resources for the period of the plan.
The budgets of the Central and State Governments this year show a deficit of over
Rs.400 crores for financing a plan outlay of about Rs.800 crores. The extent of deficit
financing has from now on to be operated within limits if it could not be progressively
reduced, if prices are to be prevented from going up further and creating fresh difficulties
through increased pressures for higher wages and increased costs all round. The full
yield of some of the measures mentioned above will accrue only gradually; but this
only means that the earlier the task is begun the better it is from the point of view of the
overall stepping up of investment which we propose not only during the Second Plan
period but for several plan periods to come.
33. In conclusion, I should like once again to emphasize the need to step up as
much as we can the rate of savings in the economy in order to match it with the
investments we are undertaking. This is no easy task. I should also stress that while an
under-developed economy has to depend in some measure on resources from abroad,
the amount of such assistance itself depends upon the efforts we make domestically to

8
keep down inflationary pressures and to mobilise the savings of the community for the
Plan. We have put all our hopes on the Plan and we must do our best by it. It is suggested
in some quarters that we ought to revise our Plan in view of the increase in outlays
required to which I have made a reference earlier, and particularly in view of the
unfavourable turn in the international situation. I think suggestions of this kind are
defeatist in themselves and are quite unjustified. We are only in the first year of the
Plan, and although the tasks we have taken upon ourselves are large and difficult, I see
no reason to be pessimistic of our capacity to Implement the Plan. Nor is there anything
in the international situation which, at this stage, suggests a revision of the Plan. I am
convinced that they do wrong who express scepticism at a time when the country ought
to be thinking of nothing else but going ahead with the greatest determination. The Plan
is a challenge, and it is a challenge which must be met with all the resources and ingenuity
at our command.

(November 30,1956)

9
 SPEECH OF SHRI C.D. DESHMUKH MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1955-56

Sir, I present the statement of the estimated receipts and expenditure of the
Government of India for the year 1955-56.
2. This year, for the first time, Hon’ble Members will find circulated with the
Budget papers Hindi versions of the Budget Speech, the Annual Financial Statement
and the Explanatory Memorandum. I am sure the House will welcome this beginning.
The Budget documents contain a large number of highly technical terms for which
suitable equivalents have yet to be evolved and standardised. Imperfections are inevitable
in this first attempt and I trust Hon’ble Members will bear with them.
REVIEW OF ECONOMIC CONDITIONS
3. Economic conditions during 1954 were generally satisfactory. Rainfall was
seasonal and adequate in the country as a whole, although in certain parts of the country
floods caused extensive damage. There was no other major climatic upset. In the
aggregate the out turn of crops was good and the overall stability attained by the economy
in 1953 was maintained.
4. The trend of prices for the greater part of the year was one of downward
adjustment. The general index of wholesale prices which had stood at 392.6 at the
end of December 1953 rose moderately to 404.2 by the middle of April 1954.
Thereafter prices fell rather sharply to 378.4 by the end of June and, except for a
slight rise up to the end of September, there was a further fall with the harvesting of
the Kharif crop, and the index at the end of January 1955 stood at 360.
5. The recent fall in prices has been due largely to a fall in prices of food
grains, certain raw materials like oil seeds and certain miscellaneous articles like black
pepper. The price of rice was about 12 per cent lower in December 1954 as compared
with December 1953 and that of wheat about 16 per cent lower. Wheat prices had in
fact declined by as much as 30 per cent during the first six months of 1954 and, to
safeguard the interests of wheat growers, Government announced a policy of price
support at Rs.10 per maund. Prices of coarse grains have also recorded a sharp decline
in recent months and the Government of India have announced as a measure of relief,
the decision to purchase from cultivators jowar and maize at Rs.5-8-0 per maund and
bajra at Rs.6 per maund at certain specified mandis in areas where prices had fallen
below these levels. These measures have on the whole had a reassuring effect.
6. The fall in wholesale prices has, to some extent, been reflected in living
costs in various industrial centres. The All-India Working Class cost of living index
declined by about 7 per cent between January and December 1954. Compared with the
1
peak of 111 in July-August l953, the index at 97 in December 1954 represents a decline
of about 13 per cent in several centres, specially in the eastern parts of the country, the
fall has been larger. I may add that most of the existing cost of living indices are based
either on pre-war weights or 1944 weights and the question of bringing these indices on
to a more recent base and of improving the available series is under examination.
7. Agricultural production in the country during the year drawing to a close
was generally satisfactory. Good and seasonal monsoons in 1953-54 had resulted in a
marked improvement in the agricultural production which stood about 18 per cent higher
than in 1950-51. The production of food grains in 1953-54, which amounted to 66
million tons, exceeded the Five Year Plan target by about 4.4 million tons; and that of
oil seeds, at 5.6 million tons, by about one lakh tons. The production of cotton amounted
to 3.9 million bales and very nearly reached the Five Year Plan target. Production of
jute, on the other hand, has shown some wide fluctuations in recent years, corresponding
to the violent fluctuations in the prices of jute, and now stands at about 4.5 per cent
lower than the figure recorded for the year 1950-51. While a part of these recent gains
in agricultural production is no doubt due to favourable weather conditions obtaining
during two successive years, a significant part must be regarded as a permanent addition
to our agricultural production obtained through a number of measures like extension of
Irrigation facilities, increased use of fertilisers and the introduction of improved seeds
and techniques whose benefits are spreading to larger and larger areas.
8. The increased production of food grains made it possible for the Government
to further relax controls over the movement and distribution of foodgrains. With the
lifting of restrict tons in respect of rice in July 1954, the controls on food distribution
have been practically dispensed with altogether. Only in regard to wheat there remain
some restrictions on inter-zonal movement, which have been retained to make the best
use of the stocks available with the Government.
9. The year 1954 closed with a comfortable stock of more than 1.5 million
tons of foodgrains with the Central and State Governments. Due to the increase in the
internal production of foodgrains, it has been possible to reduce the import of foodgrains
to only about .8 million tons in 1954 as against 4.7 million tons in 1951, 3.9 million
tons in 1952 and 2 million tons 1953. Further imports, which will not be large, will now
be for purposes of strengthening our reserves. Indeed, we are now in a position to
export a limited quantity of rice to recapture our traditional markets for the finer qualities.
10. Industrial production during the year also increased over a wide field. Cloth
production rose from 4,900 million yards in 1953 to 5,000 million yards in 1954. The
production of yarn also increased during the year, the consumption of yarn by the
handloom. Industry reaching a figure of 78,000 bales during the first 10 months of the
year compared with 73,000 bales for the whole of 1953. With increased supply of yarn
and other forms of assistance given to the handloom industry, the production of handloom
cloth increased by 100 million yards over the figure of 1,300 million yards in the previous

2
year. Cement production increased from 3.78 million tons in 1953 to 4.36 million tons
in 1954. In Jute, the production during the year was nearly 50, 000 tons more than in
19531. The members of the Indian Jute Mills I Association, which covers nearly 95 per
cent of the industry, who had had to reduce their working hours in the past, found it
possible to increase their working hours from 42-21 hours to 45 hours a week from July
1954 and to 48 hours a week from October 1954. Production of finished steel reached
an all time high of 1.23 million tons in 1954, which was nearly 2 lakh tons more than in
1953. Production of coal in 1954 was nearly one million tons more than in 1953. The
only major industry to show a decline in production was the sugar industry in which,
owing to adverse seasonal conditions and other special causes, there was a drop of
about 2 lakh tons.
11. The tempo of industrial development has also been encouraging. Daring
the year 110 licences were granted for the establishment of new industrial undertakings
and 226 licences for existing undertakings to expand their units. Several new lines of
production were first established in the country such as all-gear head lathes-121/2”,
motorised bench grinders, roller bearings, large size pumps, fuel injection equipment,
staple fibre and chloromycetin. Two important steps were taken during the year with
the object of assisting rapid industrialisation. The first was the setting up of the
Government owned National industrial Development Corporation. The Corporation is
conceived mainly as an instrument for securing a harmonious development of industries
in both the public and private sectors. The Corporation will not undertake financing of
industries except in so far as it is incidental to the development of industries. The second
was the flotation. with the Co-operation and assistance of Government and the good
offices of the International Bank for Reconstruction and Development, of the industrial
Credit and investment Corporation of India, a private institution with a capital of Rs.5
crores subscribed by the investors in India; the U.K. and the U. S. A. This Corporation
to which Government will give an interest-free loan of Rs.71/2 crores and the I. B. R. D.
a loan of $ 10 million will assist the development of industries in the private sector.
12. Small scale and cottage industries continued to receive special attention
during the past year. On the recommendations of a team of Experts sponsored by the
Ford Foundation, the Government of India have set up four regional institutes of
technology for small industries, a Marketing Service Corporation and a Small industries
Corporation which would assist small scale industries in various directions. A Small
Scale industries Board has also been set up to co-ordinate the activities of these
institutions and to carry out a programme of development. The development of Khadi
and village industries and of handicrafts has been given systematic assistance through
the All-India Khadi and Village industries Board and the All-India Handicrafts Board.
13. State industrial enterprises also had a satisfactory year. The Sindri Fertilizer
Factory has reached its rated output capacity. Other industrial undertakings like
Chittaranjan and the Indian Telephones have also recorded marked improvement. The
Hindustan Cable Factory has recently been inaugurated; the Machine Tool Factory has

3
started token production and the Penicillin and D. D. T. factories are due to start
production soon. Preliminary work on the new steel undertaking at Rourkela is well in
hand and, as the House is aware, an agreement has recently been signed with the U.S.S.R.
for the installation of an additional steel plant with a capacity of 750, 000 tons of finished
steel. Proposals for the setting up of additional units for steel and fertiliser production
and schemes for producing heavy electrical plant and synthetic oil from coal are under
consideration.
14. Although satisfactory progress has been recorded in the field of production,
and expanding production has, to some extent meant increased employment, the
employment situation continues to be a matter of some anxiety. We are not in a position
yet to state in precise terms what the magnitude of the problem is. The definition and
measurement of unemployment and under-employment in underdeveloped countries
presents special problems. These are being considered by our technical experts, and we
expect to get a steadily improving flow of information on the amount, incidence and
causation of unemployment. The number of unemployed persons registered with the
Employment Exchanges has risen continuously from about 522,000 in December 1953
to 581,000 in November 1954, reflecting partly the increase in population, but this
again gives only a partial picture. It will be some time before we can put together the
data now being collected from various surveys and enquiries. The problem of securing
full employment in a vast country with a steadily growing population does not admit of
a quick and easy solution. It is only by accelerating development on the widest possible
front, covering both the urban and rural sectors and with a diversified and, wherever
possible, decentralised pattern of production that employment opportunity on a scale
commensurate with the needs of the population can be procured. I have no doubt that
the next Five Year Plan will pay due regard to this very important aspect of the country’s
economic development.
15. There was a substantial increase in money supply during the year to meet
the needs of increasing production and growing economic activity. The note circulation
increased by Rs.75 crores and demand liabilities of Scheduled Banks by about Rs.55
crores, The increased money supply has been due, almost entirely, to expansionary
factors within the country, the external payments position being more or less in balance.
16. There have been distinct signs of a revival of investor confidence and the
capital market has reacted well to the general improvement in the country’s economy.
The response to both Government and private borrowing in 1954 was heartening,
especially in comparison with the previous two years. Monetary policy and the structure
of interest rates, save for a slight rise in short term rates, remained unchanged during
the year.
BALANCE OF PAYMENTS
17. The country’s balance of payments position showed a surplus of Rs.11
crores during the first two quarters of 1954. The third quarter of the year showed a
deficit of Rs.15 crores. In the last quarter, figures for which are not yet available, it is
4
expected that there will be a small surplus.. There was an increase in Imports during the
year, particularly of industrial raw materials, and sugar Imports have also been larger
due to decline in indigenous production and increase in consumption. As a result,
although our exports also increased, mainly through increased external demand for our
major exports, jute and tea, and for the first time since 1951-52 our export prices were
better in relation to import prices, there was a sizeable deficit in trade account during
the second half of 1954. Taking the year as a whole, however, I expect that we shall be,
more or less, in balance in our external transactions as against a surplus of Rs.55 crores
in 1953. This is roughly indicated by the movement in the level of our sterling balances
which rose by about Rs.4 crores during the year from Rs.727 crores on 1st January to
Rs.731 crores on 31st December 1954.
18. Although the balance of payments position has so far been satisfactory, the
increase in Imports, which would become necessary with increased investment
expenditure, would place considerable strain on the payments position in the future. It
is, therefore, necessary to increase foreign exchange earnings through increased exports
and considerable attention is being paid to export promotion. Export duties and quotas
are adjusted from time to time to enable the country to maintain and develop its exports
markets and strengthen its competitive position in the world markets. Thus export duties
on a number of items, like manganese, black pepper, mustard oil, groundnut oil, linseed
oil, castor oil and raw cotton have been either abolished or reduced. Export Promotion
Councils have been set up during the year for cotton textiles, silk and rayon, and rules
have been made for giving drawback of import duty on raw materials and components
utilised in the manufacture of several articles that are exported, as for example linoleum,
artificial fabrics, etc.
DOLLAR POSITION
19. The improvement in our dollar position has continued, although the net
surplus with the dollar area in 1954 is expected to be smaller than in 1953. In the first
half of 1954. excluding the official assistance received from the dollar area, the net
surplus on Current Account with the dollar area was Rs.7 crores as against Rs.13 crores
in 1953. While Government imports during the first half of 1954 were lower by more
than 66 per cent as compared to the previous half year owing to reduced purchases of
foodgrains, commercial Imports, especially of raw cotton, offset the decline in imports
on Government Account. There was also some decline in exports of metallic and non-
metallic ores.
20. Daring 1954 for which only preliminary figures are available, we drew $
12 million from the Sterling Area’s reserves for meeting our obligations in the dollar
area. The corresponding figure for 1953 was a surplus of $ 15 million. This was due to
the fact that we made during 1954 a special payment of $ 47 million to the International
Monetary Fund to repurchase a part of our currency from that Organisation. Hon’ble
Members will remember that in my budget speech last February I mentioned
Government’s intention to repurchase from the Fund the equivalent of $ 72 million out
5
of the total of $ 100 million we had purchased from it in 1948. We expect to make a
further payment of $ 25 million next month, leaving an outstanding balance of about $
28 million, which will not involve the payment of any interest charges.
21. India has continued to receive assistance from friendly countries towards
her development schemes. For the current year a sum of $ 60.5 million was authorised
by the United States Government as development assistance to India. About 50 per cent
of this assistance is being utilised in obtaining agricultural commodities like wheat and
cotton. Out of this sum of $ 60.5 million, the Government of India have agreed that a
sum of $ 45 million or its rupee equivalent should be a loan. The Government of Canada
have again offered to provide a further sum of the order of $ 13 million, the Government
of Australia a sum of £ 2.5 million and the Government of New Zealand a further sum
of £ 250, 000. The Ford Foundation, which has been providing assistance for programmes
of development, particularly in the field of training, made available an additional sum
of $ 1.1 million. Under the Colombo Plan, we are also providing assistance to
neighbouring countries. In the Budget for the next year, the total sum to be received by
us by way of external assistance under the Colombo Plan and from friendly countries is
expected to amount to Rs.74 crores, while we shall be spending on the provision of
such aid to other countries approximately Rs.2 crores. I take this opportunity of expressing
our appreciation of the active and helpful interest our friends continue to take in our
economic development.
22. Daring the current year, India obtained two more loans from the International
Bank for Reconstruction and Development; a loan of $ 16.2 million to Tatas for their
Thermal Power Project at Trombay, and another of $ 10 million to the recently established
industrial Credit and investment Corporation of India. This brings the total of loans
from the Bank to India to $ 126.7 million. Both the loans being for private bodies, the
Government of India has guaranteed them as usual.
23. I should like to mention at this stage the steps taken by the Government of
the United Kingdom towards convertibility of sterling. The Pound has been
disencumbered of a mass of short term financial obligations by reducing the U.K. debts
to other members of the European Payments Union, and by the repayment of the
outstanding borrowings to the International Monetary Fund. A number of steps have
also been taken to simplify the Exchange Control operations through the widening of
the automatic transferability and usability of sterling held by non-residents, and a
significant step towards limited convertibility was taken by the reopening of a number
of commodity markets. These steps are of advantage to the entire sterling area and
reflect the growing strength of sterling to which all sterling area countries have
contributed. India has also liberalised its exchange restrictions and some steps have
been taken towards relaxation of exchange facilities. We must not forget, however, that
our foreign exchange expenditures are bound to grow rapidly as development
programmes are accelerated, and we must spare no efforts to conserve our foreign
exchange reserves and to secure an improvement in our export earnings. I should like to
6
take this occasion to remind the House that since the end of March 1951, until the close
of 1954, that is, roughly in four years of the Plan, our sterling balances declined by
Rs.153 crores. By the end of March 1955 we would have received external assistance
in the form of outright grants of about Rs.56 crores and in the form of loans of nearly
Rs.100 crores. As I mentioned earlier, though our present balance of payments position
is satisfactory, it would, in my judgment, be wrong to infer that the long term outlook is
any other than one of continued relative shortage of foreign exchange.
24. All in all, 1954 may, in a sense, be regarded as the end of the post war
period of transition. The substantial increase in food production, the improvement in
the supply position in other directions and the disappearance of inflationary conditions
represent the end of war time stresses and strains. The process of decontrol which
commenced in 1952 was more or less completed in 1954, and free interplay of market
demand and supply forces was resumed over a wide field. From now on, unless a very
marked deterioration takes palace in the international situation or a natural calamity
like the failure or maldistribution of the monsoon occurs in a big way, the determining
factor in the economic situation, we may hope, will be the rate of planned economic
development in the country.
FINANCIAL YEAR 1954-55
25. I shall now deal with the Revised Estimates for the current year and the
Budget Estimates for the coming year.
26. The Budget for the current year provided for a revenue of Rs.451.73 crores
and expenditure of Rs.467.09 crores, leaving a deficit on Revenue Account of Rs.15.36
crores. I now expect that the revenue deficit will amount to Rs.5 crores only. The
improvement is the result of a saying in expenditure of Rs.11.01 crores offset by a small
fall in revenue of Rs.65 lakhs.
27. The Revenue from Customs is now put at Rs.180 crores against Rs.175
crores taken in the original budget. During the year, a number of Export Duties were, as
I stated earlier, abolished or reduced in the interests of our export trade but the resultant
fall in revenue was more than offset by the increase from the enhancement of the Export
Duty on tea which is expected to bring in an additional revenue of Rs.6.6, crores this
year. Larger imports of sugar, necessitated by the decline in indigenous production,
also resulted in increased revenue to the extent of about Rs.10 crores. Against these
increases the Revenue under Customs will lose this year about Rs.6 crores owing to the
gradual replacement of imports of motor spirit, kerosene and lubricants by indigenous
production of oil refineries in India, one of which went into production this year. The
revenue from Union Excise Duties is now estimated at Rs.103.65 crores, about the
same figure as in the original budget, the additional revenue from increased production
of petroleum and kerosene being neutralsed by a fall of Rs.31/2 crores in revenue from
sugar and an almost equal fall in revenue from tobacco. The fall under sugar is due to

7
the decline in Production during 1954; that under tobacco to the concessions in duty
given ‘ during the year as a measure of relief in view of the large accumulations of
stocks with growers and traders and the resultant fall in prices. The revenue from new
excises introduced during the last Budget has been, more or less, according to expectation.
The total collections from these new excises are now estimated at Rs.4.75 crores against
Rs.4.2 crores assumed in the budget. Revenue from income-tax has been taken at Rs.165
crores which is the same as the budget figure. The credit of Rs.9 crores which I had
taken in the Budget from repayment of partition debt by Pakistan has, however, not
materialised so far, as, contrary to the hope which I had expressed in my Budget Speech
last year, it has not yet been possible, for a variety of reasons, to reach a settlement with
Pakistan over the outstanding financial issues between the two countries. Further
negotiations are, as the House is aware, to take place in the near future and I hope that
these will result in a satisfactory settlement on these vexed issues. The estimate of Rs.4
crores from Estate Duty taken in the original budget has proved optimistic and I now
expect only Rs.1.26 crores from this source during the current year. The Estate Duty
proceeds go, however, almost entirely to the States and the reduction does not affect the
Central Budget. I may mention that the distribution of the Estate Duty proceeds among
the States has under Article 269 of the Constitution, to be made in accordance with such
principles of distribution as may be formulated by Parliament by law. We have been
considering the question of formulating the principles of distribution, but with the very
limited experience of the working of the Estate Duty Act and the lack of basic data,
such as sources and area of collection, essential to the framing of a scheme of distribution,
it has not been possible to do so. We have, therefore. come to the conclusion that the
next Finance Commission should be asked to advise on this issue and that in the
meanwhile, a provisional distribution should be made on the same basis as the States’
share of income-tax. This provisional distribution will be subject to revision by the next
Finance Commission; and, as the collections of duty are not likely to be large for some
time, this will not make for any significant difference to the finances of individual
States. Other miscellaneous heads of revenue show an improvement of about Rs.3 crores.
28. Expenditure this year is now estimated at Rs.456.08 crores of which Civil
Expenditure will amount to Rs.258.06 crores, a saving of Rs.3.41 crores in the original
budget and Defence Services to Rs.198.02 crores, a saving of Rs.7.6 crores in the original
budget.
29. The saving in Civil Expenditure is the net result of a number of variations
of which I need mention only the more significant ones. Consequent on the fall in
revenue from the Excise Duty on tobacco mentioned earlier, the share of Union Excise
Duties payable to States, payment of which is treated as expenditure, will decrease by
Rs.1.18 crores. Payments to States against the provision of Rs.8.13 crores for educational
schemes are now expected to amount to Rs.6 crores only owing to the slower progress
of expenditure in some States. Similar savings amounting to Rs.4.49 crores are expected
in grants to States towards community Development Projects and National Extension

8
Service. On the other hand, grants to States for flood and famine relief have increased
from Rs.2 crores in the original budget to Rs.6 crores, expenditure on displaced persons
by Rs.89 lakhs, while expenditure of the Pondicherry, State accounts for an addition of
Rs.76 lakhs to the Central Budget.
30. The saving in expenditure on Defence Services is mainly due to the fact
that procurement of stores was less a than anticipated at the time the budget was framed.
There has also been a reduction in demands as a result of economies.
FINANCIAL YEAR 1955-56
31. For the next year, Revenue, on the basis of existing taxation, is estimated
at Rs.468.76 crores and Expenditure at Rs.498.93 crores, leaving a deficit of
Rs.30.17 crores.
32. The Revenue from Customs in the coming year has been placed at Rs.165
crores against the current year’s Revised Estimate of Rs.180 crores. The recent a
enhancement of the Export Duty on tea will bring an additional revenue of Rs.11 crores
over the current year’s yield. Imports of motor spirit, kerosene and lubricants will,
however, decrease to almost a quarter of the present level as a result of the second oil
refinery at Bombay also coming into full production. In consequence there will be a
drop of about Rs.20 crores under this Head as compared with the collections of the
current year but a substantial part of this revenue will be realised through excises.
Imports of sugar are also expected to be less than in the current year. In the result, the
Customs Revenue will show a net drop of Rs.15 crores next year. The revenue from
Excise Duty is put at Rs.123.45 crores next year as compared with the current year’s
Revised Estimate of Rs.103.65 crores. The increase is largely accounted for by revenue
from the excises on kerosene and petrol following larger internal production; the
collections of Tobacco Excise are also expected to improve by Rs.3.3 crores, and,
following better production, the collections from sugar by Rs.1.5 crores. Under income-
tax the current year’s figure of Rs.165 crores is being repeated for next year. Collections
recently have been somewhat lower than expected due to the progressive clearance of
arrears but I hope that improvement in normal collections will make up for this deficiency.
Revenue from Estate Duty is estimated at Rs.3 crores next year but, as I have already
pointed out, this goes almost wholly to the States. Under Currency and Mint, profits of
the Reserve Bank payable to Government are expected to be Rs.20 crores next year
against Rs.17.5 crores this year, owing to the increased yield on Treasury Bills held by
the issue Department. I am also taking a credit of Rs.8 crores from profits from the sale
of sugar imported on Government account. On the other hand, I am not taking any
credit for repayment of partition debt by Pakistan in view of what has happened in the
last two years. If, as I hope, a settlement is reached in the coming year, I shall take the
credit into account in my revised estimates.
33. The Expenditure next year is being placed at Rs.498.93 crores, Rs.202.68
crores under Defence Services and Rs.296.25 crores under Civil Heads.

9
 34. The Estimates for Defence Services show an increase of Rs.4.66 crores
over the Revised Estimates for the current year. This increase is mainly due to the
normal expansion programme of the Navy and Air Force but partly to the promulgation
of the New Pension Code and the grant of certain pensionary benefits to personnel
recruited initially on a short term engagement but kept on for longer periods. The Army
budget actually shows a decrease of about Rs.1 crore in spite of the inclusion of
substantial amounts for certain modernisation measures. This has been rendered possible
by economies in other directions. While in present conditions it is not realistic to expect
any reduction in the strengths of the Defence Forces, we are trying to effect as many
economies as possible by better conservation and utilisation of staff, reduction in scales
of consumption and avoidance of wastes. The drive for economy has been and is being
pursued with vigour and I know receives constant attention from my colleagues in the
Defence Ministry.
35. Considerable progress has also been made in the production, in India, of
stores required by the Defence Services. As the House is aware, a Committee was
appointed last year under the Chairmanship of Sardar Baldev Singh to examine the
present organisation, procedure and methods of production in our Ordnance Factories
with a view to expanding their activities and ensuring their economical administration.
The Committee recently submitted their report, which is under the examination of
Government. A factory for the manufacture of electronic equipment is being set up.
Plans are under consideration for undertaking the manufacture of certain other types of
stores in India, the aim being to achieve self-sufficiency in as wide a field as possible.
36. Before I deal with the Estimates of the Civil Expenditure, I may mention
that we are making a beginning on the 1st April 1955 with the separation of Audit from
Accounts, on which the Public Accounts Committee have rightly been laying stress. As
I stated during the budget discussions last year, there is no difference of opinion about
the need for separation, but such a fundamental change in a long and well established
system which affects both the Centre and the States can be brought about only by stages
to avoid dislocation of administration. The Finance Ministry have been in close
consultation with the Comptroller and Auditor General and it has now been decided, as
a first step, to introduce the reform in respect of the transactions relating to Supply,
Food and Rehabilitation with effect from the 1st April 1955. Accordingly, Departmental
Accounts Offices are being constituted in the respective Ministries. To begin with, the
extra staff will be provided for these offices from the Indian Audit Department and the
scheme will be implemented in close and continuous consultation with the Comptroller
and Auditor General. The Comptroller and Auditor General has been in correspondence
with the States also for a similar change to be made in the maintenance of the Accounts
relating to the States and it is hoped that it will be possible to make a beginning during
the next financial year in some of the States as well.
37. Civil Expenditure next year shows an increase of Rs.38.19 crores. The
bulk of the increase represents larger allotments for development expenditure, which is

10
inevitable in the final year of the Plan. As usual, full particulars of the individual
variations are given in the Explanatory Memorandum. I will mention here only the
more important ones.
38. The total expenditure on Nation Building and Development Services
amounts to Rs.75.3 crores against Rs.50.69 crores in the current year. Allowing for a
transfer of about Rs.4.6 crores from other heads, the net increase here comes to Rs.20.01
crores. Thus the Budget for Education increases by Rs.7.3 crores to Rs.18.31 crores
which includes provision of Rs.10 crores for grants to States for Basic, Social and
Secondary Education, Rs.3.5 crores for the University Grants Commission and Rs.1.29
crores for scholarships to students of Scheduled Castes, Scheduled Tribes and other
Backward classes. Expenditure on Scientific Departments and research schemes
increases by Rs.2.01 crores; Medical and Public Health Services account for an increase
of Rs.1.96 crores; and development of village and small scale industries will cost an
additional Rs.2.23 crores. For development of Khadi and Handloom industries, a total
provision of RS.4.25 crores has been made which will be met from the fund created out
of the special cess on mill-made cloth. In addition to the increase of Rs.20.01 crores
under Nation Building and Development Services, mentioned above, there is an increase
of Rs.4.44 crores in expenditure on Community Development Projects and National
Extension Services; an increase of Rs.2.41 crores in grants to Part C States with their
own legislatures for financing their development schemes; an increase of Rs.81 lakhs
in grants for the development of Scheduled Tribes and Scheduled Areas; an increase of
Rs.50 lakhs in grants to States for the development of primary education under the
Finance Commission’s award and an increase of Rs.1.1 crores in grants for social welfare
and welfare of backward classes. he total additional provision for Development Services
next year thus aggregates about Rs.29.27 crores.
39. Of the rest of the increase in Civil Expenditure, a sum of Rs.3 crores
represents the first instalment of the write off of the trading losses expected on the
disposal of the existing rice stocks. As I stated earlier, Government will be having a
stock of about 1.5 million tons of foodgrains, mostly rice, representing partly stocks
taken over from the States following decontrol last July and partly imports from Burma
under the agreement with the Burma Government. In view of the recent fall in prices,
the disposal of this stock, which will take two or three years to effect, is likely to result
in substantial losses, which at present prices may be of the order of Rs.45 crores, although
it is not possible to estimate their extent accurately. These losses differ from the food
subsidies given in the post-war years which were a part of price control and rationing.
They are straight trading losses arising from the peculiar conditions of the current year
when, with a good crop and because of decontrol, we are having to carry large stocks
liable to early deterioration in storage. With an improvement in food position, large
losses of this nature are not likely in future. It will completely distort the Revenue
Budget if all the losses are taken to Revenue as they arise. I consider it both desirable
and necessary to spread them over Revenue over a reasonable period. Pending the

11
emergence of the final figure of the loss. I have made an ad-hoc provision of Rs.3 crores
in the Revenue Budget for meeting the losses. A provision of Rs.1.34 crores has also
been made, in accordance with the arrangement I explained last year, for the first
instalment of the write back to Revenue of certain expenditure initially taken to Capital.
The total expenditure this year on the four items covered by that arrangement, namely,
Grants for industrial Housing, Grants for Local Works, Grants under the Gadgil
Committee Report, and compensation to displaced persons met by Government, is
expected to amount to Rs.19.36 crores, which will have to be written back to Revenue
over 15 years commencing with next year. In addition, we have. In consultation with
the Comptroller and Auditor General, decided to treat in the same manner grants to
States for the Rural Water Supply and Sanitation Schemes which are of the same nature.
These schemes have been started this year and the expenditure in the first year is estimated
at Rs.81 lakhs. All this expenditure is to be written back to Revenue over a period of 15
years and the debit to Revenue next-year will, as stated above, amount to Rs.1.34 crores.
Among the other increases are Rs.1.55 crores for payments to States of their share of
Union Excise Duties consequential to the increase in Revenue from Tobacco Excise
adopted for next year, Rs.1.46 crores for Expansion of Administrative and Development
Services in the North East Frontier and Rs.1.27 crores for Civil Works.
CAPITAL EXPENDITURE
40. For Capital Outlay the current year’s budget provided for an expenditure
of Rs.145.75 crores. The expenditure is now estimated at Rs.178.54 crores. The increase
is accounted for by a worsening of Rs.61.59 crores under Government Trading Schemes
largely due to purchase of rice stocks from the State Governments, offset by saving of
Rs.28.80 crores in other items. A provision of Rs.10 crores was made in the budget for
possible purchase of shares in the Hindustan Steel Ltd., but this provision will now
remain unutilised during this year. There is a saving of about Rs.7 crores under Civil
Works mainly due to slower progress in the construction of buildings and roads. For
similar reasons, there is a saving of Rs.4 crores in the Grants for industrial Housing and
of about Rs.4.7 crores in Defence Capital Outlay.
41. For next year, Capital Expenditure is estimated at Rs.223.3 crores including
Rs.29 crores for Government Trading Schemes mostly for our normal imports of wheat
for the Central Reserve. As I remarked earlier, outlay in the final year of the Plan will
inevitably increase.
42. For Railways a provision of Rs.66 crores has been made against the current
year’s expenditure of Rs.321/2 crores. The Five Year Plan for Railways provided for an
expenditure of Rs.400 crores during the Plan period, of which Railways were to find
Rs.320 crores from their own resources. While the total outlay during the quinquennium
will be only slightly over the original Plan, there has been a shortfall during the period
in the resources raised by the Railways themselves. This explains the larger allotment
for Railways next year. Compensation to displaced persons in the form of cash and
transfer of Government property and write off of loans is estimated at Rs.31 crores of
12
which about Rs.91/2 crores will be made from sale proceeds of evacuee property, that is,
a net figure of about Rs.21 crores against the current year’s net outlay of Rs.71/2 crores.
A provision of Rs.5 crores has been made for investment in the Hindustan Steel Ltd. in
addition to a loan of an equivalent amount. A sum of Rs.7.7 crores will be payable to the
Reserve Bank of India next year in lieu of Hyderabad securities forming part of the
assets against Hyderabad note issue which has been taken over by the Bank. As part of
the settlement for the allocation of assets and liabilities of the Hyderabad State, following
its financial integration, it has been decided that this liability for Hyderabad securities
which were created ad ho by the State Government before integration for expansion of
its currency will be taken over by the Government of India. Provision for Civil Works
amounts to Rs.32 crores against Rs.24 crores this year, after excluding the adjustment
in respect of Government property transferred to displaced persons as part of the
compensation scheme. Capital Outlay on Defence, next year is estimated at Rs.22.38
crores against Rs.13.09 crores, the increase being due partly to the carry-forward from
the current year and partly to the normal expansion programme.
43. In addition to the provision for Capital Outlay just mentioned, the estimates
include, against the original provision of Rs.249 crores, Rs.306 crores this year and
Rs.355 crores next year for loans to State Governments and others mostly for their
development projects. Details of these loans are given in the Explanatory Memorandum.
WAYS AND MEANS
44. The current year’s budget provided for an overall deficit of Rs.239 crores
to be met by expansion of Treasury Bills On the basis of the Revised Estimates, the
overall deficit will amount to Rs.208 crores. As the opening balance was about Rs.12
crores less than the minimum of Rs.50 crores which it is necessary to maintain, the
expansion of Treasury Bills will, therefore amount to Rs.220 crores.
45. During the year Government floated the 31/2 per cent. National Plan Loan,
1964. The response to this Loan, which was a combined loan to cover the needs of both
the Central Government and the States, was satisfactory and subscriptions amounted to
Rs.158 crores out of which Rs.251/2 crores were lent to the States which would otherwise
have approached the market independently for their loans. The Small Savings Scheme
has also been making notable progress. Appointment of Agents under the General
Authorised Agency System has been proceeding steadily. With the co-operation of the
State Governments, steps are being taken to intensify the movement in rural areas.
Panchayats and other Agencies, such as Union Board Presidents in West Bengal, have
already been appointed for the sale of certificates in a number of States, and extension
of such Rural Agency System to other States also is in hand. The Women’s Savings
Campaign under the Central Advisory Committee, which has recently been expanded,
has also been making valuable contribution to the movement not only in actual collections
but in spreading its message. Over 100 voluntary social and women’s organisations
have already been appointed agents for the sale of certificates and over Rs. one crore

13
have been collected under the Campaign. During the year, Government made two
additions to the investments available under the scheme. The first was the 10-Year
National Plan Certificates. These certificates are intended for the small saver, particularly
in rural areas, and give higher yield than the National Savings Certificates. Although
issued originally as a supplement to the National Plan Loan, their sale has been continued.
The second addition was the 15-Year Annuity Certificates which are intended to meet
the need of those who wish to provide for themselves and their dependants a regular
monthly payment from a lump sum investment. As a result of all these efforts, we are
likely, for the first time, to exceed the annual target of Rs.45 crores which was set some
years ago for collections from Small Savings. While this is heartening, I must appeal
for still greater effort and for whole hearted co-operation on the part of every one in
spreading the movement and making, through it, a massive contribution towards the
country’s development and prosperity. Mobilisation of small savings, necessary at all
times to the country’s economy, has now assumed added importance for the fulfilment
of the development plans which will need increasingly larger resources.
46. The improvement in loan receipts and small savings was, however, partly
offset by increases in capital expenditure and in loans by the Central Government and
also by a drop of Rs.23 crores in foreign aid expected during the year, the last representing
a carryover to the next year.
47. The overall deficit next year is estimated at about Rs.340 crores. This follows
the larger provision for development expenditure in the Revenue and Capital Budgets.
During the coming year one loan, the 21/2 per cent. Loan 1955, with an outstanding
balance of Rs.60 crores, falls due for repayment, while Government have the option to
repay another, the 41 per cent. Loan 1955-60, with an outstanding balance of Rs.9
crores. It has been assumed that both these loans will be discharged next year. Credit
has been taken for a new market loan of. Rs.125 crores. Small Savings next year may
amount to Rs.52 crores and foreign aid to Rs.74 crores. Allowing for other miscellaneous
transactions under Debt and Remittances Head, it will be necessary to expand Treasury
Bills by Rs.340 crores to cover the overall deficit.
48. I might summarise the ways and means position for the coming year.
Government need Rs.30 crores for meeting the Revenue deficit, Rs.578 crores for
financing Capital Outlay and loan requirements of State Governments and others, and
Rs.69 crores for the repayment of the maturing debt. Against this, they hope to raise
Rs.125 crores from the market loan, and Rs.52 crores from Small Savings. Foreign aid
expected next year amounts to Rs.74 crores, and other miscellaneous debt and remittance
transactions may bring in Rs.86 crores. This will leave a gap of about Rs.340 crores in
the available resources to balance the budget. As the cash balance will have no margin
left to be drawn upon, the whole of this gap will have to be met by issue of Treasury
Bills.
49. The sizeable budgetary deficit in the current year and in the next must be
viewed in the context of our developmental needs and the various economic indicators
14
like production, prices, employment and foreign exchange. All these, I think, suggest
that we can and should go ahead more boldly. The production potential of the economy
is steadily increasing as a result of the Plan, and considering the present price and
employment situation. I am confident that while no effort should be spared in maximising
our resources, budgetary deficits of this order carry no threat of serious inflationary
pressures. Nevertheless, the House may rest assured that the situation will be watched
constantly and carefully, and while Government will take the risk necessarily attaching
to any significant development effort, it will be a calculated risk combined with caution.
50. I now turn to the budget proposals for the coming year.
51. I mentioned earlier that the deficit on revenue account in the coming year
was estimated at Rs.30.17 crores and the overall deficit at Rs.340 crores. The problem
before me is how much of this deficit should be covered by additional taxation.
52. The deficit on revenue account is largely due to increased expenditure on
what I would broadly describe as on current account. It is, I think, a prudent principle to
meet as much of the current expenditure as possible from current taxation. Other
considerations, to which I shall refer later, also indicate the need for increased taxation.
Out of the deficit on revenue account, I propose to meet the major portion by fresh and
additional taxation. Even with this the uncovered overall deficit would remain substantial
but, as I stated earlier in my speech, in the present economic climate, a deficit of that
order is, in my opinion, both safe and justified.
53. Hon’ble Members may ask why, if a sizeable overall dificit was Justified
by the needs of the Plan and by the present economic conditions, the whole of the dificit
should not be left uncovered. The fact that the various economic indicators suggest that
deficit financing could be resorted to without undue risk does not mean that the attempt
to mobilise domestic resources to the maximum extent should be given up and prudent
finance replaced by the printing press. While deficit financing would be used as an
instrument for securing the maximum development without injury to the stability of the
economy, the public must be prepared to make the maximum contribution to current
revenues. In fixing the level of taxation, all relevant considerations such as the effect of
the various increases on the economy, saving, investment and production will, obviously,
be taken into account.
TAXATION ENQUIRY COMMISSION
54. Before I go on to deal with the detailed proposals, I should like to make a
brief reference to the report of the Taxation Enquiry Commission. As Hon’ble Members
are aware, the Commission were appointed early in 1953. They completed their work
towards the end of last year and their report reached Government early last December.
It is a massive and historic document covering the entire field of taxation-Central, State
and Local-and the recommendations cover a very extensive field. The report has just
been printed up and copies, together with a summary, are being made available to Hon’ble
15
Members along with the budget papers. Simultaneously, it is also being released to the
public. I am sure the House will join me in paying a tribute to the Chairman and Members
of the Commission for the magnificent work done by them. The report of the Commission
bears the Impress of a thorough and careful study of the problems in all their aspects
and the labour involved must have been stupendous. I am grateful to the Commission
for having submitted the report in time to enable me to take into account the broad
framework of their proposals for my present purposes.
55. I said just now that the report was massive and historic. A report like this
requires very careful study and examination for which, as the House will appreciate
there has not been much time. Indeed, as the printing has only been just completed,
there has not been time even to make it available to the State Governments. All that we
have been able to do is to make a preliminary study of it for our own guidance in the
context of the budget that was immediately ahead and to circulate confidentially to the
State Governments a summary of the recommendations in the fields of State and Local
taxation to enable them to take these into account in framing their own budgets. Now
that the report has been printed and published, it will be possible to take in hand the
detailed consideration of all the recommendations, both at the Centre and in the States.
56. The House will appreciate that in the limited time available to me it will
not be possible to summarise the Commission’s recommendations in the field of Central
taxation. Indeed, any such attempt, even if it were possible, would not be fair to the
report as the background against which these recommendations have been made will
not be clear. Broadly speaking, however, the recommendations are in the direction of
widening the base and range of taxation, both direct and indirect, and involve
readjustment of the rate structure.
57. The recommendations of the Commission cover the basis and procedure
and the rates and rate structure of Central taxation. Insofar as the basis and procedure of
taxation are concerned, effect can be given only by changing the law. As my detailed
proposals will indicate, I am implementing a number of the recommendations
immediately. The House will appreciate, however, there are several limitations to my
giving effect to all the recommendations of the Commission in the present budget.
Firstly, in the case of many of these recommendations detailed study and further thought
are necessary before we can take decisions. It has not been possible within the short
time at my disposal to complete this process. Secondly, there is the very important
problem of gearing the administration to take on the new and additional responsibilities.
And finally, procedural changes which do not impinge directly on the tax liability are
appropriately left out of the Finance Bill to be implemented through amending bills to
the various Acts. I hope the House will agree that in spite of these limitations, the
number of recommendations being given effect to is not inconsiderable and it may have
my assurance that the remaining proposals will be examined by Government and
amending bills placed before the House as early as possible.

16
 58. Coming now to the rates of taxation, one has to bear in mind that the rates
suggested or implied by the Commission are more an indication of the possibilities in
these directions than in the nature of actual budget proposals. The House will remember
that the first Taxation Enquiry Committee was appointed some thirty years ago and, in
a sense, that Committee’s recommendations affected the taxation policy of a generation,
although the events of that generation were crowded by many constitutional and other
changes. Similarly, the present Commission’s report will deeply colour and affect taxation
policy for some time to come. The lines of future policy have been indicated by the
Commission but the steps that we take each year or from time to time must necessarily
be considered in the light of economic and budgetary considerations of the time.
CHANCES IN CUSTOMS DUTIES.
59. I shall first deal with my proposals about Customs duties.
60. In accordance with Government’s general policy of gradually replacing,
wherever possible, at least partly quantitative restrictions by higher import duties, a
number of import duties on goods such as articles made of Paper, papier mache, etc.,
advertising circulars and cutlery not plated with gold or silver, are being raised.
Simultaneously, the import quotas will be liberalised. While the effect on revenue will
not be considerable, the prices, including the duty, will be high enough to act as a
deterrent to any undue expansion of consumption. On some items like zip fasteners and
tiles of earthenware and porcelain, alternate specific duties are also being prescribed so
that low-priced imports may not adversely affect indigenous manufactures.
As part of the changes in the import tariff, I also propose to abolish completely,
subject to the margin of preference being maintained wherever this is bound by
agreement, duties on dyeing and tanning substances, gums, resins, plumbago and
graphite. This is in accordance with Government’s general policy of a gradual remission
or reduction of duties on essential raw materials.
The export duty on cotton cloth is also being reduced to 61 per cent, as a measure
of assistance towards the maintenance of our competitive position in world markets.
These changes, which I am sure the House will welcome, will result in a loss of
approximately half a crore of rupees and will be given effect to by a notification under
Section 23 of the Sea Customs Act which is being issued today.
A slab system is also being prescribed for export duties on tea in lieu of the
existing flat rates. A specific rate tends to become onerous in a period of falling prices;
on the other hand when, as now, prices are rising the incidence of the tax in terms of
value becomes progressively lighter with a flat rate. On account of the numerous qualities
of tea and because such teas are often sent for sale in auction in the United Kingdom
and the price at the time of the export is not ascertainable beyond reasonable doubt, it
has not been possible to devise a system of ad valorem assessment. As a compromise,
certain slab rates varying with the value have been prescribed in the present Bill.
17
 This will not result in any change in the revenue yield at present prices.
The effect of these changes will be a loss of Rs.50 lakhs in revenue.
UNION EXCISE DUTIES.
61. Turning to excises I shall first deal with the changes in the existing duties.
My first proposal is to raise the existing excise duty of Rs.3/12/- per cwt. on sugar to
Rs.5/10/- per cwt. The Taxation Enquiry Commission consider that there is a case for a
substantial enhancement of duty. Consumption of crystal sugar has expanded
considerably in the last year or two and large quantities have had to be imported at
considerable expenditure of foreign exchange. The increase in duty may also have the
effect of discouraging consumption to some extent. The additional revenue is estimated
at Rs.5 crores.
My second proposal is with regard to the duties on cotton cloth. I propose to
rationalise the existing classification and make a readjustment of the duties. At present,
cotton cloth has been graded for purposes of the duty into four categories-superfine,
fine, medium and coarse. This classification, as a basis for tax differentiation and as
indicating the broad sections of the community using the cloth, has become somewhat
unrealistic. I propose to reclassify cloth into two categories,-superfine and others. The
rate of duty on superfine cloth will be, it, two annas six pies per square yard and that on
other cloth one anna per square yard. The, special cess of three pies per yard for the
development of the handloom industry will be levied in addition.
These proposals involve an increase equivalent to about three pies a linear yard
on superfine cloth and six pies a linear yard on medium and coarse cloth. The total
production of superfine cloth is not substantial in relation to the production of other
categories. The Taxation Enquiry Commission have expressed the view that there was
a case for enhancement of the rate of duties on all varieties of cloth. In making these
adjustments, account has also to be taken of the need for additional revenue. Taking all
factors into consideration, I do not think the increase involved can be considered as
unreasonable.
The change in the unit for duty from linear yard to square yard is designed to
secure a more equitable basis. In determining the category for purposes of assessment,
the average count of yarn will, in future, be the basis and not the count of the warp yarn
only as heretofore. I trust the House will agree that this rationalisation is in the right
direction.
The additional revenue from these adjustments will amount to Rs.9 crores.
My third proposal relates to matches. In pursuance of Government’s policy of
fostering the development of small-scale industries, I propose to increase the existing
preference margin for the medium-sized and cottage groups of match factories. The
present margin in respect of match boxes of 40s for medium-sized factories is one anna

18
per gross of boxes. This is being raised to two annas per gross of boxes. Suitable increases
are being made in the margins in respect of other categories. These concessions will
result in a loss of revenue of Rs.50 lakhs of which the States’ share will be Rs.20 lakhs.
My fourth proposal is in respect of cigarettes. In 1951, a temporary surcharge of
3 pies and 6 pies per ten cigarettes according to their retail price was imposed. The
Taxation Enquiry Commission have recommended that these surcharges should be
removed from the category of cigarettes of the value of Rs.10 to Rs.15 per thousand
which appeared to them to be relatively over-taxed and that the revenue loss this would
involve should be recouped by a suitable increase in the duty on the category of cigarettes
of the value of Rs.40 to Rs.50 per thousand. They have also recommended that along
with this readjustment, the surcharge on categories other than the Rs.10 to 15 per thousand
category should be merged with the basic excise duty. These recommendations are
being accepted with certain consequential modifications and necessary changes made.
These taken together have no revenue significance.
62. I now turn to the new excises. The Taxation Enquiry Commission have
recommended the imposition of a large number of new excise duties. I feel myself that
an expansion of revenue from excises is, in the context of our requirements and also in
the pattern of industrial development in the country, inescapable and that we shall
increasingly have to look to the products of organised industries in the country which
have grown up under the shadow of protection, both for bringing in additional revenues
and replacing the loss of customs resulting from the replacement of imported
manufactured goods by indigenous production. I propose to make a beginning with a
number of these new excises in the coming year, the collection of which is unlikely to
involve any major administrative problem. These excises would be on the production
of factories and the rate of duty will be 10 per cent ad valorem The commodities proposed
are Woollen Fabrics, Sewing Machines, Electric Fans, Electric lighting bulbs, Electric
dry and storage batteries, Paper (excluding Newsprint) and Paperboard, and Paints and
Varnishes. The total estimated revenue from all these excises will be Rs.4 crores.
In order to maintain the existing margin between import and excise duties, a
countervailing import duty at the same rate as excise duty will be levied on the imports
of these commodities, where necessary.
The net additional revenue from the changes in excise duties will amount to
Rs.17.7 crores.
CHANGES IN INCOME-TAX
63. I now come to changes in direct taxation.
Among the large number of the Taxation Enquiry Commission’s recommendations,
some deal with the broad structure of taxation and others with matters of detail, such as
the inclusion or exclusion of certain categories of income from taxation, grant of
incentives and other concessions and go on. So far as the basic structure of personal
19
taxation is concerned they have suggested a graded diversification of the existing slabs,
particularly in the slabs of super-tax and the readjustment of rates within these slabs.
They have also recommended the withdrawal of the concession relating to earned income
beyond a certain reach which, they have suggested, should be Rs. 24,000. In the case of
super-tax they have also suggested a lowering of the limit at which super-tax is attracted
from Rs. 25,000 to Rs. 20,000. The broad pattern of adjustments suggested by the
Commission has been accepted by Government and the proposals which I shall just
explain seek to implement the scheme with such modifications as have been found
necessary and desirable. As I mentioned earlier, the current year’s proposals do not by
any means cover all the recommendations of the Commission, but only such of them as
have been found immediately practicable and feasible.
64. I shall first deal with changes in the tax structure.
In accordance with the recommendations of the Commission, the present tax
exempt slab of Rs. 1,500 is being raised to Rs. 2,000 for married persons and reduced to
Rs.1,000 for unmarried persons. This is the first move in the direction of evolving a
suitable scheme of family allowances which the Commission have suggested for
implementation. The net loss of revenue is estimated at Rs.90 lakhs.
The existing slab of Rs. 5,000 to Rs. 10,000 is being broken into two slabs; on the
slab of Rs. 7,500 to Rs. 10,000 the tax is being raised by six pies from one anna nine
pies to two annas three pies. This is expected to yield a revenue of Rs. 1.35 crores.
In the next slab of income from Rs. 10,000 to Rs. 15,000, the rate is being raised
from three annas to three annas three pies. This is expected to bring an additional revenue
of Rs. 85 lakhs.
I accept in principle the recommendation of the Commission that earned income
relief should not be allowed on higher brackets of income. As a first step I propose to
reduce the allowance by stages on incomes in excess of Rs. 25,000, the concession
ceasing when the level of Rs. 45,000 is reached. Between Rs. 25,000 and Rs. 45,000 the
relief of Rs. 4,000 now allowed will be reduced by Rs. 200 for each Rs. 1,000 of income.
The additional revenue is estimated at Rs. 1.9 crores.
In regard to super-tax, the existing slabs have been readjusted and the level at
which super-tax is attracted reduced from Rs. 25,000 to Rs. 20,000. The readjustment
generally follows the pattern suggested by the Commission, but some adjustments have
been made in the rates and slabs. The changes in the super-tax are estimated to yield an
additional revenue of Rs. 5.75 crores.
1 should like to mention two other changes which are being made in the structure
of taxation. The first is an increase in the limit for rebate allowed for payment of premia
on life insurance policies and subscriptions to recognised provident funds. In accordance
with the Commission’s recommendations, the existing limit of one-sixth of income

20
subject to a ceiling of Rs. 6,000 is being raised to one-fifth of income with a ceiling of
Rs. 8,000. Corresponding increases are being made for Hindu Undivided Families.
This concession is designed to provide an incentive to savings and will cost the exchequer
Rs.25 lakhs. The second is a concession in favour of Hindu Undivided Families consisting
of four members or more entitled to claim Partition. Such families will be exempted
from tax so long as their income does not exceed three times the exemption limit of Rs.
4,200 allowed to individuals. For such families the exemption limit for the payment of
surcharge on income-tax is being raised from Rs. 14,400 to Rs. 21,600. It has not been
possible to calculate the financial effect of these concessions but the amount involved
is not likely to be substantial.
The Commission have made an interesting suggestion for imposing a surcharge-
cum-deposit on incomes of over Rs. 25,000. As the Commission themselves recognise,
this scheme requires further examination in the Finance Ministry. Meanwhile, I propose
to continue the existing surcharge of 5% on income-tax and super-tax.
65. In the last few years, there has been a demand for an increase in the amount
of depreciation allowances so as to take into account increased costs of replacement..
The Commission have examined this matter in considerable detail and have come to
the conclusion that the principle of revalorisation or continuous revaluation of an asset
for purposes of depreciation is not merely defective in theory but certainly unworkable
in practice. Instead, they have suggested that while the existing system of initial and
double depreciation allowances may be retained with certain modifications for all
industries, certain other new industries might be given a development rebate equivalent
to 25% of the cost of new fixed assets in the year of installation. For certain special
industries of national importance, they have suggested a tax holiday for six years. These
proposals require further detailed consideration. Meanwhile, I propose to allow a
Development Rebate of 25% of the cost of all new plant and machinery installed for
business purposes instead of the present initial depreciation allowance of 20%. For
purposes of calculating ordinary and double depreciation allowances, this rebate will
not be taken into account.
Another important change proposed is that losses of business should be allowed
to be carried forward indefinitely instead of only for six years as at present.
A number of other changes affecting the tax liability are being included in the
amendments to the income-Tax Act embodied in the Finance Bill for the coming year in
accordance with the recommendations of the Taxation Enquiry Commission. I do not
propose to weary the House by explaining all of them ‘ in detail. Some of these involve
bringing into the net certain incomes which were not being taxed. Others give concessions
recommended by the Commission. I would like to mention the more Important among
the former. The value of any perquisite or benefit, whether convertible into money or
not received by salary earners drawing over Rs. 18,000 per annum and by directors of
companies, and entertainment allowances of all kinds are being made subject to tax.

21
Unclaimed balances out of expenses allowed as deduction, compensation received for
loss of managing agency or other agencies and compensation received for termination
of employment are similarly being made subject to tax. The provisions of Section 23-A
are being tightened and a flat rate of super-tax of four annas in the rupee is being
imposed on the undistributed profits of the company if 60% of its profits have not been
distributed. Certain further concessions are being given to co-operative societies, but
co-operative insurance societies are being made subject to tax. These and other changes
are more in the direction of rationalising the income-tax structure and the cumulative
financial effect is not expected to be appreciable.
The net effect of all these changes in income-tax is an increase in revenue of
Rs.8.7 crores, of which the States’ share will amount to Rs.4.2 crores.
66. The net effect of the proposals may now be summarised. The changes in
customs duties will involve a loss of revenue of Rs. 50 lakhs and the changes in match
excise a loss of the same amount, of which Rs. 20 lakhs will be passed on to the States.
The new and increased excise duties will bring in a sum of Rs.18 crores. Changes in
income-tax will yield Rs. 8.7 crores of which the States’ I share will amount to Rs. 4.2
crores. In the result, central revenue will increase by Rs. 21.7 crores leaving an uncovered
deficit on revenue account of Rs. 8.47 crores. Including the additional taxation, the
overall deficit for the year will stand at Rs. 318 crores.
67. This is the last budget of the first five-year Plan, and like the budgets of the
previous years, it has been framed with the main purpose of securing the orderly
implementation of the Plan. I do not propose, in this context, to review the progress of
the Plan. The House had an opportunity during the last session of a detailed discussion
of the progress and I have no doubt there will be further occasions for a similar discussion.
But I think that the end of this period which is in sight is an opportunity for a measure
of stock-taking. The first plan was formulated under difficult circumstances with
inflation, shortages and the like clouding the economy. The formulation of a plan was
in itself a breaking of new ground, covering as it did a large part of the national life. The
aim was to make a good enough beginning, and, looking back over the four years, I
venture to suggest that this has been done with some success. The first plan itself only
touched the fringe of the problem of national development. Many more such plans will
have to follow. The Central and the State Governments are now fully seized of the
importance of fulfilling the first plan to the fullest extent possible. The machinery of
administration is being increasingly geared to the more effective implementation of the
Plan, although there is still considerable room for improvement. While there have been
shortfalls in achieving the targets, considering the size of the plan and the inevitable
margin which has to be allowed for in any human planning, these have not been such as
to discourage us. The country as a whole is becoming more and more plan-minded, and
in the rural areas there is an awakening of interest in economic development which is
noticeable even to a casual observer. The achievements of the first plan in terms of

22
irrigation and power, industrial development and the community and the national
extension programmes have been by no means inconsiderable. The second plan must
provide for more accelerated development consistent with the stability of out, economy
and our declared policy of adherence to democratic methods. A great deal of new
statistical information has now become available as a result of the publication of the
Census Reports, the National income Committee’s Reports, the Reports of the National
Sample Surveys and the Report of the Rural Credit Survey. In the last few months,
considerable preparatory work has been done on statistical and technical aspects of the
problem of formulating a comprehensive plan. I hope it will be possible to issue in the
near future a plan-frame which will set forth tentative inter-related targets, with due
regard to the central objectives of the plan and the availability of resources.
The success of the second five-year plan will, in my view,, depend upon two
main factors, organisation and finance. In an economy in which monetary rewards are
the principal device for directing real resources along desired lines, the availability of
finance is a crucial consideration. But finance is, in a sense, a token. It can, if one likes,
be created up to a point and within limits laid down by the need for combining stability
with quick but orderly progress. It is not and can never be a question of formulating
physical targets and leaving financial considerations aside. Both have to be correlated
and the maximum amount of resources currently raised for investment and production.
It is because the raising of the maximum resources is necessary for planned development
that I make the large draft which I have made today on the tax payers, purse. There is
the further justification for it, namely, that unless this is done, the objective of a welfare
State enshrined in the Constitution will never be attained.
I mentioned earlier that the country as a whole was getting increasingly plan-
minded. All over the country people of small means are making a contribution towards
the plan by the offer of their resources and sometimes their labour. I myself have been
receiving from small people, sometimes students who wish to remain anonymous, small
contributions towards the Plan. It is to me personally sustaining and heartening experience
and if the spirit behind this continues to animate the people as whole, we can look
forward with confidence to the successful implementation of this and of future plans.
(February 28th, 1955)

23
 SPEECH OF SHRI C.D. DESHMUKH, MINSTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1954-55

Sir, I present the statement of the estimated receipts and expenditure of the
Government of India for the year 1954-55.
REVIEW OF ECONOMIC CONDITIONS
2. The presentation of the annual budget provides an opportunity for a review
of the economic conditions of the year which form the background against which the
budget for the coming year has been prepared and I propose to give a brief account of
the main features of the country’s economy in the year now drawing to a close.
3. Like other countries India has been going through a process of return to
more normal conditions after the war, a process which was disturbed and delayed by
the outbreak of the Korean war and its after-math. The return to “normality” commenced
in 1952 and continued during 1953. Thus while at the end of December, 1951 the price
index of all commodities had risen from 397.1 immediately before the commencement
of the Korean war to 432.2, by the end of December, 1952 it had fallen to 374.5, well
within the level reached at the time of the outbreak in Korea. In 1953 the variations of
prices were within a narrower range than in the previous year and at the end of December
1953 the index number had risen by a little under 5 per cent and stood at 392.6.
Throughout the earlier months of the year and until about the middle of August there
was a continuous but a moderate rise in prices, largely caused by temporary factors.
The supply position was slightly difficult and the difficulty was aggravated by
expectations of lower output in certain important commodities like black pepper, sugar,
cotton and ground nuts. The demand for certain commodities like sugar and cotton also
rose owing to increased internal consumption and the physchological effect of all these
factors was to generate an upward movement of prices. Measures were taken from time
to time to improve the supply position and bring down prices and among these I would
mention the imposition of the ban on the export of sugar and gur, restriction on the
export of groundnut oil, liberalisation of imports of conconut oil and copra, reduction
in import duties on palm oil, copra, sugar and cotton, seed oil, the opening of fair price
shops, the issue of a large quantity of foodgrains and the reduction in the price of
imported wheat supplied by the Centre. These measures played an important part in
arresting the upward movement of prices and between August and December there was
a continuous decline. The general index number at the end of December was 20 points
less than the peak figure reached in the middle of August. Since then there has been a
slight increase but there is yet no evidence that this is not due to purely temporary and
seasonal causes.
4. Over a wide field there was also marked increase in production during
1953. The domestic production of cloth and cement reached new records. Most of the
1
other industries also showed a significant increase in their production. The general
index number of industrial production, which stood at 128.7 in 1952, the highest for
any post-war year, was exceeded in 1952, the average for the first nine months being
over 133. Though later figures are not yet available, there is good reason to believe that
1953 would be the best year yet for industrial production. This achievement is note
worthy because in some very important industries production was below normal owing
to certain special factors. The strike in a steel plant resulted in a drop in the production
of iron and steel, the total for which is now estimated at a little below the 1.1 million
tons reached in 1952. Similarly the production of copper dropped by nearly a sixth on
account of a strike. Jute manufactures were about 83,000 tons below the output of
1952, during part of which year the mills worked longer hours. Sugar production was
also nearly 2 lakh tons less than in 1952 owing to a smaller acreage under sugarcane
and the diversion of part of the cane supplies to the production of gur. The fact that, in
spite of the drop in production in some individual industries, the general index number
of industrial production in 1953 will be higher than in 1952 gives an indication of the
progress achieved.
5. Industry, however, cannot be said to have been entirely free from difficulties.
The jute industry was faced with the problem of maintaining its export market and had
to be assisted by a readjustment of the export duties. The tea industry was also helped
to meet a difficult situation created by the fall in the price of tea and is now in a healthier
position than it was at the beginning of the year. Lack of demand is also affecting
certain industries like paints, power-driven pumps and asbestos cement sheets. But the
complaint so common in 1952 that industry in general was facing a severe recession
may now be said to have largely disappeared. Nevertheless, the need for increasing
efficiency and economy, especially in markets characterised by keener competition,
still remains paramount.
6. The improvement in the general food situation recorded in 1952 was
maintained during 1953. With the sustained improvement in production there has been
a drop in food prices and at one stage there was concern in certain quarters over the
possibility of prices falling below the economic level in certain parts of the country.
The improvement in the food position has made it possible to relax controls in several
directions. Gram has been completely decontrolled as also coarse grains except in a
few areas. Controls on wheat have also been relaxed with the exception of certain
restrictions on inter-State movements. The year 1953 closed with a comfortable stock
of about 15 lakh tons of foodgrains, of which about 5 lakh tons were held in the Central
reserve. The prospects for the coming harvest are generally good and, if the monsoons
do not disappoint us next year, the food prospects may be said to be reassuring. In view
of this improved position the target of food imports next year has been fixed at a much
lower figure than in recent years: any improvement in this respect also improves
materially the country’s balance of payments position.
7. The production of cash crops during 1953 was also good except in the case
of jute, which has shown a decline, partly due to adverse weather conditions and partly
to fall in prices at the time of sowing.
2
 8. While the general economic situation in the country continues to improve,
there has, in recent months, been an aggravation of the problem of unemployment. The
number of the unemployed registered with the Exchanges rose continuously from 425,
000 in March 1953 to 522, 000 in December. The problem of unemployment has been
discussed at great length on the floor of the House and I had occasion to explain both
the dimensions of the problem and the measures that Government have in hand for
dealing with it. I should only like to reiterate what I have said in the past, namely, that
the problem should be viewed in its proper perspective. Unemployment is not a short
term phenomenon calling for short term remedies. It is one which calls for long term
measures and ultimately it is only by a considerable increase tn economic activity that
it will be possible to absorb the increasing number of men and women who come out of
our schools and universities year by year. This means an increase in the tempo of
development in which both the public and the private sectors have to take their due
share. So far as the public sector is concerned, the Planning Commission have recently
expanded the Plan to the extent of Rs.175 crores, mainly to assist in meeting the situation
created by unemployment in rural and urban areas. Measures for increasing employment
opportunities have become an integral part of the Plan and in the orderly implementation
of the Plan lies, in my view, the most promising method of easing the position.
9. I just mentioned the role of the private sector in mitigating unemployment.
Industry has to expand and new industries providing wider opportunities for employment
have to spring up in the country. To assist in such a development Government have
under consideration the question of setting up an industrial Development Corporation
to stimulate the flow of capital into new industries. As I mentioned in the statement I
made in the House last Wednesday, Govt. are also exploring possibilities of bringing
into existence, with the co-operation of private interests both in this country and outside,
of another Corporation to promote the expansion of industry. These discussions, in
which the International Bank for Re-construction and Development are also taking
interest, are still in their preliminary stages and the House will appreciate that I am now
in no position to say anything definite about the outcome.
BALANCE OF PAYMENTS
10. The country’s balance of payments position was generally satisfactory
during the year that is now drawing to a close. The House will remember that for the
first time, after a series of deficits earlier that year, a heartening surplus in the external
accounts emerged in the third quarter of 1952. This trend became more pronounced in
the last quarter of that year the surplus for which amounted to Rs.38 crores, Rs.13
crores more than in the preceding three months. From the beginning of 1953, however,
the surplus began to decline and in the second quarter of 1953 a deficit of about Rs.10
crores emerged for the first time in twelve months. In the third quarter of last year we
nearly balanced our account, and for the last quarter for which final figures are not yet
available, there may well be a small surplus. Taking the year as a whole we are likely to
have a moderate surplus, which is reflected in the Sterling balances held by the Reserve

3
Bank, which have risen from Rs.706 crores at the end of December, 1952 to Rs.723
crores by the end of December 1953. This overall improvement has, however, been
achieved at a reduced level of trade. Export receipts for the first nine months of 1953
amounted to only Rs.375 crores, registering a decline of Rs.125 crores compared with
the corresponding period of 1952. But this decline in export earnings has been more
than balanced by the decline in imports which at Rs.434 crores were less by Rs.174
crores as compared with the previous year.
11. The fall in the country’s export earnings is, in the main due not to a
contraction of exports but to a fall in export prices. Over the whole field of international
trade we are now definitely in a buyer’s and not a seller’s market and the effect of this
transition on prices has to be constantly kept in mind in regulating the country’s export
trade. It is not enough to maintain the present quantities of exports and the markets for
them at that level. It to necessary to off set the fall in export earnings due to a reduction
in prices by expanding the country’s exports. During the course of the year many export
duties were readjusted with this end in view. The duties on hessian, linseed and linseed
oil were reduced while the duties on some cotton goods and on selected jute manufactures
like twist, yarn, rope and twine, hessians other than cloth and bags and all other
descriptions of jute manufactures were totally abolished. These measures appear to
have had a healthy effect and trade in the three principal commodities figuring in our
export trade, namely, jute, tea and cotton textiles appears, in recent months, to have
recovered from the difficulties which faced it in selling these goods abroad. In order to
allow new line of export to develop, the Sea Customs Act has also been recently amended
to permit the grant of a rebate of import duty on raw materials and components used in
the manufacture of goods subsequently exported. A special organisation to deal with
export promotion has also been set up.
12. The reduced payments for imports in 1953, as compared with the previous
year, have to be considered against the background of the special factors which accounted
for the high level of imports in the latter year, in which there were very substantial
imports of wheat and raw cotton. The improvement in the food position and the increase
in the production of cotton has led to a contraction of imports of both in the current
year. Although industrial production has, on the whole, remained buoyant, the demand
for supplies of raw materials from abroad has not been on a level commensurate with
the higher output. Part of this may be explained by the switch over to indigenous supplies
and the running down of inventories. But the position is not one which need cause
anxiety, especially when one remembers the somewhat exceptional level of imports in
the previous year against which the fall is measured.
DOLLAR POSITION
13. The improvement in the dollar position during last year was even more
striking than the improvement in the balance of payments position as a whole. In the
first nine months of 1952 we had a deficit of Rs.127 crores on current account; in the
corresponding period of 1953 we had a surplus of Rs.18 crores. This improvement is
4
largely due to smaller payments for food and cotton purchases from the United States.
In the latter half of 1952 India’s contribution to the gold and dollar reserves of the
Sterling Area amounted to $70 million against a net drawal of $ 188 million in the first
half of that year. In the first half of 1953 we had to draw a small sum of $14 million
from the Central pool. Figures for the latter half of 1953 are not yet available but the
preliminary figures indicate that during the five months ended last November we made
a net contribution of $ 22 million to the Central reserves.
14. The improvement in the balance of payments position of this country has
also materially assisted in strengthening the Sterling Area’s position as a whole. I do
not propose to say anything in detail now about the conference of Commonwealth
Finance Ministers held last month in Sydney, as I have already made a full statement on
the subject on the floor of the House. The Conference provided an opportunity for a
free and frank exchange of views among representatives of the participating Governments
and the review of the progress of their development plans. While’ individual countries
would pursue policies best suited for their own needs, there was general agreement that
all of them should follow sound internal policies, increase production and facilitate the
expansion of world trade which would make it possible to achieve the multilateral
convertibility of Sterling and other important currencies. So far as India is concerned, I
would only repeat what I said last year, that the pursuit of these policies does not involve
the adoption of any new policy by Government. By resolutely persevering in the
implementation of the Five Year Plan we shall best serve the rest of both ourselves and
the Sterling Area.
15. Before leaving the subject of external finance I should like to make a brief
mention of a few other matters of interest in this connection. As the House is aware, we
have taken a number of loans from the International Bank for Reconstruction and
Development for some of our development projects and the question of increasing this
arena of assistance is under constant consideration. A mission of senior officials of the
Bank visited this country last September with the object of studying the trends in the
country’s economy and considering the possibilities of further participation by the Bank
in new projects. The report of the Mission is still awaited but, meanwhile, discussions
are going forward for obtaining assistance from the Bank for the setting up of a thermal
station in Trombay and financing a hydro-electric generator, which is part of the Koyna
multipurpose project.
16. In view of the satisfactory balance of payments position we are also
proposing to repurchase from the International Monetary Fund a portion of our currency
which we sold to the Fund in 1948 in exchange for dollars when we needed the dollars
to meet the heavy balance of payments deficits with the dollar area during that year. Out
of the total outstanding of $ 100 million, we propose to repurchase the equivalent of
$72 million, of which the equivalent of $ 36 million will be purchased next month and
the balance in the coming year. The repurchase of the rupees will result in a saving of
the interest charges paid to the Fund.
5
 17. The House is aware of the assistance which India has been receiving from
friendly countries outside for the country’s development schemes. This has come from
Commonwealth countries under the Colombo Plan, from the United States Government
and certain private agencies in that country and from other friendly countries like Norway.
In the current year a sum of $ 77.1 million was provided by the indo-U.S. Technical
Co-Operation Agreement for utilisation on agreed development projects. The
Government of Canada have agreed to provide a further sum of $ 13. 6 million. The
Ford Foundation, which has been providing assistance for a programme of rural
development made available an additional sum of $ 1 million for undertaking a training
programme for social education and health. Under the Colombo Plan we are also
providing assistance to neighbouring countries. In the budget for the next year the total
sum received by us by way of external assistance under the Colombo Plan and from
friendly foreign countries is expected to amount to Rs.45 crores while we shall be
spending on the provision of such aid to other countries about Rs.2 crores.
FINANCIAL YEAR 1953-54
18. I shall now give a brief account of the financial position in the current year
and the prospects for the coming year.
19. The House will remember that the budget for the current year placed the
revenue at Rs.439.26 crores and the expenditure at Rs.438.81 crores leaving a nominal
surplus of Rs.45 lakhs. In balancing this budget, I had taken credit for a recovery of
Rs.18 crores from Pakistan on account of two instalments due from that country in
repayment of the partition debt. Hon’ble Members are aware of the large number of
complicated problems which are outstanding between us and Pakistan of which the
settlement of the partition debt is only one issue. Over the whole front we have been
trying to achieve a settlement of these issues but it has not been possible to arrive at a
settlement so far. I may, however, mention that I have been having discussions on this
subject with the Finance Minister of Pakistan and we both hope that it will be possible
to commence the repayment of the debt in the coming year. This single factor has made
for a deterioration of Rs.18 crores in the revenue budget for the current year, and
converted the surplus of Rs.45 lakhs into a deficit of Rs.16. 96 crores.
20. The total revenue this year is now placed at Rs.413. 69 crores and the
expenditure at Rs.430.65 crores leaving, as I just said, a deficit of Rs.16.96 crores. Of
the drop of Re.25.57 crores in revenue, Rs.18 crores are, as I have already explained
accounted for by the non-receipt of the instalments expected from Pakistan. Customs
revenue to expected to be Rs.10 crores less than the sum provided in the budget, largely
due to the readjustment of export duties during the course of the year, particularly the
export duties on jute, to enable U’s to maintain our position in world markets where
there has been a gradual shift from a seller’s to a buyer’s market. Union excise duties
are expected to show a drop of nearly half a crore. The revenue from taxes on income
and corporation tax to, on the progress of actuals, expected to show an improvement of
Rs.6 crores, of which nearly Rs.3 crores will be absorbed by larger payments to the
6
State Governments on account of their share of income tax. The receipts under other
heads are unlikely to differ materially from the figures I had taken in the budget estimates.
21. On the expenditure side the revised estimates show an improvement of
Rs.8.16 crores. This is made up of a drop of Rs.1.57 crores in the expenditure on the
cost of revenue collections, Rs.2.7 crores in the provision for civil Administration and
Rs.8.73 crores in the provision for Extraordinary Charges, partly offset by increased
expenditure of Rs.1.68 crores under Debt Services and Rs.3.64 crores under the head
‘Miscellaneous’. The decrease in the cost of revenue collection is mainly due to a saving
of Rs.94 lakhs in the provision for the payment to the States of their share of the Union
Excise Duties due to the readjustment of certain excess payments in the previous year
made on a provisional basis, and a reduction in the collections of the shared taxes. The
decrease under Civil Administration is distributed over a number of heads, details of
which are given in the Explanatory Memorandum. A substantial portion of the saving is
due to lapses in the provision for basic and social education and economic development
in the Tribal Areas, where the progress on the implementation of developmental schemes
has been slower than anticipated. There is also a saving of Rs.93 lakhs in the provision
for transfers to certain funds, the actual transfers being less than was expected at the
time the budget was framed owing to the delay in passing the necessary legislation.
Under extraordinary charges the budget included a total provision of Rs.17.37 crores
for community development schemes, local works, industrial housing and Grow More
Food. The total expenditure on these items is now estimated at Rs.8.72 crores.
Community Development schemes are now getting under way and the expenditure on
them,, in what is practically their first year of operation, has been less than estimated.
Similarly, it has not been possible, owing to the inevitable delay in the drawing up of
schemes spread over, a large number of States and within each State, over a large number
of districts, and involving a measure of local or State contribution to spend fully the
provision made for local works. Assistance to States for Grow More Food schemes is
partly given by way of grants and partly by way of loans, the actual distribution depending
upon the nature of the schemes accepted for Central assistance. On the progress of
actuals, it is expected that the expenditure by way of grants would be about a crore less
than was assumed in the budget. Subsidies on industrial housing are also expected to be
less than the budget by about Rs.243 crores mainly due to, the slower progress in the
expansion of industrial housing which, among other things, requires the co-operation
of industrial employers and their willingness to undertake such schemes. In spite of the
efforts made for accelerating schemes for the promotion of the welfare of the back ward
classes, it has not been possible to spend the entire provision made for this purpose in
the budget. If I may put it somewhat shortly, the entire saving in the provision for
extraordinary charges is largely due to a short fall in the developmental expenditure,
the result largely of the inherent difficulties in the way of getting these schemes going.
Under Debt Services, the increase of Rs.1.68 crores is mainly accounted for by the
hardening of discount rates of treasury, bills, while under Miscellaneous the increase is
largely due to an unforeseen expenditure of Rs.1.77 crores on payment of subsidies on

7
foodgrains, mostly to Travancore-Cochin, which has a special problem, as a large
importer of costly rice from outside, and a carry over of Rs.2.06 crores from the last
year in the payment to sugar factories out of the special excise levied in November,
1952, as part of the measures to secure a reduction in the price of sugar.
22. Before I pass on to the estimates for the coming year, I should like to mention
the expenditure on Defence Services during the current year. The total net expenditure
is expected to be just within the figure taken in the budget. While the total estimate
remains about the same, there is an increase of Rs.2.46 crores in the Air Force estimates
offset by decreases in the expenditure on the other Services. These variations are mostly
due to variations in the forecast for the receipt of stores.
FINANCIAL YEAR 1954-55
23. For the coining year, I estimate the revenue at Rs.441.03 crores and the
expenditure at Rs.467.09 crores leaving a deficit of Rs.26. 06 crores on revenue account.
24. The revenue from customs in the coming year has been placed at Rs.175
crores against the current year’s revised estimate of Rs.160 crores. The improvement of
Rs.15 crores is due firstly to the additional duty expected to be collected next year on
the increased imports of sugar on Government account, now estimated at between 4
and 5 lakh tons, against 2. 5 lakh tons this year, secondly to increased yield from the
import of commodities which carry high revenue duties, which may be expected with
the easing of our foreign exchange position, and thirdly to the normal expansion of
revenue. The revenue from Union Excise Duties, is placed at a crore less than in the
current year. The yield from sugar will be Rs.21 crores less than in the current year,
receipts in which were somewhat inflated by the proceeds of the special excise which
was withdrawn last November; but this will be partly set off by an improvement of Rs.1
crore in the receipts from tobacco and about half a crore from the other excises. Under
income Tax, I am repeating the revised estimate for the current year. I expect that the
progressive drop in the arrears of excess profit and other taxes will be made good by the
improvement in normal collections. Revenue from the Estate Duty, recently levied, is
likely to come in for the first time in the coming year. It is a new tax, the yield from
which is most difficult to estimate. The administrative machinery for the assessment
and collection is being specially assembled and trained and I hope it will be possible to
get it in full working in the coming year. I have taken credit for a gross revenue of Rs.4
crores from this duty, nearly the whole of which will be transferred to the States in
accordance with the provisions of the Constitution. Under Currency and Mint, following
the Increase in the gross income of the Reserve Bank from the increased yield on treasury
bills held In the issue Department, the surplus profits paid to Government next year are
expected to be Rs.5 crores more than the current year’s payment of Rs.121 crores. I
have also taken credit for the receipt of one instalment of Rs.9 crores from Pakistan. As
I explained earlier, I hope to reach a settlement of this issue in the near future and I am
confident that it will be possible to commence these repayments with effect from the
coming year.
8
 25. For next year I am budgeting for a total expenditure of Rs.467. 09 crores,
of which Rs.205.62 crores will be on Defence Services and Rs.261.47 crores under
Civil Heads.
26. In present circumstances, I do not think I need make any apology for the
size of the expenditure on Defence Services. As I mentioned last year, there is no question
of any sizeable reduction in the size of the Armed Forces so long as there exists any
danger 60 the country’s security. In spite of recent developments likely to affect the
balance of power in the area in which we and our vital interests are located, we are not
embarking on any scheme of expansion of our Armed Forces. We are only going ahead
with our normal programme of bringing the Navy and the Air Forces upto reasonable
efficiency in men and material and the increase of Rs.6 crores in the expenditure next
year over the current year is due to this normal programme. While the recent
developments have underlined the need for continuous vigilance on our part that the
country’s security is not in any way jeopardised, and the House may rest assured that
this vigilance to being kept, it is not our intention to halt or slow down the economic
development of the country, on which, in the long term, the country’s inherent strength
depends, by entering into any race for armaments.
27. Civil expenditure next year is expected to be Rs.30.5 crores more than in
the current year. I do not propose to weary the House by giving a detailed account of
individual increases, particulars of which are given in the Explanatory Memorandum. I
shall content myself with drawing attention to the more important factors which account
for this increase.
28. I must remind the House that the coming year will be the fourth year of the
Five Year Plan and it to reasonable to expect arise in the tempo of developmental
expenditure during that year. The bulk of the increase of Rs.30.5 crores in civil
expenditure is due to this factor. For example, the total expenditure on what may
compendiously be called the nation building and developmental services in the coming
year is likely to amount to Rs.53.67 crores against Rs.39.52 crores in the current year.
Expenditure on scientific departments, mainly on grants to scientific institutions and
outlay on scientific services, is likely to be about a crore more than in the current year.
The budget for education, providing for substantial grants for the expansion of basic
and social education throughout the country, will be about Rs.8 crores more than in the
current year. Nearly a crore and three-quarters more will be spent on medical and health
services and about Rs.2 crores more on agriculture and allied services. Increased
provision has also been made for the development of village and small-scale industries,
so vital to the balanced development of the country. Community projects and national
extension services between them will cost Rs.81 crores more than in the current year;
about a crore more will be spent on grants for grow more food schemes and a crore and
a quarter on schemes of social welfare These increases in developmental expenditure
together account for Rs.25 crores roundly of the total increase of Rs.301 crores.

9
 29. The increase of Rs.51/2 crores in the rest of the expenditure is mainly due to
two factors. A lump sum provision of Rs.3.6 crores has been made under grants-in-aid
to States for meeting any Assistance that may have to be given to the State of Jammu
and Kashmir if the scheme for financial integration of that State with the Indian Union,
somewhat on the pattern of the former Princely States, which is under discussion with
it, materialises. The payment of the States’ share of Union excise duties next year will,
on the basis of the estimated revenue from the ‘shared excises, be about three quarters
of the crore more than in the current year. Increased provision has also, been made
under grants-in-aid to States for the welfare of Scheduled Tribes, Scheduled Castes and
other backward classes. While, obviously, there are bound to be small increases here
and there on account of the normal growth of expenditure, I think I could truthfully
claim that the increase in expenditure in the coming year is mostly on development in
accordance with the approved plan.
CHANCES IN CLASSIFICATION
30. In the estimates of the coming year I have, in consultation with the
Comptroller and Auditor General, made a change in the classification, to which I must
draw the attention of Hon’ble Members. The proper allocation of expenditure between
revenue and capital is always a matter of some difficulty, particularly against the
background of the large development programme, which is in process of implementation
and which takes into account the resources of the country as a whole. While it is true
that normally every effort should be made to meet current expenditure, in the sense of
administrative expenditure and expenditure that does not result in the creation of tangible
assets, from current revenue, an exception may have to be made in the case of expen-
diture which, in the broader national interest, is incurred at a faster pace than would be
justified by the amount of revenue that can be raised, or is expenditure which while it
technically does not create any tangible assets to the Government which spends the
money nevertheless results in the creation of such assets for the community or for other
Governments. The House will remember that in the budget for 1951-52 I transferred to
revenue from capital certain types of grants on the ground, that the expenditure on the
payment of these grants does not create any durable asset for the Central Government.
I believe that the principle behind that change is still valid but, if it is carried to its
logical conclusion, it may create a difficult position for revenue when, as under the
Plan, we are providing Central assistance on a substantial scale to State Governments
and others by way of outright grants for purposes which, if they had been the direct
concern of the Centre, the Centre would have met from borrowing. I have in mind three
types of grants namely grants for industrial housing, grants for local works and grants
to State Governments under the report of the Gadgil Committee which recently looked
into the question of the implementation of the special undertaking given to the States of
Saurashtra, Madhya Bharat, Rajasthan and Patiala and East Punjab States Union in
their integration agreements that the remedying of their backward condition would form
the subject of a special enquiry. The first represents the capital contribution which does
create an asset and which, if the Central Government were building the houses for its
10
own purposes, would have been met from borrowings. The second is mostly for the
construction of roads, buildings, etc. in local areas which also creates durable assets for
the community. The third is merely the conversion of a part of the Central assistance
under the Plan to these States from loans to grants and additional grants for the
construction of certain administrative buildings. In all these three cases I am convinced
that it would be proper to meet the expenditure from capital. But as the expenditure
does not create any durable asset for the Centre, I propose that it should be written back
to revenue over a period of fifteen years so that ultimately all this expenditure is met
from revenue. This proposal has the advantage of securing a measure of stability for the
revenue budget, while at the same time outlay on development schemes is not held up
by the mere size of the revenue resources currently available. In accordance with the
change mentioned above, a sum of Rs.16 crores will be debited to the capital budget,
next year. There may be other similar expenditure in the coming years and it will be
decided from time to time, in consultation with the Comptroller and Auditor General,
whether it should be initially debited to revenue or capital.
COMPENSATION TO DISPLACED PERSONS
31. Hon’ble Members are aware of the interim scheme of compensation for
the loss of immovable properties in West Pakistan which was sanctioned last November
for certain categories of displaced persons. The scheme involves, in addition to the
transfer of property in kind like houses and the adjustment of outstandings of
rehabilitation loans, the payment of some amount in cash. These payments are likely to
amount to a substantial sum and it has been decided, in consultation with the Comptroller
and Auditor General, to debit these payments initially to capital and then write them
back to revenue over the next fifteen years. I need hardly mention that the debit of these
payments directly to revenue would involve a very heavy strain on the revenue budget
and there is good justification for spreading the burden over a reasonable period.
CAPITAL EXPENDITURE
32. The current year’s budget provided for an expenditure of Rs.76.64 crores
on capital outlay. I now expect that the expenditure will amount to no more than Rs.63.9
crores. The large saving of Rs.13 crores occurs mainly under three heads. On Defence
a saving of a little over Rs.41 crores is likely to be realised mainly due to slower progress
on certain works and the non-receipt of some plant and machinery. Civil works will
also show a saving of Rs.4 crores roundly, again due to slower progress on works taken
up during the year. Schemes of Government trading, which were expected to involve a
net outlay of Rs.31 crores in the budget, are now likely to balance their accounts. These
three heads together account for a saving of Rs.11.9 crores. The savings under other
heads are relatively of smaller amounts and part of the savings will be absorbed
by4nereased expenditure on the Damodar Valley Scheme where it has been possible to
accelerate progress.
33. For next year a total provision of Rs.145.75 crores has been made for capital
expenditure. The large increase over the current year’s revised estimates reflects a rising
11
tempo of developmental expenditure to which I referred briefly earlier in my speech. In
the first three years of the Plan developmental expenditure was necessarily somewhat
smaller than the proportionate outlay for that period. This is partly due to the essential
time taken in the preparatory work on new schemes. It is also partly due to the fact that
in the earlier period of the Plan Government had to be cautious in going forward with
expenditure, so as to keep inflationary trends under control. Now that the economic
climate is better suited for stepping up investment and the schemes themselves are
gathering momentum, and in some cases nearing completion, the expenditure in the last
two years is bound to be much more than in the current year.
34. I shall briefly mention the more important factors accounting for the increase
in the provision for the budget year. The estimates include a provision of Rs.16 crores
for grants to States for development which will be written back to revenue over a period
of fifteen years. A gum of Rs.4 crores has also been provided for payment of compensation
to displaced persons which will be similarly spread over revenue. For Railways an
increased provision of Rs.16 crores has been made partly to meet essential commitments
and partly to make good the fall in resources which the Railways themselves were
expected to provide under the Five Year Plan for development. Expenditure on Posts
and Telegraphs will be nearly Rs.4 crores more than in the current year. On Major Ports
about Rs.21/2 crores more will be spent on the development of the Kandla Port and the
nearby township of Gandhi Dham. The provision for residential and office buildings in
New Delhi, where the accommodation problem is still acute, is being increased by
nearly Rs.33/4 crores. The development of roads and national highways next year will
cost a little over Rs.131/4 crores against Rs.81/2 crores this year. The general building
programme for Government departments located outside Delhi, covering both residential
and office accommodation, will cost Rs.8 crores next year against Rs.21/2 crores this
year. Rehabilitation works will also require an additional outlay of Rs.75 lakhs. Provision
has been made for a possible outlay of Rs.10 crores on the new steel plant which Govern-
ment are putting up in collaboration with a German Combine. Capital outlay on Defence
will, next year, cost Rs.173/4 crores, an increase of nearly Rs.71/2 crores over the current
year which provides for the normal programme of reorganisation and the carry over
from the current year.
35. In addition to the provision for capital outlay mentioned above, the estimates
include Rs.160 crores this year and Rs.214 crores next year for loans to State
Governments, mostly for their development projects.
36. Hon.1ble Members may wonder whether the increased sums provided for
development, both in the revenue and in the capital budget, are likely to be spent in full,
when one remembers the large savings in the provision for developmental expenditure
in the last two years and anticipated savings in the current year. The reasons for the
slower progress of development schemes, which these lapses reflect, have, I freely
confess, been a matter of some concern to Government. We have asked a senior officer
to conduct a quick examination of the existing procedure in the drawing up, sanction
12
and execution of development schemes and to report on the causes leading to the present
unsatisfactory position. Government attach the greatest importance to the implementation
of the Five Year Plan within the period contemplated in the Plan and it is their intention
to take all measures possible to remove the procedural and other impediments to the
progress of the development schemes. I hope it will be possible to take early decisions
on the findings of this enquiry and I am confident that it will be possible to spend the
increased sums provided in the next year’s budget Such an increase is absolutely
necessary if the targets visualised in the Plan have to be achieved and Government are
determined that all possible steps should be taken to achieve these targets.
37. The House is aware of the recent decision of the Planning Commission to
make certain readjustments in the Five Year Plan. This Plan, as formulated last year,
provided for a total outlay of Rs.2,069 crores. This figure is likely to be increased by
about Rs.175 crores as a result of the readjustments, I have already referrred to. In the
first three years the expenditure, taking both the States and the Centre together, will be
of the order of Rs.1, 000 crores, a few crores less and not more. This would leave
something like Rs.1, 200 crores, to be spent in the next two years, of which a substantial
portion will fall on the Central budget either by way of direct expenditure or in the form
of assistance to the State Governments. In the context of this, the substantial increase in
the budget provision for the coming year is inescapable and Government will strain
their utmost to see that the development envisaged in the Plan and provided for in the
budget goes forward.
WAYS AND MEANS
38. The current year’s budget provided for an overall deficit of Rs.138 crores
of which Rs.28 crores was proposed to be met from the cash balances and the balance
of Rs.110 crores by the expansion of floating debt. On the basis of the revised estimates,
the overall deficit will amount to Rs.128 crores. The opening balance for the year was
Rs.19 crores more than I expected, the improvement reflecting the lapses in the provision
made under various heads of expenditure. The market loan during the year amounted to
only Rs.75 crores against the budget anticipation of Rs.100 crores but this short fall
was more than offset by an improvement of Rs.40 crores in the cash outgo on the
repayment of debt where, because of the large holdings of the maturing loan in the Cash
Balance investment Account, only Rs.76 crores had to be paid in cash against the estimate
ofRsd110crores. The net income from small savings during the year has been rather
disappointing and may not amount to more than Rs.40 crores against the budget estimate
of Rs.45 crores. The intensive drive on the part of certain State Governments to mobilise
savings for their own public loans has to some extent affected the flow of money into
Small Savings. This in itself is not a matter of any concern since, to the extent additional
resources are mobilised by the States, their dependence on the Centre is reduced. But in
the long term it is essential to develop the savings movement so that, irrespective of
temporary factors like the one I just mentioned, a continuous and rising flow of small
savings is maintained. The question of securing this is, as the House is aware, receiving

13
the constant attention of Government. Recently steps have been taken to extend the
system of authorised agents which had been revived as an experiment in three selected
States to all the States. We are also experimenting with the use of Village Panchayats
as authorised agents and if this succeeds it will be extended to all the States. I mentioned
last year that Government were taking steps to interest voluntary social and women’s
organisations in the movement. A Women’s savings week organised last March
produced very encouraging results and a regular Women’s savings campaign has been
inaugurated. A representative Central Advisory Committee has been set up to guide
and organise the campaign and a large number of selected voluntary organisations are
being appointed as authorised agents to mobilise savings. It will be some time before
the results of these measures become apparent but I believe that they would go a great
way in developing the movement. Taking the budget as a whole, I expect that the
expansion of treasury bills to leave a closing balance of the order of Rs.50 crores at
the end of the year need now amount to no more than Rs.80 crores against Rs.110
crores taken in the original budget.
39. The overall deficit next year is estimated at Rs.250 crores. This is largely
due to the substantial provision made for increased expenditure on development in both
the revenue and capital budgets. During the coming year one loan namely the 21 per
cent Loan, 1954, with an outstanding balance of Rs.35 crores falls due for payment,
while Government have the option of redeeming another loan, the 31 per cent Loan, 19
54-59,with an outstanding balance of Rs.13 crores. It has been assumed that both these
loans will be discharged and credit has been taken for a market loan of Rs.75 crores.
Small Savings next year may amount to Rs.45 crores. Allowing for all these and for the
net receipts from the various miscellaneous transactions under debt and remittance
heads, the receipt of foreign assistance, etc. It will be necessary to expand treasury bills
by its 250 crores to balance the budget overall.
40. There is another way of looking at the ways and means problem. Government
have to find Rs.26 crores for meeting the revenue deficit, Rs.395 crores for financing
essential capital outlay and-assisting the State Governments, local bodies, etc. for
financing their development schemes and Rs.53 crores for the repayment of the maturing
debt. Against this they hope to raise Rs.75 crores from the market. Foreign assistance
and dollar loans may bring in Re.48 crores and Small Savings Rs.45 crores. Other
miscellaneous debt and remittance transactions may bring in Rs.56 crores. This will
leave a gap of Rs.250 crores in the available resources to balance the budget. A the cash
balance will just provide the necessary till money and cannot be drawn down any further,
the whole of this gap will have to be met by the issue of treasury bills. The amount for
which it will be necessary to float treasury bills will depend upon the actual circumstances
of the year as they develop. But for the purposes of the budget I have assumed that it
will be of the order of Rs.250 crores.
41. There will be some-not many, I expect, -in this House and outside who will
have doubts as to the wisdom of launching upon deficit financing on this scale. I have
given the most careful thought to this question, and, on a balance of considerations, I
am convinced that in the conditions as they now are and are likely to be in the near
14
future, we are, not taking any undue risks in going forward in the manner I have indicated.
In fact, deficit financing to a moderate extent is necessary under present conditions.
The period of inflationary stresses is now well behind us and there are signs that the
high levels of production we have attained in various lines, and which we would like to
improve upon -cannot be sustained without some increase in money supply in the hands
of the public.
42. In judging, the economic effects of the budgetary deficit, it has to be borne
in mind that part of it might well be neutralised by a balance of payments deficit. For
some time past, as I have indicated earlier, we have not, on balance, been drawing upon
our sterling balances. This is an indication that the level of economic activity in the
country so far is not high enough to create any large demand for external resources; in
other words, the optimum level of tempo of development has yet to be reached. A
country’s balance of payments is subject to many uncertain and unpredictable factors,
and there is always need for caution. Nevertheless, so long as the domestic price situation
is well in hand, and there are internal reserves which can be drawn upon in case of need,
deficit financing for development involves little risk. Indeed, it can be said that deficit
financing, subject to safeguards, has a definite part to play in bringing into use the
unutilised resources in the system. It was in view of theme considerations and in the
context of the recent increase in unemployment in certain sectors that the expansion of
the Plan was decided on,, and the budget proposals for the next year have been framed
in pursuance of this decision. With domestic food production at a satisfactory level, and
with the outlook for larger imports from abroad better, should need arise, the budgetary
deficit envisaged will, I expect, prove reflationary rather than inflationary. If, however,
major changes in the economic situation or climate take place, obviously, Government
policies will have to be reconsidered. For the time being, I should say that in the context
of our developmental needs, it is important for us not only to live within our means but
also to live upto our means.
43. This leads me to another point. The bulk of the deficit finance this year and
the coming year will be more than accounted for by the Central assistance given to the
States for their development schemes. The experience of the last three years has been
that, while development schemes are more or less going forward according to the Plan,
the States have not shown the same readiness to augment their resources to the extent
envisaged in the Plan. In the same period, Central assistance to the States has been
growing the Finance Commission’s award transferred over Rs.80 crores from the Centre
to the States, which have not been counted against the assistance promised to the States.
I am not suggesting for a moment that the development of the States is not the concern
of the Centre but I do feel that the States, should make a more determined contribution
towards shouldering the burdens of the Plan than they have done so far. By raising more
resources they would help in reducing the amount which the Centre will have to find by
recourse to deficit financing and thereby contribute to strengthening the country’s
economy.

15
 44. National development is not merely the concern of Governments. In a
democracy like ours, it is also the concern of the people and now that we are having
substantial recourse to deficit financing, I should like to make a strong appeal to the
public to save more and to lend more to Government. I referred a short while ago to the
somewhat disappointing results of the small savings movement this year. It is not merely
for support to this movement that I appeal. It is the duty of the people to support it on
the widest possible front if the process of national development has to be carried on, as
it must be, over a long period. Development involves sacrifice, and the essence of
democratic planning is that the sacrifice should, as far as possible, be evenly spread and
should readily and voluntarily be forthcoming. To increase capital formation, which is
the agreed objective, firstly, current consumption must be kept within limits, and,
secondly, the production potential must be built-up through utilisation of idle man-power.
This means stinting as well as harder work. So far in the first three years of the Plan, we
have done reasonably well, but the stage has now been set for a much larger effort. In
this, I trust, all sections of the community will co-operate and give of their best.
45. I now turn to the budget proposals for the coming year.
46. In the context of the substantial overall deficit in the coming year’s budget,
I have approached the problem of dealing with the revenue deficit, not so much from
the orthodox angle of balancing the revenue budget as from the larger angle of raising
as much as is practicable by way of additional revenue for meeting the increased
expenditure on development, which is wholly responsible for the revenue deficit. While,
as I have said earlier the economic climate is now suitable for a moderate amount of
deficit financing, it is obvious that every effort should be made to keep the amount
raised by recourse to it as low as possible, so that it fills only the unavoidable gap
between the available resources and the inescapable requirements for development and
is not used to cover any short fall in resources which could otherwise be currently
raised.
47. The House will appreciate that, with the Taxation Enquiry Commission
at work, it is neither proper nor desirable to initiate any large-scale change in the
present structure of taxation until the whole problem has been considered in the light
of the Commission’s recommendations which are expected towards the end of the
current year. I have therefore confined the changes which I propose to a somewhat
restricted field.
CHANGES IN CUSTOMS DUTIES
48. I shall first deal with Customs Duties.
My first proposal is to increase the preferential import duty on betelnuts by 61
annas a pound. Profit margins on betelnuts have for some time been very high, often
leading to the payment of premium on import licences. There is little justification for
the importer and the middlemen retaining such profit and I am sure the House would
welcome this attempt to divert a part of it for the benefit of the exchequer. I do not think
that this would in any way affect the available supplies or occasion any significant
increase in prices. The additional revenue from this is estimated at Rs.3 crores.
16
 In the budget for the current year, the House will remember that certain changes
were made on import duties as part of the normal readjustments of these duties. Customs
duties cover a very wide variety of goods and the level and incidence of these duties are
under constant review so that readjustments could be made from time to time. The
annual budget provides the most suitable occasion for making these changes except
when, during the course of the year, it is found desirable in the public interest to make
such changes without waiting for the annual Finance Bill. In pursuit of this policy I
propose to make certain changes in the import tariff. Duties on some articles like plastic
and rubber insulated cables, electric fans and electric conduits are being raised. On the
expiry of the period agreed under the General Agreement on Trade and Tariffs the
preference given to the United Kingdom on the imports of motor cars, motor-car parts
and batteries is being abolished. The net effect of these and other minor changes, with
which I do not propose to weary the House, will be a net increase of Rs.1.25 crores in
revenue.
The third change I propose to make is to abolish the present import duty on raw
cotton. Imported raw cotton enters not merely in the production of cloth consumed
internally but to some extent in the exports of Indian cloth. I mentioned earlier the
arrangements which have been made for the grant of a rebate of duty paid on imports of
raw materials which enter into the manufacture! of our exports. The whole problem of
regulating the import duty on essential raw materials came under review in that context
and, while obviously no final view has yet been taken, it is felt that a move towards the
gradual replacement of import duties on raw materials by Excise Duties on the goods
manufactured from them could be made. This replacement seems more or less inevitable
as the country is progressively industrialised; it will also make the export trade simpler
by removing the complication involved in the grant of rebates of import duty. I feel that
a useful beginning should be made with the import duties on raw cotton. The loss in
revenue is estimated at Rs.4 crores.
In pursuance of the same policy, the import duty on some varieties of steel - a
basic material is being abolished with immediate effect. They are steel sheets (both
black and galvanised) plates and rails. The, loss of revenue involved is likely to be
Rs.25 lakhs.
The last two proposals will 6.e’triven effect to by notification under Section 23
of the Sea Customs Act, which is being issued today.
CHANGES IN UNION EXCISE DUTIES
49. With the abolition of the import duty on raw cotton, I propose to raise the
Excise Duty on super-fine cotton cloth by 6 pies per yard and on the other varieties of
cotton cloth by 3 pies a yard. This is designed partly to replace the revenue lost by the
abolition of the import duty on raw cotton and partly to rationalise the existing structure
of the excise. The abolition of the import duty will avoid the complications involved in
the somewhat cumbrous procedure of giving drawbacks on exports. It will also facilitate
the free imports of foreign cotton required by the industry by reducing the amount
17
required to finance it. The increase in excise duties will, to some extent, also reduce the
possibility of diversion of manufactures from one tariff category to another by making
it less profitable than at present, and will also, I hope, ease the current pressure on
Indian cotton. I consider that the changes, taking Customs and Union Excises together,
will make the structure of taxation of Indian cloth more rational than at present. The net
effect of these changes will be an increase in revenue of Rs.6. 5 crores.
My next proposal is to levy an excise duty of 1 anna and 6 pies per yard on
artificial silk fabrics. The use of artificial silk fabrics is now very widespread and they
compete to some extent with cotton cloth which has to bear an excise duty. There is
no reason why, when the bulk of the cotton cloth is subject to taxation artificial silk
fabrics should be exempt. The new duty will not be levied on the manufacturers of
handlooms and small units which have less than 10-power looms. Art silk fabrics will
also be placed in the same position as mill-made cotton textiles by the levy of an
additional 3 pies per yard, corresponding to a similar levy which is now being made
on cotton cloth under the Khadi and Other Handloom industries Development
(Additional Excise Duty on Cloth) Act, 1953. The proceeds will be appropriated to
the Special Fund for the Development of the handloom industry. The revenue from
this is estimated at Rs.1. 60 crores.
With the progress of industrialisation, revenue from Customs Duties is bound to
be a progressively less stable source of revenue. Even otherwise, the revenue from
Customs is inevitably subject to the vicissitudes of trade policies and the availability of
foreign exchange. It is, therefore, necessary to turn increasingly to indigenous industries
producing consumer goods for the replacement of a part of the revenue which, in the
past, we used to derive from Customs Duties on such goods. It is also only appropriate
that those industries which have in the past developed with the assistance of protectionist
policies, for which the consumer paid by way of increased duties should when they
have reached the stage of full development, make a fair contribution to the country’s
exchequer. The country’s tax structure can be made stable only by broad-basing its
excise without affecting the economy of the industries taxed or placing an undue burden
on the consumers. We are already levying excises on most of the important commodities
produced in the country and the scope for further additions is somewhat restricted, but
even so I feel that there is room for some expansion in this source of revenue. 1, therefore,
propose to levy a moderate duty on three commodities namely cement, soap and footwear.
The duty on cement will be Rs.5 per ton, that on soap Rs.5/4/- per cwt. on washing soap
in bars of one pound and more in weight and Rs.6/2/- per cwt. on other washing soap
and Rs.14/- per cwt. on toilet and other soaps and that on footwear at 10 per cent ad
valorem. The incidence of taxation on all these commodities will not generally exceed
10 per cent of the value. In the case of soap and footwear the products of cottage industry
will be exempted either by executive orders or directly by definition in the tariff. From
such figures as are available, I expect that the revenue from the excise on cement would
amount to Rs.1.75 crores, that from footwear to Rs.80 lakhs and that from soap to
Rs.1.20 crores.

18
 INCOME TAX
50. No changes are proposed in the income-tax rates which, for next year, will
continue to be the same as at present. Certain formal amendments to the Indian income
Tax Act, intended to continue till 1956 some of the existing concessions like special
depreciation allowance, exemption of profits upto 6 per cent, etc., have been included
in the Finance Bill. This will maintain the status quo until Government have had an
opportunity of re-examining the need for these concessions in the light of the Taxation
Enquiry Commission’s Report. Opportunity is also being taken of making two small
amendments, both of the nature of drafting changes, in the Estate Duty Act.
NET EFFECT OF PROPOSALS
51. The effect of the above changes may now be summarised. The increased
duty on betelnuts will yield Rs.3 crores and minor readjustments in import duties another
Rs.1. 25 crores. This will be offset by a drop of Rs.4.25 crores from the abolition of
import duties on raw cotton and some varieties of steel leaving the total revenue from
customs duties unchanged at Rs.175 crores.
The increase in the excise duty on cotton cloth will yield Rs.6.5 crores and the
new excise duty on artificial silk fabrics Rs.1.60 crores. The new excises on cement,
soap and footwear will together yield Rs.3.75 crores. The total additional revenue from
excise duties will thus amount to Rs.11.85 crores. This will reduce the prospective
revenue deficit for the coming year from Rs.26.06 crores to Rs.14.21 crores which I
propose to leave uncovered.
I mentioned that the overall deficit for next year would amount to Rs.250 crores,
which will be met by the expansion of treasury bills. The taxation proposals will reduce
the deficit to about Rs.238 crores. For the present I do not propose to change the figure,
taken in the budget for expansion of treasury bills. The actual amount of this expansion
will depend on developments during the course of the year. I am therefore carrying the
effect of these proposals into the cash balances and leaving them about Rs.12 crores
more than would otherwise he the case.
CONCLUSION
52. This to the fourth budget which I have had the privilege of placing before
this House and, by a coincidence, it happens to be for the fourth year of the Plan. The
main purpose of all these budgets has been to secure the orderly implementation of the
Plan. Progress reports on the Plan have recently been made available to Parliament and
I have no doubt that this arrangement will be continued. I do not, therefore’, propose to
say anything on the progress achieved in the implementation of the Plan as such, but I
cannot resist the temptation of looking back and making an assessment of what has
been achieved in the seven years since independence. Seven years are not a long period
in the history of a nation but in the life-time of a generation they certainly count for
something. One can, therefore, understand the continuous urge for improvement and
the frequent criticism that the progress achieved has not been sufficient. Such criticism

19
is always welcome, both as a corrective and as a spur to further effort, but it is apt to
obscure the sum of our achievement and place the problem of development out of its
proper perspective. In 1947 we inherited a weakened administration. a war ravaged
economy and a country in which only the rudiments of a welfare state had been developed
immediately after independence we were faced with the gigantic problem of rehabilitating
millions of people uprooted from their homes and cast adrift as refugees. Our food
position was precarious owing to the loss to us of large areas surplus in foodgrains. We
had the colossal administrative problem of bringing over 500 Princely States, of varying
sizes and in widely disparate stages of development, into the stream of the country’s
national life. Looking back over the seven years I have no doubt that we can feel some
satisfaction at the measure of our achievement. In this period, the country’s economy
has been strengthened, inflationary stresses have subsided or been eliminated and
production expanded in many directions. In particular, notable improvement has been
made in the country’s food production. The transport system has been largely
rehabilitated. Progress, sometimes well ahead of schedule, has been made in the
construction of large irrigation and power schemes which were in hand and more of
such schemes are being taken up. Vital industries, designed to reduce our dependence
on external sources for our essential needs, have been started with Government support.
In the field of basic industries effective steps have been taken to improve steel production
and a new steel plant is being set up which, in the near future, will make a substantial
addition to the country’s steel production. The Shipping industry is also being assisted
to expand and the important shipyard at Vishakapatnam has been developed. The
rehabilitation of displaced persons is now nearing completion. The integration of the
Princely States has been completed and a well-knit national Plan, covering in greater or
less degree all-important sections of the national life and economy, has been drawn up
and is in process of implementation. The States have been assisted with increasing
sums of money to enable their development to go forward. What is more vitally important,
the people have been encouraged successfully to co-operate in the fulfilment of this
high endeavour.
No idea of the vast upsurge in the national life can be conveyed by translating all
this in terms of money or compressing it into a classified table of estimates and
expenditures. The face of the country is changing and changing for the better. We
know-and none more than those on the Government Benches-that much still remains to
be done. But we can bend our energies to the tasks ahead fortified by the knowledge
that, in spite of mistakes and difficulties, we have made progress and, conscious that we
are on the right road, however, long and arduous it may be, we shall persevere, with a
stout heart, with the task of building up a more prosperous India. In this task we have
received a significant and important measure of assistance from friendly countries for
which we are grateful and which only spurs us on to more sustained efforts without
impairing our will to be self-reliant as much as possible.
(February 27, 1954)

20
 SPEECH OF SHRI C.D. DESHMUKH MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1953-54

Sir, I rise to present the statement of the estimated receipts and expenditure of the
Government of India for the year 1953-54.
REVIEW OF ECONOMIC CONDITIONS
2. Judging from the available information and taking an overall view, the
nine months which have elapsed since I presented the budget for the current year to this
House last may have witnessed a marked improvement in the economic conditions in
the country. Prices have, on the whole, remained steady at lower levels, industrial as
well as agricultural production has shown an increase, while the balance of payments
position has also been slightly more favourable than in the preceding year.
3. The general index number of wholesale prices which stood at 432.2 points
at the end of December 1951 fell to 374.5 points by the end of December 1952, a drop
of 57.7 points or a little over 13 per cent. The downward movement of prices, however,
was not uniform during the course of the year. In the first four months there was a
somewhat precipitate drop resulting from a combination of international factors,
purposeful fiscal and monetary policy and the inevitable collapse of speculative
overtrading. These marked the transition from a sellers’ to a buyers’ market, as a
consequence of which accumulated stocks, especially in the export trade, were unloaded
and prices were depressed to a level which was neither sustainable nor healthy. There
was a general revival of prices after the initial set back and by the end of September the
index number rose by about 7 per cent. Since then prices have been more or less steady,
the fluctuations being within narrow limits. The index number of raw material prices is
also about 25 per cent lower than at the end of December 1951. Food prices have, on
the whole, also remained steady although during the middle of the year there was a
slight upward movement, the index number of cereals rising to 467 points and of all
food articles to 377.6 points. There has been a significant drop since then and by the
middle of January the index number had dropped to 355.6 points.
4. The food situation was also much easier than in the preceding year. From
about the beginning of 1952 the stock position showed a marked improvement and
prices were easier, in sympathy with the recession in the commodity markets, and off
take from government shops showed a decline. In the light of these favourable
circumstances certain relaxations in food controls were allowed from the middle of the
year onwards in a number of States. These relaxations were intended to minimise the
irksome features of food controls without running the risk of having to increase imports
of food or encouraging any undue rise in prices. The relaxations, it may be emphasised,
are only in the nature of adjustments within the framework of the basic policy and do
1
not imply any departure from the policy of general control of foodgrains as long as
pockets of scarcity persist and the need to import foodgrains continues. These relaxations
were not followed by any panicky or precipitate rise in prices but certain deficit areas
were provided with imported foodgrains by the Centre, issued at prices considerably
lower than their real cost. Thanks to the American wheat loan, at the end of 1952
Government carried a comfortable stock of foodgrains, and the programme of imports
for the current year provides for a smaller volume of imports than in the last two
years. The possibility of progressively reducing imports appears to be distinctly within
our reach.
5. Industrial production during 1952 was also satisfactory. In spite of the
reduction of working hours last April and the comparative slackness in demand the
production of jute goods during the year rose to 978,000 tons, an increase of 69,000
tons over the previous year. While the demand for hessian remains reasonably stable
there has been a decline in the world demand for sacking, which is causing some concern
to the industry, but which may prove to be temporary. The cotton textile industry achieved
a record production of 4,600 million yards. The industry is now able to meet the internal
demands in full and the continuous maintenance of production at this level will, to
some extent, depend on the quantity of cloth which can be exported. The improvement
in production made it possible to achieve a considerable measure of decontrol of prices
and the practically complete decontrol of distribution. The industry has been assisted in
striving to maintain its position in the export markets against the increasing competition
of other countries by the recent reduction in the export duty, which may be taken to be
more or less a long term measure. The production of steel was also higher than in the
previous year, although the production, at 1.15 million tons, is still far below the country’s
needs. Coal and sugar production also touched new records. Cement production rose to
3.5 million tons, an increase of 300,000 tons over the previous year and 2 million tons
over the production in 1948. There was also an increase in the production of a number
of other commodities such as paper, caustic soda, power) alcohol, plywood, rayon yarn
and sewing machines. A number of new industries came into production for the first
time last year. Among these may be mentioned industrial boilers, power presses,
fluorescent tubes and a number of drugs and chemicals.
6. Among essential raw materials the production of cotton and jute also showed
an increase in 1951-52, the production of the former rising to 31.3 lakh bales and of the
latter to 46.8 lakh bales.
7. While the all round increase in production has been an encouraging
development it would be rash to assume that all these trends will continue in the future.
In the case of sugar, a fall in production is already apprehended. The engineering
industries need close attention, as they appear to be the first to be affected by any
unfavourable trend. Certain industries in the country have also been facing special
difficulties. The handloom industry, which provides livelihood for considerable sections
of the population, particularly in the countryside, has been hit by a slump. As a temporary

2
measure of assistance to the industry the production of dhoties by mills has been limited
to 60 per cent of the production in the year 1951-52. A Handloom Board has been
established recently and legislation is being undertaken to raise funds for assisting the
handloom and khadi industries by levying a small cess on mill-made cloth. The tea
industry is another industry which has been adversely affected by recent developments
in the world market. For many years this industry was insulated from the impact of
competitive market conditions by the system of bulk purchases by Britain, under which
a cross section of the crop of every garden was purchased at prices which allowed for
all increases in the cost of production. Under the sheltered condition tea production
increased from 450 million pounds in 1939 to a little over 600 million pounds in 1952.
With the termination of the bulk purchase arrangements by Britain and the recent fall in
tea prices considerable distress has been caused to the industry and some tea gardens
have been closed down. A team of officials enquired into the conditions of the industry
sometime ago and the recommendations made by them have been under discussion
with the two State Governments primarily concerned and representatives of the industry.
Government have been giving continuous consideration to the problems of the tea in-
dustry and certain ameliorative measures have already been taken. A system of guarantees
to scheduled and apex co-operative banks with a view to inducing them to extend credit
facilities to the tea gardens during the 1953-54 season was announced last December.
Reasonable time has been allowed for the payment of the excise duty after the clearance
of the tea from the gardens and the smaller growers have been exempted from liability
for advance payment of income-tax. A Committee, which will include a member with
intimate knowledge of labour problems, is being appointed, with very wide terms of
reference, to go into the cost structure of the tea industry. We have also been in
consultation with the State Governments in regard to the supply of food to the gardens
and some assistance has already been given by the Governments of West Bengal and
Assam. The problem of conversion of food grain concessions into cash concessions is
largely a matter for direct negotiation between employers and labour and it may be
hoped that a suitable arrangement will be reached at the next meeting of the tripartite
Committee on Plantation Labour. There has also been an improvement in the prices of
tea and Government are exploring the possibilities of stimulating the demand for Indian
tea in outside countries by more effective propaganda. Recently an agreement on this
subject has been reached between India, Indonesia, Ceylon and the United States tea
trade.
8. The fall in prices has had the inevitable consequence of reducing income
in certain sectors but more significant, perhaps, than this is the fact that the possibilities
of large or quick profits by traders and middlemen have been reduced. While with
production at its present level there is little possibility of any unemployment in industrial
labour, the contraction of profits in trade and commerce is, perhaps, having the effect of
creating some measure of unemployment in the urban areas. Agricultural labour has
also not been materially affected by the fall in prices except in the tea gardens where
some amount of unemployment seems inevitable if the marginally uneconomic gardens

3
have to close down. The House may rest assured that Government will do whatever
they can to minimise the extent of distress in this field. Taking a somewhat longer view
it may be hoped that as, the various development schemes get under way they will
provide increasing scope for employment. The effect of the fall in prices on production
and employment will also be constantly kept under observation. It should be remembered
that while marginal changes in the employment situation come to notice and can, in
some cases, be studied with a view to correction, the basic situation in regard to
employment and under-employment in the country is one that calls for long term measures
for its correction and that such correction could only be gradual, specially in view of
the increasing population.
BALANCE OF PAYMENTS
9. When I reviewed the balance of payments position at the time of presenting
the budget last May, I drew the attention of the House ‘to the deterioration in our position
during 1951 and the first four months of 1952. But the first half of 1952, taken as a
whole, showed an improvement as compared with the previous year, the deficit in
payments on current account having declined from Rs.92 crores in the last six months
of 1951 to Rs.74 crores. Payments for imports during the first half of 1952 amounted to
Rs.442 crores. Export receipts were Rs.315 crores and net invisible receipts Rs.53 crores.
A part of the deficit during this period was met from the proceeds of the American loan
for the purchase of wheat and the balance from the Sterling Balances.
10. Against a deficit of Rs.74 crores during the first half of 1952, there was a
surplus of Rs.28 crores during the succeeding three months, leaving for the first nine
months of 1952 a net deficit of Rs.46 crores. Figures for subsequent months are not yet
available but the trend noticed in the third quarter of 1952 appears to have been
maintained. This is broadly reflected in the increase in the Sterling balances held by the
Reserve Bank which have risen from Rs.600 crores at the end of last September to
Rs.720 crores in the middle of February.
DOLLAR POSITION
11. India’s dollar position during the first half of 1952 showed some
deterioration over the previous half year, the amounts drawn by her from the Sterling
Area’s gold and dollar reserves rising to $188 million against $30 million in the previous
half year. This was mainly due to larger payments for foodgrains and cotton from dollar
sources. In the latter half of 1952 there was, as I anticipated in my budget speech, some
improvement. The preliminary figures for the five months ended November 1952,
indicate that India contributed about $63 million to the Central Pool. This change in the
dollar position was largely responsible for the improvement in the country’s overall
balance of payments during the third quarter of 1952 which I mentioned earlier.
12. I shall now mention briefly the various factors responsible for these change
in our balance of payments. At the end of 1951 there was a movement towards tighter
credit and a reduction in expenditure generally. The increase in bank credit during the

4
busy season of 1951-52 was much smaller than usual and amounted to only about Rs.100
crores against nearly twice that amount in the busy season of the previous year. This,
combined with the general decline in the international prices of a number of raw materials
and other commodities, tended to reduce the level of prices in the country, particularly
in the early months of 1952. Thus the general index number of wholesale prices which
averaged 416 in February 1952 registered a sharp decline to 365- by the middle of
March, the fall in prices being more pronounced in industrial raw materials, India’s
exports, therefore, showed a fall while at the same time large payments had to be made
for imports of raw cotton and food, payments for the former amounting to Rs.79 crores
and for the latter to Rs.121 crores.
13. The position in the latter half of 1952 showed an improvement for a variety
of reasons. Firstly, the export regulations were liberalised about the middle of the year
to arrest the fall in export earnings noticed in the earlier months. Secondly, the export
duties were reduced and in several cases altogether removed. Thirdly, the export quotas
for a number of commodities were increased and restrictions on the export of cotton
textiles and some other commodities were relaxed. These measures assisted materially
in the revival of the country’s exports. Foreign buyers no longer sat on the fence in the
expectation of a reduction in export duties, but re-entered the market, though rather
late. The payments for food and cotton imports were also much smaller than in the
previous half year.
14. International trade and payments are, as the House is aware, affected by
variety of complex factors and developments in the international field about which it is,
as I have mentioned more than once in this House, most difficult to prognosticate. But
I think it very likely that the coming months may not be as favourable as the last six
months of 1952. The increase in the export earnings in recent months is partly due to a
carry over of orders from the previous period. There has been a further decline in the
prices of our principal exports, particularly jute manufactures and oil seeds. A number
of countries have also placed restrictions on imports. Lastly, the import policy for the
first half of the current year allows for some liberalisation in the imports of a number of
items which were restricted hitherto. Food purchases are also likely to increase our
external payments.
15. Hon’ble Members will recall the statement I made in Parliament during the
last session about the conference of Commonwealth Prime Ministers held in London
last November. The problem of arresting the drain on the dollar and gold reserves of the
Sterling Area has been in the forefront during recent months. As a result of the measures
taken by the Commonwealth Governments, following their meeting in London in January
1952, the drain on the Central Reserves was halted and to some extent reversed. These
reserves, which had dropped from $2,335 million at the end of 1951 to $1,700 million
at the end of March 1952, fell only by a small sum of $15 million during the subsequent
quarter. Since then there has been a slight increase in the reserves which stood at $1,846
million at the end of December 1952. The contribution made by us to this improvement

5
has been mentioned earlier, but the periodical crises faced by the Sterling Area in recent
years point to the necessity for long-term measures, rather than temporary palliatives.
As the Conference held in January 1952 recognised, the real key to the problem lies in
the expansion of world production and trade and in making an advance towards sterling
convertibility as early as possible. The conference of Commonwealth Prime Ministers
agreed that the Sterling Area countries should follow sound internal economic policies,
and that individual countries should aim at economic development with the object of
increasing their productive and competitive strength and co-operate with the other trading
countries. As I have already stated in this House, agreement on these points does not
involve the adoption of any new policy by the Government of India. India’s internal
policies are already geared to the tasks laid down by the conference. The implementation
of the Five Year Plan is expected to enable India to play her part in the expansion of
world trade and increasing her production. By helping herself India will be helping not
only the countries- of the Sterling Area but also the rest of the world in the expansion of
production and trade.
16. Before I pass on to other matters I should like briefly to mention the progress
made in our negotiations with the International Bank for Reconstruction and
Development for loans for some of our development projects. Following the visit to
this country early last year of the President of the International Bank several officials of
the Bank have visited this country to consider the various schemes for which we had
asked for assistance. Two missions from the Bank came to assess the requirements of
the industrial Finance Corporation. Missions also investigated the possibilities of
assisting the development of steel production and certain irrigation projects under the
Damodar Valley Corporation. A number of officials from India also visited the United
States for discussion with the authorities of the Bank. As a result of these discussions,
the Bank have agreed to the grant of a loan of $31.5 million to the Indian Iron & Steel
Company and $19.5 million for the Damodar Valley Corporation. The loan to the Steel
Company, which has been guaranteed by the Government of India, will carry interest at
4 3/4 per cent and will be repayable in 15 years. The loan for the Damodar Valley
Corporation will carry interest at 4 7/8 per cent and will be repayable in 25 years. The
negotiations for a loan to the industrial Finance Corporation are nearing completion
and an agreement is expected to be concluded shortly.
17. Discussions were also held last year with the authorities of the International
Monetary Fund about the continued retention of the existing restrictions in payments
and transfers for current international transactions with a view to enabling the Fund to
decide whether the existing exchange restrictions were justified. I am glad to say that
the Fund has agreed that, in the exceptional circumstances governing India’s external
payments position, these restrictions may be continued.
18. In accordance with the usual procedure of the International Monetary Fund
a Mission consisting of technical experts from the Fund is at present on a visit to this
country. The Mission is making a close study of the Five Year Plan and the fiscal,
monetary and economic policies of the country. I have no doubt that their objective
6
view of the efforts which we are making to sustain the economy of the country and for
its orderly development would help us to ensure that resources for implementing our
Five Year Plan are raised in an optimum manner and may perhaps encourage external
assistance on lines entirely acceptable to us.
19. While on the subject of external assistance for development, I would like
to mention the assistance received by us from the United States Technical Co-operation
Administration. A sum of $38.35 million was provided this year for the extension of
projects already undertaken and for such additional projects as may be agreed upon. In
furtherance of the objectives of the Colombo Plan, the Governments of Australia, Canada
and New Zealand agreed to provide a further sum of about $20 million. We have also
received a contribution of about Rs.67 lakhs from the Government of Norway for some
of our development schemes. I take the opportunity of expressing our appreciation to
these friendly nations.
FINANCE COMMISSION
20. Before I deal with the revised estimates for the current year and the budget
estimates for the coming year, I should like to refer to the report of the Finance
Commission, which has already been placed before both Houses of Parliament. The
House will remember that in accordance with the recommendations made by the
Commission, in their First Report submitted to the President in December 1951, the
budget for the current year was framed on the basis that the arrangements which were
in force at the time in regard to the allocation of revenue between the Centre and the
States and the payments of grants-in-aid to them will be maintained during the current
year, subject to the condition that the decision taken on the final recommendations of
the Commission would be given effect to from the 1st April, 1952. As Hon’ble Members
are aware, the recommendations of the Commission in their final report have been
accepted in their entirety by Government. These recommendations involve the
assignment of a larger share of income-tax to the States, the allocation of 40 per cent of
the net proceeds of the Union duties of excise on tobacco, matches and vegetable,
products to the States and the payment of increased and additional grants-in-aid to a
number of States. The net effect of these recommendations is to transfer, on an average,
a sum of the order of Rs.21 crores a year more than at present to the States by way of
devolution of revenue and grants-in-aid. Except in regard to two matters in which the
Commission themselves have suggested that their recommendations should take effect
from the next financial year, the recommendations of the Commission are being given
effect to from the current year and the revised estimates for this year and the budget
estimates for the next year take this into account.
21. I do not propose to dilate at length on the recommendations of the
Commission as their report has already been circulated to the Members of both Houses
and details, as they affect the various heads of revenue and expenditure, will be found
in the Explanatory Memorandum circulated with the Budget Papers. I would, however,
like to take this opportunity of placing on record Government’s appreciation of the
7
valuable work done by the Commission. As the first Commission set up under the
Constitution, entrusted with the delicate task of adjudicating between the claims of so
many Governments, they had a difficult and onerous responsibility and I am sure all
sections of the House and the public outside would join me in paying a tribute to the
impartial and objective manner in which the Commission have dealt with the problems
placed before them.
FINANCIAL YEAR 1952-53
22. In the current year’s budget I had provided for a surplus on revenue account
of Rs.3.73 crores. I now expect that this surplus will be converted into a deficit of
Rs.3.79 crores. This is the result of an increase of Rs.13.66 crores in revenue and a
worsening of Rs.21.18 crores in expenditure met from revenue.
REVENUE
23. The total revenue for the year is now estimated at Rs.418.64 crores against
the budget estimate of Rs.404.98 crores. The improvement in revenue is largely due to
better receipts from customs and income-tax. The revenue from import duties is now
placed at Rs.120 crores, a drop of Rs.5 crores in the sum expected to be collected when
the budget was framed. Export duties however, have been somewhat better than expected
and against the estimate of Rs.40 crores I now expect that the collections will amount to
Rs.551/2 crores. The House will remember that in view of the uncertainty regarding the
income that could be expected from this source, which depends so largely upon
developments in the world markets, and the need, from time to time, of having to adjust
these duties to enable us to maintain our position in the overseas markets, we had assumed
that there will be a substantial drop in the revenue from export duties this year as
compared with the previous year. Actually, while there has been a drop, it has beep
much smaller than we had reason to expect at the time the budget was framed. Collections
of income-tax are also likely to show an improvement of Rs.15 crores of which
corporation tax will account for Rs.9.3 crores and income-tax for Rs.5.7 crores. This
improvement is largely due to larger collections as a result of the drive for the speeding
up of assessments and the clearance of arrears which has been in operation for sometime.
The revenue from Union excises is now placed at Rs.80 crores against the budget estimate
of Rs.86 crores, the drop being largely due to smaller collections of the duty on cotton
cloth and to a small decrease in the revenue from tobacco. In the budget credit had been
taken for a recovery of Rs.9 crores from Pakistan as the first instalment of its debt
repayment to India but as it has not yet been possible to reach an agreement on the
provisional amount of the partition debt, this payment is likely to be carried forward to
the budget year. Under other heads it is not expected that there will be any substantial
change compared with the budget. The payment to the States of their share of income-tax
is now likely to be about Rs.6 crores more than was provided in the budget, partly
owing to the increase in collections mentioned earlier and partly to the acceptance of
the recommendations of the Finance Commission.
8
 EXPENDITURE
24. Expenditure met from revenue in the current year is now placed at Rs.422.43
crores against the budget estimate of Rs.401.25 crores. Defence Services account for
Rs.192.73 crores and Civil expenditure for Rs.229.70 crores.
25. Under Defence Services the drop of Rs.5.22 crores is due mainly to the
non-receipt of supplies from abroad to the extent anticipated in the budget. Under
Civil heads, the expenditure is now expected to exceed the budget by Rs.26.4 crores.
This increase is largely accounted for by the additional payments to the States under
the Finance Commission’s recommendations and increased expenditure on food
subsidies. The revised estimates include a provision of Rs.16.42 crores for payments
to the States as their share of the Union duties of excise on tobacco, matches and
vegetable products. Grants-in-aid to the States under Articles 273,275 and 278 of the
Constitution are expected to amount to Rs.2.98 crores more than was provided in the
budget, these will cover increased payments to the States recommended by the Finance
Commission. Expenditure on food subsidies, for which the budget had provided Rs.15
crores, is now placed at Rs.21 crores. Other variations as compared with the budget
are not likely to be substantial and have been explained in the Memorandum circulated
with the budget Papers.
FINANCIAL YEAR 1953-54
26. At the existing level of taxation the revenue for the coming year is estimated
at Rs.437.76 crores and the expenditure met from revenue at Rs.438. 81 crores, leaving
a deficit of Rs.1. 05 crores.
REVENUE
27. I have mentioned earlier the difficulty in making an estimate of the revenue
from customs duties. Against the sum of Rs.177 crores which we expect to collect in
the current year, I have assumed Rs.170 crores for the budget year. The revenue from
import duties may be expected to be about the same as in the current year and to bring
in Rs.118 crores. The revenue from export duties this year was somewhat higher than
expected and I do not think that in the present circumstances it would be realistic to
provide for the maintenance of the revenue at the level reached in the current year. I
have assumed a drop of Rs.41/2 crores in the revenue from this source and have placed
the total revenue from customs duties at Rs.170 crores. Under Union excises, I have
taken Rs.94 crores against the revised estimate of Rs.80 crores. The increase of Rs.14
crores provides for Rs.6 crores from the cess on mill-made cloth levied for the benefit
of the khadi and handloom industry and Rs.3 crores from the proceeds of the special
excise on sugar which was recently imposed. An improvement of Rs.3 crores in the
revenue from the excise duty on cloth has also been assumed; small improvements
under other heads account for the balance of Rs.2 crores. The total revenue from
income-tax has been placed at Rs.160 crores a drop of Rs.10 crores on the revised
which is mainly accounted for by the drop in the revenue from voluntary disclosures
and the contraction in the post-war refunds of excess profits tax and the income-tax

9
collected on them. Under Currency and mint the profits from the Reserve Bank are
expected to amount to Rs.12.5 crores against Rs.7. 5 crores this year. Credit has been
taken for the recovery from Pakistan of two instalments of its partition debt to India,
one instalment representing a carry over from the current year. The net surplus of the
Posts and Telegraphs Department will also be Rs.1 crore less. The estimates under the
other heads largely follow the revised estimates.
EXPENDITURE
28. Expenditure met from revenue next year is estimated at Rs.438.81 crores,
an increase of Rs.16.38 crores over the revised estimate for the current year. Expenditure
on Defence Services has been placed at Rs.199.84 crores and Civil expenditure at
Rs.238.97 crores.
29. Of the total expenditure of Rs.199.84 crores next year on Defence Services,
Rs.148.18 crores will be on the Army, Rs.11.07 crores on the Navy, Rs.25.2 crores on
the Air Force and Rs.15.39 crores on non-effective charges. The increases over the
revised estimates are mainly in respect of the Navy and the Air Force which, as the
House is aware, are expanding Services.
30. In considering the estimates of expenditure on Defence I must repeat, what
I have said on more than one occasion in the past, that there can be no question of any
large-scale reduction in the size of the Armed Forces so long as there is any danger to
the country’s security. While this overriding consideration exists, I can hold out no
hope of any substantial reduction in Defence expenditure in the immediate future.
Nevertheless, our aim has been, and continues to be, to maintain the minimum forces
essential for the country’s security. The House will recall that, while presenting the
budget for the current year, I mentioned that a critical examination of the organisation
and equipment of the Armed Forces had been undertaken in order to see what economies
could be effected in Defence expenditure. This critical examination will, more or less,
be a continuous process. The conclusions so far reached in regard to the scales of
equipment of certain establishments and the reorganisation of some services are of
considerable importance from the point of view of ultimate economy and, although I
cannot say that the estimates for the coming year reflect very much of this, I am confident
that in course of time they will yield appreciable savings. While, as I have mentioned
earlier, the requirements of national security set the limit to expenditure on defence, the
search for economy within this limitation will continue to be assiduously pursued.
31. Civil expenditure next year is estimated at Rs.238.97 crores against
Rs.229.70 crores in the current year. The current year’s estimate includes a provision of
Rs.21 crores for food subsidies and Rs.4 crores for the payment of compensation to
sugar factories to cover the reduction in price of stocks of the 1951-52 production. It
has been decided not to subsidise food any longer from revenue and no provision is
being made in the budget for next year on this account. Excluding these two special
items civil expenditure next year will be Rs.341/2 crores more than the corresponding

10
figure in the current year. This increase is mainly due to larger provision for a number
of development items. Among these I would mention the provision of Rs.2 crores for
basic and social education, Rs.6 crores for transfer to the fund for the development of
the handloom industry, Rs.1 crore for the development of small scale industry, Rs.4
crores for industrial housing, Rs.6.33 crores for community projects, Rs.1 crore for the
uplift of the backward classes, Rs.3 crores for local works, Rs.50 lakhs for the national
extension organisation and Rs.1.5 crores for grants to certain States for the expansion
of primary education recommended by the Finance Commission. Expenditure on the
relief of displaced persons is also expected to be about Rs.1 crore more than in the
current year. Increased provision has also been made for research expenditure, grants to
the Council of Scientific and industrial Research and grants for the development of
scheduled areas and tribes.
CAPITAL EXPENDITURE
32. The current year’s budget made a provision of Rs.79 crores for capital
expenditure, including a transfer of Rs.10 crores to the Special Development Fund
from the sale proceeds of American wheat. The transfer to the latter Fund, is now expected
to amount to Rs.26. 57 crores and, excluding this, the capital expenditure will amount
to Rs.49 crores. Loans to State Governments for development, rehabilitation of displaced
persons and relief of famine this year, will amount to Rs.117 crores against Rs.104
crores provided in the budget. The provision for capital outlay in the revised estimates
has largely been regulated with reference to the progress of expenditure on the various
schemes. The reduction of Rs.20 crores in the expenditure is mainly due to a saving of
Rs.8.29 crores in the provision for defence capital outlay and Rs.8.15 crores in the
provision for capital outlay on industrial development, mainly in the provision for
development of the shipping industry and the setting up of a steel plant. In addition to
loans for various capital projects and Grow More Food schemes, a provision of Rs.6
crores has been made for ways and means assistance to State Governments in connection
with works undertaken for the relief of famine and scarcity.
33. For next year, a total provision of Rs.77 crores has been made for capital
outlay and Rs.131 crores for loans to State Governments, including loans from the
Special Development Fund. The provision for capital outlay includes Rs.19 crores for
Railways, Rs.7.6 crores for Posts and Telegraphs, Rs.6.75 crores for industrial
Development, Rs.21/4 crores for the development of Civil Aviation, Rs.31/4 crores for
the development of Major Ports, Rs.3.73 crores for the Central share of expenditure on
River Valley Schemes, Rs.17.81 crores for Civil Works, including communications,
Rs.1.59 crores for capital outlay on New Delhi and Rs.15 crores for capital outlay on
Defence. Included in the provision for loans to States are Rs.10.3 crores for the
rehabilitation of displaced persons, Rs.11 crores for Community Development Schemes,
Rs.46.27 crores for River Valley Schemes and Rs.27.86 crores for Grow More Food
Schemes.
34. As in the past, the provision for development and capital expenditure in the
11
budget broadly follows the plan suggested by the Planning Commission. The final report
of the Commission, which was issued after the last budget was presented to Parliament,
now places the total expenditure in the public sector at Rs.2,069 crores, an increase of
Rs.276 crores over the figure envisaged in the first Draft of the Plan issued by the
Commission. Of this total expenditure, Rs.361 crores will be on agriculture and
community development Rs.168 crores on irrigation, Rs.266 crores on multipurpose
irrigation and power projects, Rs.127 crores on power, Rs.497 crores on transport and
communications, Rs.173 crores on industry, Rs.340 crores on social services, Rs.85
crores for rehabilitation and Rs.52 crores on other miscellaneous items. Against this
plan, which covers a period of five years ending March 1956, the total expenditure in
the first two years, taking the States and Centre together, is expected to be of the order
of Rs.600 crores. So far as the Central budget is concerned, the provision in the budget
for next year has been made having in mind, among other considerations, the need for
raising the tempo of expenditure, so as to secure that in the third year of the Plan the
phase of development envisaged by the Commission is, as far as possible, attained.
WAYS AND MEANS
35. The current year’s budget provided for an overall deficit of Rs.76 crores to
be met from the opening cash balance of Rs.159 crores, leaving at the end of the year a
balance of Rs.83 crores. The revised estimates indicate that the overall deficit would be
slightly higher at Rs.83 crores, leaving a closing balance of Rs.80 crores at the end of
the year. No loans fell due for repayment in the current year and although in the budget
credit had been taken for a market loan of Rs.25 crores no loan was actually floated, so
as to leave the market free for the States to borrow for their development schemes. This
shortfall in the estimate will, however, be more than offset by increased receipts from
the proceeds of the Americal Wheat Loan and under the Colombo Plan and Technical
Co-operation Administration Assistance. Receipts from small savings will, in the
aggregate, be up to the original estimate. The ways and means position was also eased
by the resumption of treasury bill sales to the market which are expected to yield a net
sum of Rs.5 crores or so this year.
36. For next year, the budget provides for an overall deficit of Rs.140 crores.
During the year Government have the option of repaying the 3% loan 1953-55 with an
outstanding balance of Rs.115 crores. It is proposed to exercise this option and I have
assumed, taking into account this discharge, that it would be possible to raise a market
loan of the order of Rs.100 crores. Credit has been taken for receipt through small
savings of Rs.45 crores, more or less on the same scale as at present, although steps are
being taken to intensify the savings movement and achieve a bigger target. The benefit
of any such increase will however accrue to the States and not to the Centre; at the
recent Conference of Finance Ministers it was agreed that the States should be assisted
by the diversion to them of the equivalent of any part of the net receipts from small
savings in excess of Rs.45 crores.

12
 37. The overall deficit of Rs.140 crores which I just mentioned would more
than completely wipe out the closing balance for the current year. It is necessary, taking
into account the volume of transactions involved, to have a minimum cash balance of at
least Rs.50 crores. It would, therefore, be necessary to reduce this deficit of Rs.140
crores to Rs.30 crores by means of additional borrowing. The method and manner in
which this additional borrowing should be secured can be decided only during the course
of the year and with reference to conditions as they develop. For the purposes of the
budget, I have taken a credit of Rs.110 crores under treasury bills, so as to leave an
adequate closing balance at the end of the year.
38. The question may be asked whether in. present conditions it is wise to
resort to deficit financing on the scale envisaged in the budget for the coming year. I
have given the matter the most careful consideration and I am satisfied that taking all
circumstances into account we are not taking any undue risk. The development plan for
the country sets a limit of Rs.300 crores or so over the five years covered by it to be met
by deficit financing an average of roughly Rs.60 crores a year. In the first two years of
the plan taken together the overall deficit, will be of the order of Rs.82 crores. If the
programme of development laid down in the plan has to be carried out, within the broad
limits set for the raising of resources, it is necessary to increase the tempo of expenditure
in the remaining three years of the plan. Recent trends in the, economic conditions of
the country also indicate that the inflationary pressures, which had been the besetting
difficulty, have been brought under control and the climate seems suitable for raising
the scale of developmental expenditure. The effect of this on the economy of the country
will be kept under constant watch and I need hardly assure the House that appropriate
measures will be taken to counteract any unhealthy development.
39. Before I pass on to the budget proposals I would like to refer to the progress
of the small savings movement. As I have more than once emphasised, we shall have to
turn increasingly to the small saver for providing the finance required for development.
We have endeavoured to get the States more actively interested in spreading the
movement by giving them a financial interest in the proceeds from small savings. We
are considering the extension of the system of authorised agents, which has been under
experiment in three States, to all the States, and the matter is under discussion with the
State Governments concerned. Steps are also being taken to interest voluntary social
and women’s organisations in the furtherance of the movement. I have every hope that
these steps and the widening interest among the masses in the development plans of the
country will bear fruitful results.
40. I now turn to my budget proposals for the coming year.
TAXATION ENQUIRY COMMISSION
41. Before passing on to the budget proposals I have an important announcement
to make. For some years there has been a persistent demand both in the Legislature and

13
outside, for a systematic enquiry into taxation and as far back as 1946, the then
Government of India decided that such an enquiry should be conducted. But this decision
could not be implemented owing to the impending constitutional changes, and since
independence this had been further held up by more urgent preoccupations. But as has
been indicated more than once on the floor of this House the idea had not been dropped.
Government have now decided to set up a small compact Commission, with specialised
knowledge, to conduct a comprehensive enquiry into taxation and I am glad to announce
that Dr. John Matthai has accepted our invitation to be the Chairman of the Commission.
The other Members will be Shri V.L. Mehta, till recently a Member of the Finance
Commission, Dr. V.K.R.V. Rao of the Delhi School of Economics, Shri K.R.K. Menon,
Secretary, Finance Ministry, Shri B. Venkatappiah a former Finance Secretary of the
Bombay Government and Dr. B.K. Madan, Economic Adviser of the Reserve Bank. A
senior officer from the Finance Ministry will be the Secretary of the Commission. The
terms of reference of the Commission will be very comprehensive and will cover taxation
in all its aspects, Central, State and local. It is Government’s intention to associate with
the Commission two foreign experts on taxation and public finance so as to make
available to the Commission such expert advice as they may require from foreign
experience. The Commission will also be free to co-opt additional Members for short
periods when considering specific problems. I expect the Commission will start
functioning from next April and complete their work in about two years. I am sure that
the labours of the Commission would assist in laying the foundations of a taxation
system best fitted for the development of the economy of the country on a firm and
sound basis.
BUDGET PROPOSALS
42. The relatively small amount of the revenue deficit in the coming year has
made my task, so far as it concerns the raising of additional revenue, somewhat easier
than usual and I propose to confine myself largely to, what I may call readjustments in
taxation rather than to exploring avenue for additional taxation.
RELIEFS IN TAXATION
43. I shall first deal with reliefs in taxation. My first proposal is to reduce the
export duty on jute sacking. While the prices of hessian have recently been looking up
the position in regard to sacking has been causing Government some concern. I propose
a reduction in the export duty on sacking from Rs.175 per ton to Rs.80 per ton. immediate
effect to being given to this by a notification under the Sea Customs Act. I hope that this
reduction will assist the industry in retaining its exports in the world markets. The loss
in revenue is estimated at Rs.3.5 crores.
44. My second proposal to raise the exemption limit for personal income-tax.
The existing limit of Rs.3,600 for individuals and Rs.7,200 for Hindu undivided families
will he raised to Rs.4,200 for individuals and Rs.8,400 for Hindu undivided families.
14
This increase to made not merely as a measure of relief in taxation but also for securing
some relief to the income tax administration. I have felt for some time that far too much
of the time of the income-tax Department is being taken up by the relatively smaller
assessments and, if the number of such assessments could be reduced, the Department
would be able to give greater attention to the cozen of the bigger assessees and improve
the revenue from income-tax. The change proposed will have the effect of taking away
a little over 70,000 assessments out of a total of nearly 8 lakhs. The loss is revenue is
estimated at Rs.82 lakhs, of which the Central share will he Rs.40 lakhs. I feel that in
the long run this loss to the exchequer would be more than offset by the improvement of
income-tax collections.
45. The two changes mentioned above will raise the deficit of Rs.1.05 crores
to Rs.4.95 crores and I propose to cover thin by certain readjustments in import duties
and postal rates.
CHANCES IN IMPORT DUTIES
46. The changes in import duties, which cover a number of items, mainly relate
to semi-luxury items. The duty on toilet requisites, certain categories of textiles, crockery
and glass and earthenware tiles will be raised and a limited quota allowed for import.
While this will bring in some additional revenue the prices, including the duty, will be
high enough to act as a deterrent to any undue expansion of consumption. The duty on
certain other items like motor car imported in an assembled condition is being raised
while duties are being imposed on the costlier type of horses and precious stones and
pearls. These duties will bring in some revenue without any material increase in
expenditure of foreign exchange.
The duty on betel-nut is also proposed to be increased by about two annas a
pound. This will assist the indigenous grower in securing a more remunerative market
for his crop.
As part of the changes in the import tariff I also propose to reduce the duties on
penicillin, antibiotics and sulpha drugs, milk foods for infants and invalids, certain
types of parent foods, scientific instruments and appliances, prints, engravigs and pictures
and works of art. These changes, which I am sure the House will welcome, are unlikely
materially to affect the revenue.
The net result of the changes in the import duties mentioned above will be an
additional revenue of Rs.3.5 cores which will just off set the loss in export duties from
the reduction in the duty on sacking.
CHANGES IN UNION EXCISE DUTIES
47. Certain readjustments are also being made in the excise duty on cloth. Before
May 1952 the rates of duty on fine and super-fine cloth were 5 per cent and 20 per cent
ad valorem respectively. The heavy fall in the price of cloth of these categories last year
made the assessment of the duty on the Textile Commissioner’s ceiling price onerous
and ‘it was decided to prescribe certain specific duties per yard as maximum duties, the

15
duty being levied at these rates or at the ad valorem rates, whichever was less. The rates
of specific duties were fixed at a level which, it was believed at the time, would eliminate
ad valorem assessments in most cases. The subsequent further fall in prices belied this
expectation and led to the preponderance of ad valorem assessments, giving rise to
administrative difficulties and continual friction between the mills and the assessing
staff on the question of the adequacy of the declared prices. In order to overcome these
difficulties it has been decided to do away with ad valorem assessments altogether and
to prescribe absolute specific duties. Super-fine cloth will be charged a duty of 3 annas
9 pies a yard and fine cloth a duty of 1 anna 3 pies a yard, and the necessary provision
is being included in the Finance Bill. This will not mean any increase or reduction in
revenue but will make the task of assessment and collection easier.
CHANGES IN POSTAL RATES
48. In recent years the Posts and Telegraphs Department has been implementing
a programme of expansion of postal facilities in the rural areas and during the last five
years more than 16, 000 Post Offices have been opened in villages with a population of
2,000 and over. Many of these Post offices are not expected to be remunerative for
some time. This, together with the adoption of the Pay Commission is recommendations
and the other measures taken for the improvement of the service conditions, especially
of the lower categories of staff, has resulted in a loss in the working of the Postal
services since 1948-49. In the four years ended March 1952 the net loss of the Postal
branch amounted to Rs.3.61 crores. The loss in the current year is estimated at Rs.2.23
crores while for next year it will be a little over Rs.2.68 crores. A review has, therefore,
been carried out of the existing scale of postal rates with reference to the cost of the
service under each head and the charges levied in other countries. As a result of this
review, it has been decided to increase the scale of fees for parcels, packets, registration
and insurance. The existing rate of 6 annas for every 40 tolas for parcels will be raised
to 8 annas. The postage on book pattern and sample packets will be raised from 9 pies
for the first five tolas and 3 pies for every additional 21/2 tolas to 1 anna and 6 pies
respectively. The registration fee will be raised from 41/2 annas per article to 6 annas per
article while the fee for insurance will be raised from 4 annas to 6 annas for the first
Rs.100 and from 2 annas to 3 annas for every additional Rs.100. These increases in
rates are estimated to yield an additional revenue of Rs.1.90 crores.
NET EFFECT OF PROPOSALS
49. I shall now summarise the effect of the various changes mentioned above.
The reduction in the export duty in sacking and the raising of the exemption limit for
personal income-tax will involve a loss in revenue of Rs.3.90 crores, which will raise
the deficit from Rs.1.05 crores to Rs.4.95crores. The changes in import duties will
bring in Rs.3.50 crores and the increases in Postal rates Rs.1.90 crores. This will leave
a nominal surplus of Rs.45 lakhs on revenue account.
CERTAIN CHANCES IN INCOME-TAX LAW
50. Before I conclude I should like to mention a few changes relating to
income-tax which are being included in the Finance Bill for the coming year. The House

16
will remember that in the budget for 1948-49 provision was made for exempting from
income-tax payments made to approved charities up to a maximum of Rs.21/2 lakhs or
10 per cent of the income, whichever is less, to stimulate private assistance to charitable
purposes. Experience has shown that this arrangement is not sufficiently flexible,
particularly in regard to the charities to be benefited. We have now decided that the
requirement in regard to the approval of the charity or the charitable institutions by the
Central Government should be waived and the benefit given to any fund or charitable
institution registered or under a trust or run by the Central or State Governments or a
local authority. I trust that this modification will lead to a freer flow of assistance to
deserving institutions. Simultaneously, we propose to reduce the limits from its. 24
lakhs to Rs.1 lakh and from 10 per cent of the income to 5 per cent. Necessary
amendments are being made to Section 15B of the income-tax Act.
Some difficulty has been experienced by companies which invest their surplus
funds in another company as the investing company has to pay corporation tax on its
dividends from the investment in order to encourage such investment it is proposed to
exempt such dividends from corporation tax. This concession will be given to dividends
of new undertakings engaged in certain selected industries.
At present a foreign company operating through a wholly Indian subsidiary has
often to pay a slightly larger tax than a foreign company working through its branches
in India. This operates to the disadvantage of the Indian subsidiaries and provision is
being made so that the disparity could be gradually reduced.
Certain other changes are also proposed in the income-tax law. I need draw the
attention of the House only to two somewhat important changes. The first is the provision
designed to cheek the practice of buying up speculative losses. The income-tax
investigation Commission recommended that the law should be amended so as to allow
speculative losses to be set off only against speculative gains. This amendment was
included in the income-tax (Amendment) Bill, 1951 which lapsed. It is now proposed
to make this amendment. The second is the provision empowering Government to
negotiate agreement with foreign Governments, if necessary, for relief from or avoidance
of double taxation. This removes a lacuna in the law as at present Government have
power to negotiate such arrangements only with certain countries.
CONCLUSION
51. The budget for the coming year has been framed against the background of
the Five-Year Plan and I am sure the House would like to know to what extent progress
would have been made by the end of the budget year in reaching the measure of
development envisaged by the Plan. The expenditure proposed in the Plan covers the
budgets of not only the Centre but also of the States, and, although we are in the second
year of the Plan, it is difficult to make a precise estimate of the progress achieved. As I
mentioned earlier, on a rough estimate, the total expenditure by the Centre and the
States together in the first two years of the Plan is expected to be of the order of Rs.600
crores. This would be roughly equally divided between the Centre and the States. In the
17
coming year the provision in the Central budget for developmental expenditure is of the
order of Rs.225 crores exclusive of Central assistance for financing the State Plans. If
the level of developmental expenditure reached by the States in 1952-53 is maintained
in the coming year, the total expenditure, taking the Centre and the States together, for
the three years ending March 1954 would have reached about Rs.1,000 crores. Since
the total expenditure envisaged by the Plan is Rs.2,069 crores this would leave a balance
of Rs.1,000 crores or so for the last two years of the Plan. When it is remembered that
the level of expenditure in the earlier years of the Plan is bound to be somewhat lower,
as expenditure on individual schemes takes some time to gather momentum, I think that
it could be fairly said that the progress in implementing the Plan has not fallen short of
the target to be reached in the first two years. I hope it will be possible, in the very near
future, to make a complete survey of the progress made in the first two years of the
Plan, in consultation with State Governments; so that the public may know the precise
extent to which the Plan has been implemented. I know that there is a keen demand for
this information, but it has to be remembered that the final outturn for the current year
will take some time to become available and that it may be somewhat misleading at this
stage to attempt an appreciation based on the revised estimates for this year.
52. The fulfilment of a programme of planned economic development depends
not merely on the laying down of policies and making the finance available but on
efficient administration and public co-operation. The Five-Year Plan which, in the nature
of things, is bound to be the first of many more Plans, lays down the policy for the next
three years in each major field of development. To carry through this policy and
programme with the maximum Amount of public co-operation is the main task before
both the Centre and the State Governments. At the Centre, I believe I can justly claim
that we have done our part in implementing the Plan. I am sure the State Governments
are also animated by the same purpose although I fear that some of them have not
shown the necessary determination, matching their keenness, in raising the resources
expected from them after full consultation. But it is also true that some of them have
had to carry the strain of meeting substantial additional expenditure on account of scarcity.
I hope that in the remaining years of the Plan the State Governments will find it possible
to concentrate all their attention and energy on augmenting their resources, so that the
completion of the development proposed by the Plan is not delayed. The transition
from a regulatory to a welfare state is never easy. It requires as much of inspired, informed
and understanding leadership as a sense of discipline, a co-operative attitude and a
spirit of sacrifice in the interest of the common good on the part of the community. The
fostering of such leadership will be the supreme test of political wisdom and
statesmanship. It will be for the Governments in the country, assisted by the Planning
Commission, to furnish precise and definite guidance in regard to the direction and
content of the public co-operation expected; and once such guidance is forthcoming, it
will be for the people of the country to give of their best without stint, so that the Plan
goes forward to the prosperity and greater glory of our motherland.
(February 27, 1953)
18
 SPEECH OF SHRI C.D. DESHMUKH, MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1952-53 (Final)

Sir, I deem it a great privilege to present this budget to the first Parliament elected
under the Constitution.
2. As Honourable Members are aware, a budget for the current year was
presented to the Provisional Parliament last February as usual and a vote on account
was obtained from that Parliament to enable the Government to be carried on for the
first four months of the current year. A Finance Act was also passed by that Parliament
continuing, during the current year, the taxes in force when the budget was presented. I
then mentioned that the budget as then presented will be presented again to the new
Parliament with such changes as may be considered necessary by the new Government.
3. The usual factual information contained in the budget speech was embodied
in a White Paper which was circulated with the budget last February. I am having this
White Paper and the speech I then made circulated to Honourable Members. I do not
propose to go over the whole ground covered by this White Paper and I shall only deal
with the further changes that have taken place since I presented the budget to the
provisional Parliament.
4. In my speech last February I mentioned, as a welcome development in the
country’s economy, the steady drop in prices which had been taking place from July
1951 onwards. At the end of January 1952 the general index number of wholesale
prices stood at 430.3, a drop of nearly six per cent from the peak figure of 457.5 reached
in April 1951. Between January and March there was a more pronounced fall in the
index number, which dropped to 364.9 points i.e. by a further fourteen per cent by the
middle of March. Since then there has been a slight upward movement and the index
number for the week ended the third May stands at 369.8 points which may be compared
with 301.4, 367.2, and 393.3, the corresponding index numbers for August 1947, May
1948 and May 1950 respectively.
5. This general fall in prices has, as I had occasion to explain more than once
in the debate following the budget, not been confined to any particular commodity
although in the case of some of them the drop has been rather abrupt. It has been largely
due to the disappearance of several international factors which led to an artificial rise in
prices since June 1950, the impact of the monetary and credit policy adopted by
Government to cheek inflation and the improvement in the general internal supply
position as a result of increased Production and larger imports. The fall in prices in the
case of certain commodities has, however, been sharper than these factors warranted,
but this is mainly because of speculative overtrading which had led to an artificial

1
increase in recent months in the prices of these commodities. On the whole, the drop in
the price level in recent months has been beneficial to the country’s economy, although
the readjustment necessitated by lack of accord between costs and prices is bound to
cause some unavoidable difficulties to those engaged in business. In their own interest
they must now decide to cut their losses reasonably and concentrate on economy and
efficiency of production.
6. Honourable Members are, aware of the measures taken by Government
from time to time to meet the situation created by the abruptness of the fall in prices
with particular reference to its effect on the country’s export earnings. The export duty
on hessian was reduced last February from Rs.1,500 per ton to Rs.750 per ton and was
further reduced a few days ago, as s imply a revenue duty, to Rs.275 per ton. The duty
on sacking was also similarly reduced from Rs.350 per ton to Rs.175 per ton. Export
duties on raw cotton and cotton waste have also been reduced, while the duties on wool
and groundnut oil and some oil seeds have been abolished. Licensing restrictions on the
export of jute goods have been almost completely withdrawn. In the case of cotton
textiles, in which there has been, as in the other exporting countries in the world, a
sharp reversal of the relative strength of demand and supply, distribution controls have
been relaxed and mills have been allowed freely to sell the entire production of fine and
super-fine cloth and 80 per cent of the production of coarse and medium cloth. They
have also been permitted to export fine and super-fine cloth freely for shipment upto
the end of September 1952. Last week Government also permitted the free export of
coarse and medium cloth for shipment upto the end of August 1952. Government have
also assisted the industry in purchasing foreign cotton by arranging special credit
facilities, while the concomitant fall in the prices of raw cotton has been arrested by
Government’s offer to purchase the cotton at floor prices if necessary, backed by the
necessary organisation.
7. The level of industrial production during 1951 showed a marked
improvement in spite of the special difficulties which some of the industries encountered
in obtaining essential raw materials and the cut in electric power in Bombay. During the
early months of this year the improvement in the production of important commodities
like steel, cement, and cotton textiles has been maintained. Production of jute goods in
the first three months of the year also showed an increase from the 1st of April the
industry has had to reduce working hours owing to a fall in demand which in its turn is
the result of the recent trend of prices. The abrupt change over from a seller’s to a
buyer’s market is reflected in the consumer resistance which the products of a number
of industries are encountering at the moment. But once the necessary adjustments have
been effected in production and prices it is hoped that the level of the production will
recover from its temporary set back.
8. The improvement in agricultural production has also been well Maintained
although in the case of foodgrains the additional production from the Grow More Food

2
schemes was more that offset by the fall in production in large areas of the country
affected by drought or insufficient rains. Jute production has increased to 46.8 lakh
bales, nearly thrice the quantity produced in 1947-48. Although the cotton crop was
affected by adverse seasonal conditions, the yield is estimated at 33 lakh bales compared
with 24 lakhs bales in 1947-48. The production of sugar has shown a remarkable increase
and it estimated at 131/2 lakh tons as against 101/4 lakh tons in 1947-48. As the House is
aware, a committee under the Chairmanship of Shri V.T. Krishnamachari is enquiring
into the achievements of the Grow More Food campaign and the results of this enquiry
are being awaited with keen interest.
9. The question has been frequently asked in recent weeks whether the fall in
prices over the last few months is not an indication of the onset of a recession or even a
depression. Personally I do not think that this is so, although I confess that in this
matter, where so much depends on unpredictable world developments it is hazardous to
prognosticate. But I believe that most competent observers are of the view that the fall
in prices represents in a sense the phase in which the inflationary trends which have
been such a marked feature of world economy for the last so many years have been
spent out and in our country, countered by measures deliberately adopted to curb them.
I do not subscribe to the view that at the present juncture the fall is a portent calling for
the reckless injection of purchasing power into the country’s economy. While it would
be premature to talk of anything in the nature of a recession it is clear that prices have
now reached a more stable level. I venture to suggest that a fall in prices is not per se a
thing to be feared especially if it can be brought about in an orderly manner. It is only
when it is of such a nature as to lead to a reduction in production and employment that
it contains a threat to the country’s economy. I need hardly assure the House that
Government are most keenly alive to this danger and that they would take adequate
steps, so far as lies in their power, to see that the level of production and employment is
not adversely affected by a disorderly movement of prices.
10. I shall now digress to deal briefly with the country’s balance of payments.
Honourable Members may remember that both in the White Paper on the interim budget
and in my speech last February I drew attention to the fact that the balance of payments
position during last year was not as favourable as in 1950. After taking into account the
amounts drawn from the American Wheat Loan the deficit on current transactions for
that year is likely to be of the order of Rs.30 crores. This deficit has continued during
the first four months of the current year and is reflected in the drop of Rs.81 crores in
the amount of our Sterling balances, between the end of December 1951 and the end of
April 1952.
11. I do not want the House to gather the impression from this that this position
was wholly unforeseen. Under the stimulus of the devaluation of the rupee and the
boom in prices which followed the out break of the Korean war we had accumulated a
substantial surplus in our balance of payments during 1950 and the early months of

3
1951. During this period we could not import as much as we could wish owing to the
difficulty of obtaining supplies from abroad. In consequence, the domestic stocks of
essential supplies had fallen to a low level and it became essential to take measures to
restore the stocks by reducing exports as for example of cotton textiles, oil and oil
seeds, and by stepping up imports of raw materials and essential consumer goods. We
also had to pay higher prices for whatever supplies we could obtain. The unavoidable
increase in the import of foodgrains also contributed to the large import surplus during
this period. It is not, therefore, a case of frittering away the ‘country’s assets; the deficit
could be said to be, in a sense, a planned deficit. I might mention in this connection that
till the end of last month the deficit on current transactions had been met wholly from
the surplus accumulated by us in 1950 and early 1951 and we had not to draw on the
release of £ 35 million for the year ending June 1952 under the Sterling Balances
Agreement.
12. During recent months the rate of the deficit in our balance of payments has
risen owing to a change in world conditions and the fall in the demand for some of our
principal exports and their prices. I mentioned earlier the various steps taken in the
field of export duties for stimulating exports and maintaining our export earnings. We
have also considerably relaxed the procedure for the licensing of exports. It is difficult,
when conditions are so fluid, to forecast the future trends which are affected as they are
bound to be, by conditions in world markets. But the House may rest assured that
Government will take all possible steps to arrest and reverse the recent trends and
maintain the deficit in the overall balance of payments within the amount available to
us from the accumulated sterling balances.
13. A brief account of the deterioration during 1951 in the dollar position of
this country and of the Sterling Area as a whole and the measures taken to stop the drain
on the Central reserves has been given in the White Paper circulated with the budget
papers. Although the measures taken by the Commonwealth Governments, following
the meeting of their Finance Ministers in London last January, have not taken full effect,
the rate of decline in the gold and dollar reserves of the Sterling Area has come down
considerably in March 1952. In our own case, it may be expected that the present
relatively improved position in the stocks of wheat and raw cotton should enable us to
reduce our dollar expenditure to some extent in the second half of this year. It is also
likely that the recent reduction in the export duty on hessian will stimulate exports. If
the negotiations for loans from the International Bank for Reconstruction and
Development, which are in train, result in the grant of loans, this will also assist the
country’s dollar position.
14. I shall now pass on to the changes made in the budget as presented to the
Provisional Parliament. But before I do so I should like to mention a change in procedure
in regard to the preparation of the demands for grants. It has been the practice so far,
where any recoveries are, under the accounting rules, taken in reduction of the
expenditure, to ask Parliament to vote the net sum under the demand. The recoveries so

4
included in these demands became in effect available for expenditure although they
may have no direct relation to the sum actually spent during Vie year. This procedure
has recently been examined in consultation with the Comptroller and Auditor-General
and it has been decided that in future the demands for grants should be presented for the
gross amount of the expenditure, without regard to the recoveries that may come in
during the course of the year. These recoveries will continue to be adjusted in the accounts
as at present in reduction of the expenditure but, so far as the spending authorities are
concerned, these will not be available to them and they will be answerable to Parliament
for the gross amount of expenditure, which in a sense represents the real outgoings
from the Consolidated Fund for which the authority of Parliament is required. I need
hardly mention that this change does not involve any actual increase in expenditure. It
is only a change in the method of presentation and I hope that the elimination of these
recoveries from the budgets of spending authorities will result in an improvement in the
control of expenditure. A note explaining the changes made on this account in the
demands for grants is being circulated with the budget papers.
15. The budget presented last February provided for a surplus of Rs.18.73 crores
on revenue account and an overall deficit of Rs.56.35 crores, taking the revenue and
capital budgets together. I now estimate that the revenue surplus will be Rs.3.73 crores
and the overall deficit Rs.75.6 crores. The fall of Rs.15 crores in the revenue surplus is
mainly due to a drop of Rs.25 crores in the receipts from customs owing to the recent
reduction in the export duty on hessian and sacking, raw cotton and cotton waste, and
the abolition of the export duties on raw wool, groundnut oil, seeds, etc. This will be
partly counterbalanced by an improvement of Rs.5 crores in advance collections of
income-tax. On the expenditure side, I expect a drop of Rs.5 crores in civil expenditure,
made up of a reduction of Rs.10 crores in the provision for food subsidies set off by a
provision of Rs.5 crores for grants, of which Rs.3 crores represents the Central share of
the expenditure on community development schemes sponsored under the indo-U.S.
Technical Co-operation Agreement and Rs.2 crores is for subsidising industrial housing.
I do not propose any other change in the revenue budget at this stage. In the capital
budget I expect a worsening of Rs.4. 25 crores due to an additional provision of Rs.10
crores for loans to finance minor irrigation projects, Rs.5 crores for loans for industrial
housing, Rs.6 crores for loans for the community development projects mentioned earlier
and Rs.25 lakhs for investment in a machinery manufacturing corporation, which
Government have under consideration, partly set off by the receipt of Rs.10 crores from
the sale of American wheat carried over from last year, Rs.5 crores from the sale proceeds
of materials likely to be received under the Technical Cooperation Agreement and Rs.2
crores of short term loans returned by the State Governments. I do not think that the
f1guires under the other heads in the budget require to be changed.
16. Hon’ble members will notice that I propose to retain only a sum of Rs.15
crores in the budget for food subsidies out of the provision of Rs.25 crores made in the
budget last February. This amount will, I expect, be sufficient for meeting the expenditure

5
in accordance with the policy announced last February and the subsequent reduction in
the price of milo. This reduction in food subsidies has led to protests and demonstrations
from the sections of the public affected in the States. As I explained to the House at
some length last Tuesday, after giving the most anxious consideration to these criti-
cisms Government feel that the policy adopted by them is inescapable and will prove to
be beneficial in the long term interests of the country. With the rise in the prices of
imported supplies we shall require something of the order of Rs.60 crores a year if, in
addition to subsidising milo, we are to maintain the subsidies in the industrial areas as
in last year and last year’s price level elsewhere. This by it self, would place an impossible
burden on the financial resources of the Centre. Even last year some States criticised
vigorously the subsidisation of industrial urban areas while in the rural areas outside
prices remained high. In the circumstances of the current year this gap would have been
widened and there is little room, for doubt that once a full subsidy for industrial urban
areas is conceded there would be an equally claimant demand for a corresponding subsidy
for rural areas. If the subsidy is to give the whole range of consumers prices charged in
industrial areas in 1951, the cost would amount to something like Rs.90 crores a year, I
am sure that there will be widespread agreement with the view that with so many
competing claims upon our resources, particularly for development of our economic
resources, calculated to secure more lasting benefits, it will be wasteful to spend sums
of this order on consumption by subsidising food. It has also to be remembered that the
increase in the price of food grains has to be considered against the back ground of the
reduction in the general price level of other commodities, the benefit of which goes to
the consumer. The movements in the working class cost of living indices at the various
industrial urban centres show that the compensatory fall in the aggregate on these other
commodities has been substantial. There is bound to be some measure of hardship,
owing to the disturbance of family budgets, until the necessary adjustments are made.
But this hardship is inevitable and Government are doing their best to mitigate for the
lower class by subsidising milo, wherever it is consumed. I regret I cannot hold out any
hope of a relief, in the form of the restoration of any system of subsidies committing the
Central exchequer to bring about an approximation between the prices of imported and
internally procured grain. But as mentioned by the President in his Address to Parliament,
Government are anxious that no distress should be caused and will do all in their power
to prevent this from happening.
17. I shall now summarise the result of the changes which I mentioned earlier.
The total revenue for the year is now estimated at Rs.404.98 crores and the expenditure
met from revenue at Rs.401.25 crores (of which Rs.197.95 crores will be on Defence
Services and Rs.203. 3 crores under civil heads) leaving a surplus of Rs.3.73 crores an
revenue account. The capital and ways and means budget is expected to snow a deficit
of Rs.79.33 crores, leaving an overall deficit of Rs.75.6 crores, taking the budget as a
whole. This, will leave at the end of the budget year, a closing balance of Rs.8 3. 08
crores, of which roughly Rs.40 crores will be the unspent balance of foreign aid received

6
by us the rest representing what any prudent management of the exchequer would need
as a minimum bank balance for the order of financial operations involved.
18. Although the estimated revenue surplus has now been reduced by Rs.15
crores and the overall budgetary deficit increased by Rs.19.25 crores, I do not propose
to make any changes in taxation. I expect I shall hear, in the course of the next few
weeks, complaints both from Members of Parliament and from the public that I have
given no concession to the tax-payer. The problem before me now is really not one of
having any money to give away but of how to make good the net loss of resources
which the changes I have proposed involve. In present circumstances when for the first
time in four years the ordinary citizen finds the price levels a little less irksome, there is
so much to be accomplished for the development of the country and there is no clear
indication of impunity for deficit financing. I do not feel that any one would seriously
suggest a reduction in taxation. In the last two years our revenues have been buoyant
largely on account of fortuitous and by no means welcome international developments
while the calls on our resources for essential expenditure have been steadily rising. The
recent developments in the economic situation, which have affected substantially our
revenues from customs, underline the need for strengthening the country’s revenue
position as far as possible it will be dangerous at this stage to do anything to weaken
Government’s revenue position and I have no doubt that there will be understanding
support for this view.
19. This leads me to the question of economy in public expenditure to which
Government’s attention is being continuously drawn both in Parliament and outside. So
far as the expenditure on Defence is concerned, while it is not possible to secure any
further appreciable reduction in the size of the Defence budget without a reduction in
the size of the Army, which the needs of the country’s security rule out for the present,
the search for economy in this expenditure has been continuously going on. As I
mentioned when I presented the budget last February, a critical examination of the
organisation and equipment of the Armed Forces, as they exist today, has been
undertaken. This examination, which is progressing satisfactorily, is expected to be
completed in the next few months. The progress made in this examination and the
tentative conclusions on some of the matters considered indicate the possibility of
effecting some savings. A firm estimate is still not possible but I hope to be in a position
to give the House an indication of this saving when I place before it, in due course, the
revised estimates for this year.
20. I also mentioned that I had deputed one or two senior officers to conduct a
similar enquiry into civil expenditure. This enquiry is still going on and it may be some
time before its results are available. But I must make it clear that in an expanding
economy like ours any saving realised in administrative expenditure is likely to be
more than absorbed by increasing demands for developmental expenditure. It will be
unwise to think that there is sufficient scope for economy to make possible a substantial

7
reduction in taxation. While the departmental search for economy continues, I also
look forward to continuing assistance from the labours of the Public Accounts and
Estimates Committees in securing that, within the four corners of the policy laid down
by Parliament, the moneys authorised to be spent by it are utilised to the best possible
advantage and without avoidable waste.
21. As I mentioned earlier, at the end of the budget year Government’s cash
balances would have dropped to approximately Rs.8 3 crores, a drop of about Rs.200
crores from the accumulated cash balances immediately after the partition. The bulk of
this money has been spent on essential purposes and on the development of the country,
and although there may be a difference of opinion as to whether every rupee of it has
been well spent, few will deny that the expenditure has substantially been for the security
or benefit of the country. The existence of these accumulated balances was a reserve
which will not be available in future years, as the level of the free balances which we
shall have reached at the end of March 1953, after omitting the unspent balance out of
the foreign assistance, will, as I have already pointed out, leave Government only with
the minimum balance which they ought to keep for the future. Therefore on the
assumption that the various indices do not point to the onset of persistent recession, we
shall have to raise currently all the money that we may need for meeting public
expenditure and for the execution of the five year plan. On any view of the future which
one could take, there con be no room for complacency or for the relaxation of the
efforts to raise the maximum amount of resources for the country’s development. The
Planning Commission has drawn up a realistic plan which would take us a definite step
forward in the realisation of the larger and fuller life, without which freedom would be
devoid of zest. We have received assistance from abroad for our development plan in
recent months through the U.S. Technical Co-operation Agreement the Ford Foundation,
the Colombo Plan and so on. But while all this to welcome and while one may hope for
an increasing flow of such assistance in the future, we have largely to rely on ourselves.
The edifice of our prosperity cannot be built on props of outside assistance without
sacrificing something vital in the nation’s spirit but can rebuilt enduringly only by the
efforts of our own people. If the budgetary burdens are sometimes found to be irksome,
I trust those who find it so in this House and outside will remember that we carry these
burdens for ourselves and our children and not for some one else. I have no doubt that
the realisation that the people of this country are doing the utmost in their power to help
themselves will widen the flow of assistance from our friends outside.
(May 23, 1952)

8
 SPEECH OF SHRI C.D. DESHMKH, MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1952-1953 (INTERIM)

Sir,
I rise to present the budget of the Central Government for the year 1952-53.
This is only an interim budget although it has been prepared as usual for a full
year. Its main purpose is to place before Parliament an account of the finances of the
Central Government for the current year and the prospects for the coming year on the
existing basis of revenue and expenditure so that the House may know the general
background against which it has to deal with the demands which will be placed before
it for a vote on account to meet the expenses of the administration till the new Parliament
considers and passes the budget for the whole year. The budget which I am now presenting
will be presented again in due course to the New Parliament with such changes as the
new Government may consider it necessary. Meanwhile, Government propose to ask
the House only for a vote on account to meet the anticipated expenditure during the first
four months of the next year and to approve of the continuance of the existing measures
of taxation.
A White Paper giving an account of the economic conditions in the country during
1951 and the main features of the revised estimates for the current year and the budget
estimates for the next year is being circulated with the budget papers. I do not therefore
propose to make any detailed speech introducing the budget but I shall content myself
with giving the House a brief account of salient features of the budget.
Before I deal with the estimates I should like to mention briefly the main
developments in the economic conditions in the country during the year which is now
drawing to a close. As Hon’ble Members are aware the vagaries of the monsoon have
again left the country to face a substantial deficit in foodgrains during the coming year.
In the other respects the years’ results are, however, more encouraging. For some months
the steady rise in prices, which has been one of the disconcerting features in the country’s
economy since the commencement of the Korean war, has been halted and from July
1951 onwards there has been a steady downward movement in the price level. This
welcome development can be traced as much to the world-wide falling of trend
commodity prices as to the general disinflationary effect of the very large revenue surplus
realised during the year and the withdrawal of a substantial volume of purchasing power
from the public by the sale of imported wheat purchased from the American loan. The
level of production in the principal industries of the country has also been higher than
in the previous year and the larger supplies thus made available for internal consumption
have had a steadying effect on prices. Agricultural production also showed some

1
improvement although in the case of foodgrains the increased production secured by
the Grow More Food campaign was more than wiped out by the shortages created by
adverse seasonal conditions.
The balance of payments position during 1951, was not as favourable as in the
preceding year. This was due partly to a fall in the demand for the principal export of
this country after the first phase of stock piling by the United States and other countries
was over and partly to our having had to pay more for our imports, owing to rise in
world prices and increase in freight rates. I do not expect that these conditions will
change materially in the coming year. We shall still have to import substantial quantities
of foodgrains, and essential raw materials and capital and consumer goods, while no
appreciable expansion of our principal exports is likely to take place, although
Government will continue to take all possible steps to maintain and develop the country’s
export markets. Among such steps I would mention the recent lowering of the export
duty on hessian. I see little prospect of any reduction in the volume of our imports and
in dealing with the problem of the adverse balance of payments position of the sterling
area as a whole I made it abundantly clear that while we would assist in every way In
stimulating the country’s exports there was no scope for this country cutting down its
imports to any significant extent in its present stage of development and with its chronic
shortage of food.
The House will remember that in the current year’s budget I had provided for a
revenue surplus of Rs. 26.1crores and an overall budget deficit, taking the revenue and
capital budgets together, of Rs. 51.88 crores. I now estimate the revenue surplus for the
year at Rs. 92.61 crores and the overall budget deficit at Rs. 3.7 crores. The improvement
in the revenue position is mainly due to the extraordinary buoyancy of receipts from
Customs which are now estimated to show an improvement of Rs. 76 crores over the
budget. Union Excise duties and Income-tax are also expected to show larger yields.
Revenue as a whole is now placed at Rs. 498 crores against the budget estimate of
Rs. 402 crores. Of this improvement of Rs. 96 crores, Rs. 30 crores will be absorbed by
additional expenditure, mainly on the payment of food subsidies and expenditure on
displaced persons, leaving Rs. 66 crores more than the original estimate for assisting
the capital budget.
The capital budget was also assisted during the year by the net receipts from the
sale proceeds of the wheat purchased from the American loan of 190 million dollars
and wheat obtained from certain Commonwealth countries under the Colombo Plan.
These together are estimated at Rs. 76 crores and taken With the increased revenue
surplus of Rs. 66 crores more than balanced the shortfall of Rs. 50 crores in public
borrowing and the contraction of Rs. 30 crores in the floating debt during the year,
resulting from the liquidation of their investments by some of the States and other
authorities. This also made it possible to make increased allocations for some of the
capital schemes such as the River Valley projects during the year.

2
 At the existing level of taxation and expenditure, I estimate the revenue for next
year at Rs. 425 crores and the expenditure at Rs. 4061/4 crores, leaving a revenue surplus
of Rs. 183/4 crores. The actual surplus may be Rs. 15 crores more than the figure I have
just mentioned and which Hon’ble Members will also find mentioned in the budget
papers. The reason for this increase is that of the provision of Rs. 25 crores taken in the
estimates for food subsidies, Rs. 15 crores is not likely to be required as a result of the
decision announced last week by my Hon’ble colleague the Minister for Food and
Agriculture about the abolition of the food subsidies except to a very limited extent.
The drop of Rs. 73 crores in revenue in the coming year as compared with the
current year is mainly due to a reduction of Rs. 42 crores under Customs and Rs. 23
crores under income-tax. The fall in Customs revenue is accounted for by the reduction
in the export duty on hessian recently announced and also by an estimated fall in the
receipts from import duties which have been unusually high this year. The reduction in
income-tax reflects the result of the action taken in the current year for the clearance of
arrears and also the gradual disappearance of arrear collections of taxes no longer in
force. I have also taken into account the disappearance from the Central budget of the
revenue and expenditure of the five Part C States which will have their own separate
budgets from next year.
The total expenditure next year is estimated at Rs. 4061 crores, of which Rs. 197.95
crores will be on Defence Services and the balance under Civil heads. As a result of the
abolition of the food subsidies a saving of Rs. 15 crores is likely on these estimates.
Defence expenditure will be Rs. 17 crores more than this year, mainly owing to the
carry over of certain liabilities for stores on order from the current year. The other
variations as compared with the original budget and the revised estimates are explained
in the detailed memorandum circulated with the budget papers and I do not propose to
weary the House by repeating them here.
Substantial provision has been included in the budget for the coming year for
capital and development expenditure and for loans to State Governments to assist them
in financing their development schemes. The provision for capital and development
expenditure broadly follows the pattern laid down by the Planning Commission in the
draft Five-Year Plan. The House may remember that the Plan envisaged the Centre
producing a revenue surplus of the order of Rs. 26 crores in each of the 5 years covered
by it. Although the estimated surplus this year is about Rs. 67 crores larger than the sum
envisaged in the Plan, this improvement is only fortuitous and cannot be carried forward
to subsequent years. It only helped partially to fill the gap in borrowing during the year
and there was no net addition to our resources on this account-indeed we had to run
down to some extent the unforeseen accretion to our balances from the previous year.
Next year’s budget taken as a whole provides for an overall deficit of Rs. 56
crores, which the increase in the revenue surplus resulting from the abolition of food
subsidies will reduce to Rs. 41 crores. This will be well within the estimated balance of

3
payments deficit for the year and will not therefore add in any way to the inflationary
position. At the end of the year I expect that our cash balances would be of the order of
Rs. 116 crores. Included in this figure will be an unspent balance of Rs. 40 crores received
by way of foreign assistance.
I do not propose to embark at any length on a review of the fiscal and financial
policy of Government on this occasion of presenting what is virtually a caretaker budget.
But looking back on the year just drawing to a close I feel that there is justification for
sober satisfaction. Although the country’s food problem still remains acute, there has
been a notable improvement in other directions. The rise in prices has been halted and
there has been a progressive decrease in the price level in recent months. In spite of the
difficulties in obtaining some of the essential raw materials there has been an all round
increase in production. The emergence of a realistic and coordinated plan of development,
as a result of the labours of the Planning Commission, has, I think, convinced people
both in this country and outside that we mean, and have. set about In right earnest, to
tackle the problem of the proper development of the country’s resources. I venture to
think that the cumulative effect of the fiscal and financial policy in recent months has
definitely been to enhance the creditworthiness of this country. It will I hope, pave the
way for a larger flow of international assistance and foreign investment to this country,
to help us in our planned campaign for developing the latent resources of this country
for the raising of the standards of life of our people.
(February 29, 1952)

4
 SPEECH OF SHRI C.D. DESHMUKH MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1951-52

Sir,
I rise to present a statement of the estimated receipts and expenditure of the
Government of India for the year 1951-52.
Review of Economic Conditions.
2. It is customary, while presenting the annual budget, to give a review of the
economic developments in the country in the year that has just ended and following this
practice I propose to take the House back briefly over the main changes in the last
twelve months.
3. This period has been one of considerable anxiety. The strain on the country’s
economy reflected in the rising level of prices and the threat of inflation has been
aggravated during the year by severe natural calamities like the earthquake in Assam,
the floods in certain parts of Bihar and Uttar Pradesh, the failure, for the fifth year in
succession of the north-east monsoon over a large area of Madras and serious droughts
in Bihar and certain other parts of the country. Meanwhile, the slow return to normal
conditions in the post-war years all over the world- has been violently upset by the
outbreak of hostilities in Korea and the threat this holds of spreading into a wider
conflict.
4. The problem of holding the prices in cheek has been one of the major
preoccupations of Government in the years following the end of the war. It to unnecessary
to dilate on the steps taken to this end in the earlier years and it will be enough, for my
present purpose, to mention the steps taken in recent months, particularly after the
devaluation of the rupee in September 1949. The House will recall that soon after this
event price cuts in certain essential commodities were made in an effort to counter the
possible effects of devaluation, and this assisted in holding the price level for some
time. In fact, the general price index fell by 12 points from 393.3 at the end of October
1949 to 381.3 at the end of December 1949. It did not, however, prove possible to cheek
for long the upward pressure on prices generated by devaluation, and by June 1950 the
gain secured during the closing months of the previous year had been lost, the index
number standing at 395.6. The outbreak of the Korean War gave a further impetus to
the rise in prices and by September the index number had risen to 412.5. Since then it
has been more or less steady, although January has reregistered a further slight increase
of nearly 2 points. This increase in prices to, however, not peculiar to India and to a
very great extent it reflects the upward movement in prices in other countries, which
supply important categories of our imports.

1
 5. Hon’ble Members are aware of the steps taken by Government to meet the
situation created by the upward trend in prices. With the approval of Parliament powers
were taken by the Centre to make laws for a period of one year from the 15th August
1950 in respect of two subjects falling in the State list, namely, trade and commerce and
production, supply and distribution of goods. The main object was to evolve a uniform
policy for the whole country in regard to production and distribution and the regulation
of prices. The Essential Supplies (Temporary Powers) Act was also amended to prescribe
drastic penalties for the hoarding of food grains. An ordinance was promulgated in
September to regulate the supply and prices of a number of essential consumer goods,
which were likely to disappear into hoards and to be black-marketed. Government also
set up a Prices Advisory Board, consisting of representatives of trade and industry, to
advise them on the fixation of prices and other matters connected with the administration
of the ordinance.
6. One result of the developments in the international situation, following the
outbreak of the Korean war, was to intensify the demand for some of the principal
exports from this country like jute goods, raw cotton, cotton waste and raw wool. The
external prices of these commodities rose very steeply and in view of both the interests
of the exchequer and the necessity for countering inflation it was decided that this
difference should be intercepted by Government through the enhancement or levy of
export duties. Export duties on jute goods and raw cotton were accordingly enhanced
while new duties were imposed on exports of cotton waste and wool. In the rapidly
changing conditions which now obtain, Government also considered it necessary to
obtain from Parliament temporary power to enhance, if necessary, existing export duties
and to levy new duties. All these measures have had a steadying effect on prices in
recent months although, as I said earlier, it has not been possible wholly to arrest an
upward trend.
7. The level of industrial production in 1950 in a number of industries has
been encouraging though the jute, cotton textile and sugar industries have been affected
by difficulties in regard to sup, plies of raw material. The production of cement, steel
and coal has been well above the previous year’s figures while there has been a substantial
drop in the production of jute goods. cotton textiles and sugar. Owing to the virtual
cessation of imports of raw cotton from Pakistan after the devaluation of the rupee and
a somewhat sub-normal crop in the country the supply of cotton to the Indian mills has
not been adequate inspite of increased imports from other countries. The limited supplies
of raw jute received from Pakistan under the trade agreement of last April have also not
been sufficient to meet the demands of the jute mills. Sugar production has suffered
from the diversion of cane to the manufacture of gur and khandsari sugar, which, not
being subject to price control, offered more attractive profits. The strike of mill workers
in Bombay also affected the production in the textile industry.
8. The problem of securing an adequate supply of raw materials for the two
major industries in the country, namely, cotton and jute has, as the House is aware, been
2
receiving constant attention and efforts are being made by the State Governments and
the Centre to increase the production of jute and cotton without affecting the production
of food. Provided the season is normal, by March 1952, we shall have made significant
strides in the direction of practical self-sufficiency in cotton and jute. Meanwhile, in
order to secure an equitable distribution of the still insufficient available supplies of
raw jute a Central Jute Board has been set up and all purchases of raw jute by the mills
are compulsorily canalised through it. Cotton mills have been prohibited from covering
their requirements in the form of kapas and a Cotton Advisory Board, consisting of
representatives of the mill owners and the trade, has been set up to maintain liaison
between Government and the industry. In the case of sugar, maximum prices have been
fixed for gur and khandsari so as to restrict the diversion of cane to their manufacture
and sugar mills have been encouraged to expand production by being allowed to dispose
of in the free market their’ surplus production over a ceiling. Government have also
appointed a high-powered Development Committee on industries to assist in devising
ways and means for stepping up industrial production to the maximum of the installed
capacity and to plan the future development of industries.
9. The House is well aware of the serious deterioration in the food situation
caused by the widespread natural calamities that overtook the country last year. Their
effect has been to increase the overall food deficit, with the result that imports have had
to be increased from the 1.5 million tons estimated in the budget to a little over 2
million tons. It has also not been possible to build up the small reserve of 200,000 tons
contemplated in the budget. For the coming year it is proposed to import 4 million tons
of food grains and efforts are also being made to obtain an additional 2 million tons of
wheat from the United States of America. Recently, the Grow More Food plan has also
been reoriented so as to concentrate efforts in selected areas with an assured water
supply. Additional production will also be linked with procurement and greater emphasis
laid on schemes of a permanent character like tube-wells and land reclamation. Although
Government are doing everything possible to increase internal production and obtain
the maximum quantity of food grains from abroad in the coming year the food position
in the country is not likely to be easy.
10. For the first time since the recession in 1946 the capital market showed
some signs of revival although the developments in the international situation during
the later part of the year arrested this improvement. During the earlier months of the
year the gilt-edged market remained fairly steady and Government took the opportunity
of floating a cash-cum-conversion loan for Rs.30 crores. The Governments of Bombay,
Madras and Madhya Pradesh also took advantage of the improved position for floating
small loans of their own. Since the middle of the year, however, prices in the securities
market have receded and the market has remained stagnant. By contrast, the equities
market during the larger part of the year under review has been steadier. In spite of the
adverse effects of the shortage of raw materials like jute and cotton and the rise in the
price of industrial raw materials after the outbreak of the Korean war, the expansion of

3
exports and the increasing demand for our primary products resulting from the
rearmament and stock pilling programme of Western countries have, on the whole, had
a steadying and encouraging effect on the market. But the fact remains that the flow of
available capital in the market is still woefully short of the requirements of Government
for implementing their large development programmes and for meeting the reasonable
requirements of industry for expansion.
BALANCE OF PAYMENTS
11. While the internal economic conditions have been a matter of continuous
concern for Government, the position in regard to the balance of payments during the
year under review has been more heartening. An improvement in the balance of payments
began with the devaluation of the rupee in September 1949 and this improvement has
been maintained, the process being assisted daring recent months by the changes in the
international situation following the outbreak of hostilities in Korea. Except for a short
period daring the second quarter of 1950, when a slight seasonal fall in exports and
heavy payment for imports of raw cotton resulted in a small deficit, the overall position
has been favourable since the last quarter of 1949.
12. It will be interesting to compare the balance of payments position during
the twelve months following devaluation with the position in the corresponding period
preceding it. Our exchange receipts during the year ending September 1950 amounted
to Rs.638 crores and our payments to Rs.572 crores, showing a net surplus of Rs.66
crores. For the year ending September 1949 our receipts were Rs.517 crores and payments
Rs.766 crores resulting in a deficit of Rs.249 crores. In the 12 months following
devaluation our exchange earnings have increased by 24 per cent while our payments
have dropped by 25 per cent. The precise figures for the period after September 1950
are not yet available; but it is clear from the rise in our sterling balances, which at the
end of January stood at Rs.843 crores against Rs.807 crores at the end of September,
that the balance is still moving in our favour.
13. This change in our balance of payments has been caused by several
factors. Firstly, as the House will recall, even before devaluation Government had started
taking special steps for stimulating exports, on the suggestion of the Export Promotion
Committee. Secondly, the devaluation of the rupee in September 1949 raised the
competitive capacity of our exports in terms of foreign currencies and the surplus balance
of payment during the succeeding six months reflects this advantage. A further factor
which has assisted in the expansion of our export trade in recent months is the improved
prospect of international demand for commodities. Following the hostilities in Korea
and the danger of their spreading into a world war, the United States of America, Canada
and the countries of Western Europe are re-arming on a considerable scale and have
begun the stock pilling of essential raw materials. These have raised the demand for
exports of our raw materials. Our export trade has also been assisted indirectly by these
developments. The large purchases of primary commodities by the Western countries

4
from the countries of the Middle East and South and South East Asia have created in
these regions a larger demand for consumer and manufactured goods like cotton textiles,
exported from this country. The effect of all these developments is reflected in the
larger volume of our exports as well as the increased prices paid for them.
14. In view of the improvement in our export position, the restrictions on
imports, which had been tightened in the middle of 1949, have been gradually relaxed
to allow of larger imports of essential commodities into the country. The monetary
ceilings for the licensing of imports of raw materials as well as essential consumer
goods like drugs and medicines were progressively increased during 1950 and a fresh
Open General Licence was issued last August to widen the scope of imports. Changes
have also been made in the licensing procedure to minimise delays in the issue of
licences and to enable importers to make forward contracts under a system of advance
licences. The improved foreign exchange position has also enabled us to make larger
allocations for the purchase of food grains during the current half year.
15. While the position so far has been satisfactory I must sound a note of warning
in regard to certain trends which might make it difficult for us to maintain this favourable
balance in payments over a long period. Firstly, even if the somewhat artificial demand
for our primary products created by the fear of a possible war is maintained, as it may
well be for some time, we may have difficulties in maintaining our present level of
exports. Two of the major commodities exported from this country are jute goods and
cotton textiles. Unless adequate supplies of raw jute are available to the jute mills the
present level of exports may be difficult to maintain. In the case of cotton textiles. the
large increase in exports has already begun to affect supplies available for internal
consumption. It has been found necessary to restrict the export of coarse and medium
cloth; and even in respect of fine and super-fine cloth, the necessity for maintaining
adequate supplies for internal consumption may in the future necessitate quantitative
restrictions on exports. Secondly, there is bound to be a substantial increase in the
volume and value of our imports due to the purchase of a larger quantity of food grains
in the difficult food situation expected to persist during the next year and the rising
prices abroad of industrial raw materials and manufactured goods. In the present rapidly
changing world conditions it is difficult to make any reliable forecast but in taking a
view of the future position these factors have to be borne in mind.
16. There is also one other fact to be remembered in this context. A continued
favourable balance of payments brought about by a sudden and large demand for exports
is not itself an unmixed blessing. The impact of the higher prices offered for the export
commodities directly affects the internal prices both of these commodities as well as of
others. From the point of view of avoiding inflation it is necessary to intercept the large
difference between the external and internal prices for the benefit of the exchequer. As
the House is aware, increased export duties have been levied on raw cotton and jute and
new duties imposed on cotton waste and wool in the course of the year to secure this
end. The power to impose and raise export duties recently given by Parliament together
5
with the power to restrict imports will be used by Government to minimise the impact
of high external prices on the internal economy of the country.
17. While I am on the subject of the country’s foreign trade I should like to
draw attention to the effect on the supply position of many imported raw materials and
manufactured goods, of the recent developments in the international situation. Many
supplying countries have imposed restrictions on the export of these materials and the
tight shipping position is also likely to aggravate the difficulties in getting supplies. It
will be necessary to take steps to secure the maximum possible allocation of these
materials and to ensure their economical and efficient use in this country. This, and the
search for local substitutes to augment the smaller supplies that may be coming forward,
are engaging the constant attention of Government.
18. One fact of our foreign exchange to which in recent years a considerable
amount of attention has been paid is the dollar position. India, being a member of the
sterling area, conforms to the general policy in respect of dollar imports and exports
agreed upon for the sterling area as a whole. At the Commonwealth Finance Ministers’
Conference held in July 1949, it was decided, on the then position of the Central reserves,
that members of the sterling area should take measures to reduce their dollar purchases
to 75 per cent of their imports in 1948. These measures, as well as the devaluation of
the sterling area currencies and the larger dollar area demand for sterling area products,
reversed the earlier trends and led to a marked increase in the gold and dollar reserves,
which were nearly doubled in 1950. India, with a dollar surplus of $79 million against
a deficit of $69 million during 1949 made a substantial contribution to this increase.
The position was reviewed at the meeting of the Commonwealth Finance Ministers last
September. It was agreed that taking changes in the price levels into account the Central
reserves were still very short of their pre-war level and that, in the rapidly changing
pattern of trading conditions, it was still necessary to economise in the spending of
dollars. It was, however, decided that there should be no quantitative limitations on
dollar purchases but that each member country should endeavour to secure the maximum
economy possible.
19. In our own case economy in dollar expenditure has largely been made
possible by the availability of goods outside the dollar area at competitive prices.
This advantage seems to be gradually disappearing both for raw materials and for
certain important manufactured goods. Moreover, our food requirements are now so
large that a substantial portion has inevitably to be obtained from dollar countries.
For these reasons, it is probable that our dollar position in 1951 will be less favourable
than in the previous year.
20. Before I leave this subject of balance of payments I would like to refer
briefly to our sterling balances. Hon’ble Members will recall the statement I made in
this House during the last session on this subject. A new agreement regarding future
releases from the accumulated balances will be entered into with the United Kingdom

6
Government, when the existing agreement terminates in June 1951. The broad outlines
of this agreement have been agreed upon between the Governments of the two countries.
The new agreement will provide for an annual release of £ 35 million during the six
years 1951 to 1957, any additional releases which are likely to be emergent, being a
subject for special consultation with the United Kingdom Government. At the end of
this period our sterling balances are likely to reach a figure which we may wish to
maintain as a normal foreign exchange and currency reserve. The conclusion of these
arrangements may well be regarded as a mutually satisfactory solution of a problem on
which so many controversies have raged in the past.
21. Hon’ble Members will recall the loans which the Government of India
have been negotiating with the International Bank for Reconstruction and Development
for some of our development schemes. Since the presentation of the last budget we
have concluded another agreement for a loan of $ 18.5 million for the purchase of plant
and machinery and the installation of a Thermal plant at Bokaro as part of the Damodar
Valley scheme. This loan will carry interest at 4 per cent., inclusive of the Bank’s
commission, and will be repayable over a period of 20 years. So far we have obtained
loans amounting to $62.5 million from the International Bank. Of these loans India has
already drawn $ 34.8 million and the repayment in respect of the Railway loan has
already commenced.
22. The picture of our external trade can hardly be complete without an account
of our trade relations with Pakistan. The House is aware of the circumstances in which,
following the non-devaluation of the Pakistan rupee when other member’s of the sterling
area devalued their currencies in September 1949, trade between the two countries bad
come to a virtual standstill, and it is unnecessary for me to dilate on them. The effect pf
the non-devaluation of the-Pakistan rupee was to cause an immediate increase in the
price which importers in this country had to pay for Pakistan goods, of which the most
important single item is raw jute. A rise in the price of raw jute, at a time when the jute
mills were faced with difficulties in maintaining their markets against the competition
of substitutes, was a matter of great concern to this country. If the prices in Pakistan had
been allowed to fall to the appropriate levels under the normal action of the forces of
supply and demand, it might have been possible for India to buy her raw jute and
continuity of purchase by India need not have been broken.
23. India’s willingness to buy Pakistani goods, if they were available at
reasonable prices, was amply demonstrated by the Trade Agreement which was signed
in April 1950. Under it Indian jute mills were to be supplied raw jute by Pakistan, to be
paid for in Indian rupees at prices comparable to the prices of Indian raw jute. These
rupees were available to Pakistan for the purchase in India of certain specified
commodities like jute manufactures, cotton textiles, cement, timber, etc. According to
the latest information available to us Pakistan supplied to India under this agreement
raw jute worth Rs.14.46 crores and has utilised the bulk of the sale proceeds in the
purchase of jute and cotton manufactures and various other goods.

7
 24. Besides the goods which were the subject of the self-balancing arrangement,
there were certain other commodities mentioned in the agreement, like cotton seeds,
raw hides and skins, gram, betel-nuts, biris, fresh vegetables and fruits, etc. which could
move freely between the two countries without any trade or exchange restrictions on
either side. The total trade between April 1950 and September 1950, in this free sector
amounted to Rs.16.8 crores, imports being Rs.10.7 crores and exports Rs.6.1 crores.
25. The Trade Agreement negotiated last April expired in September and as, at
that time the fixation of the exchange rate of the Pakistan rupee was before the
International Monetary Fund the question of entering into a fresh agreement was helo
over. Unfortunately, the International Monetary Fund postponed a decision on this issue
with the result that trade between the two countries again came to a standstill, except
for trade confined to a few perishable and essential commodities exported and imported
freely by the two countries, finance for which is found in the free exchange market. As
the question of the par value of the Pakistan rupee is still before the International Mone-
tary Fund I do not wish to say anything at this stage on this subject. But I am sure it will
be agreed in both countries that the prevailing international situation re-emphasises the
inter-dependent nature of the economies of the two countries and that it is equally in the
interest of both that the existing stalemate in trade is ended. As the Prime Minister
mentioned in the House a few days ago we took the initiative in arranging for the
resumption of trade talks between the two countries. These talks have resulted in a
satisfactory agreement the terms of which I announced in the House last Monday.
FINANCIAL YEAR 1950-51
REVENUE
26. I shall now pass on to a brief review of the revenue and expenditure in the
current year and the estimated revenue and expenditure in the coming year.
27. The current year’s budget provided for a revenue of Rs.338.59 crores and
an expenditure of Rs.337.88 crores leaving a surplus of Rs.71 lakhs. The revenue is
now estimated at Rs.387.21 crores and the expenditure at Rs.379.28 crores, leaving a
surplus of Rs.7.93, crores. Allowing for the transactions of Vindhya Pradesh, amounting
to Rs.21 crores on each side, estimates of which, the House will remember could not be
included in the original budget but were presented subsequently last April, the revised
estimates show an increase of Rs.48.62 crores in revenue and an increase of 41.4 crores
in expenditure.
28. The increase in revenue is largely accounted for by the improvement in the
receipts from Customs, which are now estimated at Rs.145.31 crores against the budget
estimate of Rs.106.54 crores. This is partly due to an all round increase in imports
following the liberalisation of import allocations in respect of certain articles and partly
to the high yield from export duties consequent on the enhancement of the duty on jute
manufactures and raw cotton and the levy of new duties on cotton waste and wool
during the year. Incomer-tax receipts, at Rs.1663/4 crores, are at about the same level as

8
in the original budget, the States’ share also remaining unchanged at Rs.473/4 crores.
The contribution from Railways this year will be Rs.39 lakhs more than the budget
figure of Rs.6. 37 crores. There is, however, a drop of Rs.2 crores in the receipts from
Union Excises, mainly in the excise duty on cotton cloth due to a fall in production
caused by the prolonged strike of textile workers in Bombay. Although the gross revenue
from the Posts and Telegraphs Department is likely to show an improvement of Rs.29
lakhs over the budget this will be more than offset by increases in expenditure so that
there will be a short fall of Rs.97 lakhs in the contribution from the Posts and Telegraphs
Department. Under other heads an increase of Rs.12 crores is now expected, spread
over a number of heads like currency, civil administration and opium, the bulk of which
is of a non-recurring nature.
EXPENDITURE
29. The reasons for the increases in expenditure have been explained in
connection with the supplementary demands placed before the House earlier in the
session and it is necessary for me to draw attention only to the more important variations.
Of the total increase of Rs.41.4 crores Defence Services account for Rs.11.45 crores
and Civil estimates for Rs.29.95 crores. The bulk of the increase in civil expenditure is
due to additional requirements for the relief of displaced persons from East Pakistan
and increased expenditure on food subsidies. The relief of displaced persons accounts
for an increase of Rs.7.67 crores, while subsidies on imported food grains, which were
in much larger quantities than was estimated at the time the budget was framed, account
for a further Rs.7.93crores. The expenditure on the payment of bonus for procurement
of food grains is also expected to show an increase of Rs.3.84 crores, while the supply
of food grains in Delhi State is estimated to result in a loss of Rs.2.3 crores. The rest of
the increase of Rs.8 crores is distributed over a number of items, among which I would
mention Rs.2.64 crores on prepartition payments, which turned out to be higher than
estimated mainly due to a larger carry over, Rs.31 lakhs on the preliminary expenses
connected with the forthcoming elections, Rs.50 lakhs on repairs to national highways
damaged by floods and Rs.60 lakhs for grants to certain Part B States consequent on the
finalisation of their revenue-gap grants.
FINANCIAL YEAR 1951-52
30. For the coming year, at the existing level of taxation, I estimate the total
revenue at Rs.369.89 crores and the total expenditure at Rs.375.43 crores leaving a
deficit of Rs.5.54 crores.
REVENUE
31. On the revenue side, the receipts from Customs are placed at Rs.141.29
crores, about Rs.4 crores less than the revised estimate for the current year. The revenue
under this head depends so much on the availability of foreign exchange and the
developments in the international situation, which affect both supplies and shipping,
that it is difficult, particularly in the present unsettled conditions, to make a precise
estimate of the revenue in the coming year. The estimate is based on the assumption
9
that there will be no serious shortage either in the availability of the goods which we
import or in shipping and that, on the export side, we shall be able to maintain the
present level of exports and the present level of our export duties. Union Excises are
estimated at Rs.71.63 crores and receipts of income-tax have been placed at Rs.157.05
crores against the current year’s revised estimate of Rs.166.8 crores. The fall in revenue
under this head is largely due to the gradual disappearance of collections from the
excess profits tax, business profits tax and the Central surcharge, which are no longer in
force, and also to a reduction in profits due to the strike in the textile industry this year.
The divisible pool of income tax will amount to Rs.88.96 crores of which the States’
share will be Rs.44.48 crores. In addition a sum of Rs.55 lakhs is expected to be paid as
their share of income tax to such of the Part B States as do not receive a grant-in-aid to
cover the revenue-gap caused by federal financial integration. it is also proposed to add
a sum of Rs.21/2 crores to the share of the Part A States for any possible arrears that may
be due to them in respect of previous years, the accounts of which remain to be finally
closed. The contribution from Railways, as the House is already aware, will be Rs.7.26
crores. The contribution from the Posts and Telegraphs Department is estimated at Rs.2
crores. The revenue under other heads is estimated at Rs.38.19 crores, the drop of Rs.5
crores compared with the current year’s revised estimates being largely due to the
elimination of certain special non-recurring items included in the current year.
EXPENDITURE
32. The total expenditure for next year is estimated at Rs.375.43 crores of
which Defence Services will account for Rs.180.02 crores and civil expenditure for
Rs.195.41 crores.
33. Before I deal with the expenditure estimates I shall digress to explain
briefly certain changes which are being made in the presentation of the demands to
this House. In the first place, to enable Honourable Members to have more time for
the consideration of the budget, it has been decided to introduce the procedure for a
vote on account so that it is not necessary to complete the voting of the demands and
the passing of the budget by the end of the financial year. The House will be asked to
vote a month’s supply pending the detailed consideration of the demands for grants
and the Finance Bill for both of which more time will be made available than in the
past. Secondly, in accordance with certain suggestions made by the Estimates
Committee, the grants have been arranged by Ministries, the details of the demands
have been added to each demand instead of being relegated to a separate supplement
and the descriptive material in the explanatory memorandum has been further amplified
so as to make it more informative. Thirdly, grants to States for financing their
development and grow more food schemes which are now charged to capital have
been transferred, to revenue. Similarly, certain items of Defence expenditure which
are now debited to capital have also been transferred to revenue. I shall explain the
reasons for these changes when dealing with the estimates concerned.

10
DEFENCE SERVICES
34. The expenditure on Defence Services next year is estimated at Rs.180.02
crores against the revised estimate of Rs.179.47 crores. In comparing the estimate for
next year with the revised estimate for the current year the change in classification
already mentioned must be taken into account. The House will remember that a capital
head outside the revenue account was opened during the last war to accommodate certain
transactions, although in the special circumstances governing Defence expenditure,
particularly in war time, no effort was made to allocate precisely the items which should
be charged to capital as distinct from revenue. The House will ‘appreciate that the rules
of allocation, such as those based on productivity, which may regulate the matter on the
civil side cannot apply to Defence and the question of what should be treated as capital
expenditure and what should be met out of revenue must be a matter kept open for
review from time to time. In the budget for 1948-49 it was decided that expenditure on
the acquisition of land, the provision of accommodation and the acquisition of naval
vessels and aircraft should be charged to capital. I have carefully reviewed the position
and I feel that in present conditions it will be more appropriate to meet the expenditure
on the acquisition of aircraft from revenue. Aircraft, with the relatively small working
life they have, cannot possibly be put in the same category as lands, buildings or plant
and machinery and I have decided that the cost of all aircraft purchased for Defence
services should be debited to revenue instead of to capital.
35. Of the total expenditure of Rs.180.02 crores next year, Rs.130.69 crores
will be spent on the Army, Rs.9.31 crores on the Navy, Rs.24.49 crores on the Air Force
and Rs.15.53 crores on non-effective services. Compared with the revised estimates for
the current year it will be seen that the expenditure on the Army shows a decrease of
Rs.12.88 crores which has been counterbalanced by increased expenditure on the Navy
and the Air Force. The decrease in the Army expenditure is mainly due to the fact that
the full effects of the reduction in the strength of the Army carried out this year will be
reflected in the estimates for next year. It is also hoped to effect certain further reductions
during that year. As regards the Navy and the Air Force, it must be remembered that
these two services are in the process of being built up, and, as has already been made
clear in this House, the reduction in the Armed forces relates solely to the Army and the
expansion and development of the two other nascent services have to go forward. The
increase in the estimates for the Air Force is also partly due to the change in classification
mentioned earlier.
36. Before I pass on to deal with the civil estimates I should like to refer to the
reorganisation of the former Indian States’ forces and the problem of economy in Defence
expenditure. Good progress has been made in the reorganisation of the States’ forces
and simultaneously with the reorganisation the strength of these forces has been reduced
to fit in with the defence requirements of the country as a whole. It has also been
decided that the terms and conditions of service of the personnel of these forces should
be the same as in the rest of the Indian Army with effect from the 1st April 1951.

11
 37. The problem of securing economies in Defence expenditure has to he
considered in the context of the requirements for the security of the country and the
maintenance of the efficiency of the services. While these considerations should be
given due weight I am sure the House will agree that considering the size of defence
expenditure, which accounts for about half the revenues of the Central Government, it
is of the utmost importance that all avenues for effective economy should be explored
without affecting the efficiency of the services. The problem has been kept under constant
review and with the cooperation of my colleague the Minister for Defence, various
economy measures, such as the reduction in the scales of issue, better conservation of
stores and equipment have already been or are being given effect to.
38. In addition to the provision of Rs.180.02 crores in the revenue budget a
provision of Rs.14.97 crores has been included for Defence in the capital budget. This
expenditure will be mostly incurred on works projects for the three services and for the
purchase of plant and machinery for the manufacturing establishments.
CIVIL EXPENDITURE
39. Civil expenditure next year is estimated at Rs.195.41 crores compared
with the current year is revised estimate of Rs.199.81 crores. The actual reduction is
somewhat larger as expenditure on the payment of grants to States for the Grow More
Food and development schemes which used to be charged to capital has been provided
in the revenue budget next year. The decision to charge the grants for development to
capital was taken in the immediate post-war period largely as a matter of budgetary
convenience in the context of the heavy deficits on revenue account in the post-war
years. Grants for Grow More Food are for short-term schemes which do not result in
the creation of any permanent assets while grants for other schemes of development
do not create for the Centre any durable assets. There is, therefore, very little
justification for charging any portion of these grants to capital and on a careful review
of the whole position I have decided that they should more appropriately be met from
revenue. Excluding the amount of Rs.8.31 crores thus transferred to the revenue budget,
the reduction in the expenditure next year as compared with the current year amounts
to Rs.12.71 crores. This decrease is almost wholly accounted for by a reduction in the
expenditure on food subsidies and bonus on procurement. The expenditure on these
next year, in accordance with the food and procurement policy recently announced, is
estimated at Rs.25.32 crores against Rs.35.07 crores this year, which includes Rs.2.3
crores on account of the supply of food grains at concessional rates in the Delhi State.
The variations under other heads, which are explained in detail in the Explanatory
Memorandum more or less cancel out and I do not propose to weary the House by
repeating them here. Expenditure on the relief of displaced persons next year is
expected to be Rs.3.81 crores less than this year while there will be a drop of Rs.1.89
crores in the provision for pre-partition payments. These savings will however be
more than counterbalanced by normal increases under other heads. The budget also
includes a provision of Rs.1 crore for additional grants to States for the welfare of the

12
scheduled tribes and the development of scheduled areas and Rs.1 crore for possible
grants to such of them as have suffered from natural calamities like floods and earthquake
this year.
40. The civil expenditure, which I have just mentioned, takes credit for
economies amounting to Rs.5.53 crores. It has not been possible to take the entire amount
of this reduction under the respective heads as final decisions in respect of many of the
proposed economy measures had not been arrived at when the budget was being prepared.
For purposes of completing the estimates, therefore, I have taken a lump reduction of
Rs.5 crores under miscellaneous expenditure. It is my intention, before the demands for
grants are finally presented to the House in April, to distribute this provision over the
respective heads.
41. In this connection, the House will be interested to know that the total
reduction which could have been possible if the recommendations of the Economy
Committee had been implemented in toto is of the order of Rs.41/2 crores. The reduction
of even Rs.51/2 crores in civil expenditure envisaged in the budget may not at first sight
appear substantial, but I must remind the House of the somewhat limited scope available
for the contraction of expenditure. Of the gross expenditure of Rs.200.41 crores provided
in the budget, nearly a third, or Rs.63 crores, is in respect, of obligatory expenditure
like interest and debt redemption, pensions, fixed grants to States and pre-partition
payments. Expenditure on Grow More Food, food subsidies and bonus and rellef of
displaced persons account for another Rs.40 crores, which is not capable of further
reductions. There are certain self balancing items such as payments of certain cesses to
specific funds apd transfers to the road fund which account for another Rs.5 crores.
This leaves about Rs.92 crores to which the axe could be applied. Even here, there is a
substantial amount of expenditure on nation building activities, tax collection and so on
which cannot be materially reduced without affecting the revenue or the development
of the country. In taking a view of possible economies the House must also remember
that as a result of the integration of the former Princely States considerable, but more or
less backward, areas have been brought under direct Central administration and the
provision in the budget for these areas, where so much still remains to be done for
raising the standards of administration, cannot be reduced. In judging the results of the
campaign for economy I am sure the House will bear these facts in mind. But I can give
the assurance that the quest for economy will be continued throughout the year.
INCOME-TAX INVESTIGATION COMMISSION
42. I should like at this stage to digress and give an account of the work of the
income-tax Investigation Commission. As Hon’ble Members are aware, the report of
the Commission on the adequacy of the existing income-tax law to prevent tax evasion
and the steps necessary to remove existing defects has been under consideration for
some time. A bill embodying the accepted re-commendations was to have been submitted
to Parliament in the last budget session but such a comprehensive measure required
some time to prepare and could be introduced only in the current session.
13
 43. During the year under review the Commission have made further progress
in the investigation of individual cases referred to them. Out of a total number of 1390
cases referred to them they have disposed of 337 cases, including those settled by
agreement. On the cases so far disposed by them a sum of nearly Rs.61/2 crores is likely
to be recoverable while the actual recoveries amount to Rs.90 lakhs. Recoveries have
lagged behind assessment because in many cases extensions of time have had to be
given by the Commission, taking into account the assessee’s present capacity to pay
what in effect is the tax demand of several years. The cases still pending with the
Commission are at various stages of investigation. It is therefore impossible to give an
idea of the time it would take for the completion of the work. The term of office of the
Commission is due to expire at the end of March 1951 but in view of the large volume
of work still remaining to be done steps are being taken to get their term extended.
CAPITAL EXPENDITURE
44. The current year’s budget provided for a capital expenditure of Rs.62 crores
and Rs.34.8 crores for loans to the State Governments to meet their capital requirements
and for rehabilitation of displaced persons. Capital expenditure this year is now estimated
at Rs.83 crores while loans to State Governments will amount to Rs.67 crores. Details
of the capital expenditure are given in the Explanatory Memorandum and I shall content
myself with mentioning only the more important reasons for the increase. As part of the
policy of curtailing expenditure to the maximum extent possible the provision in the
current year’s budget was severely pruned and the actual requirements for Railways
and irrigation schemes proved heavier. An unforeseen payment of Rs.2.62 crores had
also to be made to Pakistan, in accordance with the partition arrangements, in connection
with the payment for her subscriptions to the International Monetary Fund and World
Bank, as India retained the entire subscription paid by undivided India before the
partition. Defence capital outlay is also expected to cost about Rs.31/2 crores more than
was originally estimated. The large increase in advances to State Governments is mainly
due to an increase in the loans for the rehabilitation of displaced persons which are now
estimated at Rs.15.85 crores against the original estimate of Rs.8.35 crores and loans
for Grow More Food schemes which, at Rs.12.86 crores, involve an excess of over
Rs.1041 crores over the original budget. Additional loans had also to be given to the
States for the river valley projects and for certain important irrigation and hydro-electric
schemes in some of the Part B States.
45. For next year, a total provision of Rs.77 crores has been made for capital
outlay and Rs.62.62 crores for loans to States. Among the important items included in
the former I would mention Rs.19.62 crores for Railways, Rs.5.45 crores for Posts and
Telegraphs, Rs.10.56 crores for industrial development on such items as the Fertiliser
Factory at Sindri, the Machine Tool Factory at Bangalore and investment in ship building
and the manufacture of dry core cables. Defence capital outlay, as mentioned elsewhere,
is estimated to cost Rs.14.97 crores, while schemes of State trading will involve a net
outlay of Rs.13.68 crores, which will be recovered in subsequent years. The provision

14
in the loans budget includes Rs.27 crores for loans to States for the river valley schemes,
Rs.71/2 crores for loans for other productive purposes, Rs.1.68 crores for industrial
housing, Rs.16 crores for rehabilitation and Rs.8 crores for Grow More Food schemes.
A lump sum provision of Rs.11/2 crores has also been included for possible loans to
those States which have recently suffered from natural calamities like floods and
earthquake.
46. Before 190 on to consider the ways and means position I should like to
mention briefly the work of the Planning Commission. The Commission have been
engaged for some time in a close study of the problems of planning and development in
the country and their report is likely to be received by Government by about the end of
May 1951, after they have completed their consultations with the States Governments
and others. An underdeveloped economy like ours is inevitably one with a low volume
of savings which can be devoted to productive investment. Even this small margin has
been affected as a result of the strains and stresses of the war and post-war years and the
shifts in the distribution of income within the community. The resulting dearth of
resources calls for a degree of national effort which makes planning and the fixation of
priorities a vital necessity if even the meagre resources available are not to be frittered
away. In recent years there has perhaps, been a tendency to identify planning with large
scale expenditure out of past savings. But the real problem is to increase the current
flow of saving through a concerted effort by the present generation so as to make
available, without a violent disturbance of the country’s economy which the unregulated
release of accumulated savings will involve, resources for productive investment and
for financing social services. Without in any way anticipating the findings of the
Commission it may be hoped that as a result of their examination of the problem they
would advise Government of the lines on which national effort should be mobilised, the
levels to which the Centre and the States should endeavour during the next few years to
raise their financial resources and the targets which the country should try to achieve
through intensive development.
47. This leads me to a mention of the discussions which Government have
been having with the United States Government for participation in President Truman’s
Point Four Programme and with Commonwealth countries in connection with what is
generally known as the Colombo Plan. Hon’ble Members are aware of the agreement
which has been signed between this country and the United States under President
Truman’s Point Four Programme, the significance of which to the technological progress
of the country is likely to be far greater than what its monetary dimensions indicate. In
connection with the Colombo Plan, we have drawn up a statement of our essential
requirements in the next six years involving a total outlay of Rs.1,800 crores. The problem
of raising the living standards of the vast underdeveloped and, till recently, exploited
regions of South East Asia is one which is unlikely to be solved by the resources available
to the countries of that area. Finance from abroad, and that on a substantial scale, has to
be forthcoming if this problem is to be tackled adequately. There is an increasing

15
recognition by the more fortunately placed countries of the West and the Western
hemisphere that their help in this urgent task is necessary and that the raising of the
living standards of these backward areas is vital for the peace and stability of the world.
While it is obviously in our own interest to help ourselves to the maximum extent
possible by mobilising our own resources I trust that outside assistance on terms
acceptable to us will be available in the near future in undertaking this great task.
48. I shall now turn to a consideration of the ways and means position. The
current year’s budget included Rs.75 crores from market borrowings and Rs.28 crores
from small savings. In addition, credit was also taken for a possible sale of Rs.10 crores
from securities held in the cash balance investment account. In June 1950 a
cash-cum-conversion loan was floated, cash subscriptions to which amounted to Rs.71/
2
crores and converslonwto Rs.223/4 crores. In addition to the public loan, sales of
securities from the cash balance investment account have amounted to Rs.23 crores
while the net receipts from small savings are now placed at Rs.31 crores showing an
improvement of Rs.3 crores over the budget. The total borrowings have, however, still
fallen below the estimate by Rs.29 crores. This has been mainly due to the fact that the
recovery in the capital market has not been as good as was once expected and that the
promise of increased demand for investment of the earlier period has not been maintained.
For next year, I have taken credit for Rs.100 crores for new loans and a net credit of
Rs.43 crores from small savings. Government have the option of repaying the 3 per
cent loan 1951-54 with an outstanding balance of Rs.87 crores next year and provision
has been made for this repayment.
49. There has been a welcome, though slight, improvement in the position
regarding small savings this year. With the shift in the distribution of the national income
in recent years that most competent observers have noticed, the mobilisation of small
savings, particularly in the rural areas, has assumed special importance and has been
engaging the constant attention of Government. Among measures taken for stimulating
additional savings may be mentioned the revival of the system of authorised agents in
three States as an experimental measure. In rural areas it is also proposed to avail of the
assistance of Branch Sub-Postmasters in this task. Recently, a Treasury Savings Deposits
Scheme, which combines the attractive yield on National Savings Certificates with the
advantage of an annual income, has been introduced and the results, in the short time it
has been in operation, are encouraging. The question of widening the pattern of
investment for the small saver is constantly under examination. Social and political
changes have occurred in the country which involve more restricted opportunities for
certain classes who in the past have been large supporters of the investment market.
Their contribution has to be replaced from the savings of those who benefit from these
changes. The importance of mobilising the small savings cannot therefore be over em-
phasised. This is a task which requires the cooperation of all sections of the community
both rural and urban, agricultural and industrial. We cannot depend purely on casual
sales of savings or deposit certificates. We must develop a wide net work of savings

16
groups in the towns and in thq countryside for a continuous mobilisation of small
amounts. In this connection, may I mention that the successful working of savings
groups in industrial undertakings should not be regarded as a relevant consideration in
dealing with disputes regarding the level of wages?
50. Before I pass on to the budget proposals I may summarise the position. The
revised estimates for the current year show a surplus of Rs.7.93 crores while the deficit
on capital account will amount to Rs.67 crores. For next year, on the existing basis of
taxation, the revenue account is expected to show a deficit of Rs.5.54 crores while the
deficit on capital account will aumount to Rs.78 crores. The total deficit in the current
year will be met from the opening balance of Rs.149 crores which will be reduced to
Rs.95 crores at the end of the year. On the estimates that I have explained so far, I am
left with the problem of not merely covering the estimated revenue deficit of Rs.5.54
crores but also of covering, as far as possible, the more substantial deficit on capital
account while closing the budget year with an adequate closing balance.

PART B
51. It may assist the House if I explain briefly the various considerations which
I have taken into account in formulating the proposals which I shall place before it. In
dealing with the substantial deficit on both capital and revenue account in the coming
year I have had to keep in mind two requirements. Firstly, additional resources have to
be raised for leaving Government with a sufficient closing balance at the end of the
Budget year. Secondly, the deficit has to be covered to the largest possible extent so as
to avoid the generation of further inflation.
52. At a time when inflationary conditions exist it must be the aim of
Government to adjust the money supply to the available supply of goods and services
by drawing off as much as possible of the purchasing power in the hands of the
community, either by taxation or by borrowing, the exact proportion between the two
being determined with reference to the prevailing circumstances. In other words,
Government ought to aim at a surplus budget, taking the revenue and capital budget
together. Conversely, at a time of deflation the effect on the community of the fall in the
purchasing power should be mitigated by Government increasing the money supply by
increasing public expenditure. The effect of a budgetary deficit on the economic life of
the country is precisely the same whether it is a deficit on revenue account or a deficit
on capital account. Such a deficit, other things remaining equal, increases the available
money supply in the hands of the community and at a time of inflation adds to the
inflationary spiral. The effect is in no way altered even if the deficit in a particular year
is met from the accumulated balances of the past.
53. In the light of what I have said just now, I am sure the House will agree
with me that the substantial deficit of Rs.83 crores in the budget next year cannot be left
17
wholly uncovered. This will reduce the cash balance of Government at the end of the
budget year to Rs.12 crores which will be wholly inadequate, considering the present
magnitude of Government transactions. A safe closing balance for Government should,
in my view, be something of the order of Rs.50 crores. This, in a sense, sets the minimum
limit to the amount of fresh resources that will have to be raised next year to achieve a
satisfactory cash position. Any further addition to our resources will be welcome, if it
could be obtained.
54. After a careful consideration of the problem in all its aspects I have come
to the conclusion that something like half this deficit should be met by raising additional
resources and the balance met from the accumulated cash balances of Government.
55. The House may well ask if this deficit could not have been avoided either
by economies or by the postponement of capital expenditure. I have explained at some
length, while dealing with the expenditure estimates, the steps taken to secure economies
in public expenditure. While this quest for economy will be rigorously pursued, it will
be unrealistic to expect that this will release any appreciable amount for financing the
capital budget. The capital budget itself has been so carefully pruned that it now provides
only for essential schemes of capital outlay and development, which cannot be further
curtailed without affecting the country’s development and for the requirements con-
nected with the rehabilitation of displaced persons. Even within the accepted provision
for capital expenditure, which in the case of most spending Ministries and State
Governments represents a very substantial reduction on their demands, it is my intention
to suggest the enforcement of economies in spending by the adoption of austerity
standards in regard to construction, scale of accommodation and so on. While all these
efforts may yield some results, it is unlikely that they will bridge to a substantial extent
the deficit on capital account next year.
56. This brings me to the important problem of distributing the additional burden
in the coming year between taxation and borrowing. So far as borrowing is concerned,
the House is well aware of the difficult conditions prevailing in the capital market. In
my estimates for the coming year I have taken credit for a total borrowing of a little
over Rs.140 crores, taking small savings and market borrowings together. While I am
satisfied that this is not in any way over-optimistic there is little scope, unless there is a
very marked improvement in the position, for bettering on these estimates. I am, therefore,
left with no alternative but to turn to the tax-payer for helping me out. In doing so I am
not unaware of the present level of the tax burden but in an emergency like this I am
sure that some additional burden will be borne cheerfully in the wider interest of the
country. In laying the tax-payer under further contribution, the House may rest assured
that I have made every effort to see that the additional burdens are spread as widely and
as equitably as possible.
NEW AND ADDITIONAL TAXATION
57. In the field of direct taxation, my first proposal is to raise the rate of
Corporation tax by a quarter of an anna, from two and a half annas to two and
18
three-quarter annas. Since 1922 it has always been the practice to fix the rate of Company
super-tax at the lowest rate of super-tax applicable to an individual. This was departed
from twice in recent years, once in the Finance Act of 1946 and again in the Finance Act
of last year. I consider that it is not inappropriate at the present juncture to do something
towards re-establishing the conventional parity between the two rates. This proposal is
estimated to yield an additional revenue of Rs.2.25 crores.
58. My second proposal is to levy, exclusively for the purposes of the Centre,
a small surcharge of 5 per cent on all income tax and super-tax rates, excluding
Corporation tax with which I have already dealt. The present situation calls for a measure
of sacrifice from every one according to his means and this surcharge will not be an
onerous burden on anyone. On a person with an income of Rs.5,000 a year, this will
mean no more than 8 annas a month. It will amount to Rs.3 a month on a person with an
income of Rs.12,000 a year and Rs.12 a month on a person with an income of Rs.24,000.
I am sure the House will agree that this burden cannot be considered excessive. The
additional revenue from this surcharge which, as I mentioned, will accrue in its entirety
to the Centre is estimated at Rs.6 crores.
59. Before I leave the subject of income-tax I should like to mention a minor
adjustment that is being made in respect of the rebate of super-tax given to Life insurance
Companies. The income tax investigation Commission have suggested that the rebate
of super-tax hitherto given to Life insurance Companies was not justified in respect of
that portion of the profits of the business which went into the pockets of the shareholders
and did not accrue to the benefit of the policy holders. Government have accepted the
Commission’s recommendation and the rebate is proposed to be reduced from 2 annas
to 11/2 annas. The effect of this on the revenue will be negligible and I have taken no
credit in the budget for this.
60. Turning to indirect taxes I shall first deal with changes in-the Customs
duties. My first proposal is to levy an enhanced surcharge of 5 per cent on all items in
the import schedule except such of them as are governed by specific agreements under
the General Agreement Relating to Trade and Tariffs. In other words, the proposal is
that for any item for which the existing surcharge is, say, twenty per cent the new rate
should be 25 per cent. Articles at present exempt from surcharge will pay a surcharge of
5 per cent. The yield from this is estimated to be Rs.2 crores.
61. My next proposal is to increase the Present surcharge of 100 per cent on
ale, beer, spirits, and other fermented liquor by 50 per cent. The yield from this is
estimated at Rs.40 lakhs.
62. My third proposal is to rationalise the incidence of import duties on mineral
oils other than motor spirit and kerosene. The existing duties on these oils will be raised
alternatively to a maximum of 20 per cent of their value, wherever it is higher. The
additional yield from this is estimated at Rs.60 lakhs.

19
 63. In the field of export duties I propose to make two changes. I propose to
levy a duty of Rs.80 per ton on ground nut kernel. The price of ground nut kernel has
gone up considerably in recent months on account of the increase in demand and this
duty will be in consonance with the policy of appropriating to the exchequer the large
difference between the external and internal prices. I also propose to revive the export
duty on cotton cloth, which was withdrawn in 1949, but confine it to coarse and medium
cloth only, excluding furnishing fabrics and manufactures like hosiery, apparel, towels,
etc. The cloth covered by this duty is made mostly from Indian cotton and enjoys a
price advantage which would justify the imposition of a moderate export duty, which I
suggest should be 10 per cent ad valorem. The yield from the export duty on ground nut
is estimated at Rs.11/2 crores and that from the export duty on cotton cloth at Rs.21/2
crores. Certain readjustments in the application of concessional assessments to existing
export duties on cotton waste and black pepper will also be made by executive orders,
yielding Rs.1 crore and Rs.75 lakhs respectively.
64. I now turn to Union Excises. Here my first proposal is to increase the present
excise duties on motor spirit and kerosene by 5 per cent so as to equalise the duties of
Customs and Excise. This change is consequential to the general surcharge of 5 per
cent on import duties which I have mentioned earlier. The additional revenue from this
is estimated at Rs.15 lakhs.
65. My next proposal is to make certain changes in the excise duties on tobacco.
The rationalisation of tobacco excises has, as the House is aware, been under the
consideration of Government for some time. The existing system of taxing tobacco on
the basis of its intended use has not only been criticised as being contrary to the normal
principle that an article should be taxed according to its specific character but has also
proved cumbersome and difficult, both to the administration and to the trade. A
widespread scheme of departmental restrictions designed to guard against the evasion
of taxation by the diversion, after clearance, of tobacco, capable of multipurpose use,
from a low-rated use to a high-rated use has had to be imposed. These have been difficult
to administer and have also created some amount of justifiable discontent in the trade.
66. The scheme of rationalisation now proposed has two main features. It makes
the minimum changes necessary in the taxation of tobacco which goes into the
manufacture of cigarettes. In respect of other categories of tobacco, the present basis of
taxation with reference to intended use will be abandoned and the duty will be levied as
a leaf duty at flat rates, separately for flue-cured and for other tobacco. The rationalisation
also provides for the levy of a further duty on certain tobacco manufactures like biris
and snuff. The leaf duty on flue-cured tobacco, except tobacco used in the manufacture
of cigarettes, will in future be Rs.1 per lb. while other tobacco will pay a duty at 8 annas
per lb. Flue-cured tobacco used in the manufacture of cigarettes will continue to pay
duty at the existing rates while other tobacco used for the manufacture of cigarettes will
pay the flat rate of leaf duty of 8 annas. The existing concessions for stalk and tobacco

20
used for agricultural purposes will continue. The manufacture duty on cigarettes, whether
made out of flue-cured tobacco or other tobacco, will subject to certain minor tariff
alterations due to the imposition of the flat rate of leaf duty, continue as at present.
Pipe-tobacco will pay a rate of Rs.6/8/- per lb. Biris and snug will pay in addition to the
leaf duty of 8 annas, as against 12 annas at present, an additional manufacture duty
averaging 8 annas per lb. on their tobacco content.
67. I have carefully considered the effect of the proposed changes on the
consuming public. Fluecured tobacco is not generally used for chewing or hooka purposes
and over most of this field the additional burden would amount to only 4 annas a pound
over the present rate of 4 annas a lb. This duty has, no doubt, been doubled but considering
the low per capita consumption of tobacco in this form, the additional burden is likely
to be insignificant. In the case of snuff and biris also, fluecured tobacco is hardly ever
used and the consumer will get the benefit of a reduction of 4 annas per lb. In the
present tax of 12 annas a lb. which he is now paying. This loss of revenue has to be
made up and it is in the context of the need for additional revenue and the desirability of
making every section of consumers contribute their share of additional revenue, that
the small manufacture duty on snuff and biris is justified. The manufacture duty on
snuff will be at 8 annas per lb. For birts a graded manufacture duty will be levied at 9
annas a thousand for biris containing more than three quarters of a lb. of tobacco per
1,000 and 6 annas a 1,000 for biris containing three-quarter of a lb. of tobacco or less.
At the existing rate of taxation an average birl smoker is probably paying a duty of Rs.6
a year. Under the new proposals he would pay about Rs.8 a year. Compared to what the
smoker of even the cheapest variety of cigarettes has to pay, I do not think that this
places an undue burden on him.
68. I mentioned earlier that the rates of duty on tobacco used for cigarettes will
mostly remain unchanged. But, while we are raising the rates of tax paid by the other
sections of tobacco consumers, it is hardly fair to leave the cigarette consumer untouched.
I therefore propose to levy a small surcharge of a quarter of an anna per 10 cigarettes
the retail price of which is more than 2 annas per ten and half an annas per 10 cigarettes
the retail price of which is more than 51/2 annas per ten.
69. The total additional revenue from the changes in the tobacco tariff which I
have just mentioned is estimated at Rs.13 crores.
70. Before I conclude the taxation proposals I may mention a proposal which
has only a limited interest, as it affects only the Delhi State. Hon’ble Members are
aware that the question of levying a sales tax in Delhi has been under consideration for
some time. The neighbouring States of Punjab and Uttar Pradesh have sales taxes and
there have been complaints that the existence of a tax-free zone in Delhi results in a
diversion of trade from these States to Delhi to the detriment of their revenues, without
any corresponding benefit to the Centre. The Centre has been advising the various State
Governments to exploit sales taxes for augmenting their resources and there is no reason

21
why the Centre should not introduce it in Delhi in the present financial stringency
which has underlined the need for exploring all available means of raising additional
money. Government have accordingly decided to introduce a sales tax in Delhi. This
will be done by applying, with suitable modifications, the law of one of the Part A
States. The tax will be a moderate single point tax. The details are being worked out but
in the meanwhile I have taken a credit of Rs.1 crore on this account for the coming year.
NET RESULTS OF PROPOSALS
71. I may now summarise the net effect of the proposals which have been placed
before the House. The additional revenue from the changes in income-tax is estimated
at Rs.8.25 crores and that from changes in Customs and Central Excise duties to Rs.8.75
crores and Rs.13.15 crores respectively. The sales tax in Delhi is estimated to yield
Rs.1 crore. The total additional revenue is thus estimated atRs.31.15 crores. This will
convert the revenue deficit of Rs.5.54 crores into a surplus of Rs.25.61 crores and
reduce the overall budget deficit of Rs.52.37 crores. This remaining deficit will be met
from the opening balance of Rs.95.42 crores, leaving a closing balance of Rs.43.05
crores at the end of the year.
CONCLUSION
72. I have now come to the end of my story. I wish it had been possible for me
to present a budget without imposing the additional burdens I have been compelled to
suggest. But the financial difficulties through which the country is passing make it
imperative that sacrifices should be made to enable Government to meet the heavy
demands on them without impairing the economic health of the country. I know that
there will be some criticism that the entire burden next year has been thrown on the
tax-payer and that in distributing this burden the direct tax-payer has been let off more
lightly than the indirect tax-payer. So far as laying the entire burden on the tax-payer is
concerned. I have already explained how it is not possible to raise additional money by
borrowing over of the amount, for which I have taken credit in the budget. Apart from
the effects of recent political and economic changes on the capital market, we still seem
to be in a state of transition so far as the effect of-the shifts in income, to which I have
already referred, on the capital market is concerned. As regards the second criticism I
would point out that, in a relatively poor country like ours, the scope for raising money
by direct taxation is somewhat limited and a fair amount of the tax burden has necessarily
to be laid on the community by means of indirect taxes. For a population of over 35
crores the number of people who pay income-tax in this country is probably something
like 6 to 7 lakhs. It will not, therefore, be correct to say that the raising of additional
taxation by the enhancement of indirect taxes is inequitable. But in suggesting increases
in indirect taxation I have confined them as far as possible to either luxury or near
luxury items. It is, nevertheless, true that the net of taxation has been cast fairly wide
but I am sure the House will agree with me that in the burden of building up the new
India every section of the community should take its legitimate share.

22
 73. Before I conclude, I should like to say a few words about a charge that has
frequently been made that by drawing upon the accumulated balances in recent years
Government have added to the inflationary pressure. If it is suggested that Government
have been drawing on these balances and putting the money in circulation inside the
country I think this is wholly wrong. We started with an opening balance of about
Rs.270 crores after the partition and at the end of the current year the balance would
have dropped to Rs.95 crores. Thus, in a period of three and a half years, our balances
would have been run down by Rs.175 crores. But during this period Government’s net
overseas expenditure, mainly on the purchase of foodgrains, stores, equipment etc.,
will amount to a little over Rs.400 crores. Thus, taking Government expenditure by
itself, this running down of thtt balances cannot be said to have generated fresh inflation.
But if the suggestion to that the disinflation trends would have been materially assisted
if Government had raised all the finance they required currently, without drawing on
their balances, my answer to it is that it ignores the realities of the situation While a
Government is, in a sense, the creator of economic conditions by its policies, it is, very
often, also the creature of circumstances beyond its control. No government, much less
a popular government, faced-With the multitudinous problems with which this
Government has been faced by the partition of the country and its aftermath, could have
sat back and refused to incur expenditure necessary for the security of the country, the
relief of displaced persons, the grant of food subsidies to keep prices from rising or the
progress of essential schemes vital to the country’s welfare and development. While
there may be legitimate criticism of some item of expenditure or the other I think it will,
on the whole, be correct to say that the bulk of this money has been spent on useful or
unavoidable items.
74. Sir, it to, I believe, the usual custom to end the budget speech with a review
of the general financial position of the country but I do not propose to do so. In the
rapidly changing conditions all over the world he will indeed be a rash man who can
hazard a guess as to the future. But I have little doubt myself about the inherent strength
of our financial position and I have every confidence in the ability of our people to
sustain and support the Government in whatever measures may be necessary to maintain
the finances of the country in a sound position. It is in this hope and in this faith that I
have made the substantial demands which this budget makes on the tax-payer. I have
been greatly heartened in this task by a recent communication which I have received
from an ordinary villager, who is neither in business nor in service, which I would
venture to mention to the House. It is from one who at present pays no tax to any
authority, Central, State or local. He says that he has a burning desire to help the
Government of India in some way or the other. He has remitted a sum of five rupees to
me and has promised to remit a similar sum every year. It is not the small amount that he
has offered but the spirit behind the offer that matters and, so long as the common run
of our people can produce men and women with this spirit, this country can face the
future, however difficult it may be, with confidence.
(FEBRUARY 28, 1951)

23
 SPEECH OF SHRI JOHN MATHAI, MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1950-51

Sir, I rise to present the estimated Receipts and Expenditure of the Government
of India for the year 1950-51. This is the first Budget of the Republic of India, and Mr.
Speaker, I consider it a great honour that it has fallen to me to present it to the House.
There is one matter, Sir, which I would like to mention before I proceed any
further,, I have arranged for distribution to honourable Members at the end of today’s
sitting, not merely the Explanatory Memorandum which is usually circulated with the
Budget but also a White Paper on the Budget which contains practically all the material
set out in the Budget speech, in more or less the same form and somewhat amplified.
For this reason, I propose to allow myself today the freedom of speaking somewhat
informally on the matters covered by the Budget, instead of delivering a set address as
is usually done on occasions of this kind. The House will find that the material set out
in the White Paper would give Honourable Members all the data which they would
require for the consideration and discussion of the Budget later in the session. All that
I propose to do at this stage is to give Honourable Members a broad outline of the
Budgetary position and the general economic background of the Budget.
This Budget is being presented under the new Constitution. From that fact there
are two matters that arise to which I would like to invite the attention of the House. The
first is this, that the Constitution lays down a somewhat elaborate procedure for the
consideration and discussion of the Budget. We are not following this year the procedure
prescribed by the Constitution, largely for the reason that this procedure has implications
which it would take the House and this Government a little time to consider, and the
arrangements required for carrying out this procedure would also take a little time. But
there to one rather important change which we propose to make this year. As you, Sir,
announced earlier in the session, we propose to ask the House to set up an Estimates
Committee to scrutinise the expenditure of each Department of Government and of the
Government as a whole. Personally I am looking forward to the work of the Estimates
Committee when it is set up because I think in two directions it is going to exert a
healthy influence upon the course of public expenditure. In the first place, the suggestions
and criticisms which may be made by the Estimates Committee would, in my judgement,
give a useful direction and guidance to the Government in the matter of regulating
expenditure. Secondly I think the knowledge that the expenditure of Government and
of the various Departments of Government would be examined in detail by an
independent authority set up by the House would act as a deterrent to extravagance in
public expenditure.

1
 Although it is a matter which, ultimately, has to be decided by the House, I would
like to say. at this stage, that, as far as I am concerned, I would like the Standing Finance
Committee to continue at the same time. There is a real distinction between the work of
the Standing Finance Committee and the work of the proposed Estimates Committee.
The Standing Finance Committee is concerned with specific proposals of expenditure
by each Department of Government, but the Estimates Committee’s business would be
to make a comprehensive examination of expenditure in relation to the resources available
to Government. The real business of the Estimates Committee would, therefore, be
taking the policy and the objectives of Government (with which they are not concerned)
to suggest how this policy and these objectives could be carried out with the least
expenditure of public resources. That, Sir, is the first matter to which I would like to
refer as arising from the introduction of the Constitution.
The second matter is this. The Constitution of India envisages not merely the
India of the Provinces, but also the India of the States. The estimates for the year 1950-
51 which I am going to present to the House would, therefore, cover not merely the
finances of the old Provinces, but would cover also the federal expenditure and the
federal revenues of the integrated States. The result of that is that the estimates of 1950-
51 would not be strictly comparable with the figures of 1949-50 or the preceding years.
The House will realise that that is going to mean a break in the continuity of our budgetary
figures. The year 1947 which saw the partition meant a break in the continuity of our
statistics, and the integration of the States in 1950 is going to mean a further break.
Therefore, this period of 1947 to 1950, from the point of view of comparison of economic
and financial trends over a continuous period of years, will be an awkward period of
transition, and call for laborious work before the Budgetary figures of future years
could be compared with those of past years.
That is looking at the question from the point of view of those interested in
statistical comparisons. But there is, as will be obvious to the House, another way of
looking at this period of transition, because this period of 1947 to 1950 will, I have not
the slightest doubt, appear to the future historian of India as a dividing line between one
segment of our history, of the storied past of India, from another segment of our history
which is just opening out, and which as it widens and moves forward will have witnessed
the fulfilment of the aspirations of the generation that strove to build the New India of
our dreams.
I want at this stage to take the House back to the main economic events that
occurred during the year 1949. What I want to do is to ask the House to survey the
principal economic trends which were in evidence since the last Budget was presented.
It has been a year of great difficulty and of great anxiety. It has been a period of almost
unprecedented difficulties. There were times during the year 1949 when some of us
more immediately concerned with the economic activities of Government felt a sense
of almost overwhelming crisis. But on an objective examination of the facts as they
stand today, I feel I am in a position to tell the House that the stage of crisis at any rate
2
is now definitely past. I do not want to hide from the House or hide from myself that
there are still difficult problems ahead of us. But I think I am justified in saying that we
have now been able to take the measure of these problems and if there are problems in
front of us they are problems which would not be beyond the ability of Government to
meet and to solve in due course.
The first main economic problem to which I would like to refer is the problem
which is compendiously referred to as ‘inflation’. Inflation has many aspects to it. I
want today to confine myself to that aspect of it which is reflected in the level of prices.
The first that I want the House to realise in regard to inflation is that it is a problem
which is not by any means confined to this country. It is a world problem which has
come to us as a legacy principally of the war. It is interesting to trace the difference
between inflation as it was created by the First War and the inflation that has been
generated by the Second World War. In the first war, the position was that the war ended
in 1918 and th6 inflationary trends created by the war continued until 1920. In 1921 a
marked downward trend began.
In the case of the second war, the war ended in 1945. To day we are in the fifth
year after the termination of the war; but the inflationary process set going by the war
still continues in many countries. Not merely does it continue, but in several countries
it is actually on the increase. India, therefore, is finding itself entangled in a world
situation many aspects of which are beyond the control of this country. What exactly
are the causes that distinguish inflation as it emerged from the first war and as it has
emerged from the recent war? The House will appreciate there was much larger
destruction of national assets and productive capacity in the second war. There was a
much larger expenditure in pursuance of the war which resulted in a larger increase in
purchasing power. There was also a large redistribution of purchasing power with the
result that the less well-to-do sections of the population in many countries found
themselves in a position to spend more upon consumable goods than they did before
and a large degree of potential inflation thereby came into existence.
Another factor which is also important, is that the end of the first war was followed
by a relatively long period of lull, People feeling they have been through a war of vast
proportions and another war of that kind was not likely to come again in the near future.
But the end of the second war has coincided almost immediately with talks and thought
of another war. Re-armament is already in the air. Stock piling has already started and
increasing demand has already come into existence for baste and strategic materials.
Therefore, today we are in a position much more difficult that the position created by
the first war.
Taking our own country, we are necessarily affected by all these international
forces. India today has far more points of contact with the outside world than she had at
the end of the first war. We are therefore exposed to the influences that are active in the
world today. On top of it we have had difficult problems created by partition. We have

3
also problems created by the fact that a large part of our expenditure during the war was
met by fiduciary currency backed by foreign assets, instead of by loans and by taxes as
a large part of war expenditure in other countries was met. We are therefore in a specially
difficult position and I ask the House to take that fact into account in judging the
inflationary position in India to-day.
Now, I would like to briefly examine the movement of prices in 1949. As
honourable Members will remember, the Government adopted certain anti-inflationary
measures towards the end of the year 1948 - to be precise, in October, 1948. As the
result of these anti-inflationary measures, prices slowly began to come down from
October, 1948, and that steady downward trend continued until March, 1949. It was a
steady downward movement. I was one of those who, having observed this steady
downward movement during a period of six months, thought, and I think I said so in the
House, that that movement would continue. But my expectations in that matter did not
materalize. On the other hand what happened was that from April 1949 for several
months thereafter the trend of prices was upward and that upward trend continued until,
I think, October 1949, a few weeks after devaluation. Then we took certain special
measures for countering the possible effects of devaluation. The result of those measures
has been that although we have not been able to bring down prices, we have, at any rate,
been able substantially to hold the level of prices. From October right until the end of
January the level of prices remained stationary. The result, therefore, is briefly this; We
have considerable cause for what I may call “negative satisfaction”. I frankly confess
we have not very much cause for positive satisfaction. Although that is the real position,
I want the House to observe certain redeeming features in the situation. Although it is
perfectly true that there has been no fall in prices generally there has been since October
1948, judged by the Economic Adviser’s index Number, a steady fall in prices of
foodgrains from October 1948 till now. As far as the whole group of food articles is
concerned, there has also been a fall, though not to the same extent. The fall in the
general group of foodstuffs might have been greater but for the fact that certain articles
included in the food category behaved in an erratic fashion as the result of certain
special circumstances. I am referring particularly to sugar and gur. But for that, the
whole group of foodgrains would have had shown a more marked decline. That is one
factor which I would like the House to consider as a factor that to some extent redeems
the situation. The other is this, I believe India is one of the few countries in the world
which attempted devaluation in September in which there has been no rise in the general
level of prices as a result of devaluation. If you take for example, the movement of
prices since September in a country like the U.K. you find that there has been a perceptible
rise in prices. We, at any rate, have been able to keep our prices steady. To my mind, it
is a circumstance which offers some room for satisfaction. I have brought the story
right up to the end of January. Since the end of January or since the beginning of February,
I regret to say there have been signs of a slow upward trend and the situation therefore,
needs very careful watching. We have not by any means reached the stage where in this
matter we can afford to stand still. In connection with the rise which has started in our
4
level of prices since the beginning of this month, I would like to bring a particular
circumstance to the notice of the House. If, Sir, you observe the trend of movements of
prices in the various categories covered by our Index Number, you will find principally
the recent rise in prices has been in regard to industrial raw materials.
I consider that a factor of some importance. I could probably make the point clear
to the House by explaining the difference between the movement of world prices after
the devaluation of sterling in 1931 and the movement of world prices after the devaluation
of sterling in 1949. In 1931 when sterling was devaluated, it was followed by a decline
in dollar prices, the result being that prices of commodities of dollar origin in terms of
sterling did not rise to the whole extent of the devaluation. What is apparently happening
today is that the devaluation of sterling has, as far as America is concerned, resulted in
the maintenance of the original level of the prices. Dollar prices have remained steady
since September 1949 on the whole. The result is that sterling prices of industrial
commodities have gone, up almost to the extent of the devaluation. That has happened
as regards not merely the commodities of dollar origin but by psychological reaction
and directly, also in the case of industrial materials of non-dollar origin. Therefore the
movement that we are witnessing today, the upward movement La the prices of industrial
raw materials in our index number is really a symptom of a world movement and the
controlling of that therefore to not entirely in our hands.
Next, Sir, I come to the question of production. I place production second because
the crux of the problem of inflation in our country is increased production. I do not
believe that the monetary factor of inflation to nearly as important in this country as it
to in others. And if we want to find a solution for this problem of inflation, we could do
so effectively only by increasing the quantity of goods and services available in the
country. Now if you take production in 1949, I think there has been a substantial increase
in various important industries- steel, cement, coal, heavy chemicals, paper and
generation of electricity. There are two industries and very important industries in our
country of which that particular proposition cannot be made. The first is cotton textiles
and the other is jute manufactures. In both these cases the limiting factor in the matter
of production is the supply of raw material, particularly as the result of the deadlock
that has arisen in the trade between us and Pakistan. As regards raw cotton, I want to tell
the House quite briefly what Government are doing. We have, as the House knows,
definitely arranged for the import of 10 lakhs of bales of cotton. If the situation needs it,
we are also prepared and we are in a position to arrange for the importation of further
raw cotton. I think also active steps with promising results have been taken in the matter
of increasing the indigenous production of raw cotton. The results so far I think have
been promising.
With regard to raw jute, the position is that the production of raw jute in the
Indian Union has, during the past 2 years, definitely shown signs of improvement. The
estimated production of jute in 1949 is 30 lakhs of bales against 20 in 1948, and we

5
expect as the result of special efforts which are being made by double cropping, by
bringing fallow land under cultivation, by the extension of cultivable lands we are
expecting that the production would go up to somewhere about 50 lakhs in 1950. In the
meantime, I believe there are sufficient stocks of raw jute to maintain our jute mills in
production until the end of the current jute season.
With regard to production of foodgrains, I think the indications are also
encouraging. The estimated production in 1949 is 43 million tons against 41 in 1948
and we have every expectation that in 1950, there would be an increase of 2.8 million
tons over 1949. With regard to the availability of foodgrains, procurement to quite as
important a factor as production. I think the recent figures of procurement have been
satisfactory. The procurement for the eleven months of 1949 ending November is 4.2
million tons against a target of 4.6 for the whole year of twelve months. The procurement
target for 1950 is a million tons above the target of 1949. The conclusion that I would
come to is that although production still leaves a great deal of room for improvement,
there is no cause for anxiety.
There are two important factors which have assisted this increase in production.
The first is the marked improvement that has taken place in railway transport. The
figures that my Honourable colleague the Minister for Railways placed before the House
in the Railway Budget are ample proof of the improvement that has taken place. The
other factor which has helped is the improvement in the labour situation. All the figures
indicate that there has been a perceptible improvement in the relations between labour
and management. There have been fewer labour disputes. There has been quite a marked
reduction in the number of man days lost as the result of industrial disputes. I think that
is a fact that ought to give us encouragement and I want, in this connection, to pay a
tribute to the great labour organisations of this country. They have grown in stature;
they have gathered strength. They have developed a greater consciousness of their
legitimate rights; they have developed a greater sense of self-respect. Along with that, it
seems to me that they have developed also a spirit of patriotism and a sense of
responsibility and of their duty to the other sections of the community, which, to my
mind, justify us in looking forward with confidence to the future of Indian industry.
The third problem that I want to refer to is the situation in the money market. The
conditions in the money market have a direct importance for production. The position
of the short term money market has a direct reaction on current production; the position
in the long term or investment market has a direct re-action upon the development and
expansion of production. Practically all through the first half of 1949 the conditions in
the money market, I regret to say, showed very little improvement. The position in the
short term market was one of acute stringency. The position in the long term market
was one of continued stagnation. It is usual to explain the stagnation in the investment
market by the allegation that capital today is on strike. I have looked into this matter
with some care, and I have come to the conclusion that there is no foundation for this
allegation. The position of the investment market can be fully and intelligibly explained
6
with reference to such factors as increased costs, reduced margin of profits and unstable
economic and psychological conditions which, if they had prevailed in any other country,
would have resulted in exactly the same situation in the investment market; It is
unnecessary to resort to the somewhat far-fetched hypothesis that capital for tactical
reasons to deliberately declining to utilise avenues of sale and gainful employment. It is
quite unnecessary to resort to this thesis. I have made this statement with regard to
capital because, having given some thought to the whole question of industrial relations
in the spirit, may I say, of a detached student, I have come to the conclusion that in spite
of everything that we hear about us, the relations between labour and capital in this
country today are fundamentally sound. The predominant sentiment in this country
today is nationalism and we are not so far removed from the successful completion of
the national struggle for freedom that the country’s interests could be submerged in
People’s minds by sectarian interests. If only Government and Parliament and the Press
would avoid mishandling and misjudging one section or the other, I have not the slightest
doubt in my mind that both sectors of production will continue to play the game.
I said that in the first half of 1949 conditions in the money market were
unsatisfactory. There was a marked fall in bank deposits. There was also an increase in
bank advances. The result was that during the first six months of 1949, the ratio of
deposits to advances which is the test by which we can judge the stringency of the
market -the ratio was higher than in the preceding years. If you take a normal year in
our country, in the slack season, the ratio is somewhere about 45 per cent and in the
busy season about 50; it varies between 45 and 50. In the first half of 1949 it rose above
55, an unhealthy situation. I am glad to say that since July 1949 the position has improved
but it is not improvement of the kind that one would accept as wholly satisfactory,
because part of the improvement is due to the fact not that the deposits have gone up but
that advances have come down, because banks are more cautious and because also of
the deadlock in our trade with Pakistan. But judged by the ratio test, the position is
more satisfactory. That is as far as the short term market is concerned. So far as the
investment or the long-term market is concerned, as the House knows, right from August
194 6 when the great communal disturbances started in Calcutta, there was a continuous
fall in industrial investments which, with occasional ups and downs, continued almost
until July 1949. Since July 1949 there have been signs of revival of confidence and a
restoration of what might be called normal conditions, and I cannot remember a period
since August 1946 when there has been a similar period of six months when the movement
of revival was kept going. I regard the situation with some confidence. It is still too
early to predict a permanent recovery in the investment market. As far as I am able to
judge the activity in the investment market-1 am particularly thinking of the Stock
Exchanges-it is still confined largely to professional operators. I am not for a moment
suggesting that professional operations are unhealthy; but unless the activity of the
professional operator is supplemented and corrected by the activity of the genuine
investor, the investment market will not be sufficiently broad-based, will not be restored
to really healthy conditions, and there is the big problem that is facing us today; what
7
exactly we can do to bring the genuine investor back into the investment market. One of
the reasons why the genuine investor is holding aloof is that he has not got the measure
of confidence which would justify his putting what little he has into investment. Here
again, India is by no means in a peculiar position. The result of the wider distribution of
current national income which has occurred since the war in many countries of the
world is having this effect that large number of people now are having a small margin
of savings in their hands. When the amount of saving that you have is small, you want
a much larger degree of security than you would if you had large amounts to save and
invest. Therefore, since the large number of potential investors in this country belong to
exactly the same class as you and me, it is necessary that the spirit of confidence should
be fostered by every means in our power.
There is just one point in connection with investment to which I would like to
refer before I turn on to other topics, and that is the question of foreign capital. I consider
that foreign capital is necessary in this country, not merely for the purpose of
supplementing our own resources, but for the purpose of instilling a spirit of confidence
among our own investors. I would like to make just this brief proposition that any
considerable assistance in the way of capital from foreign countries must hereafter be
looked for not in the shape of fixed interest bearing loans and bonds, but in the shape of
equity capital on the basis of joint participation on strict business considerations with-
out any political strings attached to it. I consider that kind of assistance desirable from
our point of view, and feasible from the point of view of the foreign investor.
The House will appreciate the change that has come over the investment market
in foreign countries. The difference between the position today and the position in the
19th century is this: In the 19th century when foreign capital sent out from advanced
countries to undeveloped countries, they had the security born of political control. In
other words, colonialism provided the necessary sense of security to the foreign investor.
Today, since colonialism has disappeared, the only way in which the same sense of
security could be imparted is by friendly agreement. Therefore it is necessary that we
should consider providing reasonable conditions of security and fair treatment for those
who are willing to take the risk of investing their money in this country. The statement
that the Prime Minister made last year still represents our policy in this matter and I
believe that the terms and conditions outlined in that statement ought to provide
reasonable security for foreign investors.
May I in this connection also refer to the question of the Dividend Limitation
Act. The House will remember that originally the Bill as it was placed before the House
was intended to extend the operation of the Act until December 1950. The Select
Committee of the House on a thorough examination of the position decided to advance
it from December 1950 to March 1951. The question now arises whether this Act should
be renewed. When I spoke on the Bill last year in this House I said that the whole
position would be fully examined and unless the situation was such that the continuance
of the Act was necessary Government would not extend it. We have now decided not to
8
extend the Act for the following reasons. On account of the general fall in the level of
profits the limit fixed In the Act is practically inoperative. Secondly, as an anti-inflationary
measure; the effect of the Act has been negligible. Thirdly, it has had a disproportionately
depressing effect on the investment market. For these various reasons we have decided
not to extend the Act.
The next problem I want to deal with is the balance of payments. The House is
fairly familiar with the problem of balance of payments because we have discussed it
on the floor of the House several times in recent months. The main fact is that for the
period July 1948 to June 1949 we had to draw from our sterling balances to the extent
of £ 81 million, in addition to the amount provided in the agreement of 1948. The
position since then has shown improvement.
In connection with this question of balance of payments there has been a great
deal of criticism regarding the Open General Licence and the articles which were
admitted into the country under the O.G.L. the main charge against Government being
that under the Open General Licence a large quantity of goods of a purely luxury character
was admitted into the country. On a careful examination of the figures I am satisfied
that what can be called luxury goods amounted to not more than 1.5 to 2 per cent of the
total imports. My Hon’ble colleague the Commerce Minister has more than once
explained to the House that the reason why it has become necessary to import articles
of this kind is that in the bilateral agreements that we make with other countries, these
countries generally insist upon a certain proportion of their non-essential goods being
imported into India. They do that for this obvious reason. We as one of the parties in an
agreement have no right to say “We will export all the commodities that we want to
send to your country and in return we will accept only such articles as we specify”. That
is not businesslike: in actual practice it is not workable. That is the attitude of the
Commerce Ministry and it is perfectly valid. But I want to bring to the notice of the
House a consideration which has some importance for the Finance Ministry. If we decided
to confine our imports completely to essential articles, I can assure the House that the
Budget of this country would become unmanageable. Because from the revenue point
of view these essential articles are not particularly profitable. If, for example, you confine
your imports to foodgrains and plant and machinery, foodgrains bear no duty at all,
agricultural machinery bears no duty at all, industrial machinery bears a duty of 5 per
cent, industrial raw materials bear relatively low rates of duty. If, therefore, I confined
imports to these articles, the customs revenue would be exactly half of what it is today.
We would be faced with a huge deficit which would create inflation in its turn. It is a
fact which is recognized in other countries that for the sake of maintaining a reasonable
level of customs revenue it is justifiable to allot a certain portion of your exchange
resources for articles which bring revenue to the exchequer.
I said there has been improvement since July 1949. At the end of June 1949 our
Sterling Balances stood at 820 crores. In the first week of September they declined to
776. A drop of 44 crores. Since September they continued to rise, and the latest figure
9
that I have is 846 crores. In other words, in the course of seven and a half months there
has been not merely no decline, there has been a surplus of 26 crores. During this
period our dollar receipts also exceeded our dollar payments. As the House is aware
this situation is due to a number of temporary causes the suspension of dollar licences,
the late issue of import licences and partly the loan that we have had from the International
Bank. But I think the figures of exports are sufficiently encouraging for us to hope that
there has been a definite turn for the better as regards our balance of payments. As Mr.
Neogy told the House the other day, the figures of exports for November and December
were practically record figures.
There is one aspect of the matter, however, which the House ought to realize. The
figures undoubtly show an improvement for the time being. But there is no room for
complacency. It is much too soon for us to think in this matter of resting on our oars. A
balance of external payments which is based upon a drastic reduction of imports and by
continued releases of our accumulated balances abroad is an unhealthy balance. A healthy
balance is the sort of balance that you attain at the highest possible level of imports as
well as exports. If you look at the present size of our Sterling Balances, making allowance
for an adequate reserve against our currency in foreign assets, and assuming for the
time being that the releases would he more or less at the average rate of the past two
years, our Sterling Balances are not likely to last us more than six or seven years.
Therefore, it seems to me a matter of the highest importance that we should begin to
plan for an external economy which would be self-balancing. And that can be done
only by a stimulation of exports. I am glad to say that the steps that have been taken
recently by the Ministry of Commerce in respect of their export drive have already
produced results which justify our looking forward with confidence to the future.
When you come to the question of exports again, the crux of the problem is
production, more production and still more production. Whichever way you look at the
economic difficulties of this country, over and over again at every turn you come up
against the problem of increased production. Government naturally, therefore, attach
the very highest importance to this question of increasing the level of production.
The House will remember that early in this session the President announced to
the House that a Planning Commission would be set up. It is necessary to undertake a
review of our existing programme of development and our existing schemes of
production. The geographical and economic facts on which the present programme is
based no longer hold good, the estimate of financial resources on which the existing
programme is based is no longer valid, and public opinion rightly demands a different
kind of approach to the whole problem of development. In view of these facts,
Government have decided to set up a Planning Commission as announced by the
President. The composition of the Commission has been settled. The Commission will

10
consist of the following:
Chairman: Pandit Jawaharlal Nehru
Deputy Chairman: Mr. Gulzari Lal Nanda, Labour Minister in the Bombay
Government
Members: Mr. Chintamani Deshmukh, formerly Governor of the Reserve
Bank and now our representative in matters of external finance
Mr. Gaganvihari Lal Mehta, President of the Indian Tariff Board
Mr. R. K. Patil, Food Commissioner of the Government of
India
(A fourth Member whose name would be announced later).
Mr. N.R. Pillai, the Secretary of the Cabinet, will function as the Secretary of the
Commission and will be assisted, as Deputy Secretary, by Sardar Tarlok Singh, Deputy
Secretary in the Finance Ministry. The terms of reference and other matters relating to
the Commission will be announced in due course.
Before I leave this question of balance of payments, I want to make a brief reference
to our position vis-à-vis Pakistan. Unfortunately, the deadlock with Pakistan over the
exchange issue still continues. We have expressed our agreement to the proposal that
there should be a joint discussion between the two countries. Our proposal is that that
discussion should cover all matters which are relevant to the economic relations between
the two countries, but so far the Pakistan Government have not seen their way to
extending the scope of the conference as we have suggested. They are definitely opposed
to the question of prices and the exchange ratio being brought within the purview of the
discussion. As far as we are concerned, we don’t think that a conference which is not
able to discuss prices and the exchange ratio would serve any useful purpose. That is
how the matter stands at present.
As the House knows, the admission of Pakistan as a member of the International
Monetary Fund has been agreed to although the admission has not become effective yet
I presume, therefore, in the near future the International Monetary Fund will examine
the question of the exchange value of the Pakistan currency. I don’t want to anticipate
the opinion of the International Monetary Fund, but I think I must make a few relevant
facts clear. Firstly, that if Pakistan has an overall favourable balance, which from the
figures I have seen I doubt, that favourable balance is due entirely to her favourable
balance with India. Secondly, this favourable balance with India is due to a very large
extent to the open door policy in trade matters which we had adopted towards Pakistan
and the restrictive policy adopted by Pakistan towards India. Thirdly, from such facts as
have come to my notice, Pakistan has recently been running a deficit both on her sterling
and on her dollar accounts. In view of this, it seems to me an anomaly that Pakistan
could remain in the sterling area and yet decline to devalue her currency as a means of
rectifying her adverse balance like every other member of the sterling area. Lastly,
what ever rate may be agreed to by the International Monetary Fund for the Pakistan

11
currency, it will not, in practice, result in a normal, restoration of trade between India
and Pakistan unless that rate fits the facts of the economic situation.
Now, generally to sum up the economic position, let me repeat that although the
position is still replete with dangers and calls for the utmost care and watchfullness,
there to, in my opinion, no cause whatever for pessimism. Government have been,
strongly and widely criticised for the way in which they have handled the economic
situation. I do not, for a moment, complain of this criticism. On the other hand, I welcome
it and I welcome it for two reasons. First of all, I think it has had a very stimulating
effect on members of Government. All of us are the better for this criticism. Secondly,
I think it has done a great deal of good to the people who make the criticism. My own
observation of democratic Governments is that it is the great advantage of a political
democracy that under it, the Government provides, a target for all the criticism and fire
going in the country, it provides a very useful and essential outlet for the suppressed
emotions of people which, but for this outlet, might some day burst and break up society-
Mr. Speaker, even they serve whose business is just to get shot.
Sir, I now turn to the revenue and expenditure of Government. As regards the
current year, 1949-50, Members will remember that last year I estimated a total revenue
of about Rs. 323 crores and a total expenditure of Rs. 3221/2 crores, leaving a small
surplus of about Rs. 49 lakhs. The revised estimates now show a total revenue of a little
over Rs. 332 crores and a total expenditure of a little over Rs. 336 crores, thus converting
the token surplus of Rs. 49 lakhs into a deficit of Rs. 3.74 crores. May I say, in passing
that there was a time, in the course of the year, when I expected to be faced with a
deficit of much bigger dimensions? Therefore, this small deficit of Rs. 3.74 crores, I
regard with a sense of relief.
There are various minor changes both on the side of receipts and on the side of
expenditure which cancel out. The outstanding fact is this: defence expenditure during
the current year went up from the estimated figure of over Rs. 157 crores to about
Rs. 170 crores - an increase of about Rs. 122/3 crores. Against that customs revenue
went up by about Rs. 9 crores. The difference between the increase in the defence
expenditure and the increase in customs revenue gives exactly the measure of the deficit.
The increase in defence expenditure, the House will appreciate, was due to inevitable
circumstances. When I put my estimates before the House last year I made it clear that
my estimates were based on the assumption that the ‘Cease Fire Agreement’ would lead
to a peaceful solution of the Kashmir problem. That anticipation did not materialise and
we did not think it right or safe in the interests of the country not to make the necessary
provision.
As regards the customs revenue, the increase is largely due to the fact that we had
a very liberal import policy working over the greater part of the year and also we have
had some extra receipts from export duties levied since devaluation.

12
 I will now come to the estimates for 1950-51. I want the House again to appreciate
that the figures for 1950-51 are not strictly comparable with the figures of 1949-50,
because the finances of the States come into the picture. The position regarding financial
arrangements between the Union and the States is this. We appointed a Committee to
go into the whole question of the financial arrangements necessary on account of the
integration of the States. Mr. V.T. Krishnamachari presided over that Committee which
did very valuable work. Government have, with slight modifications, accepted the
recommendations of this Committee.
I will briefly summarise the recommendations. They boil down to this that the
integrated States, acceding States, would be placed on exactly the same footing as the
old provinces, the Centre having responsibility for Federal Subjects and Services and
the Centre also taking over the Federal assets and liabilities. In several cases where
what was once a single composite Government is broken up In this way on a functional
basis, serious financial dislocation results. In such cases what we have agreed to do is
that the whole difference between the Federal revenues which the States have surrendered
and the Federal expenditure which the States have been saved, would be reimbursed to
the States. This arrangement is to last for a transitional period of ten years. During the
first five years of this ten-year period the reimbursement will be made in full-the whole
of the difference between Federal revenue and Federal expenditure. During the next
five years reimbursement would be on a diminishing scale. At the end of this ten-year
period the whole matter would be subject to further review. But it is our expectation
that the States would be able so to adjust their financial resources that there would be
little demand on the Centre.
With regard to States which are not likely to suffer any financial dislocation, that
is, States which are able under the financial integration programme to make a surplus,
will be allowed to retain the surplus. The Privy Purse of the original rulers would come
out of this surplus. Those States would however he allowed to retain their share of the
divisible pool of the income tax. Now this is with regard to the integrating States - both
the continuing states and the Unions. With regard to States which have been merged
into the Provinces, the Krishnamachari Committee did not go specifically into that
question; but they had dealt with the individual case of Baroda. What they said with
regard to Baroda was that the principle which they had proposed in regard to acceding
States should be adopted also in regard to Baroda merged in the Bombay Province, the
reimbursement being made to the Province into which the State is merged. That
suggestion they made with regard to Baroda and we have accepted that and we have
extended it to all Provinces into which States have been merged.
As regards States which have been constituted into Chief Commissionerships,
the House realises, the problem does not arise because we are responsible for federal
and for provincial expenditure.
At the existing level of taxation, the total revenue for 1950-51 is estimated at
Rs. 347.5 crores and the total expenditure at Rs. 337.88 crores, leaving a surplus of
9.62 crores. On the revenue side the principal changes are: Customs show a drop of

13
very nearly 14 crores, due to our present policy of strict limitation of imports. Income
tax shows an increase of nearly 35 crores which is due to three factors. First of all it
allows for the income tax derived from the integrated States. Then there is the larger
receipts that we expect by a prompter collection on current assessments and by better
recoveries of arrears. Lastly, a considerable part of it represents the advanced payments
made under section 18A of the Income Tax Act which have been taken to revenue
instead of deposit, maintaining the accounting change which was made two years ago
and which we expect to complete in 1951-52.
On the expenditure side, in 1949-50 the revised figures of defence expenditure
show an expenditure of Rs. 170 crores. We are providing for 1950-51 an expenditure of
168 crores for Defence. This sum of Rs. 168 crores includes Rs. 8 crores for the pay,
allowances and maintenance of the Indian State Forces which were taken over under
the integration scheme. The intention is to bring up the training, equipment and
establishment of the State forces to the same standard as the rest of the Indian Army,
and my Hon. colleague the Defence Minister expects hat these forces will, after the
training, be indistinguishable from the regular Indian Array in efficiency and in fighting
spirit. Defence represents 50 per cent of the expenditure which is a high ratio; but in
view of the present circumstances I want to make a qualification to these estimates
similar to the qualification I made with regard to the estimates of last year. These estimates
are based on the assumption that no abnormal developments will occur.
Our policy, as the Prime Minister has declared more than once, is to contribute in
every way we can to the maintenance of peace and to the employment of peaceful
methods to the settlement of international disputes. As anybody who knows the Prime
Minister will appreciate that declaration has been made from the highest of motives
and with the completest sincerity of purpose. if, however, contrary to our expectation
events so develop that the peace and security of this country are endangered, Government
will have no hesitation in raising whatever finance may be required for meeting the
situation. Government will not hesitate to call upon the people to make whatever
sacrifices may be necessary for safeguarding the vital interests of the country.
Now I come to the estimate of Civil expenditure. The Civil expenditure estimate
for 1950-51 is 169.87 crores against 166.04 crores for the revised estimate of 1949-50,
showing an increase of 3.83 crores. Hon. Members will straightaway ask: “is this what
your much boosted economy campaign has led to ?” May I stop for a moment and offer
a word of explanation, because, I think, it is important that the House must know the
real position?
This figure of 169.87 includes expenditure under the following items:
Administration of States taken over as Chief Commissionership;
Administration of Central subjects in States and Unions, under the integration
scheme;

14
 Privy purses of Indian rulers with whom we have made solemn agreements and
Grants by the Centre under the financial integration scheme.
These four items of expenditure aggregate to 26.18 crores. Deducting that you
get a figure of 143.69 which is the comparable figure with 166.04 in 1949-50 a reduction
of 22.35 crores. I would like to give the House another breakdown of this total of 169
crores. It includes such special items as these:
Relief of displaced persons;
Food subsidies and bonuses on production of food;
Expenses of the coming elections;
Pre-partition payments due to our own people.
These amount to 30.34 crores which would leave a balance of 139.53. Now taking
this balance of 139.53, it includes expenditure on tax collection. My experience to the
more you spend on tax collection, the more you get in return, a good deal more. Therefore
it to a good investment. Another item is interest charges, pensions, and debt redemption
charges amounting to very nearly 44 crores. You cannot touch a pie of it. Then there are
the grants in aid both to the States and Provinces. Then there is expenditure on various
nation-building activities, scientific services, agriculture, medical, health and so on.
After allowing for these various items of expenditure we are left ultimately with
a balance of 36.59 crores and I suggest very respectfully to the House that the field of
expenditure to which economy cuts are properly applicable is denoted by this figure. I
am not for a moment suggesting that economy even to this extent is to be despised. It is
my intention to watch the course of public expenditure in the coming year with the
closest possible care. A Finance Minister who does not do it is not worth his salt and I
trust I shall have the fullest confidence of the House and of the Estimates Committee
which the House will appoint in this essential but somewhat thankless job.
The estimated surplus is, as I told the House, 9.62 crores. I will explain later how
I propose to deal with it.
Now I come to the capital budget. The figures for capital expenditure, meaning
thereby development expenditure by the Centre, loans to states for long-term expenditure,
expenditure from depreciation and Reserve Funds, stand like this:
For 1949-50 the budget estimate was 203 crores.
Revised figure for 1949-50 is 155 crores.
Budget figure for 1950-51 is 133 crores.
I will now take the capital receipts, meaning by that revenue taken to reserve,
borrowing in the market, small savings and foreign loans (foreign loans in this case are

15
loans from the International Bank). The figures are-
Budget for 1949-50 140 crores.
Revised figure for 1949-50 101 crores.
Budget figure for 1950-51 148 crores.
As regards the more important of these receipts viz., loans from the market the
House will remember that we were able to raise only 40 crores in 1949-50 against our
estimate of 85 crores. From small savings I expected 371 crores while it yielded only
26. But in view of the signs of improvement that are visible, I am estimating 75 crores
for 1950-51 from market borrowings and 28 crores from small savings.
Apart from capital expenditure, we have other non-recurring expenditure to meet.
There is the redemption of our permanent debt like the 21/2.per cent loan of 1950 we are
going to pay. Also the outstanding on the 41/2 per cent loan of 1950-55. We have also to
pay the first instalment of our dues to the World Bank this year and there are certain
Railway Annuities falling due. Altogether the discharge of permanent debt would mean
about Rs.48 crores. Taking all our non-recurring receipts and expenditure i.e., those
outside the revenue budget, the deficit figures stand as follows:-
In 1949-50 budget we estimated a deficit on capital account of 134 crores. The
revised estimate shows a deficit of Rs. 120 crores. For 1950-511 estimate a deficit of
Rs. 24 crores. Taking all Government transactions and allowing for them our Cash
Balances position would be as follows:-
At the end of 1949-50 I expect our cash balances will stand approximately at
Rs. 95 against a figure of Rs. 58 which I estimated in my budget last year. At the end
of 1950-511 expect the balances would stand at Rs. 7 8 crores.
Now, Sir, I turn to the taxation proposals. I have no proposals to make for any
increase in the taxes either indirect or direct. As regards indirect taxation a few weeks
ago by executive order we reduced the excise duty on cotton piece-goods on super-fine
from 25 per cent to 20 per cent and on fine from 61/4 per cent to 5 per cent. These
reductions have been taken into account into the budget and I propose to incorporate
them in the Finance Bill. Although it is not really a taxation measure, I want to invite
the attention of the House to the fact that the Budget estimates provide for an expenditure
of Rs. 11 crores for subsidising imported cotton used for the manufacture of yarn for
the benefit of the handloom weavers.
With regard to postal and telegraph charges our proposals are these. In accordance
with the practice in other countries, it is proposed to introduce concessional rates in
respect of local deliveries. For letter, for the first tola, it is proposed to reduce the rate
from two annas to one anna. For every subsequent tola, the existing rate of one anna
will remain unchanged. For local deliveries, the rate for post-cards would be reduced

16
from nine pies to six pies. May I say in passing that Government intend that this
concessions should not by any mean be confined to urban areas, but by a liberal
interpretation of the rules relating to local deliveries and by extension of sorting offices,
this would be extended as much as possible to rural areas. With regard to telegrams, the
proposals are that the basic minimum charge for an ordinary telegram should be reduced
from nine annas to eight annas. The basic minimum charge for express telegrams will
be reduced from Rs. 1-2-0 to Rs. 1. With regard to telephone rates, the maximum trunk
call rate for a three-minute call will be reduced from Rs. 16 to Rs. 12, for a six minute
call from Rs. 32 to Rs. 24. It is proposed also to extend slightly the periods for which
calls can be made at concessional rates. My Hon. colleague the Minister for
Communications expects, and rightly, that with these concessional rates, traffic will
more than correspondingly increase. May I say can we trust my Hon. colleague the
Minister for Communications to see that the traffic increases according to schedule.
With regard to direct taxation, our proposals are the following: First, the Business
Profits Tax to be abolished. This was introduced three years ago as a temporary measure
of taxation to replace the Excess Profits Tax. With the present greatly reduced levels of
profit, this tax is bearing hardly upon industrial concerns. It bears more directly upon
equity capital, capital which bears the risk rather than the fixed interest bearing capital.
The receipts from the Business Profits Tax have been steadily falling. We are today
three years after it was imposed and there is no justification for maintaining this Tax.
Secondly, with regard to income tax, I have three proposals to make. The maximum rate
of income tax to be reduced from five annas to four annas. The rate applicable to the
slab 10,000 to 15,000 to be reduced from three and a half annas to three annas. As
regards the slabs below this, last year, I made some change, the result of which in
conjunction with the relief on earned income applicable to income tax, slabs below Rs.
10,000 today bear a percentage rate which is lower than the rates in force in 1939-40.
My third proposal in regard to income tax is that the exemption limit for an undivided
family, which was raised from As. 3, 000 to Rs. 5,000 last year, should be raised to Rs.
6,000. With regard to the Corporation Tax, I propose that the Corporation, Tax should
be increased from two annas to two and a half annas. But the net result is that in
conjunction with the reduction in the maximum income tax rate, the total company rate
of taxation will be reduced from seven to six and a half annas. As regards Super Tax,
there are two proposals. It is proposed to abolish the distinction between earned and
unearned income and to levy a uniform rate on both. This distinction in the matter of
Super Tax is not recognised in any other country as far as I know and the administrative
difficulties in applying it have been enormous.
The second proposal is that the maximum super-tax rate will be reduced from
nine annas in the case of earned income and ten annas in the case of unearned income to
a uniform rate of eight and a half annas for both earned and unearned income and will
be applicable to incomes above 1.21 lakhs of rupees. The Super-tax rates applicable to
slabs below the highest will in the decending order he eight annas, seven and a half

17
annas, seven annas, six annas, four annas and three annas. The maximum rate of personal
taxation in the country will therefore be twelve and a half annas or about 78 per cent.
The total amount of revenue involved in this tax reduction is about 15 crores, of which
the Centre will bear about 8 crores and the States about 7 crores leaving a final surplus
of Rs. 1.31 crore for 1950-51. The share of the States in the divisible pool will not,
however, be affected as compared with the budget estimates of 1949-50. In the budget
estimates of 1949-50 the provinces share of the divisible pool of income tax was
40.45 crores. On the revised figures for 1949-50 their share will he 45.74 crores.
Allowing for all these tax reliefs, the budget for 1950-51 provides a share of a little
over 43 crores for the States. I may point out that with regard to the Integrated States;
in many cases where the difference between Federal revenue and Federal expenditure
to reimbursed to the States, their share of the divisible pool of income tax will be set
of against this grant so that practically the whole of this will be available to the other
provinces. The Deshmukh Award will apply from the 1st April until the Finance
Commission has reported, and it is the intention of Government to set up the Finance
Commission at the earliest possible date.
There are two general considerations which I wish to mention with regard to
these taxation proposals. I have for some time held the view that the present level of
taxation in this country is uneconomic in the sense that the economy of the country
cannot bear it. I know there is considerable body of academic economic opinion in the
country which holds a different view, but I am perfectly clear in my own mind that the
effect of the present level of taxation is not disinflationary but positively inflationary,
because, if you take the line that the solution to the problem of inflation to production,
then a very high level of taxation which reduces the margin of saving and the amount
available for investment to a potential inflationary force.
There is another general consideration that I want to mention. It is a matter of
regret to me that I have had to make these adjustments in taxation within the existing
framework of our tax structure. I should have preferred to make these adjustments on
the basis of a more fundamental revision of our tax structure, but I have refrained from
doing so because we are still in the middle of a very difficult period of transition and
our receipts and our expenditure are still in such a very fluid state that no responsible
person could undertake a drastic revision of the tax structure at this stage. Also we do
not have sufficient data on which we could make a scientific revision of the present
position. It is for that purpose that Government have act up a Committee to inquire into
the whole question of national income and its distribution. That Committee which is
composed of three of the most distinguished economists and statisticians of this country
together with three foreign advisers equally distinguished, I expect, will be able to give
us a report by the end of 1950 on the basis of which, I hope, Government would he able
to make some satisfactory proposals regarding our taxation system.
Sir, this to all that I have to say in regard to budgetary matters. I must apologise
for having detained the House so long. In so drawing on their time and patience my
18
excuse is that this to a budget presented at a very important time in India’s history. I
may be pardoned for dealing at come length with some aspects of our general economic
and financial position.
Sir, I must apologise also for the unconventional character of my speech. There
my excuse is that I have always held that a Government Budget in the last analysis is a
human document in the sense that it involves and has reactions upon the experiences
and the emotions of multitudes of men and women all over the country. I think therefore
it to appropriate that its presentation to the people’s representatives in Parliament should
be somewhat less impersonal than has been customary with us hitherto.
Mr. Speaker in conclusion may I thank you again and the House for the indulgence
you have shown me
(FEBRUARY 28, 1950)

19
 SPEECH OF SHRI JOHN MATHAI, MINISTER OF FINANCE
INTRODUCING THE BUDGET FOR THE YEAR 1949-50

1 rise to present the Budget for 1949-50.

REVIEW OF ECONOMIC CONDITIONS
2. Although this is the fourth year since the cessation of hostilities, the return
of normal conditions, without which it is impossible to expand production and develop
trade, seems still as far off as ever. Over large parts of the world, conditions remain
disturbed and the progress of recovery from the ravages of the war is painfully slow. In
Europe the impasse in Berlin, the civil war in Greece and the emergence of two rival
camps among the countries that fought the war as allies are symptomatic of the abnormal
conditions which still prevail. The Palestine question, which is a serious threat to peace
and stability in the Middle East, is still unsolved. Nearer home, the continuance of civil
strife in China, the disturbances in Burma, which concern us deeply in view of our
close economic ties with that country and the large interests our nationals have in it,
and the unprovoked assault of the Dutch on the Indonesian Republic, all these retard
the economic recovery not merely of this largely underdeveloped area of the globe but
of the whole world. Prosperity, like peace, is indivisible and while these conflicts are
going on in various parts of the world involving a tragic waste of men and material, the
common man in all countries, particularly the less developed countries continues to pay
a heavy price In want and suffering.
3. In our own country, as in most other countries in the post-war period, the
major problem has been that of keeping the inflationary trends under control. It is not
necessary for me to dilate on the causes of the emergence of these trends, since the end
of the war. While as a result of the war the purchasing power in the hands of the
community increased considerably, the available supply of commodities in the post-
war period was not sufficient to meet the increasing demand for them. The shortage of
essential commodities, particularly food and clothing, aggravated the situation owing
to the rise in the money income of some sections of the community who in the past
never competed for food and consumer goods on the same scale. Difficulties in transport
and distribution accentuated the shortages while the partition last year and the economic
dislocation caused over considerable parts of the country by the movement of population
between the two Dominions made the position worse. A steady rise in prices occurred
throughout 1947 the general index number of wholesale prices rising from 290.5 at the
beginning of the year to 314.2 at the end of December. In the first seven months of 1948
there was a further steep rise in prices, the index number of wholesale prices rising by
as much as 76 points to 390.1. Since then the prices have slightly dropped and as a
result of the various measures taken by Government prices have remained more or less
steady.

1
 4. The answer to the problem of inflation and high prices is to increase the
supply of commodities to meet the existing demand and until this position is reached to
control the distribution of the available supply of the essential commodities. In the
matter of food the supply position still continues to be difficult and last year owing to
the poor crops in certain parts of the country we have had to import 2.8 million tons
from overseas at a cost of Rs. 130 crores against an estimated import of 2 million tons
at a cost of Rs. 110 crores. The position is expected to be still more difficult this year
owing to the floods in Bihar and the United Provinces, the damage caused by the recent
cyclone in Bombay and the outbreak of famine in parts of Gujarat, Saurashtra, Rajasthan
and Cutch and imports may amount to 4 million tons. As the House is aware, it has
already been decided to reintroduce food control and it is hoped that this will secure an
equitable supply of food grains throughout the country at fair prices. In respect of other
commodities the position in regard to internal production has, I am glad to say, been
encouraging in recent months although it has not been possible in many cases to reach
the peak production of the war years or the target that has been set. Last year the
production of coal at 29.73 million tons and of steel at 854,000 tons just fell short of the
production in the previous year while the production of salt rose from 49.6 million
maunds to 59.3 million maunds, of cotton yarn from 1,315 million lbs. to 1,442 million
lbs., of cloth from 3,816 million yards to 4,338 million yards, of art silk fabrics from 85
million yards to 114 million yards, of plywood from 28.6 million sq. feet to 38.63
million sq. feet and of soap from 80,000 tons to 190,000 tons. The flow of raw materials
to industry has also improved with the improvement in the transport position while
with the relaxation of import controls there has been a larger flow of imported goods.
Production has been greatly assisted by the occurrence of fewer strikes and labour
disputes. If the present favourable trends in production continue, I have no doubt that it
will be possible not merely to arrest the rise of prices but to bring them down
gradually.
5. The state of the capital market in the year under review has been a matter
of concern to Government. While there is obviously a large amount of money in the
country competing for the limited supply of goods, the Investment market has been
stagnant and there has been little flow of money into Government loans or into industrial
concerns. This stagnation is due In large measure to the prevailing uncertainty in regard
to matters affecting industrial development and prospects. My own view is that with
the huge potential demand in this country for both consumer and capital goods, there is
bound to be for many years a wide field for private enterprise and that in this matter no
one who invests money is taking a greater risk than in any other country in the world.
6. As I mentioned a while ago, the fight against inflation has been one of
Government’s main pre-occupations this year. As Honourable Members are aware,
Government consulted various interests and sections of public opinion regarding the
measures necessary to deal with this situation. In a matter of this kind, It is obviously
not possible to expect complete unanimity of opinion as to either the causes of Inflation

2
or the remedies to be adopted. But it was clear that immediate action should be taken to
prevent, as far as possible, the further creation of purchasing power in the hands of the
community and to take all steps possible to stimulate production and Instil a spirit of
confidence in industry. With this end In view, in the field of taxation additional duties
on certain articles of luxury such as liquor, tobacco, motor cars, silk and art silk fabrics
were imposed and an excise duty on superfine cloth was levied. Power was taken to
make provisional assessments of income tax on the basis of returns submitted by the
assessees. A system of interest bearing deposits for income tax introduced in 1943 was
also revived and It was decided to postpone for a further period of three years the
refund of deposits of Excess Profits Tax except for approved purposes. A temporary
limit was also placed on the amount that may be distributed as dividend by public
companies, by an Ordinance, the enactment of which into law is now under consideration
by the House. Among measures taken to stimulate industrial production, I would mention
the reduction in the import duty on machinery and certain industrial raw materials and
the abolition of the import duty on cotton yarn. New industrial undertakings commencing
production in the next three years have been given exemption from income tax for the
first five years up to a limit of six per cent per annum on their capital. The rules regulating
depreciation allowances have also been liberalised. In the field of Governmental
expenditure a rapid review was conducted of all capital and development schemes
including the Provincial schemes. As a result the total provision for capital and
development schemes and loans has been substantially reduced. It was also made clear
to the Provinces that in the present financial situation they should not count on Central
assistance for implementing their schemes of social or agrarian reform. The House will
realise that it was not without regret that we decided to hold up even temporarily the
various schemes of development the execution of which is necessary for the well being
of the country. But the need for economy was imperative and we had to postpone all
avoidable expenditure. But this has not led to the slowing down of any productive
scheme or any scheme essential for the national Interest. I would like to take this
opportunity to express my sense of gratitude to the Provincial Governments for their
ready co-operation in this matter.
BALANCE OF PAYMENTS
7. The main features in the external financial position of the country in the
year under review have been the sharp decline in the sterling balances held by the
Reserve Bank of India, the growing difficulty in the financing of imports from the hard
currency areas and the emergence of Pakistan as a foreign country for currency purposes
with the separation of its currency from that of India. The sterling balances which
reached the peak figure of Rs. 1,733 crores at the end of 1945-46 declined by Rs. 121
crores to Rs. 1,612 crores during 1946-47. This reduction was due mainly to the large
imports of food but there were also substantial imports of other goods in satisfaction of
the pent-up demand of the war years and a certain amount of repatriation of British
capital. During 1947-48 the reduction was somewhat smaller due to the restrictive import
policy which was introduced towards the close of 1947 and the balances fell by only
3
Rs. 67 crores to Rs. 1,545 crores. In the first ten months of the current year there has
been a further drop of Rs. 556 crores in these balances. This heavy outgo is due to
several causes. The first is the payment to the United Kingdom Government in accordance
with the agreement reached with them last July, of Rs. 284 crores for the purchase of
annuities for financing the payment of sterling pensions and the acquisition of the
Defence installations and stores left behind in India by the United Kingdom at the end
of the war. The second is the payment to the State Bank of Pakistan of. Pakistan’s share
of these balances following the separation of its currency from that of India. This payment
is still continuing as the sterling and other assets of the Issue Department are handed
over in instalments as Indian notes are withdrawn from circulation in Pakistan and
handed over to the Reserve Bank. Sterling to the extent of Rs. 177 crores has so far been
transferred to the Pakistan State Bank. The third factor responsible for the decline is
India’s adverse balance of payments on current and capital account.
8. Government’s import policy is largely determined by the trend of the balance
of payments. The aim of this policy is so to regulate trade that while it is kept at the
highest possible level consistent with the needs and requirements of the country, India
should not have an overall deficit in her balance of payments on current account during
any particular period of time of more than the amount by which it has been agreed with
the United Kingdom Government India, s sterling balances should be drawn upon.
Under the present agreement signed last July it has been agreed that India’s free sterling
account which had a balance at the end of June, 1948 of £ 80 million will be credited
with an equivalent sum during the period July, 1949 to June, 1951. In pursuance of this
policy and also with the immediate object of reducing the inflationary pressure in the
country, import controls were relaxed during the course of the year, and I am glad to say
that they have resulted in substantially increasing the available supply of goods in country.
9. While our overall balance of payment position is on the whole satisfactory,
our balance of payments with the dollar and hard currency countries is causing us great
concern. In the pre-war years India had usually a surplus with the United States of
America and during the war years owing to the drastic curtailment of imports to conserve
dollars for the war effort, India continued to have increasing surpluses. After the war,
the trend of trade rapidly reversed itself and, in common with the rest of the world, this
country started having substantial deficits on hard currency account. The reason for
this was that we had increasingly to turn to the hard currency countries for our
requirements as the countries whose economies had been disrupted by the war could
not meet them. This was particularly true of food which is today the largest single
consumer of foreign exchange. Burma could not supply all the rice we needed because
of the ravages of the war and its aftermath; Australia could not give us all the wheat we
wanted because the United Kingdom had priority in supply.
10. India’s dollar deficit in the past used to be financed by the central reserves
of the sterling area. But beginning from January, 1948 the United Kingdom refused to
carry -this responsibility any further and insisted on limiting the convertibility of our
4
sterling very rigidly. The limits imposed - £ 10 million ($40 million) for the half year
January-June, 1948 and £ 15 million ($60 million) for the year July, 1948-June, 1949 -
bear no relation whatever to our needs. Concurrently with the imposition of these limits
on convertibility, there came the separation of the exchange resources of Pakistan from
India which also took place In January, 1948. This has also handicapped us severely as
many commodities which before partition earned hard currency, such as raw jute, raw
cotton and hides and skins, were largely exported from territories now in Pakistan. In
spite of the maximum possible limitation of imports from the hard currency areas and
the maximum possible encouragement of exports thereto, India had a deficit In her
balance of payments with the hard currency countries in the six months April to
September, 1948 of $45 million. The deficit for the next three months, for which
preliminary figures are available, is expected to be $48 million. Of these deficits, the
purchase of food grains was responsible for $35 million and $40 million respectively.
These deficits which exceed by far the convertibility allowed to us by the United
Kingdom have been met by loans from the International Monetary Fund from which
since March, 1948 we have borrowed no less than $92 million.
11. I confess that this chronic dollar deficit is causing Government no little
anxiety. Honourable Members are aware that we intend to negotiate dollar loans from
the International Bank for Reconstruction and Development. But these loans will be
available only for financing the purchase of equipment for our developmental projects
and not for current expenditure. We do not favour the idea of borrowing on the present
scale from the International Monetary Fund but if the central reserves of the sterling
area, to which we were at one time a source of strength insist on continuing to limit our
claims on them In the same way as at present, we shall have no alternative to continuing
to borrow. One ray of hope in the situation lies, of course, in the fact that we hope, in
future years, to import less food and to divert our food purchases to the soft currency
areas. It is also possible that the international prices of food grains will not remain at
the present high levels.
12. While we have exchange control with all countries in the world, we have
none with Pakistan. This has been rendered possible by the fact that simultaneously
with the separation of their currencies on the 1st July, 1948 India and Pakistan came to
a monetary and payments agreement. The main terms of this agreement, which is in the
first instance valid for a period of one year, are that each party will hold the currency of
the other up to a limit of Rs. 15 crores, that thereafter up to a further limit of Rs. 10
crores accounts will be settled in free sterling and the balance in sterling in Account No.
11. The reason for entering into an agreement of this kind was that the Governments of
both Dominions were anxious to ensure that the obstacle to Inter-dominion trade, which
the imposition of exchange control would necessarily entail, should, if possible, be
avoided. I am glad to say that this agreement has worked satisfactorily and that currency
considerations have not stood in the way of inter-dominion commerce.

5
FINANCIAL YEAR, 1948-49
13. I shall now proceed to give a brief review of the financial position in the
current and the ensuing years.
For the current year the deficit is now estimated at Rs. 1.55 crores against Rs.
2.14 crores provided In the budget.
REVENUE
14. The revenue receipts are now estimated at Rs. 338.32 crores against the
budget estimates of Rs. 255.24 crores, an increase of Rs. 83.08 crores. With the relaxation
in the import controls during the course of the year there has been a considerable
expansion of imports and the revenue from Customs is expected to be Rs. 36.49 crores
more than the budget estimate. The yield from the excise duties on sugar, matches,
tyres and tubes and vegetable products has also shown a substantial improvement and
with the excise duty on cotton cloth imposed last December and estimated to yield
Rs. 7 crores in a full year the revenue from Central excise duties is likely to be Rs. 4.28
crores more. Income tax receipts are now placed at Rs. 20.62 crores more than the
budget largely as a result of the intensive drive for the clearance of arrears and the
recent ordinance authorising the provisional collection of tax on the basis of the
statements of income of the assessees, but of this increase of Rs. 5.38 crores will accrue
to the provinces as their share of revenue. The Revenue from the two Government
commercial departments also shows increases. The contribution from Posts and
Telegraphs Is likely to be Rs. 2.95 crores more while from the Railways, as the House
is already aware, the contribution will amount to Rs. 7.34 crores against Rs. 4.5 crores
taken in the budget. The profits from currency also show an increase of Rs. 3.65 crores.
There is also a carryover of Rs. 1.33 crores on account of Government’s share of the
profit on stocks of sugar frozen in December 1947 which was not realised during that
year and certain pre-partition receipts amounting to Rs. 13.4 crores.
EXPENDITURE
15. The total expenditure this year is now estimated at Rs. 339.87 crores, an
increase of Rs. 82.49 crores over the budget estimate which nearly wipes out the increase
in revenue. Of this Increase, Defence Services account for Rs. 34.35 crores and Civil
estimates for the balance of Rs. 48.14 crores.
16. Defence Services. - The expenditure on Defence Services during the year
has been affected by the continuance of the operations in Kashmir, the extent and duration
of which could not be foreseen at the time the budget was prepared and for which, in
consequence, no provision was included and also by the unforeseen deterioration in the
situation in Hyderabad which led to the police action last September. In view of these
developments the armed forces had to be maintained at a higher strength than was
contemplated in the budget. New units had to be raised and some of the operational
demands for stores, equipment and munitions had to be met by fresh procurement. In
addition to our own forces we had to take in service larger forces from the Indian States

6
and the Government of Nepal also loaned us some of their troops for purposes of Internal
defence. All these measures entailed additional expenditure for which there was no
provision in the budget.
17. The increase of Rs. 48.14 crores in civil expenditure is mainly due to three
causes. Firstly, the revised estimates include a new provision of Rs. 20.75 crores for
meeting pre-partition liabilities for which no provision was made in the budget. At the
time the budget was framed, sufficient data regarding the outstanding liabilities were
not available and the arrangements with Pakistan for meeting and adjusting these had
not also been settled. It was hoped that these liabilities would be met and shared currently
by the two Dominions but the Pakistan Government declined to meet these liabilities
on the ground that they were initially those of India and that Pakistan would take its
share only through the debt settlement. The Government of India do not accept this
view as, in their opinion, after the division of the available cash balances of the undivided
Government between the two Governments, the outstanding liabilities should be paid
and currently shared by the two Governments. But in order to avoid hardship to those
who had made supplies or rendered services to the undivided Government, the
Government of India have agreed to meet the liabilities in the first instance. Certain
outstanding payments relating to the pre-partition period such as the Provincial share of
Income-tax, are also due to the Provincial Governments now located In India which the
Government of India propose to meet. Secondly, the expenditure on the relief and
rehabilitation of refugees which has always been difficult to estimate and for which a
provision of Rs. 10.04 crores was made in the budget is now expected to amount to Rs.
19.45 crores. This increase is partly due to the carryover of certain liabilities from the
previous year, mainly payments to Provincial Governments, which could not be made
before the close of last year and partly to increased expenditure on relief which has to
be regulated with reference to the constantly changing requirements of the situation.
Thirdly, the expenditure on the subsidising of imported food grains and the payment of
bonuses to Provincial Governments on internal procurement is now expected to exceed
the original budget by Rs. 12.05 crores. The House will remember that after a review of
the food position last October it was decided that with effect from the 1st October 1948
the Central share of the loss on the supply of imported food grains to deficit areas
should be raised from two thirds to three quarters and that a similar concession, limited
to the Centre meeting half the loss, should be extended to the Indian States. Part of the
increase is also due to the fact that while the budget provided for subsidies up to the end
of the calendar year, provision has now been made for the full financial year.
I should also mention a further reason for the increase in civil expenditure. The
House will remember that in the budget for the current year my predecessor made a
lump cut of Rs. 2.5 crores for economies likely to result from the implementation of the
recommendations of the Economy Committee. The work of this Committee has taken
somewhat longer than was originally expected and its report on a number of Ministries
is still under examination. No savings are therefore likely to be realised this year. For

7
next year I am not making any provision at this stage as it is not possible, until firm
decisions have been taken on the recommendations, to estimate the savings likely to be
realised. But I may assure the House that this does not mean that I do not expect any
economies to result from the Committee’s recommendations. On the contrary it is my
intention to secure the utmost economy possible in public expenditure and the House
may rest assured that the recommendations of the Committee will be most carefully
and earnestly considered by Government and the resulting economies enforced during
the course of the year.
INCOME-TAX INVESTIGATION COMMISSION
18. Before I pass on to deal with the estimates for the coming year I should like
to mention the progress made in the work of the Income-tax Investigation Commission.
Honourable Members will remember that the Act constituting the Commission assigned
two duties to it, namely, to investigate and report on all matters relating to taxation on
Income, with particular reference to the extent to which the existing law relating to and
procedure for the assessment and collection of such taxation Is adequate to prevent
evasion and to investigate specific cases referred to the Commission by the Central
Government. On a study of the working of the income tax law and its administration
during recent years, the Commission came to the conclusion that on a long term view
the first task was no less important than the second, and as work on the second had for
various reasons necessarily to be slow, the Commission devoted a great part of its time
till recently to the first task. This involved the examination of voluminous evidence
tendered in reply to a comprehensive questionnaire which was issued and the Commission
has recently submitted a long report in which it has made recommendations on many
points of law and of administration. These recommendations are now being examined
with a view to the necessary legislation being introduced, and it is hoped that it will be
possible to place a bill before the House at its next session.
19. As regards the Investigation of specific cases referred to it by Government,
the Commission has completed a few cases. Greater progress was not possible for a
variety of reasons. Firstly, it was only In April 1948 that the necessary staff for
investigation work could be placed at the disposal of the Commission. This was because
it was not possible for the Income-tax Department to spare their more experienced
officers for this work before April 1948, In view of the shortage of officers in the
Department and the large amount of arrears that had to be cleared. However, this difficulty
has now been overcome to some extent, and the officers authorised by the Commission
are working in different cities carrying on investigation under instructions and directions
given by the Commission. It is the material gathered by them that will form the basis of
the Commission’s work.
Another factor which has delayed the disposal of specific cases taken up for
enquiry is that It has been found that a good deal of general enquiry and collection of
facts and figures Is a necessary preliminary to the Investigation of the specific cases.
These general enquiries and the collation of the materials collected have taken a
8
considerable time, and the work is proceeding apace. Once this is completed, it may be
hoped that the disposal of specific cases will be expedited.
In this connection I may add that the possibility of disposing of the referred cases
by agreed settlement is being explored, and a bill will shortly be placed before the
House for vesting the necessary powers for making such settlements in the hands of the
Commission.
20. I now turn to the estimates for the next financial year. At the existing level
of taxation, I place the total revenue at Rs. 307.74 crores and the expenditure charged to
revenue at Rs. 322.53 crores leaving a deficit of Rs. 14.79 crores.
REVENUE
21. The total receipt from customs is estimated at Rs. 107.25 crores. This
provides for a full year’s effect of the changes in the tariff in the course of this year as
part of the campaign against inflation. Central excises are expected to bring in Rs.
57.75 crores, including Rs. 7 crores from the recently imposed excise duty on cotton
cloth. Receipts from income tax, which include Rs. 11.22 crores on account of Excess
Profits Tax and Rs. 12.01 crores on account of Business Profits Tax have been placed at
Rs. 155 cwores. Honourable members will remember that it was decided last year that
advance payments of tax should be taken direct to revenue instead of being treated
initially as a deposit and, as a first step in the process of changing the accounting
procedure, advance payments of Corporation Tax were taken direct to revenue in the
budget for the current year. Next year, as a further step in the pr6cess, I have taken
credit in the re-venue estimates for Rs. 12.5 crores for a part of these advance payments
that will be received during the year. I hope that the change will be completed over the
next three years. The divisible pool of income tax is estimated at Rs. 90.7 crores of
which the Centre will retain Rs. 46.85 crores leaving Rs. 43.85 crores as the Provincial
share. The profits from Currency and Mint after allowing for the share of Pakistan are
estimated at Rs. 9.7 crores.
The revenue from the Posts and Telegraphs Department is expected to amount to
Rs. 30.26 crores and working expenses and interest to Rs. 28.63 crores, leaving a surplus
of Rs. 1.68 crores. As in the current year this surplus will be shared equally by general
revenues and the department which will get a rebate of interest on its share of the
accumulated profits, expected to amount to about Rs. 10 crores at the end of the
budget year.
The contribution from the Railways for next year has been taken at Rs. 4.72
crores, the amount provided in the Railway Budget.
EXPENDITURE
22. The total expenditure in the coming year to estimated at-Rs. 322.53 crores
of which Defence Services will account for Rs. 157.37 crores and civil expenditure for
Rs. 165.16 crores.
9
 23. Defence Services. - Following the customary procedure I shall first deal
with the Defence estimates. The Defence Budget for the coming year shows an increase
of Rs. 1.94 crores over the revised estimate for the current year, the excess in which I
largely ascribed to the operations in Kashmir. The House may well ask why with the
cease fire in Kashmir there is no decrease in the Defence Budget. The main reason for
this is that the reduction in the strength of the armed forces cannot be made over-night
and the process of demobilisation has necessarily to be spread over a period similar to
the recruitment and training of the forces. The current year’s revised estimates reflect
the expenditure on the gradual building up of our strength while the budget for next
year would reflect the gradual reduction in that strength. Since both the processes take
time the average strength of the troops during the budget year is unlikely to differ
materially from that in the current year. In framing the budget for next year we have
taken into account the improvement in the Kashmir situation following the cease-fire
and our hope that this cease-fire will eventually lead to a peaceful solution of the problem.
The House will naturally not expect me to go into greater detail in this matter but I must
utter a warning that if for any unforeseen reason these hopes on which we have based
our estimates are not realised, it may be necessary to exceed the provision now proposed.
It has also to be remembered that the recent grant of an ad hoc dearness allowance to
employees of the Central Government has added Rs. 4 crores to the Defence Budget
next year. The budget for next year also includes additional provision for the expansion
of the Navy and the Air Force. As the House is aware, our Navy till recently consisted
of only a few sloops and frigates designed primarily for port defence but with the
achievement of independence the Navy has been called upon to shoulder greater
responsibilities than before, for which it is necessary to have a balanced force, complete
with aircraft carriers, cruisers, destroyers and submarines. With this end in view,
Government have recently approved the first phase of a 10-year plan for the Navy,
confined mainly to the recruitment and training of the personnel in the various branches
of the Navy. The last war proved conclusively the overwhelming importance of the
fleet air arm and the House will be glad to know that a beginning has already been made
in this respect and that the budget includes provision for the establishment of a fleet air
arm. With regard to the Air Forces also, plans for their expansion and development are
going forward. It is hoped to train sufficient technical manpower to make it a more
balanced and effective force.
24. Before I pass on to civil estimates I would like to refer to a change in the
preparation of the Defence Demands for next year. The provision for supplies and stores
which was previously pooled together and included under one Demand for all the three
Services, except for certain Naval and Air Force stores, has now been split among the
three Services-Army, Navy and Air Force. This change will make the estimates for each
Service self-contained to a greater extent than before and enable the Defence authorities
to exercise a closer and more efficient control over the expenditure in their respective
Services.

10
 25. Civil Estimates. - I now come to the Civil Estimates. Details of the estimates
under individual heads are, as usual, given in the Explanatory Memorandum circulated
with the budget papers and it is unnecessary for me to deal with them at any considerable
length here. I should like, however, to refer briefly to certain special items for which
provision is included in these estimates. The budget next year includes Rs. 9.85 crores
for the relief and rehabilitation of refugees. In addition, a provision of Rs. 23.27 crores
has been made in the capital budget, Rs. 21.34 crores for loans for rehabilitation including
loans to Provincial Governments and the Rehabilitation Finance Administration and
Rs. 1.93 crores for buildings. The expenditure on food subsidies and the payment of
bonus on procurement under the revised policy is estimated at Rs. 32.97 crores next
year. The estimates also include Rs. 10~crores for the meeting of pre-partition claims
and Rs. 12.83 crores under the various heads of expenditure for development schemes.
26. Of the total expenditure of Rs. 165.16 crores provided in the budget for the
year, Rs. 52.82 crores are accounted for by the expenditure on refugees, the payment
for food subsidies and pre-partition payments, leaving Rs. 112.34 crores for normal
expenditure. This includes Rs. 10.06 crores for tax collection. Rs. 41.97 crores for
obligatory expenditure on payment of interest and pensions and provision for debt
redemption, Rs. 2.04 crores for planning and resettlement Rs. 2.23 crores for expenditure
on Currency and Mint. Rs. 2.95 crores for grants-in-aid to Provincial Governments and
Rs. 24.20 crores for expenditure in the nation building spheres such as Education,
Medical and Public Health, Broadcasting, Aviation and on Scientific Surveys and
institutions in which the Central Government largely supplement the work of Provincial
Governments. The balance of Rs. 28.89 crores represents the provision for administration,
Civil Works, etc. and represents only 17.5 per cent of the total civil expenditure. In
addition to Rs. 24.20 crores in the national building spheres mentioned above, provision
has also been made for the grant of Rs. 26.81 crores to Provincial Governments for
development and Rs. 49.25 crores for loans.
27. Honourable Members are aware that in recent months a large number of
Indian States have been merged in the neighbouring Indian Provinces or taken over for
administration direct by the Centre as part of the policy of unifying the country under
the guidance of my distinguished colleague the Deputy Prime Minister. Ultimately the
revenue and expenditure of these States have to merge in those of the Provinces or the
Centre depending on the subject to which they pertain. But the process of integration is
still incomplete and for the present the transactions of these States have been kept
separate in a deposit account and not included in the revenue and expenditure of India.
If, as may be hoped, the integration is completed in the course of the coming year, these
transactions will be included in the revised estimates for the year.
28. On the basis of the estimates of revenue and expenditure that I have
explained so far, the anticipated deficit for next year is Rs. 14.79 crores. I shall return to
the question of how I propose to deal with this deficit in a later part of my speech.

11
POST-WAR PLANNING AND DEVELOPMENT
29. I mentioned earlier that as part of the campaign against inflation,
Government had to review their whole programme of expenditure and reduce the outlay
both in the capital and in the revenue budgets. Even so, substantial amounts have been
included in the budget for grants to Provincial Governments and for Central schemes of
development. So far as the Provinces are concerned it is not the intention that the scale
of assistance promised to them by the Centre for their development schemes and on
which they have formulated their plans should in any way be reduced. All that is
happening is that the pace of this assistance is being temporarily slowed down in view
of the urgent need for economy and in so doing special care has been taken to see that
the progress of productive schemes and schemes of long range importance essential for
national developments is not held up. The House will remember that last year we laid
down the policy that the grant each year from the Centre should be limited to half the
amount spent on the approved schemes. Some of the smaller Provinces whose resources
are limited asked for the waiver of this condition and in spite of our own difficulties we
have agreed for this year and next year to allow them grants up to the total amount they
may spend on approved schemes. The budget for next year includes a provision of Rs.
26.81 crores for grants and Rs. 49.25 crores for loans to Provinces for development.
30. For Central schemes of development including resettlement a provision of
Rs. 12.43 crores has been made in the revenue budget and Rs. 24.97 crores in the capital
budget. Details of the provision are given in the Explanatory Memorandum and among
the important schemes I would mention the expansion of the Forest Research Institute,
DehraDun, the development of the forest estate in the Andamans, the preliminary work
on a number of river projects like the Kosi, the Assam Valley, the Narbada, Tapti and
Sabarmati schemes, investigations in Coorg, Central Provinces and Bastar, the
reorganization of the Central Waterways Navigation and Irrigation Research Station,
the expansion of the Indian Agricultural Research Institute and the development of
basic education. The budget also provides Rs. 2.19 crores for the Central Government’s
share of the expenditure on the Damodar Valley scheme, Rs. 90 lakhs for buildings for
development schemes, Rs. 4.93 crores for the Fertiliser factory under construction at
Sindri, Rs. 2.92 crores for the expansion of civil aviation and Rs. 96 lakhs for the
expansion of Broadcasting.
In the sphere of industrial development a beginning is also being made in the
starting of basic industries essential for national development. Among these I would
mention the Government Telephone Factory for the manufacture of telephone equipment,
the setting up of a Shipping Corporation in which a total sum of Rs. 6.98 crores is
expected to be invested this year and next year, the setting up of new steel works and
factories for the manufacture of wireless equipment, synthetic oil, machine tools, cables.
Diesel engines and heavy electrical equipment. A beginning will be made in the
establishment of these industries which will be developed in subsequent years.

12
CAPITAL EXPENDITURE
31. With regard to capital expenditure I have just mentioned the provision
included in the budget for development schemes. The House will doubtless be interested
in the provision made in the budget for normal capital expenditure. But before I describe
this, I must mention certain special transactions which have been entered in the capital
budget this year. The first is the payment to the U.K Government for the purchase of
annuities for meeting the sterling pensions which accounts for a net debit of Rs. 215.68
crores this year and a recovery of Rs. 7.42 crores next year for which credit has been
taken. The second is the payment, again to the U.K. Government, as part of the Sterling
Balances Agreement of Rs. 133.33 crores for the Defence stores and installations taken
over from them against which Rs. 51.57 crores will be recovered this year and Rs. 11.8
crores next year from Pakistan and from the sale of surpluses. The third is the outlay of
Rs. 5.93 crores on the acquisition of the shares of the Reserve Bank of India this year.
Lastly, there is a provision of Rs. 5.08 crores this year and Rs. 92 lakhs next year for
payment to Pakistan for setting up Ordnance factories and other unique institutions. As
part of the partition arrangements it was agreed that as most Ordnance factories and
institutions like the Security Printing Press and the Currency Note Press were located
in India and it was not desirable to break up these institutions, a sum of Rs. 6 crores
should be made available to Pakistan for setting up similar institutions in Pakistan. This
payment will be added to Pakistan’s partition debt to India. Excluding these special
items and the provision for development schemes and grants to Provinces the provision
for normal capital expenditure amounts to Rs. 44.09 crores this year and Rs. 62.42
crores next year. Of the provision this year, Railways account for Rs. 27.15 crores and
the Posts and Telegraphs Department for Rs. 2.91 crores. Next year’s budget provides
Rs. 28.49 crores for the Railways, Rs. 3.82 crores for Posts and Telegraphs and Rs. 7.9
crores for schemes of State Trading, mainly for the purchase of foodgrains the cost of
which will be recovered in the following year.
The House will remember that a provision of Rs. 14.99 crores was made in the
budget for the current year for capital outlay on Defence. The actual expenditure is now
estimated at Rs. 9.91 crores, the decrease being mainly due to the delay in the completion
of certain plans for major works and the procurement of aircraft. For next year a provision
of Rs. 15 crores has been included of which Rs. 7.24 crores will be spent on the Army,
Rs. 2.79 crores on the Navy and Rs. 4.9 crores on the Air Force.
WAYS AND MEANS
32. I now turn to a brief consideration of the ways and means position. The
current year’s budget provided for a total borrowing of Rs. 150 crores from the market
and to a net receipt of Rs. 31.25 crores from small savings. For a variety of reasons to
which I have referred in another part of my speech the gilt edged market remained
inactive throughout the year with very little investment demand. It was not therefore
possible to borrow on the scale originally contemplated. For next year I have made a
modest provision of Rs. 85 crores for market loans. But if, as I hope, conditions improve

13
the scale of borrowing will be raised. Next year Government have the option of repaying
the 3 per cent loan 1949-52 with an outstanding balance of Rs. 67 crores. I have assumed
that this amount will be repaid and in my estimate of borrowing next year I have taken
this return of money to the market also into account. In the present inflationary conditions,
it is of the utmost importance for the economy of the country that the community should
save as much as possible and lend its savings to the State. I trust that the recent measures
taken by Government to meet the inflationary situation would restore public confidence
and that this time next year I shall be in a position to give a more heartening picture of
public co-operation in the Government’s borrowing operations. As regards small savings,
there has been in recent months some improvement in the net receipts from Savings
Banks and in the sale of National Savings Certificates. The House will remember that
last April Government issued two new series of certificates with a currency of five and
seven years to cater to the smaller investor and also raised the maximum limit of
investment in both Postal Savings Bank and National Savings Certificates in order to
stimulate further investment. It is too early to assess the results of these measures but
Government are doing all in their power, in co-operation with the Provincial
Governments, to stimulate and sustain the small savings movement. It is hoped that the
budget anticipations in regard to receipts from this source will be exceeded this year by
Rs. 1.6 crores. For next year I have allowed for some further improvement and taken
credit for a net receipt of Rs. 37.56 crores.
33. I now pass on to my proposals for dealing with the deficit of Rs. 14.79
crores anticipated in the coming year.
34. The prospective deficit for next year is substantial and I am sure that the
House will agree with me that in the present inflationary conditions should not be left
uncovered.
35. The problem before me is not merely that of raising the additional revenue
to cover this deficit. I have also to consider the adjustments in taxation -necessary in the
light of the experience of the working of the tax system in the period since the House
passed the budget for the current year. Fiscal policy is not an end in itself but has to
subserve the ends of national policy and in a transitional period like this it is essential to
keep the working of the taxation system under constant review and readjust it in the
light of changing circumstances.
Apart from inflation, to which I have referred in detail elsewhere, the most
disconcerting element in the economic 11% of the country today is a deep, underlying
fear of the future, of which the stagnation in the capital market is an index. In my view
one of the most urgent tasks before a Finance Minister today is to concert measures
designed to remove this fear and to secure a revival of confidence. It is clear from
recent experience that the formation of capital in this country has been seriously. affected,
with the result that investments in Government loans and industry have been falling off.
Unless this stagnation is checked and conditions are created in which the incentive to

14
save and to invest is revived, the industrial expansion of the country and the execution
of the plans for raising the living standards of the people are bound to be delayed. In
formulating the proposals which I shall place before the House, I have kept this
requirement prominently in mind.
RELIEFS IN TAXATION
36. I shall now deal with the various measures of relief which I propose to
give.
In the field of direct taxation, my first proposal is to abolish the Capital Gains
Tax. At the time this tax was introduced it was expected to yield a large revenue, but it
synchronised with a period of falling values and the yield from this tax has, in
consequence, been small. Its psychological effect on investment has, however, been
markedly adverse and it has had the effect of hampering the free movement of stocks
and shares, without which it is hardly possible to maintain a high level of industrial
development. In present circumstances, I consider the retention of this tax ill advised.
The loss of revenue is estimated at Rs. 1 crore.
My second proposal relates-to income tax. Here I propose to give some relief to
income tax payers in the lowest and medium income groups. The tax on incomes upto
Rs. 10,000 will be reduced by a quarter of an anna, from one anna to nine pies in the
first slab and from two annas to one nine pies in the second slab. This class has been
severely hit by the rise in prices and a certain degree of relief in their case is amply
justified. The loss is estimated at Rs. 3 crores.
My third proposal relates to super-tax. Here I propose two reliefs designed to
meet the criticism that the existing level of taxation leaves little incentive for saving
and investment and that it is illogical to ignore the differentiation between earned and
unearned income above Rs. 11 lakhs. In respect of earned income I propose a reduction
of an anna and half in the rates charged on incomes above Rs. 11 lakhs, leaving the
maximum rate of tax for income tax and super-tax together at 14 anna. For unearned
income, I propose a reduction of 6 pies in the maximum rate of super-tax. The cost of
the two concessions will be Rs. 2.1 crores.
Of the total loss of Rs. 6.1 crores involved in these concessions, Rs. 3 crores will
fall on the Provinces by reducing the divisible pool of income tax and the balance on
the Centre.
37. Before I leave the subject of direct taxation I would like to mention two
changes which I propose to make. The House will remember that in the budget for the
current year my predecessor gave a concession to companies with an income of
Rs. 25,000 and below by reducing their income tax to half the usual rates. This concession
was meant to encourage the growth of smaller companies but the reduction which was
allowed in income tax, has given rise to considerable administrative difficulties, wholly
out of proportion to the amount involved or the benefit accruing to the companies. I
15
have carefully reviewed the position and come to the conclusion that while the concession
should be maintained it should take the form of a rebate of half the Corporation Tax,
and should be limited to public-controlled small companies which are not branches or
subsidiaries of bigger companies. The result of this change will be that the entire cost of
the concession will fall upon the Centre, and the Provinces will not have to share it. The
amount involved to likely to be small and I have therefore made no specific provision
on this account in the estimates for next year. The second change relates to the taxation
of incomes of privately controlled companies which do not declare their dividends in
India. It may be recalled that there was a serious anomaly in the administration of
income tax law relating to the recovery of super-tax from shareholders, in respect of the
dividends paid out of Indian profits, by companies incorporated outside this country. It
was difficult to obtain from these companies information concerning the names of their
shareholders and the amounts of dividends paid out of Indian profits and there was
consequently a considerable loss of revenue. The problem of plugging this leakage was
considered last year and my predecessor introduced a scheme whereby an extra tax of
one anna was imposed on all such companies with a view partially to recouping the
loss. As part of the scheme, an amendment was made to the Income Tax Act so as to
confer personal immunity from further taxation upon the shareholders of such companies.
The amendment however had the effect of conferring immunity from super-tax not
only upon the dividends actually received, but also upon the dividends which under the
operation of section 23-A of the Income-tax Act could be deemed to have been received
from privately- controlled companies. Therefore, if the matter had been left there, the
profits of these companies would have escaped with an overall impost much lighter
than that to which they were subject under the previous law. This point was met by
applying to this category of companies the rates of income tax and super-tax prescribed
for individuals or associations and the definition of “company” was altered to permit of
this being done by executive action. The arrangement has, however, not been satisfactory,
and after a careful review of the matter I have decided that instead of attempting to tax
each such privately- controlled company as an individual, the principle of applying an
average rate should be adopted. I accordingly propose that all corporations, whether
Indian or non-Indian, should continue to be treated as companies but a further super-tax
of one anna should be paid by those privately controlled companies that do not distribute
their profits in India. I propose to apply this method commencing with the current year.
It will not involve any change in the revenue estimates.
38. There is one aspect of the complaint about the high taxation in relation to
industry to which I would like to make a passing reference. Owing to the steep rise in
the level of prices of raw materials, wages and working costs larger amounts of working
capital are needed to maintain production. Replacement costs are also higher and there
have been complaints that the calculation of depreciation allowance for purposes of
taxation on the original cost of the asset involves great hardship. It has been suggested
that industries should be allowed to revalue their existing fixed assets at the present day
prices so that future depreciation allowance may be given on the basis of the revaluation.
16
The Government of India considered this problem in all its aspects last October and
came to the conclusion that while the difficulty complained of was real the solution
proposed was not practicable. It would give no assistance to those who have immediately
to replace their worn out assets and there was no point in giving a concession to others
who, at some future date may not be required to pay the high prices now prevailing. It
was however realised that some relief should be given to those who were prepared to
renew and re-equip their capital assets immediately, in spite of the prevailing high costs.
It was decided that for all new plant and machinery installed during the five years from
the 1st April 1948, depreciation allowance at double the ordinary rate will be allowed. It
has also been decided that if by 1st April 1953 there is a drop in the general level of
prices, the difference between the written down value of the assets and the corresponding
value at the reduced price will be allowed as an additional depreciation allowance. For
existing plant and machinery, it has been decided to grant extra depreciation allowance
for increased wear and tear if triple shifts are worked. I trust that these concessions will
go a long way in meeting the complaints of industry in this matter. In addition, the
concession given last year of a reduced rate of income tax to companies which do not
distribute a part of their profits as dividends, and the recent limitation, for a temporary
period, of the amount that may be distributed as dividends will also enable industrial
concerns to accumulate reserves for meeting the increased cost of replacement.
39. I now turn to the reliefs in indirect taxation.
The House will remember that in the budget for the current year an export duty
was levied on oil seeds and vegetable oils. This was justified at the time by the wide
disparity between the internal prices of these commodities and their export prices and it
was then felt that the levy of this duty will not affect our export market. The effect of
this duty has since been carefully reviewed and it is now clear that its continuance
hampers the maintenance of our exports, particularly to the dollar countries, where we
have to meet severe competition. In the interests of the export trade I propose to withdraw
this duty. The loss in revenue is estimated at Rs. 1.5 crores.
As a measure of assistance to civil aviation and to foster the development of
flying clubs and the training of Indian pilots, it is proposed to give a rebate of half the
duty on aviation spirit used by air companies, flying clubs and others. This concession
is estimated to cost Rs. 40 lakhs.
Honourable Members are aware that it has been the policy of Government to give
relief in respect of customs duty on raw materials imported for industry. In pursuance
of this policy it is proposed to give relief next year in the case of a number of imported
articles, the total cost of such remissions being estimated at Rs. 35 lakhs.
40. The net effect of all the reliefs mentioned so far is a reduction in revenue of
Rs. 5.35 crores, raising the prospective deficit to Rs. 20.14 crores.

17
NEW AND ADDITIONAL TAXES
41. Before I deal with proposals for new taxation I would mention certain
changes proposed in the postal rates. With the rapid development of a net work of air
services over the whole country, It has been decided to utilise this facility for accelerating
the delivery of malls and transmit all first class malls, namely, letter and post cards as
far as possible by air. The existing surcharge on air mails will accordingly be abolished
and as all malls will be carried over as much of the distance as possible by air, it is
proposed to revise the existing rates for letters and post cards. The rate for letters will
be raised from 11/2 annas to 2 annas for the first tola or fraction thereof, the rate for each
subsequent tola or fraction thereof remaining unchanged at 1 anna. For post cards the
present charge of six pies will be raised to nine pies, the rate which was in force prior to
the 1st July 1946. The net additional revenue from the revision of these rates and the
abolition of the surcharge on air malls is estimated at Rs. 2.84 crores.
42. I now come to the problem of covering the remaining deficit of Rs. 17.3
crores. It is obvious that at the present level of taxation there is now no scope for raising
additional revenue by an increase of direct taxes. As regards customs duties, the level
of our import duties is, in my opinion, so high that no substantial increase in revenue is
likely to result from enhancing them. The levy of export duties has to be carefully
regulated with reference, not so much to our revenue needs, as to the need for maintaining
and developing the country’s export trade which earns the foreign exchange necessary
for financing essential imports. While some adjustments may be found possible in respect
of import duties, and export duties could be utilised to some extent, we can no longer
rely on customs duties for raising substantial additional revenue and we shall have to
depend largely on developing excise duties.
43. I shall first deal with customs duties. I propose to retain on the tariff next
year the changes made by ordinance in November last as part of the campaign against
inflation and complete the process of raising the duties on luxury items, which was then
begun, by a number of further minor changes in the tariff. To this effect I propose to
levy a surcharge on liquor equivalent to the basic duty, to raise the surcharge from one-
fifth to one-half on fabrics containing silk, art silk, wollens and their mixtures and
cotton knitted apparel, to double the surcharge on artificial silk yarn and thread,
earthenware and china, and to raise the duty on paper (other than newsprint), stationery
articles, glass and glassware including sheet and plate glass, cutlery, metal furniture,
flashlights, photographic appliances and clocks and watches. The additional revenue
from all these changes is estimated at Rs. 2.4 crores.
I also propose to raise the import duty on motor spirit from 12 annas a gallon to
15 annas a gallon. The excise duty will also be similarly raised. This will bring the duty
on motor spirit to the level in 1945 46, when consumption of this article was regulated
by more severe austerity standards, and bring in an additional revenue of Rs. 2.55 crores,
taking Customs and Central Excises together. I have carefully considered the implications
of this course on transport and am satisfied that it will not retard the development of
transport or add materially to the cost of road transport.

18
 My next proposal is to raise the import duty on betelnuts from 5 annas a lb. to 71/
2
annas a lb., with the present preference of 6 pies a lb. for imports from British colonies.
This will bring in additional revenue and will also be in the interests of the indigenous
grower. The yield is estimated at Rs. 1 crore.
In the sphere of export duties I propose a new duty of 15 per cent, ad valorem on
exports of cigarettes, cigars and cheroots. I am satisfied that this will not affect the
export market for these goods. The estimated yield is Rs. 60 lakhs.
44. I now turn to changes in Central Excise Duties. I have already referred to
the increase in the excise duty on motor spirit as complementary to the increase in the
import duty. I propose further changes in respect of sugar, tyres for motor vehicles and
cotton cloth. I propose to increase the duty on sugar from Rs. 3 per cwt. to Rs. 3-12-0
per cwt., to yield Rs. 1.5 crores. The duty on tyres used for motor vehicles will be raised
from 15 per cent ad valorem to 30 per cent ad valorem to bring an additional revenue of
Rs. 70 lakhs. As regards cotton cloth, as the House is aware, a duty of 25 per cent ad
valorem was levied on superfine cloth with effect from 1st January 1949, as one of the
measures against inflation. This duty will be continued next year and in addition, it is
proposed to levy a duty of 61/2 per cent ad valorem on fine cloth and a quarter anna per
yard on coarse and medium cloth. The duty will be confined to mill-made cloth and will
not be applicable to cloth woven on handlooms. The revenue from this additional duty
on cotton cloth is estimated at Rs. 9 crores.
45. The excise duty on cloth has a long and bitter history behind it, and I must
explain to the House my reasons for introducing it in the first place, the circumstances
in which we are levying the duty today are different from those in which it was levied
by a foreign Government in the interests of a foreign industry. In the second place, it is
necessary to replace the-heavy loss in revenue resulting from the abolition of the salt
duty by developing some other equally stable source of revenue. Cloth with a large
internal production and as an article of universal consumption, offers itself as the most
obvious choice for a tax on consumption. Thirdly, in the present conditions, as the price
of imported cloth remains high and the import duties thereon have been enhanced
considerably, the proposed excise duty is not likely to affect the indigenous industry. I
would also mention that this duty is likely to assist the handloom industry. During the
war years when there was no control on handloom cloth and supplies for civilian use
were restricted the handloom industry had an assured market for its products. With the
Indian mills steadily expanding their production and imports from overseas also tending
to increase, the advantages which the handloom industry had during the war years will
gradually disappear. The excise duty now proposed, which adds slightly to the cost of
the mill product, will, in some measure, help the handloom. industry to retain its market.
From the point of view of the consumer the incidence of this duty, particularly on the
middle and lower middle classes using coarse and medium cloth, will be negligible and
in view of the substantial revenue that is expected from it I trust the House will accord
its approval to it.
19
 46. While on the subject of Central excises, I may mention the question of
rationalising the duty on matches, which I have had under consideration for some time.
The ideal arrangement will be to have one standard size of matches but owing to practical
difficulties in production it is not possible to achieve this. I have therefore decided that
two sizes, namely, 40s and 60s should continue in production for the home market and
I have made some slight readjustment in the rate of the duty. Factories whose annual
output is less than 5 lakhs gross boxes will now benefit by the levy of a somewhat lower
rate of duty. Necessary amendments to the tariff will be made through the Finance Bill
but this will not involve any change in the revenue estimates. With the provision of the
two sizes I hope that the retail prices will not exceed 6 pies and 9 pies per box and that
the consumer will get the benefit of the partial standardisation without any loss of
revenue to the exchequer.
NET RESULT OF PROPOSALS
47. I may now summarise the net effect of all the proposals that I have placed
before the House. The various measures of relief which I have suggested in direct taxes
will result in a loss of revenue of Rs. 3.1 crores; the abolition of the export duty on oil
seeds and vegetable oils will involve a loss of Rs. 1.5 crores; and the rebate of duty on
aviation spirit and industrial raw materials will cost a further sum of Rs. 75 lakhs. As I
have already stated, this will bring the total loss of revenue to Rs. 5.35 crores, raising
the prospective deficit from Rs. 14.79 crores to Rs. 20.4 crores. The increases in customs
duties and, the new export duty on cigarettes and cigars will yield Rs. 6.23 crores, the
net increase in Postal rates Rs. 2.84 crores, and the increases in Central ]Excise Duties
Rs. 11.52 crores. The final effect of these proposals is to convert the prospective deficit
into a small surplus of Rs. 45 lakhs.
CONCLUSION
48. Sir, I have come to the end of my story. It is not pleasant for a Finance
Minister to appear before the House with a record of deficits and proposals for additional
taxation but a Finance Minister is as much the creature of circumstances as any one
else. Part of the heavy expenditure which Government have now to meet is due to
extraordinary circumstances and but for these special demands, the budget would have
shown a substantial surplus. As I have mentioned earlier, the present economic conditions
in the country make it an imperative necessity to balance the budget. In laying fresh
burdens of taxation the House will accept my assurance that I have done my best to
secure that they are equitable and that no section of the community is made to pay more
than its fair share.
49. On a survey of world conditions today, I feel that we have good reason for
taking a hopeful view of our financial position. We are not alone in having to fight
scarcities and inflation. These problems confront most countries in the post-war world.
We can, however, take comfort from the fact that, unlike some other countries, our
financial position is intrinsically sound. We have only a moderate public debt in relation

20
to our national income and we have considerable external reserves with practically no
external debt. We have weathered the storm and stress of the partition and its terrible
aftermath. In spite of the heavy demands on our resources for the relief and rehabilitation
of refugees, the import of food on an unprecedented scale from overseas and the defence
of Kashmir against aggression, we are in a position to balance our budget, without
sacrificing any of our essential schemes of development. We have made some headway
in the fight against inflation. The curve of production is slowly rising and we have
plans in hand for increasing the food production of the country. I do not wish in any
way to minimise our difficulties or suggest that we can take a complacent view of the
situation. A balanced national budget may and often does, cover a multitude of ill-
balanced family budgets. In this respect, we have still a formidable task ahead of us, the
task of fighting want, sickness and poverty and raising the living standards of the minions
to whom the emancipation of the country will be a mockery unless it is translated in
terms of opportunities for a fuller, freer and better life. This task is not beyond our
resources but it requires the co-operation of all classes and sections of the community
in a spirit of partnership in a high adventure. I have no doubt that this co-operation will
be forthcoming and I pray that my stewardship of the finances of the country may
contribute in some degree to the accomplishment of this task.
(February 28, 1949)

21
 SPEECH OF SHRI R.K. SHANMUKHAM CHETTY, MINISTER OF
FINANCE INTRODUCING THE BUDGET FOR THE YEAR 1948-49

When I presented my Interim Budget for Free India’s first Parliament a few months
back, our nation had been shaken to its very foundations by the great Punjab tragedy.
Thousands of our people had been brutally butchered, and millions of innocent men,
women and children driven out of their ancestral homes and forced to make a dusty,
deadly trek in search of a new home. Our crying concern then was to dress the wounds
of uprooted humanity, and to mobilise all our financial resources to set aright an unhinged
economy. Our new found freedom, however, weathered the storm, and as the eve of my
first annual Budget approached, I could see a silver lining around the cloud. Then,
suddenly, like a thunderbolt that rends the sky and spins the globe, calamity struck us
once more and orphaned our infant State and enveloped the. country with a darkness
even more complete. The hand that nailed Jesus to the Cross reached out of the evil
recesses of history once again and slew the latest in the line of Prophets. Along with
Bernard Shaw one wonders “Must then a Christ Perish in torment in every age to save
those that have no Imagination” In Mahatma Gandhi the world has lost an uplifting
standard, our nation its Founding Father, - and each one of his friend, philosopher and
guide. Many ran up to him in times of stress, national or personal, and came back with
renewed confidence. Our fledgling freedom felt warm and secure under the protective
wing of Gandhiji. The way ill fortune has dogged our heels makes one doubt whether
our people had made a tryst with disaster rather than with destiny. But that is a most un-
Gandhian mood; for he remained cheerful and buoyant and hopeful even in the darkest
hour. Indeed I rise today under a shadow but I know it is the shadow of his Cross, and so
I feel confident that our nation will be prepared to meet the great challenge of the
situation. In the faith that looks through death we shall shape the destiny of our nation
on the pattern which he cherished and lead it from the dark abyss of hatred and despair
to the sunlit pastures of eternal life.
REVIEW OF ECONOMIC CONDITIONS
2. The third year after war finds the world still in the meshes of those economic
maladjustments which are the inevitable aftermath of total war - the nemesis that
inexorably pursues the victor and the vanquished alike. Western Europe is still in a sad
plight and intolerable economic conditions prevail in many of the devastated areas. The
efforts at rehabilitation by the United Nations Organisation and the United States
Government have so far borne little fruit. All hope is now centred round the Marshall
Plan. But its gestation is unduly delayed, and it has worsened the already strained relations
between the Big Three. The United Kingdom is making a heroic effort to rehabilitate
her war torn economy and shattered trade. There has been serious economic dislocation
in many Asian countries owing to violent internal struggles or fight for freedom from
1
foreign domination. Thus, over a large part of the world, economic conditions are still
worse than in wartime, production has fallen, even below pre-war levels in some cases,
and prices have been soaring to new heights. The world food situation is still a cause for
serious anxiety, while the world’s population has increased by about 200 millions since
1939, the total food production has fallen by 7 per cent. At the same time, there has
been a tremendous increase in the money in circulation. The many high powered
international bodies lately set up for rectifying the world’s currency and food troubles
have so far made little headway. In the result, inflation is still holding the world in its
firm grip and the standards of living of the great majority of the world’s population
remain at depressingly low levels. Especially in Asian countries, the economic situation
has greatly deteriorated owing to violent internal struggles and the consequent dislocation
of normal economic activity.
3. There has been no material change in the general economic conditions in
our own country since I reviewed them last when presenting the budget for the current
year last November. The dislocation caused by the mass migration of people between
Western Pakistan and India still remains to be surmounted and only the fringe of the
problem of rehabilitating the millions of people who have crossed over to India has so
far been touched. While active steps are being taken to provide the necessary financial
assistance to the refugees to enable them to start on. useful careers in their new
surroundings, the process of rehabilitation is necessarily bound to take some time. The
budget for next year provides a substantial amount for relief and rehabilitation and the
House may rest assured that everything possible will be done to place these refugees in
useful occupations as early as possible. It is not merely a matter of humanitarian relief
but one of economic investment, for the sooner these people, many of whom are skilled
workers and agriculturists with experience, are placed in occupations in which their
productive capacity would add to the wealth of the community the better for the country.
In this task of rehabilitation the Government of India are working in close co-operation
with the neighbouring States and Provinces and the plans for their relief and rehabilitation
are being drawn up In co-ordination with them.
4. The food position still continues to cause anxiety and conditions have
definitely become worse in large parts of the Madras Presidency following the failure
of the monsoon. Steps are being taken to make additional supplies available but the
position is bound to be difficult until the new harvest comes on the market. It is not
necessary for me to explain in detail the reasons which led to the policy of gradual
decontrol of food which was approved by this House. The effects of this policy on the
internal sources of supply still remain to be seen but if the expectation behind this
policy that it would bring more supplies to the market and, to that extent, reduce our
dependence on foreign imports is realised, it would be completely justified.
5. In my speech last November I mentioned the rising trend of prices as the
most unwholesome feature in our economic situation. This, as I explained then, was the
result-of a number of factors some of which like the accumulation of surplus purchasing
2
power in the hands of the community, have been in operation for some time while the
an round fall in production, both industrial and agricultural, was of more recent origin.
I stressed then the need for increasing production in every possible way and I gave
details of the steps taken to promote the Increase of textile production as an example of
what the Government are striving to do. But the House must realise that any substantial
increase in production is impossible until the shortage of materials, the bottleneck in
transport and other impediments are removed. If the increase in production requires the
Import of equipment from overseas, this again takes time to obtain and is also limited
by considerations of foreign exchange on which the more urgent requirements of food
have necessarily the first claim. These difficulties are inherent in the situation but it
does not necessarily follow that Government are doing nothing in the matter. One serious
hindrance in the way of production, even with the available resources, has been the
frequent disputes between capital and labour, resulting in strikes and other interruptions
of work. If the recent truce agreed upon between capital and labour for a period of three
years in the recent Industries Conference can be implemented in letter and spirit, the
way would be clear for a considerable increase in production.
6. A view that has in recent years become almost unanimous among economists
and financiers is that each year a Government’s financial policy should be so planned
as to rectify the economic maladjustments of the time, and to serve as a compensatory
device to offset fluctuations in the private sector of economy. In a time of inflation,
budgets should not only be balanced but there should he a comfortable surplus for
mopping up the excess purchasing power and encourage economy in private spending.
On the other hand, when a depression is on, Government should launch bold schemes
of public expenditure and should boldly budget for a deficit if necessary.
7. An inflationary pressure resulting from too much money chasing too few
goods has been the keynote of our present economy, and there is no indication that a
reversal of this trend is in sight. At such a juncture, we should exert every nerve to
budget for a surplus, if possible, by increasing revenue and curtailing expenditure. The
methods by which these aims are achieved are important, because as the present phase
of inflation is due to an abundance of spending power without the goods to spend on,
we must see that a surplus is achieved in such a way as to curtail spending and create
suitable incentives for increasing production. In other words, the tax-burdens laid must
be met by cutting down expenditure on consumption and not by saying less. Similarly,
the borrowing made must be from genuine savings and not from inflated bank credit.
The practical application of these principles is indeed difficult, but we must bear them
in mind in shaping our financial policy.
BALANCE OF PAYMENTS
8. I should like to draw the attention of the House to a matter which has been causing
some concern to Government, namely, the emergence, in recent times, of a substantial
adverse balance in India’s external payments. India’s balance of trade has in the past
always been substantially in her favour, the surplus of exports over imports being used
3
by her to meet the interest and amortisation charges on her sterling debt, to pay the
pensions and leave salaries of British officers and to make other invisible payments
such as the remittance of the profits of foreign investments in India and banking insurance
and shipping charges. During the war years India’s balance of trade became even more
favourable than before, due not only to restrictions on her imports on account of war
time conditions, but to the large payments which accrued to her on account of supplies
and services to the allied nations and the Defence Expenditure Plan. The result of India’s
earning, both visible and invisible, being vastly in excess of the expenditure, was the
rapid accumulation of our sterling balances. Part of these balances was used to purchase
the Indian railways and to repatriate compulsorily almost the whole of the Indian sterling
debt; part was used through Indian nationals acquiring British investments in India. All
these measures served greatly to lessen the annual drain on India while the interest
earned on the sterling balances added in some measure to our income. If, therefore, all
the other factors in the situation had been the same, India should have had now A
substantially more favourable balance of payments than she had before the war.
9. Far from having a favourable balance, however. India had in the first post-
war year, 1946-47, a substantial deficit in her balance of payments on current account.
The tendency which then manifested Itself for the first time still continues and had it
not been for the restrictive import policy which was introduced in June 1947 the deficits
we have had would have been substantially greater. The reasons for this are two-fold.
Firstly, it is the- inevitable result of the absence of imports during the many years of
war that the long pent-up demand should seek to satisfy itself as soon as goods become
available. This is true not only of consumer goods but also of producer goods and plant
and equipment, the arrears of maintenance of which have to be made good as soon as
possible if production is not to he interfered with. The second, and by far the more
important, reason for this deficit is, as is well known, our imports of foodgrains. India
has of course been a regular importer of food for many years but quantities and prices
have both been recently going up. In 1944-45 and 1945-46 the value of foodgrains
imported into India was Rs. 14 crores and Rs. 24 crores respectively. In 1946-47 the
figure was Rs. 89 crores. These figures are In addition to the import of supplementary
food articles which cost a further Rs. 15 crores in 1946-47. In 1947-48 the amount
expected to be spent on the import of food grains is Rs. 110 crores.
10. The money required for the purchase of food is of course a first charge on
our available foreign exchange resources. These consist of our export earnings and of
our sterling balances but on the latter we have necessarily to draw in moderation. These
resources are not sufficient to finance both the heavy drain caused by food imports as
well as to pay for all the other Imports we should like to purchase. As food must have
the highest priority we have necessarily to restrict the import of other commodities. It is
undesirable that this should be so, particularly at a time when inflationary tendencies
persist in the country. It is, therefore, imperative for us to take all the steps in our power,
not only to increase the production of food in this country so as to reduce imports, but

4
to increase production in every other field of economic activity so that it may be possible
to increase our export income without reducing home consumption. I fear, however,
that in spite of all the action that may be taken in this direction it will take a few years
before it will be possible for India to bring her foreign payments into equilibrium, and
that, therefore, it will be necessary to continue with our present restrictions on imports.
11. It will be appreciated that, with India’s limited resources of hard currencies,
it would have been impossible to continue the policy of now-discrimination regarding
the source from which Indian imports came, which was a feature of Indian import
policy during the last half year. Hon’ble Members will remember that I indicated to
them in my last Budget Speech that the dollar shortage would cause us to re-impose
discrimination and I fear that we have had in framing the import policy for the present
half year, to make the most drastic cuts in imports from the hard currency areas. It is
unfortunate that this has to be so, for we are being compelled either to do without a
large number of useful articles which are obtainable only in the hard currency area or to
pay for them a higher price in the soft currencies. As long, however, as the world dollar
shortage caused by the disequilibrium in world trade continues, I fear we have no
alternative but to proceed on the basis which has been in force ever since the war broke
out and to which we have now had to revert. I am, however, glad to be able to report to
the House that we have been able slightly to decrease the rigour of the import control
from the sterling and other soft currency areas which we had imposed during the last
half year. It was neither desirable nor indeed possible to continue import control from
all over the world with that degree of restriction which we had introduced, for not only
would it have led, if continued for any length of time, to an increase in the inflationary
potential but would also have interfered with production.
12. One other recent trend in our external financial position is deserving of
special mention. Till 1945-46 not only did we have an overall favourable balance of
payments bit we were in substantial surplus with the U.S.A. Since 1946-47 that situation
has also changed, both because goods have become much more freely available in that
country and because we have to purchase there a substantial portion of our food
requirements. In 1946-47 our deficit with the U.S.A. was Rs. 15 crores. In the subsequent
months it increased substantially, being Rs. 131 crores and Rs. 22 crores respectively
for the second and third quarters of 1947. Preliminary figures for the two months October
and November disclose a deficit of Rs. 14 crores. With the other hard currency countries
the position is no better and during the period April to November 1947 our deficit with
them has been Rs. 151 crores. Our total net earnings of hard currencies during the
period September 1939 to November 1947 were about Rs. 37 crores.
13. The most important lesson to be drawn from a study of our external financial
position is that so long as food imports continue on the present scale, we would be
confronted with the problem of an adverse balance of payments and the disequilibrium
in our economy will persist. Such a state of affairs will be a source of anxiety and even
danger. The only way to redress the balance is to increase the internal production of
5
food. While an expansion of our export trade will go a long way to mitigate the
seriousness of the problem, it will be impossible to bridge the gap by exports alone. It
will be observed that, though I have indicated the trends in our external financial position,
I have not given any figures for our overall deficits in the balance of payments. This is
for the simple reason that such figures have so far not existed, though steps have now
been taken to see that they are collected in future. I would, nevertheless, like to give the
House some idea of our position as it is likely to be during the first half of 1948 and
propose to mention certain figures on the clear understanding that these are to be taken
more as an indication of the magnitude of the figures involved than of the actual figures
as they are likely to be. Forecasts of balance of payments are notoriously liable to be
inaccurate because of the uncertainties of the factors involved; but in preparing the
forecast for the first six months of 1948 we have suffered from the additional handicap
that it is impossible to say what effect the partition of the country will have on its
external trade and that there are no past actuals to guide us. The figures I shall mention
relate to the balance of payments on current account of the Dominion of India with the
rest of the world excluding Pakistan. For our balance of payments with Pakistan, I fear
it is not possible to make even the roughest of estimates. In the half year January to June
1948 we hope to earn through exports and other sources Rs. 208 crores. We expect to
spend during the same period Rs. 260 crores. We therefore anticipate an overall deficit
of Rs. 52 crores. Out of our total expenditure during the half year, no less than Rs. 61
crores will be spent on the purchase of food.
14. Hon’ble Member will appreciate more fully in the light of what I have
stated above the significance of the second interim agreement on the sterling balances
which has been concluded between the Government of India and the Government of the
United Kingdom by an exchange of letters. In brief, the effect of the exchange of letters
is that the financial agreement dated 14th August 1947, which expired on the 31st
December 1947, has been extended up to 30th June 1948 with some modifications. The
first agreement was on behalf of both India and Pakistan but the present extension is on
behalf of the Dominion of India alone. Hon’ble Members will remember that in December
last, when an agreement was reached between Pakistan and ourselves on all outstanding
financial issues including the division of the sterling balances, it was agreed that from
the 1st of January 1948 the exchange accounts of the two countries should be kept
separately. As a consequence of this separation, it was also agreed that negotiations for
a further interim settlement between the United Kingdom and the two Dominions should
be carried on separately by each. Hence Pakistan was not a party to our recent
negotiations.
15. The object that we kept in view in our recent discussions with representative
of the United Kingdom Government was to make available to us sufficient foreign
exchange resources to meet our estimated overall deficit in the balance of payments
during the first half of 1948. As I have indicated earlier, we estimate our overall deficit
for this period at £ 39 million or RS. 52 crores. It has been agreed that a further £ 18

6
million (or Rs. 24 crores) will be transferred from Account No. 2 to Account No. 1, the
existing balance in which will, of course, be carried forward at our disposal except for
a certain amount to be transferred to Pakistan under the Indo-Pakistan Agreement of
December last. This fresh transfer, together with the balance that we have at our disposal
under various accounts and some borrowing from the International Monetary Fund.
will enable us to meet our anticipated deficit. As our Account No. 1 would now stand,
I have no anxiety on account of the external financial position of the country so far as
currencies other than the hard currencies are concerned.
16. One important feature of the new agreement is the limit on convertibility.
Under the original agreement the whole of our sterling in Account No.1 whether it
arose by transfer from Account No. 2 or through the proceeds of current earnings, was
fully convertible for current transactions into any currency including that of the U. S.A.
In other words, the whole of the sterling that we held in Account No. 1 was multilaterally
convertible. Under the present agreement, however, we have been put to the necessity
of limiting our right to multilateral convertibility to the extent of only £ 10 million or
Rs. 13.33 crores. This restriction will necessitate our borrowing to some extent from
the International Monetary Fund. I am, however, satisfied that the extent of our borrowing
from the Fund during the current half-year will be well within the limits of our rights of
borrowing from that Fund. Hon’ble Members are entitled to know why we agreed to
limit the right to full multilateral convertibility which is possessed by every member of
the sterling area. The answer is that, like all international agreements, this agreement
was a compromise, and in the light of the circumstances that faced us I consider it in the
best interests of the country to accept this condition. I am not unmindful of the great
difficulties under which the United Kingdom is labouring today, nor am I unappreciative
of the valiant efforts being made by that great country to restore equilibrium in her
economy and to discharge her international obligations. I am fully aware that the gold
and dollar resources of the sterling area are small, are rapidly being exhausted and
require to be husbanded with the greatest care. It Is for this reason that we agreed last
September, soon after our first interim agreement was concluded and when the United
Kingdom was forced to suspend the convertibility clause in the Anglo-American Loan
Agreement, to co-operate by restricting dollar expenditure as far as possible. For the
half year in question our expenditure in hard currency has been severely limited to
essentials. Nevertheless, I cannot help feeling that it should have been possible to avoid
introducing this very undesirable and harmful principle of a limit on the convertibility
of sterling for members of the sterling area who are pledged to holding sterling without
limit of amount. We have honoured that pledge perhaps even beyond the bounds of
prudence. Even from the point of view of the necessity for safeguarding the central
reserves of the sterling area, I cannot feel happy about the low limit of convertibility
forced upon us. After all, our proposed drawings on the central reserves were the merest
fraction of what the United Kingdom herself proposed to draw therefrom. Undesirable
as this feature of the agreement is, we accept it in the hope that it would be possible to
remove this condition at the earliest possible moment. We have decided in fact to make
7
a long term settlement with the United Kingdom on this vexed question as soon as
possible. I feel that it is unsatisfactory that there should be negotiations every six months
on this subject for the element of uncertainty as to the results of these periodical
negotiations makes it impossible for any long term co-ordinated trade policies to be
formulated. I have, therefore, conveyed to the Leader of the British Delegation my
desire that steps should be taken for initiating talks for a long term agreement.
FINANCIAL SETTLEMENT WITH PAKISTAN
17. When I gave a brief account to the House in my last Budget Speech of the
details of the partition and its financial and economic results, I mentioned that a number
of important points connected with the partition still remained unsettled and were likely
to be referred to arbitration. As the House is aware, these outstanding questions have
been the subject of further consultation between the two Governments and all of them
have been settled so that so far as the two dominions are concerned, it became
unnecessary to resort to arbitration on any issue. Now that a final settlement has been
arrived at although the details would necessarily take some time to work out, I propose
to give the House a short account of these decisions.
18. The position of the undivided Government as on the date of partition was
that its outstanding liabilities exceeded its assets so that ultimately it is the debt that is
being divided between the two Governments. On a rough estimate the outstanding debt
of the Central Government as on the 14th August, 1947, including in this not merely the
outstanding public debt but all its obligations to outside parties such as deposits in
Postal Saying Banks, outstanding balances of Post Office Cash and National Savings
Certificates, Provident Fund Deposits of Government servants, the amount likely to be
paid to the British Government for surplus stores and other property acquired by the
Defence Services and the capitalised value of the liability for pensions in payment on
the date of partition and pensions earned by serving officers upto that date, is likely to
be of the order of Rs. 3,300 crores. The Government of India’s assets on that date are
represented by the capital spent on the great Commercial Departments like the Railways
and the Posts and Telegraphs, the Security Printing Press, the irrigation works in the
Centrally Administered areas, the Port of Vizagapatam and New Delhi; the buildings,
stores and equipment of the Defence Services and the various branches of the Civil
Administration; the cash balance with the Reserve Bank and investments such as the
Silver Redemption Reserve and the subscriptions to the International Monetary Fund
and the International Bank; and the miscellaneous debts due to it such as the outstanding
loans made to Provincial Governments and local bodies and institutions. The total value
of these assets is of the order of Rs. 2800 crores leaving a net excess of liabilities over
assets of about Rs. 500 crores. As I said earlier, it will be some time before the final
figures are available and the machinery for obtaining them as early as possible is being
set in motion. The arrangement with Pakistan is that for all assets located in her territory
such as the Railways and the Posts and Telegraphs system operating in Pakistan, the
stores and other movable equipment allocated to her, the administrative buildings and

8
installations taken over by her in her territory she takes a debt equal to the book value of
these assets. An exception has been made in the case of strategic railways the book
value of which for purposes of the settlement, will be written down from a little over
Rs. 32 crores to Rs. 14.45 crores. In addition, Pakistan will take over a debt equal to the
amount of the cash balance of Rs. 75 crores allocated to her out of the cash balances of
the undivided Government and 171 per cent of the net excess of the Central Government’s
liabilities over assets which, as I mentioned earlier, is likely to be of the order of Rs.
500 crores. The total of Pakistan’s debt as calculated above will be reduced by the
liability she takes over direct in regard to Postal Savings Banks, Postal Cash and National
Savings Certificates outstanding in her area, the pensions of the undivided Government
paid in Pakistan and the liability for pensions earned by officers who have opted for
service in that Dominion. For purposes of the financial settlement the outstanding debt
of the Central Government will be valued after taking into account the interest payments,
discounts, the date of redemption and so on. Similarly the actuarial value of the
pensionary liability will have to be calculated. The closing of the accounts for the pre-
partition period, without which the outstanding assets and liabilities cannot be
determined, will also take some time to complete. It is not therefore possible to give
anything more than a very rough indication of the amounts involved in the settlement or
the share of Pakistan in the outstanding debt. Pakistan’s share will take the form of an
inter-state debt to India. On a very rough estimate this debt is likely to be of the order of
Rs. 300 crores and the rate of interest may be near about 3 per cent. Pakistan’s total debt
is to be repaid in Indian rupees in fifty annual equated instalments for principal and
interest. As a measure of assistance to the new Dominion in its earlier years it has been
agreed that the first repayment should commence only in 1952. In addition to the Rs. 75
crores given to her out of the cash balance of the undivided Government it has also been
agreed that India would make available to Pakistan a further sum of Rs. 6 crores for
meeting the expenditure on the setting up of Ordnance factories and similar special
institutions required by her. This amount will also be added to Pakistan’s debt. With
this settlement, the terms of which, as the Deputy Prime Minister has already told the
House, are generous and conceived in a real spirit of assistance to Pakistan, the purely
financial problems arising out of the partition may be said to have been satisfactorily
solved.
19. The allocation of the sterling reserves that the Reserve Bank will hold when
it ceases to be the currency authority and banker to the Pakistan Government on the
30th September next also raised difficult issues and I am glad to say that a satisfactory
solution has been reached here also. It has been agreed that out of the sterling assets in
the Issue Department, Pakistan would receive:- share in the proportion of the notes in
circulation in Pakistan. In addition she would also be entitled to 171/2 per cent of the
excess of the sterling held by the Reserve Bank on the 30th September 1948 in both the
Banking and Issue Departments after allowing for the payment to be made to the British
Government for surplus military stores and fixed assets and the capitalised value of
pensions paid in sterling and for the retention of a reserve in the Issue Department
9
which, together with the gold, would be equal to 70 per cent of the liabilities. This
additional sterling will be released to Pakistan by India, as and when required, till the
31st December 1967, against payment in Indian rupees.
FINANCIAL YEAR 1947-48
REVENUE
20. I shall now proceed to give a brief review of the financial position in the
current and the ensuing years.
In my Interim Budget I estimated the deficit for the current year covering 71/2 months at
Rs. 24.59 crores. The House will be glad to know that I now estimate the deficit at only
Rs. 6.52 crores. The improvement is due to some increase in the anticipated revenue
and a decrease in expenditure.
21. The revenue receipts during the period 15th August, 1947 to 31st March
1948 are now estimated at Rs. 178.77 crores against Rs. 172.8 crores in the Budget
passed by this House last November. The improvement of nearly Rs. 6 crores is mainly
due to an increase of Rs.2.35 crores under Customs and windfall of Rs. 3 crores from
the levy on old stock of cloth released for sale at increased prices following the recent
decontrol of textiles. The estimates also include Rs. 2.25 crores on account of
Government’s share in the increased prices of sugar, stocks of which were frozen by
Government when sugar was decontrolled last December, and Rs. 2 crores on account
of the receipts of the Cotton Textiles Equalisation Fund. The Revenue under Central
Excise Duties is now estimated to show a reduction of Rs. 1.36 crores compared with
the budget, mainly under Sugar and Tobacco. The total revenue from Taxes on Income
including Corporation Tax is now estimated at Rs. 115 crores, a reduction of Rs. 3
crores in the original estimate. The divisible pool of income-tax is now estimated at
Rs. 65.49 crores of which the Provincial share would amount to Rs. 29.74 crores. The
credit of Rs. 2.25 crores on account of the increase in sugar prices mentioned above
will however be set off by a corresponding provision in the expenditure estimates as the
intention is to fund these receipts for the benefit of the industry and the sugar producing
provinces. Similarly the receipts of the Cotton Textiles Equalisation Fund will be
transferred to it by provision in the expenditure estimates.
EXPENDITURE
22. The total expenditure this year is now estimated at Rs. 185.29 crores showing
a reduction of Rs. 12.1 crores in the original estimate. The expenditure on Defence
Services is expected to show a saving of Rs. 6.11 crores, Civil estimates accounting for
the balance of Rs. 5. 99 crores.
23. The current year’s budget for Defence Services included a substantial
provision for new schemes and for the acquisition of land but owing to changes in the
plans on strategic and other considerations and the pre-occupation of the Defence
authorities with matters such as the operations in Kashmir to repel the invaders from
that State, it is expected that a saving of Rs. 5.75 crores is likely to be effected this year.

10
The budget also included a provision of Rs. 1.68 crores for payment to an Equalisation
Fund for the replacement of certain vessels of the Royal Indian Navy and aircraft of the
Royal Indian Air Force. On further consideration it has been decided that this contribution
should wait until conditions become more stable and the provision on this account will
accordingly lapse.
24. The saving of Rs. 5.99 crores in Civil expenditure is mainly due to a
reduction in the provision for expenditure on the relief and rehabilitation of refugees.
The House will remember that a lump sum of Rs. 22 crores was provided for this
purpose in the budget. At that time when the large scale movements of population were
still taking place it was impossible to frame a close estimate of the expenditure likely to
be involved. On the indications then available, I considered it advisable to provide a
substantial figure. The position has since been reviewed and although it is still difficult,
in view of the constant changes in the position and the fluid nature of the relief plans, to
make a close estimate it is now expected that the expenditure this year may not amount
to more than Rs. 14.89 crores. A saving of Rs. 2.36 crores is also expected in the provision
of Rs. 22.52 crores for subsidies on imported foodgrains. Interest charges are also
expected to show a saving of Rs. 1.29 crores. These savings are partly set off by the
provision of Rs. 2.25 crores for funding the special receipts following the decontrol of
sugar and the provision of Rs. 2 crores for the transfer to the Cotton Textiles Equalisation
Fund of the receipts realised for it, both of which I have mentioned earlier.
FINANCIAL YEAR, 1948-49
25. I now turn to the estimates for 1948-49. At the existing level of taxation, I
place the total revenue for the year at Rs.230.52 crores and the expenditure charged to
revenue at Rs. 257.37 crores leaving a deficit of Rs. 26.85 crores. Before I deal with the
detailed estimates, I must warn the House that the revised estimate for the current year
does not provide a basis for comparison when considering the estimate for next year,
because the estimate for the current year covers only 71/2 months while the provision in
the budget for next year covers a full year.
REVENUE
26. The total receipts from customs have been placed at Rs. 81.75 crores. This
provides for a full year’s revenue from the enhanced duty on exports of cotton cloth and
yarn imposed in the current year’s budget. The effect on our revenue of the restriction
on imports so as to conserve foreign exchange has been taken into account as also the
restriction on the exports of raw cotton. Central excises are expected to bring in Rs. 34
crores and receipts from income-tax which include Rs. 12 crores on account of Excess
Profits Tax and Rs. 17 crores on account of the Business Profit Tax, have been placed at
Rs. 130 crores. The divisible pool of income-tax is estimated at Rs. 80.24 crores of
which the Centre will retain Rs. 42.37 crores leaving Rs. 37.87 crores as the Provincial
share. The profits from Currency and Mint, after allowing for the share of Pakistan
under the arrangement for the management of the currency of both the Dominions by
the Reserve Bank up to the 30th September 1948, are estimated at Rs. 9.4 crores.
11
 The revenue of the Posts and Telegraphs Department is expected to amount to
Rs. 26.2 crores and working expenses and interest to Rs. 25.82 crores leaving a small
surplus of Rs. 38 lakhs. In the current year, the surplus will be shared between general
revenues and the Department in the ratio of three to one while next year only half the
surplus will accrue outright to general revenues. The Department will get a rebate of
interest on its share of the accumulated profits in the past which at the end of the budget
year are expected to amount to about Rs. 8 crores.
In my estimate of receipt for 1948-49 no credit has been taken for any contribution
from the railway surplus. The position with reference to this matter was explained by
the Hon’ble Minister for Transport in his Budget Speech the other day.
EXPENDITURE
27. The total expenditure for next year is estimated at Rs. 257. 37 crores of
which Defence Services will account for Rs. 121.08 crores and Civil expenditure for
Rs. 136.29 crores. Following the customary procedure, I shall first deal with the Defence
estimates.
28. Defence Services. - The reconstitution of the Armed Forces of the undivided
Government of India into separate forces for the two dominions is now virtually complete.
It was envisaged at an earlier stage that the re-organisation of the Armed Forces would
be largely completed in the financial year 1948-49. With the alteration in the role of the
“ Armed Forces as a result of the partition a redistribution of the available financial
resources between the three services to allow for a more balanced development was
contemplated. Unfortunately, however, the recrudescence of communal disturbances
and the necessity in present circumstances of having to retain substantial forces till
normal conditions return have made it impossible to undertake the long term planning
of the Armed Forces so as to keep the expenditure on them at a level appropriate to the
financial resources of the country.
29. As the House is already aware, the process of demobilisation of the Armed
Forces was arrested by the partition of the country in order to facilitate the division of
the forces between the two dominions and to enable them independently to determine
the size and composition of their respective Armed Forces. In the altered strategic
situation following the partition and also in view of the recent disturbances in the country,
it has not been possible to resume demobilisation in the Armed Forces of the Indian
Dominion. The future strength and composition of these forces still remain to be decided
and it may be some time before a decision is taken. Meanwhile, the Army is expected to
be maintained at its present level.
30. Certain decisions for the expansion of the Naval and Air Forces have been
taken and a delegation was sent to the United Kingdom last November to discuss with
the British Government the question of acquiring certain Naval vessels and aircraft and
the provision of training and other facilities for officers and men of the Indian Forces.
These discussions were successfully completed and arrangements have been made for
12
the acquisition of certain assets and for the training of Indian personnel. Honourable
Members are aware of the decision by Government to strengthen the Navy with new
types of ships, notably a cruiser and three destroyers. A party of officers and men of the
Royal Indian Navy has already been despatched to the United Kingdom to undergo the
necessary specialised training in order to ensure that these ships are manned as far as
possible by Indian nationals. The Royal Indian Air Force is also being expanded.
31. The budget estimate for Defence Services for 1948-49 is, as I have
mentioned, Rs. 121.08 crores. This is exclusive of expenditure of a capital nature
amounting to Rs. 14. 99 crores to be incurred on the acquisition of land, the construction
of training institutions, the provision of accommodation for personnel, the acquisition
of new naval vessels, aircraft and connected equipment for the expansion of the Navy
and the Air Forces which I have mentioned earlier. Provision for this expenditure has
been included in the Capital Budget. As the House is aware, this practice of providing
for capital expenditure outside the revenue account was introduced during the last War,
and was discontinued only in 1947-48. I trust the House will agree with me that in the
present abnormal conditions the decision to charge to capital the expenditure on the
acquisition of permanent assets is unobjectionable.
32. The partition of the country placed heavy responsibilities on the Armed
Forces of this Dominion when they were in the process of reconstitution both in the
matter of maintenance of law and order and in assisting the Civil authorities in the
evacuation and relief of the minorities in the Punjab. A Military Evacuation Organisation
was set up during September 1947 with its headquarters at Amritsar and an advance
headquarter at Lahore and this organisation succeeded in evacuating over 4 million
non-Muslims from Western Pakistan and about 5 million Muslims from India within a
period of 3 months. This stupendous task had to be performed under the most trying
conditions and the troops which took part in it have responded most magnificently to
the call. While the energy and resources of the army were mobilised for this humanitarian
work further calls were made on them for the defence of Kashmir. The fighting in
Kashmir is being carried on in difficult terrain and severe climatic conditions. I am sure
the House will join me in paying a tribute to the Army and the Royal Indian Air Force
for the magnificent way In which they have responded to the call made on them.
33. Civil Estimates. - Details of the estimates under individual heads are as
usual, given in the Explanatory Memorandum circulated with the Budget papers and I
do not propose to weary the House by repeating them here. I should like however to
refer briefly to the provision included in these estimates for certain special items like
the expenditure on refugees and the subsidy for food. The expenditure on the relief and
rehabilitation of refugees next year is estimated at Rs. 10. 04 crores. The expenditure
next year will be largely on relief and rehabilitation as the evacuation of refugees has
now been nearly completed, except from Sind and to some extent from the N. W. F. P.
This estimate is necessarily tentative because In the rapidly changing conditions It has
not been possible to frame a close estimate. In addition to direct relief and grants for
13
rehabilitation a comprehensive scheme for granting advances to the refugees to enable
them to settle down in various walks of life has also been drawn up. A Rehabilitation
Finance Administration to which Government will advance Rs. 10 crores is also being
set up. I hope that the facilities provided by the Industrial Finance Corporation will also
be available for the assistance of industries which have ad to be transferred to India on
account of the communal disturbances. In addition to the provision of Rs.10.04 crores
In the revenue budget a sum of Rs. 10 crores has been included in the capital budget for
the Rehabilitation Finance Administration and Rs. 5 crores for loans and advances for
rehabilitation, Including loans to Provinces for this purpose. The expenditure on food
subsidies, including the bonus to Provinces on the internal procurement of grain under
the new food policy announced recently, is estimated at Rs. 19.91 crores next year. The
estimates also include a total provision of Rs. 103/4 crores under various heads for
expenditure upon development schemes and resettlement.
34. The House would doubtless wish to know if in framing the budget for next
year any allowance has been made for the implementation of the recommendations of
the Economy Committee the appointment of which under the Chairmanship of
Shri Kasturbhai Lalbhai was announced by me. The House will realise that it is obviously
impossible to forecast the directions In which the Committee may suggest economies
and the total amount that could be expected to he saved. I have however made a lump
cut of Rs. 21 crores under the various heads of civil expenditure in order to ensure that
some economy is effected pending the report of the Committee. If the Committee’s
report suggests economies on a large scale I propose to take steps during the course of
the year to see that they are realised. I wish to make it clear however that this lump cut
is mainly in the nature of a token and should not be taken as giving any indication of the
size of the economy which I consider could be effected. This must necessarily depend
on the considered judgement of the Committee after they have examined the various
departmental authorities and I do not wish in any way to anticipate their findings.
35. Of the total expenditure of Rs. 136.29 crores provided in the budget for
next year Rs. 29.95 crores are accounted for by the expenditure on refugees and the
payment of subsidies and bonus for foodgrains, leaving Rs. 106.34 crores for normal
expenditure. This includes Rs. 8.98 crores for tax collection, Rs. 43.86 crores for
obligatory expenditure on payment of interests and pensions and provision for debt
redemption, Rs. 3.15 crores for Planning and Resettlement, Rs. 2.2 crores for expenditure
on the Mints and the Nasik Press, Rs. 2.95 crores for grants-in-aid to Provincial
Governments and Rs. 20.93 crores for expenditure in the nation building sphere such as
Education. Medical, Public Health, Broadcasting, Aviation and the conduct of scientific
surveys and institutions in which the Central Government supplement the work of the
Provincial Governments and provide valuable technical assistance and research. The
balance of Rs. 24.27 crores represents the provision for ordinary administration, Civil
Works, etc., and this constitutes only 18 per cent, of the total civil expenditure. In
addition to Rs. 20.93 crores in the nation building sphere mentioned above, provision

14
has been made in the capital budget for a grant of Rs. 30 crores to Provincial Governments
for development and Rs. 34 crores for loans.
36. On the basis of the estimates of revenue and expenditure that I have so far
explained, the anticipated deficit in the Budget for 1948-49 is Rs. 26.85 crores. In a
later part of my speech I shall revert to the question of how I propose to deal with this
deficit.
POST-WAR PLANNING AND DEVELOPMENT
37. When I addressed this House last November I mentioned that the question
of re-examining the development schemes of the Provincial Governments with reference
to the reduced resources likely to be available to the Centre for financing development
and the changes resulting from the partition will be taken up. I have since had this
further examined and it has been decided that so far as the Centre is concerned there
should be no reduction in the extent of assistance promised by it to the Provinces when
the Provinces were asked to draw up their plans for development. The House will
remember that the Provinces were informed in 1945 that they could draw up their plans
of Post-war development on the assumption that in the five years beginning with 1947-
48 they could expect assistance by way of grants of the order of Rs. 250 crores. This
amount was provisionally distributed among the Provinces in the ratio of their population.
But some special weightage was given to the backward provinces of Assam, the N.W.F.P.
and Orissa and to Bengal, which with Assam, had been affected by the impact of war in
the north-east frontier. With this weightage the Centre’s promised contribution in five
years rose to Rs. 273.88 crores. The Provinces were given advance grants to cover the
expenditure incurred by them on development schemes in 1945-46 and 1946-47 to be
taken against their share of the grant for the five year period. The progress of expenditure
on the development schemes has been somewhat slower than anticipated mainly due to
the shortage of material and manpower and the time taken to formulate detailed schemes.
In the current year a provision of Rs. 20.39 crores was included in the budget for the
period 15th August 1947 to 31st March 1948 but it is unlikely that the whole of it will be
spent. After allowing for the expenditure incurred up to the partition and for the areas
now in Pakistan and reallocating the balance to the Provinces in the Indian Dominion
the outstanding balance of the assistance from Centre to the Provinces at the end of the
current year, on approximately the same scale as was promised by the then Government
of India In 1945, is estimated roughly at between Rs. 170 crores and Rs. 180 crores I
have carefully considered whether in the altered circumstances the Centre should reduce
its assistance to the Provinces but I have come to the conclusion that in the larger
interests of the development of the country as a whole it would be unwise to do so,
particularly as the Provinces have framed their plans on the assumption that the promised
assistance would be forthcoming. In reaching this decision I have been influenced by
the fact that in actual practice the grants are likely to be spread over a somewhat longer
period than the four years that remain out of the original five years period fixed for this
assistance. This, to some extent, will relieve the strain on the resources of the Centre.

15
But it is being made clear to the Provinces that in future the grants from the Centre up
to the maximum agreed to will be contingent on the Provinces spending from their own
resources at least an equal amount and that the whole scheme of assistance would be
subject to readjustment if in the new constitution there is any substantial transfer of
resources from the Centre to the units. I trust that with this assurance the Provinces will
now be in a position to go ahead with their schemes of development and that they will
conserve and exploit all the available resources for this purpose. The budget for the
next year includes a provision of Rs. 30 crores for grants to Provinces for development
and Rs. 34 crores for loans to them.
38. For Central schemes of development including resettlement a provision of
Rs. 103/4 crores has been made in the revenue budget and Rs. 251/2 crores in the capital
budget. Details of the provision are given in the Explanatory Memorandum circulated
with the Budget papers and I do not propose to dilate at length on the individual schemes
for which provision has been included in the budget. But they cover a very wide field
and among the important schemes I would mention the expansion of the Forest Research
Institute, DehraDun, the development of the valuable forests in the Andamans, the
preliminary work on the Kosi, Sone Valley, Ghandak and Assam Valley projects, all of
which form part of the large scale schemes of river development, the reorganisation of
the Central Waterways Navigation and Irrigation Research Stations, the setting up of a
Tractor Testing Station, the establishment of a Central Agricultural College, the expansion
of the Indian Agricultural Research Institute, the loan of Rs. 2 crores to the Damodar
Valley Corporation and the investment of Rs. 1 crore in the Industrial Finance
Corporation. In addition to provision for expenditure on the individual schemes just
mentioned the budget also provides for an expenditure of over Rs. 2 crores for buildings
for development schemes, Rs. 61/4 crores for the construction and development of
National Highways, 61/2 crores for the Fertiliser Factory under construction at Sindri,
Rs. 4 crores for the expansion of civil aviation and Rs. 70 lakhs for the expansion of
broadcasting facilities.
CAPITAL EXPENDITURE
39. Before I pass on to deal with the ways and means position I shall give the
House a brief account of the provision included in the budget for normal capital
expenditure. The revised estimate for this year includes a provision of Rs. 261/2 crores
of which the Railways account for Rs. 163/4 crores, Posts and Telegraphs for Rs. 21/2
crores and schemes of State Trading for Rs. 43/4 crores. For next year the provision
amounts to Rs. 76 crores of which Rs. 241/2 crores are for Railways, Rs. 31/4 crores for
Posts and Telegraphs, Rs. 15 crores for Defence to cover expenditure on the purchase
of naval vessels aircraft and spares for the expansion of the Navy and Air Forces, the
acquisition of land and the construction of accommodation for Defence Services
personnel, Rs. 31/4 crores on the provision of additional accommodation in New Delhi,
Rs. 23/4 crores for administrative buildings and communications costing over a lakh of
rupees, the cost of which is now met from capital and Rs. 27 crores for the building-up

16
of the central reserve of 6 lakhs tons of foodgrains in accordance with the recently
announced food policy of Government. The total provision in the Capital Budget for
normal requirements and for financing the development schemes both of the Centre
and the Provinces comes to the impressive figure of Rs. 70 crores this year and Rs. 1651/
2
crores next year.
WAYS AND MEANS
40. I now turn to a brief consideration of the ways and means position. During
this year owing to the uncertain political conditions in the earlier months, the partition
of the country and the widespread communal disturbances in certain parts of the country
it was not possible to borrow from the market the substantial amount which it was
originally planned. Next year in addition to the interest-free prize bonds, with an
outstanding of a little over Rs. 5 crores, which mature in January 1949, Government
have the option of repaying the outstanding balance of the 23/4 per cent Loan 1948-52
and the 4 percent Loan 1948-53. A decision on the exercise of this option will be taken
in the course of the year with reference to the conditions then prevailing. The market
borrowing next year have been taken at Rs. 150 crores but if circumstances are propitious
the scale of borrowing will be stepped up. I would in this connection reiterate the appeal
I made on the floor of this House last November for the utmost co-operation from the
public in the borrowing operations of the Government. Apart from the need which still
remains for withdrawing surplus purchasing power from the hands of the community as
a measure of anti-inflation, the requirement of funds for financing the large scale plans
of development which the Government have in view and for assistance to the Provinces
for Implementing their schemes Is as great as ever and unless the public co-operate
whole-heartedly with the Government by lending their savings it will be impossible to
undertake all the schemes of development, necessary for raising the standard of life of
our people.
41. I shall now pass on to the consideration of the all-important problem of
how to deal with the deficit of Rs. 26.85 crores.
42. I just mentioned a deficit of Rs. 26.85 crores. This is exclusive of any
contribution from the railway surplus. As Honourable Members are aware, it has now
been decided that out of the railway surplus a contribution of Rs.4.5 crores should be
made to general revenues during the next year. The estimated deficit is therefore reduced
to Rs. 22.35 crores.
RELIEFS IN TAXATION
43. The House will remember that in my Budget Speech last November I
referred to the widespread criticism that the level of taxation in the 1947-48 Budget had
seriously affected the incentive for saving and investment and I undertook to make a
careful examination of the consequences of our taxation policy before I presented the
annual Budget. Since then I have given very anxious thought to the question and I have
reached the conclusion that there is a considerable measure of justification in that

17
criticism. As I have emphasised elsewhere, the paramount need in present conditions is
to stimulate production and any fiscal or administrative measure which restricts or
curtails the expansion of industry will stunt our development and add to our future
difficulties. While industry should be called upon to pay its just contribution to the
common exchequer, the burden placed upon it must be such as to allow business to
expand. At the same time the aim of our policy should be to secure that, while the level
of taxation is reasonably high so that the wealthier sections of the community are placed
under an equitable contribution for the common needs of the State, a genuine margin is
left for savings which would flow back into investment and thereby add to the productive
wealth of the community, which the State itself could subsequently tap. It is also necessary
so to adjust our taxation as to provide a real incentive to the ploughing back of profits
into fresh business. In making my proposals in the field of direct taxation, I have kept
these considerations prominently in mind.
44. I shall pass on to deal first with the various measures of relief which I
propose to give.
My first proposal is with reference to the Business Profits Tax. This measure
gave room for a good deal of controversy when it was introduced for the first time in the
budget for 1947-48. The sudden withdrawal of the Excess Profits Tax- gave this tax a
considerable measure of justification. During the discussions on the floor of the House
the then Finance Member stated that this tax would be in operation for one year, leaving
it to his successor to decide whether it should be continued or not. In view of the criticism
levelled against this measure, both inside this House and outside, I have given a good
deal of thought to this matter. I have come to the conclusion that, in the present
circumstances, there is no justification for the complete withdrawal of this tax. Hon’ble
Members might know that in the United Kingdom a tax of this kind was introduced
some time back as a National Defence Contribution. The tax is retained though its
nomenclature has been subsequently changed to profits Tax. The need for additional
funds for reconstruction and especially for the rehabilitation of refugees would justify
the continuance of this measure in India for some time. I have, therefore, decided to
retain this source of revenue but to reduce the burden of this tax considerably. The
abatement allowed at present is Rs. 1 lakh or 6 per cent of the capital employed, whichever
is larger. The rate of the tax is 162/3 per cent. I propose that the abatement should be Rs.
2 lakhs or 6 per cent of the capital employed, whichever is larger, and that the rate of the
tax should be reduced to 10 per cent. I hope this reduction will be welcomed by the
business community. The not result of this proposal will be a gross loss of Rs. 2 crores.
Rs. 1 crore of this loss will, however, be recovered by the increase in income-tax receipts
and the net result will therefore be a loss of Rs. 1 crore.
My second proposal Is to reduce the existing rate of super-tax. The House will
remember that last year the limit of Income at which the maximum rate of 101/2 annas is
attracted was reduced in the case of earned income from Rs. 5 lakhs to Rs. 11/2 lakhs
and in the case of unearned Income from Rs. 31/2 lakhs to Rs. 1,20,000. The effect of
18
this was to take away from any person with an income of Rs. 1,20,000 nearly the whole
of the income beyond this amount. This hardly left any Inventive to save and I have no
doubt myself that such severe taxation at this level would seriously hamper the growth
of savings and retard our industrial development. I have accordingly raised the limit at
which the maximum rate of tax will be attracted to Rs. 31/2 lakhs for both earned and
unearned income. I trust the House will agree with me that this measure of relief is
justified. I have also rearranged the rate of the tax within the slabs and the rates as they
now stand seem to me to fulfil the double purpose of keeping the level of taxation
sufficiently high while leaving at the same time a margin for saving. The changes in
super-tax are estimated to cost Rs. 1 crores.
In the budget for 1946-47 a complicated system of levying super-tax at steeply
graded rates on dividends above a datum line was introduced and last year these rates
were further stiffened. The object of this was to deter the distribution of large dividends
and secure the ploughing back of profits into business. In actual practice very little
revenue was collected from this source and the purpose with which it was introduced
does not appear to have been realised. I feel that something more positive is required to
induce Industrialists to return more of their profits into investment than taxing those
who distribute large dividends. My proposal to secure this end is to reduce the tax on
the undistributed profits of companies by one anna. The cost of this concession is
estimated at Rs. 2 crores. The effect of my proposal will be that on distributed profits
the present rate of 5 annas will remain while the tax on undistributed profits will be at
the rate of 4 annas. I trust that this concession will produce better results than the
present complicated system.
My next proposal is to reduce the income-tax on companies with an income of
Rs. 25000 and below to half the usual rates. Among the dangers to be avoided in the
rapid industrialisation of this country is the one of concentrating too many businesses
in the hands of large companies and I feel that every encouragement should be given to
the growth of smaller companies. This will broadbase our economy and will also be in
line with our general pattern of industrial development with its constant emphasis on
the development of cottage industries and a fair distribution of industry over the various
Provinces. My contribution towards such a development is to allow this concession in
favour of small companies with moderate incomes. The loss of revenue from this is
estimated at Rs. 12 lakhs.
There is a widespread feeling that with the heavy taxation to which incomes are
now subject there is very little scope left for assistance by the public to deserving
institutions and charities. I have received a number of representations on this subject
and after careful consideration of the matter I feel that a measure of relief on contributions
made to recognised institutions and charities would be justified. In this country there is
a far too general a tendency for charitable and other institutions to look to the State for
assistance and not to the public. To the extent to which there is a larger flow of private
benefaction to such institutions, the burden on the State for supporting them will be
19
reduced. I accordingly propose that donations to approved institutions and charities
should be exempted from taxation so long as they do not exceed 5 per cent. of the net
taxable income in the case of companies and 10 per cent. in the case of individuals,
subject to a maximum of Rs. 21 lakhs in both cases - I trust the House will welcome this
concession and I hope it will encourage our industrialists and the public to subscribe
more generously to deserving institutions and purposes. It is my intention to have a list
of approved institutions and bodies drawn up in consultation with the Provincial
Governments. It is difficult to estimate the loss of revenue involved in this concession
and I have taken a rough figure of Rs. 75 lakhs.
I also propose to give a further measure of relief, in regard to the payment of
municipal taxes on house property. I have felt that the absence of such an exemption is
an anomaly in our tax system and that there is a justifiable claim for relief here. I
accordingly propose to exempt these payments from taxation. The cost of this concession
is estimated at Rs. 7 5 lakhs.
45. Before I pass on to deal with reliefs in indirect taxation, I should like to
mention briefly a point in which it seems necessary to readjust our Corporation Tax.
Honourable Members are aware that under the law as it stands we are entitled to recover
super-tax on dividends paid by companies incorporated outside this country to their
shareholders abroad in respect of their Indian business. For this purpose it is necessary
to ascertain from the companies particulars about their shareholders abroad and the
dividends distributed to them. This information is rarely available in full with the result
that very little of the tax due is collected. It is necessary that some effective arrangement
should be made to protect our revenue against this leakage and I think that this can best
be done by raising the general rate of Corporation Tax and giving an appropriate rebate
on their income to those companies which declare and pay their dividends in India. I
accordingly propose that the rate of Corporation Tax be raised from 2 annas to 3 annas
and a rebate of one anna allowed to the companies which declare and distribute their
dividends in India. The effect of this proposal will be that companies in India will pay
the present rate of Corporation Tax at 2 annas while foreign companies having business
in India will have to pay a corporation Tax of 3 annas on their profits earned in this
country. This change is expected to bring an additional revenue of Rs. 2 crores.
46. I may now summarise the net effect of the reliefs in income-tax and the
proposed change in the Corporation Tax. The various concessions I have just detailed
will result in a loss in revenue of Rs. 6.62 crores, of which the Provincial share will
amount to Rs. 2.41 crores. This will, however, be partly set off by the additional revenue
of Rs. 2 crores from the change in the Corporation Tax and Rs. 1 crore from the ordinary
collection of tax resulting from the reduction in the Business Profits Tax, of which the
Provincial share will amount to Rs. 45 lakhs. The net effect of my proposals on the
Centre is a reduction of Rs. 1.66 crores.
47. I shall now turn to the reliefs in the field of indirect taxation.

20
 During the debate on the interim Budget there was some criticism about the
increase in the export duty on cloth and I promised to consider the suggestion that the
duty should be converted into an ad valorem duty. I have received a number of
representations that the present specific duty is pressing too heavily on handloom cloth
and on certain categories of mill-made cloth. The duty of annas a pound on cotton yarn
has also proved burdensome and on a careful review of the matter in all aspects I have
decided to convert the export duty into an ad valorem duty of 25 per cent, to exempt
handloom cloth from the duty and to withdraw the duty on exports of cotton yarn.
These con7 cessions will involve a loss of revenue of Rs. 4.5 crores.
I also propose to withdraw the present excise duty on betelnuts. The administration
of this excise has always been difficult and it has been a prolific source of complaint
from the area-growing Provinces. I trust the House would welcome this concession
which I hope will mean a cheapening of this article to the poor man. Loss of revenue
involved is Rs. 30 lakhs.
48. The net effect of all the reliefs mentioned so far and the changes in income-
tax is a reduction in revenue of Rs. 6.46 crores, raising the prospective deficit to Rs.28.81
crores.
NEW AND ADDITIONAL TAXES
49. In an earlier part of this speech I expressed the view that in the present
inflationary conditions it is necessary to reduce, as far as possible, the gap between
revenue and expenditure and if it is at all possible to have a surplus budget. I am sure
the House will agree with me that the prospective deficit is too large to be left uncovered
and that in a transitional time like this we should take every step possible to strengthen
our revenue position. In raising additional taxation it is, in my view, necessary to secure
that as little of the burden as possible falls on the poor man.
50. Before I deal with my proposal for raising additional revenue I shall briefly
digress to mention a change in accounting which will reduce the prospective deficit by
Rs. 10 crores. Advance payments of income-tax under Section 18-A of the Income Tax
Act are not credited as revenue but held in deposit till the complicated process of
assessing the tax completed. These advance payments of tax are not really refundable
deposits and there is no reason why they should not be credited to revenue straightaway.
I propose to introduce this change with effect from next year. But the change will be
made in stages so that the budgetary position is not violently disturbed. The advance
payments will be credited to a separate minor head within the major head and transferred
to the final heads on completion of the assessments. The change in procedure will be
given effect to next year in respect of advance payments of Corporation Tax and will be
extended to advance payments of income-tax in subsequent years. I need hardly mention
that this change in procedure will not in any way affect the provincial share of income-
tax. The result of this change will be to divert to revenue next year Rs. 10 crores which
would have otherwise been credited as a deposit. This will reduce the deficit to Rs.
18.81 crores.
21
 51. I shall now address myself to the problem of covering this deficit by new
taxes. The House will appreciate that with the existing shortage in the foreign exchange
resources of the country and the need to conserve them as far as possible to meet our
heavy commitments in respect of our food purchases, it is not possible to expect any
substantial relief from the expansion of customs revenue from import duties, although
the country could absorb all the imports likely to flow in if the restrictions on imports
are relaxed. For a considerable time we shall have to rely on Central Excises and, to
some extent, on the yield of export duties. In framing my taxation proposals I have
turned as much as possible to the field of export duties, which do not involve any
additional burden on our people, and to such of the excises as do not affect the poorer
classes.
My first proposal is to levy an export duty of Rs. 80 per ton on oilseeds and Rs.
200 per ton on vegetable oils. There is a wide disparity between the internal prices of
these commodities and their export prices and I am satisfied that the imposition of this
duty will not affect our export market. The yield from this duty is estimated at Rs. 2.5
crores.
My next proposal is to levy an export duty of Rs. 20 per ton on Manganese to
yield Rs. 80 lakhs.
I propose to make only two minor changes in the import duties. The duty on
motor cars will be raised from 45 per cent to 50 per cent, with a preference of 71/2 per
cent in favour of the United Kingdom - The yield from this increase is estimated at
Rs. 50 lakhs. The import duty on cigars, cigarettes and manufactured tobacco will also
be slightly raised following the changes in the excise duty, to which I shall presently
refer. The increase in revenue from this change is estimated at Rs. 12 lakhs.
In the field of Central Excises my main proposals concern Tobacco. It is only in
recent years that the Tobacco excise has been developed and the system of taxation
could, in my opinion, be rationalised so as to increase the revenue from this source. But
this will take some time. Meanwhile, I propose to levy an excise duty on cigarettes
amounting to roughly 25 per cent on the ex-factory prices. I estimated the yield from
this change at Rs. 7 crores. Simultaneously the duty on certain categories of
unmanufactured tobacco will be raised from 9 annas per lb. to 12 annas per lb. in some
cases and 3 annas per lb. to 4 annas per lb. in others in order to secure that there is no
diversion from the consumption of cigarettes of the cheaper varieties. This increase is
estimated to yield Rs. 2 crores.
The excise duty on Tea will be raised from 2 annas per lb. to 4 annas per lb. to
bring it to the same level as the export duty. The additional revenue from this increase
is estimated at Rs. 1. 8 crores.
The duty on Coffee will be similarly raised to 4 annas per lb. to yield Rs. 30
lakhs.
22
 The duty on Vegetable Product will be raised by 50 per cent. to Rs. 7-8-0 per cwt.
to yield Rs.40 lakhs.
The duty on Tyres will also be raised by 50 per cent. The additional revenue is
estimated at Rs. 40 lakhs.
The House will remember that in the budget for 1946-47 the excise duty on
Matches was reduced from Rs. 2-8-0 per gross to Rs. 1-12-0 per gross for boxes
containing between 40 and 50 matches. In actual practice this reduction has not been
passed on to the consumer and I propose that this should be withdrawn and the minimum
duty fixed at Rs. 2-8-0 per gross on all boxes containing up to 50 matches. The additional
revenue from this will amount to Rs. 150 lakhs.
1 also propose to make two minor changes in the Postal and Telephone rates. The
registration fee will be raised from 3 to 4 annas while the surcharge on trunk telephone
calls will be raised from 40 to 60 per cent and amalgamated with the basic rate. These
changes, which will be introduced by executive orders will bring in an additional revenue
of Rs. 40 lakhs.
NET RESULT OF PROPOSALS
52. I may now summarise the net effect of all the proposals that I have made.
The reliefs and the changes that I have proposed in income-tax, super-tax and Corporation
Tax will result in a loss of Rs. 1.66 crores. The abolition of the export duty on handloom
cloth and yarn and the reduction of the export duty on mill-made cloth will mean a loss
of Rs. 4.5 crores. The abolition of the excise duty on betelnuts will cost Rs. 30 lakhs.
The total loss to revenue on account of relief and readjustments of these taxes will be
Rs. 6.46 crores. On the basis of this loss the original deficit of Rs. 22.35 crores will be
increased to Rs. 28. 81 crores. This deficit will again be reduced to Rs. 18.81 crores by
taking the advance payments of Corporation Tax next year direct to revenue. With
regard to the additional taxes, the proposed export duties will bring in Rs. 3.3 crores.
The increase in the import duties will bring in Rs. 62 lakhs. The increase in excises will
bring in Rs. 13.4 crores. The changes made in the Postal and Telephone charges will
bring in Rs. 40 lakhs. The total net revenue resulting from these new taxes and the
enhancements of certain existing taxes will thus bring in an additional revenue of Rs.
17.72 crores. The final deficit for the year will therefore stand at Rs. 1.09 crores. In the
present circumstances, I feel fully justified in leaving this small deficit uncovered. In
considering this deficit the House must remember that the estimates do not include any
credit on account of the interest due from Pakistan on its partition debt which but for
the moratorium, would be available to the credit of our revenues. Though it is not
possible to know accurately at present the amount of the interest due from Pakistan, it
may be assumed on a very rough calculation that it would be of the order of Rs. 9
crores. If this amount which is legitimately due to us and the payment of which is only
postponed, was available to me in the next year, the deficit would really be converted
into a substantial surplus.

23
DIRECT AND INDIRECT TAXES
53. Much has been said in the past on the floor of this House and elsewhere
regarding the maintenance of a proper balance between direct and indirect taxes in our
tax structure. The House will appreciate that this is not a matter which could be regulated
by any set principles and that, in the ultimate analysis it is merely a question of arranging
the taxation to the best advantage of the community and with reference to the economic
conditions of each country. Thus, while in an industrially advanced country it may be
possible to raise a substantial revenue by direct taxation it will obviously be unwise to
pitch the direct taxes too high in a country in the process of development as the inevitable
effect of high direct taxation is to retard the formation of capital without which industrial
development is not possible. Similarly when the main consideration is to curtail
consumption, as during a period of shortage of goods and inflation, it may be necessary
to raise the level of indirect taxation to secure a reduction in consumption. There is also
a common fallacy that the larger the amount of indirect taxation the heavier the burden
on the ordinary man. While it is of course true that over a considerable field consumption
taxes reach a wider section of the population than direct taxation, consumption taxes on
such luxuries as motor cars, the costlier varieties of tobacco and cigarettes, duties on
wines and spirits, export duties which do not affect the internal consumer, all of which
go to swell the total of indirect taxation do not touch the life of the ordinary man. In this
connection I am sure the House will be interested to know the pattern of our tax structure.
In 1937-38 out of a total revenue of Rs. 75.8 crores direct taxation accounted for only
21 per cent while the bulk of the revenue came from indirect taxation. This proportion
has naturally varied during the war years when there was a steep rise in direct taxation
due to the large increase in income-tax and the levy of the Excess Profits Tax. In the
budget for next year which I am now presenting to this House the proportion of direct to
indirect taxation will be about equal. It would be interesting to compare our position in
this respect with the United Kingdom. In a highly industrialised country like the United
Kingdom, the scope for raising large revenues from direct taxation is greater. The United
Kingdom budget for 1947-48 discloses that in that country the percentage of direct
taxes to the total tax revenue is only 52. This compares very favourably with our tax
structure in which, with a comparatively poor industrial economy, we collect about 51
per cent. of our taxes from direct taxes. Another interesting feature of our economy is
that, as compared with 1937-38, the direct taxes would have increased eight and half
times in 1948-49 while the indirect taxes would have increased only by a little over
twice. Considering the relatively undeveloped state of our country, I do not think that
any one could say that the burden of direct taxation in this country is unduly light or
that there has been any shifting of the burden on the shoulders of the ordinary man.
FUTURE PROSPECTS
54. On the estimates as they finally emerge, the total revenue next year will
stand at Rs. 256.28 crores and the expenditure at Rs.257.37 crores leaving an uncovered
deficit of Rs.1.09 crores. I must, however, warn the House that this cannot by any
means be regarded as the normal figure of revenue and expenditure for the subsequent
24
years. The estimated income-tax receipts for 1948-49 include collections relating to the
Excess Profits Tax which will practically disappear in the subsequent years. The Business
Profits Tax in subsequent years will also be less and other factors being equal, the net
proceeds of income-tax accruing to the Central Government for 1949-50 will be
approximately Rs. 20 crores less than the corresponding receipts for 1948-49. The total
revenue for 1949-50 will therefore be at least Rs. 20 crores less than in 1948-49. As
against this, it should be borne in mind that certain items of expenditure appearing in
the budget for 1948-49 may reasonably by expected to show a considerable decrease.
The expenditure provided for next year under relief and rehabilitation and food subsidies
amounts to Rs. 29.95 crores. It may reasonably be anticipated that the expenditure
under these two items will go down considerably during the subsequent years. If normal
political conditions are restored, a reduction in the defence expenditure may also be
anticipated. Taking all the factors into consideration, it is not unreasonable to hope for
a balanced budget in the future. The House will realise that in the transitional phase
through which we are passing, it is difficult to make any precise estimate of our financial
position for the next two or three years. On any reasonable view of the situation, I feel
it is the path of prudence to strengthen our revenue position and keep down our
expenditure as much as possible. As a precautionary measure, in tapping new sources
of revenue I have decided to re-introduce in the current session the Estate Duty Bill.
Even though the proceeds of this duty will go to the benefit of the Provinces, any
augmentation of the revenues of the Provinces would, to some extent, reduce the strain
on Central finances. Apart from this, it is possible under the proposed measure to levy
surcharges for purely Central purposes.
55. Although I have not been able to present a balanced or a surplus budget,
much as I wish to, the size of the deficit next year which I propose to leave uncovered
is very small in relation to the total expenditure. It may be considered an index of the
efforts that we are making to close the era of war-time deficits and bridge the gap
between revenue and expenditure. In my interim Budget I ventured to express the view
that the financial position of the country was intrinsically sound and that we were not
living beyond our means or heading towards bankruptcy. The Budget that I am now
presenting fully supports this view. While it will be folly to ignore the difficulties ahead,
I feel that we can face the future in a spirit of sober confidence.
PUBLIC DEBT
56. The debt position of a country is a sure index of its financial strength and
here again I think our position is inherently sound. At the end of the current year, the
total outstanding public debt is expected to stand at Rs. 1,795 crores and to rise by a
further Rs. 56 crores during next year to Rs. 1,851 crores. The total of the interest
bearing obligations is estimated at Rs. 2,182 crores at the end of this year and Rs. 2,231
crores at the end of the budget year. Against these obligations we expect to have at the
end of this year roughly Rs. 1,161 crores and at the end of next year Rs. 1,237 crores by
way of interest yielding assets representing the investments in the two great commercial

25
departments of Government, namely, the Railways and Posts and Telegraphs, outstanding
amounts due to us from the Provincial Governments, Indian States, Burma and others,
and the probable debt of Pakistan to us. In addition, we shall be holding cash and other
investments on treasury account amounting to Rs. 246 crores at the end of this year and
Rs. 130 crores at the end of next year. The total interest bearing obligations not covered
by interest bearing assets and our cash and interest yielding Investments would thus
amount to no more than Rs. 775 crores at the end of the current year and Rs. 864 crores
at the end of the next year. The House will realise that these figures are to some extent
approximate and it is not possible to give precise figures until Pakistan’s share of the
obligations which she would assume direct and her debt to India have been finally
worked out. Allowances has however been made for this on the best guess that could be
made and I think the House may accept these figures as giving a broad indication of the
position.
57. The debt burden is to be judged primarily by the size of the dead-weight
debt. The amount of dead-weight debt which I estimate at Rs. 864 crores is indeed very
small when compared with the resources of the country and the national income. The
debt position may be compared with the national income for assessing whether the debt
is one which the country can afford to carry. For this purpose, we may take the whole of
the interest bearing obligation of the Government of India which are expected to stand
at Rs. 2,231 crores at the end of next year Unfortunately, we have no accurate data
regarding the national income of our country. Various estimates have been made from
time to time, but none of them has been made on a really accurate and scientific basis
and I do not think we shall be far wrong if we assume that our national income is of the
order of 4,500 crores of rupees. Our public debt is less than half of our national income.
It is interesting to compare our position with that of more advanced countries like the
United Kingdom and the United States. The national debt in the United States is more
than 11/2 times its national income and the national debt of the United Kingdom is
nearly three times its national income. The burden of the debt may also be assessed in
another manner by studying the interest charges in relation to the annual revenue. For
the year 1948-49 our gross payment of interest charges will amount to Rs. 61.82 crores.
From our Commercial Departments like Railways, Posts and Telegraphs, etc., and by
way of interest receipts from Provincial Governments and other sources we get Rs.
25.66 crores. The net interest payment therefore is Rs. 36.16 crores. From this must
again be deducted the interest due to us from Pakistan which I have estimated at
approximately 9 crores of rupees. Our net interest burden is therefore about Rs. 27
crores. The anticipated revenue is Rs. 256.28 crores. Our net interest payment therefore
represents only about 101 per cent of our revenue. The inference that may legitimately
be drawn from these figures is that we could carry even a larger volume of debt and that
there is still a large source available here for financing the development of the country.
The savings of the community could be mobilised on a very much larger scale for
financing productive schemes of development. I appealed earlier in my speech for public
co-operation in the borrowing programme of Government. The picture of our financial
26
position which I have unfolded before this House will, I hope, have a reassuring effect
on the public and instil a spirit of confidence all round.
CONCLUSION
58. Mr. Speaker, I have completed my survey of the economic condition of our
country, my estimate of our income and expenditure and my proposals for the coming
year. I must apologise to the House for the length of my statement. In the first annual
Budget, I thought it my duty to give the House a fairly full picture of our financial
position. In my interim Budget I struck a note of subdued optimism and ventured to
express my opinion that our financial position was intrinsically sound. A more detailed
examination over a longer period has confirmed that opinion. In spite of all the trials to
which our infant State has been subjected, we have the solid foundations on which we
can confidently build the superstructure of our economic and social edifice. The pattern
of that structure is entirely in our hands to draw. While fighting the uphill battle of
freedom we dreamt the dream of an India, free from want and insecurity, a land in
which our people would have In abundance the material and moral contents of a good
life. But then our hands were tied and so we merely made plans which would improve
our agriculture and industrialise our country, and thus provide a higher standard of
living to our masses. From August 15th, 1947, the chains of our bondage have been
broken and we are free to translate our dreams into reality. The plans are there but we
find that our freedom was born in an era so fluid and fast changing that any pre-
determined step other than the next became obsolete before it could be taken. We feel
like the pilgrim who drags his weary limbs finally to the mountain top only to find
higher peaks stretching before his eyes. It is by no means the journey’s end and the
night falls and engulfs him in darkness. And like him we are inspired to pray in the
spirit of the favourite hymn of Mahatma Gandhi - Lead Kindly Light. The next step is
enough for us if it is illuminated by the star of our ambition and fortified by the faith in
our destiny.
(FEBRUARY 28, 1948)

27
 SPEECH OF SHRI R.K. SHANMUKHAM CHETTY, MINISTER OF
FINANCE INTRODUCING THE BUDGET FOR THE YEAR 1947-1948

I rise to present the first Budget of a free and independent India. This occasion
may well be considered an historic one and I count it a rare privilege that it has fallen
to me to be the Finance Minister to present this Budget. While I am conscious of the
honour that is implied in this position, I am even more conscious of the responsibilities
that face the custodian of the finances of India at this critical juncture. I have no doubt
that in the discharge of my responsibilities I may count on the sympathetic and
wholehearted co-operation of every Hon’ble Member in this House.
2. It is not necessary to dwell at any length on the political developments
which have led to the momentous changes that have taken place since the Budget for
the current year was presented to the Legislative Assembly last February. The partition
of the country has cut across its economic and cultural unity and the growth of centuries
of common life to which all the communities have contributed. The long-term effects
of the division of the country still remain to be assessed and we are too near the events
to take a dispassionate view. When the ashes of controversy have died down, it will be
for the future historian to judge the wisdom of the step and its consequences on the
destiny of one fifth of the human race. Whatever might be the immediate political
justification of partition, its economic consequences must be fully appreciated if the
two Dominions are to safeguard the interests of the ordinary man in both the new
States. Regions which have functioned for centuries on a complementary basis have
been suddenly cut asunder. To have had as a single economic unit a subcontinent
peopled by a fifth of the human race meant by itself a great advantage for the teeming
millions of its population an advantage not fully realised, and perhaps not properly
utilized while the unity was a fact. While it may be a comparatively easy matter to
make the necessary political adjustments resulting from partition, it would require
time, patience, goodwill and mutual understanding to effect the adjustments necessitated
by the economic consequences of partition. Economically India and Pakistan have
each points of advantages and disadvantages. In general, it may be said that, while
India is much the stronger at present in industrial production and mineral resources,
Pakistan has some advantage in agricultural resources, especially foodstuffs. But the
complementary character of their economies is even deeper than is indicated by this
generalisation. The compelling forces of economic necessity must create a friendly
and cooperative spirit between the two Dominions and I trust that, when the present
passions subside and normal conditions of life return, our people will work together to
secure that, notwithstanding the political division, the economic life of the common
man is not injured. So far as we are concerned, the Indian Union with its population
of nearly 300 millions will be the second largest country in the world next to China.
1
Our economy is more balanced than that of most countries and, in spite of the setbacks
resulting from partition, our large natural resources and sound financial position will
enable us to launch a vigorous economic plan for substantially raising the living standard
of our people.
3. The Budget Statement that I am presenting today will cover a period of
7 /2 months from the 15th August, 1947 to the 31st March, 1948. I may briefly explain
1

the circumstances in which it has been necessary to present a fresh Budget for this
period. With the division of the country and the emergence of two independent
Governments in place of the old Central Government, the Budget for the current year
1947-48 passed by the Legislature last March ceased to be operative. Although under
the transitional provisions of the constitution, Government could authorize the
expenditure necessary for the rest of the financial year, it was felt that it will be in
accordance with the public wish that a Budget should be placed before the
representatives of the people at the earliest possible moment. There is nothing
spectacular about my statement and there will be no surprises associated with a Budget.
I shall place before the House our estimate of revenue and expenditure for this period
and I shall try to indicate in broad outlines the pattern of the economic life of the
country and the problems that we will have to face in the immediate future.
PARTITION ARRANGEMENTS
4. Before I proceed to deal with the estimates for the year, the House would
doubtless wish to have a brief account of the broad details of the partition and its
immediate financial and economic results. As soon as the decision to divide the country
was taken, a Partition Council, consisting of the representatives of both the future
Governments, was set up to implement the decision. A number of Expert Committees,
on which both the future Governments were equally represented, were appointed under
the aegis of the Partition Council to work out the administrative and other consequences
of the partition. These Committees, some of which are assisted by a number of
departmental subcommittees, dealt with all aspects of the problems arising out of the
partition such as the transfer of staff and organisations, the division of assets and
liabilities, the arrangements for the coinage and currency In the two Dominions, the
trade and economic relations between them, the continuance of economic controls and
so on. These Committees had to complete their work in a matter of four to six weeks
and the House will appreciate that in the short time available to deal with these issues,
some of which were of the utmost complexity and importance, it was not possible to
reach an agreement on all matters before the 15th August 1947 when the two Dominions
came into existence and took over the Government of their respective territories. A
number of important points were accordingly left over for further consideration by the
two Dominions and, in the absence of an agreement between them, for reference to an
Arbitral Tribunal which has been set up. Among the important issues on which it has
not been possible to reach an agreement, I may mention the allocation of debt between
the two Dominions, the method of discharging the pensionary liability, the valuation
2
of the Railways, the division of the assets of the Reserve Bank and the division of the
movable stores held by the Army. Some of these issues are likely to go before the
Arbitral Tribunal and the House will not expect me to say anything further about them
at this stage. It was also found impossible to reconstitute the Armed Forces between
the two Dominions and allocate the military stores, equipment and installations between
them before the 15th August 1947. For the completion of this work, and for clothing,
feeding and paying the Armed Forces till their reconstitution had been completed, a
Joint Defence Council representing the two Dominions with an independent Chairman
and with a Supreme Commander responsible to the Council, has been set up. This
Council was originally expected to complete its work by the 1st of April 1948 but it is
now hoped that this may be mostly achieved by the end of this month.
5. The long range fiscal, financial and economic relations between the two
Dominions still remain to be considered, but for the rest of the current year the
intention is to maintain, within the framework of the agreements arrived at, the
status quo before the partition. For the present both the Dominions will continue the
existing taxes and duties, there will be a free movement of trade between them
without any internal barriers and the import and exchange controls of the two
Dominions will be co-ordinated. It has also been agreed that till the end of September
1948 the two Dominions will remain under a common currency system managed by
the Reserve Bank, although from the 1st April next Pakistan will have its own
overprinted notes and coin. So far as revenue is concerned, each Dominion will
ordinarily retain what it collects but in respect of income tax on assessments for
.1946-47 and earlier years and uncollected demands ion the date of the partition an
arrangement for sharing the receipts arising in both the Dominions has been arrived
at. In the matter of the division of assets and liabilities, it has not been possible, as
I have explained earlier, to reach an agreement on a number of important points
including the allocation of debt and the discharge of the liability for pensions. But
the responsibility for the outstanding liabilities of the old Government could not,
obvious reasons, be left vague and undetermined and the only practicable course
was for one of the Dominions to accept the initial liability to the creditors and settle
with the other the contribution to be made by it. The initial liability for the outstanding
loans, guarantees and financial obligations of the late Central Government at the
time of the partition and for the pensions chargeable to it has been placed by law on
the Indian Dominion subject to an equitable contribution from Pakistan. I am sure
the House will welcome this decision because in the interests of the credit of both
the successor Governments it is obviously undesirable to leave those who had lent
money to the previous Government or had earned pensions under it in any doubt as
to the Government they should approach for their dues.
REVIEW OF ECONOMIC CONDITIONS
6. There has been a marked deterioration in the economic situation in the
country since March last. The situation has been aggravated by the large scale
3
disturbances which burst out suddenly, more especially in the Punjab and the North-
West Frontier Province. Apart from the serious economic consequences arising out of
these disturbances, the human misery that it has caused cannot be measured in terms
of money. Thousands of innocent lives have been lost in the two Dominions and
migration on a scale unprecedented in history has taken place. The total number of
people involved in this mass migration of population has reached colossal figures on
either side giving rise to problems of great magnitude affecting the economy of the
country. The Immediate effect of these tragic developments has been to divert the
attention of the Government almost completely from normal activities. There has been
an almost total breakdown of the economy of the East and West Punjabs. While
Government have done and are doing everything possible to relieve the immediate
distress and suffering of the refugees, the formulation of long-range plans for their
rehabilitation raises formidable issues both in the financial and administrative fields.
These problems have imposed a heavy burden on the Central exchequer, the magnitude
of which it is not possible to assess at present. The budget of the Central Government
for the next few years will be materially affected by this unexpected development in
the country, Our whole programme of post-war development will have to be reviewed
in the light of this context.
7. The food position has continued to cause grave anxiety both to the
Provincial Governments and the Central Government. The country has just weathered
a serious threat of a breakdown of its rationing system. The results of the “Grow More
Food Campaign” have been on the whole disappointing. During the three years 1944-
45, 1945-46 and 1946-47 we had to import from abroad 43.80 lakhs of tons of
foodgrains at a cost of over 127 crores of rupees. Daring the current year from April
to September we have already imported 10.62 lakhs of tons of foodgrains at a cost of
over 42 crores of rupees. Apart from its being a constant source of anxiety, the reliance
on the import of foodgrains from abroad of such magnitude imposes a heavy strain on
the finances of the Government. In recent years our exchange difficulty is almost
entirely due to the import of foodgrains on such a large scale. The meagre exchange
resources available to us are consumed by the purchase of foodstuffs abroad with the
result that we have to impose the most stringent restrictions on the import of many
other essential articles. The various steps necessary for making the country self-
sufficient in foodgrains must now claim the highest priority. The implementation of
this policy must largely depend on the Provincial Governments though the Government
of India has been and will always be prepared to afford all possible help In this
direction. We have sent a mission to Australia for the purchase of the surplus wheat of
that country and we are hoping that we might be in a position to get from Australia a
substantial quantity of wheat during the next year. An expert committee under the
Chairmanship of Sir Purushottamdas Thakurdas has been examining the food position
in the country and the Committee has submitted an interim report which is receiving
the attention of the Government.
4
 8. The deterioration in the economic situation has been particularly noticed
in respect of prices which have shown an unchecked upward tendency. Between the
5th April and the 9th August this year the Economic Adviser’s index number of wholesale
prices rose by 7 points while the Bombay cost of living index advanced by 14 points.
Taking the Bombay cost of living index number, while it was 243 in August 1945 it
rose to 267 in August 1946 and reached 284 in August 1947. The chief factor which
has contributed to this development is the general decline in agricultural and industrial
production In the country due partly to the wide prevalence of communal disorders
and generally to the increasing Industrial unrest. While the supply position has been
deteriorating, increases in wages and salaries given by private employers and the
Government had the effect of augmenting the purchasing power of the people and
widening the gap between current money income and production of goods. The situation
would not have been so bad if the unbalance between money and goods was confined
to these factors only. The most disturbing factor which affects the situation today is
the unspent balances of Individuals and institutions accumulated during the peak years
of Inflation which are being spent on the deferred wants of individuals, repairs to
industry and on the building of trade inventory. In other words, the money demand for
goods Is colossal compared to their local production. While the inflation in war time
was due to the large increases in currency circulation (which rose from Rs. 172 crores
in 1939 to over Rs. 1200 crores at the end of 1945) without any tangible increase in
the supply of goods the present Inflation Is not due to further increase of currency but
to a steady fall in the supply of goods. Although the total available money, whether
currency or bank deposits, has slightly fallen It has spread out more among a wider
circle of people in the form of wages and salaries and thus the actual purchasing
power in the hands of those who spend it on ordinary goods has greatly increased. But
the supply of goods has meanwhile fallen and has resulted in an upward trend of
prices. To take only a few examples of the marked fall in internal production, it may
be mentioned that as against a production of 4, 600 million yards of mill made cloth
and 1, 500 million yards of handloom cloth in 1945 the production this year is estimated
at 3,900 million yards and 1,200 million yards respectively. The production of steel in
the current year is also expected to show a drop of nearly 400,000 tons compared with
the peak production of 1,200,000 tons during the war. The production of cement has
also grown steadily worse, the estimated production this year showing a drop of 700,
000 tons over the capacity of over 21/2 million tons. In recent months the production
of coal has shown some improvement. but so far as the consuming public is concerned,
this has been more than neutralised by difficulties in transport resulting in large
accumulation of coal at the pit heads. Transport and other difficulties explain the drop
in production to some extent, but this is also partly due to labour unrest and strikes.
9. If the economy of this country is to be placed on a sound footing and
maintained in a healthy condition, it is of the utmost importance to increase internal
production. The chances of increasing the supplies of commodities by imports are not
very bright. Until recently we had a fair chance of sizable imports of consumer goods
5
from the British Commonwealth countries from accumulated balances, but with the
blocking of the major part of these and the growing adverse balance resulting from the
large scale importation of foodgrains, the hope of procuring supplies from abroad is
growing weak. We have therefore to fall back on our own resources. Government
have recently announced their scheme for increasing the production of cotton textiles
which, if worked in a spirit of co-operation between industry and labour, will result in
the production of an additional 1,000 million yards over the estimated production of
the current year. It is intended to explore the possibilities of restoring the level of
production in other fields in a similar manner. I am fully conscious of the fact that any
policy of stabilisation must aim not merely at the increase of production of both
consumer and producer goods but also at the pegging of money incomes at an agreed
and accepted level so that the increased volume of trading resulting from the increase
of production may neutralise the inflationary effects of the large volume of uncovered
money income. If this policy is to be carried out successfully, it would require an
appreciation of the situation by labour and its wholehearted co-operation.
REVENUE
10. I shall now proceed to a brief review of the financial position for the rest
of the current year. But I must warn the House that the estimates now presented must
be treated as very tentative as it has not been possible to assess with any measure of
accuracy the effects of the partition on our revenue and expenditure. I hope it will be
possible to present a more accurate picture when the revised estimates are placed
before the House along with the budget for the next year.
11. I have budgeted for a revenue of Rs. 171.15 crores and a revenue
expenditure of Rs. 197.39 crores. The net deficit on revenue account in the period
covered by these estimates will be Rs. 26.24 crores. But the final figure may be higher
because the actual amount likely to be required for meeting the expenditure in
connection with the relief and rehabilitation of refugees is still very uncertain and
some help may also have to be given to the new Provinces of West Bengal and East
Punjab for which, in the absence of any reliable data, no provision has been included.
12. The revenue receipts, as I have said, are estimated at Rs. 171.15 crores.
Customs receipts have been placed at Rs. 50.5 crores and take into account the effect
of the recent restrictions on imports for conserving our foreign exchange resources.
Income tax is expected to yield Rs. 29.5 crores on account of E.P.T. and Rs. 88.5
crores on account of ordinary collections. Although the Niemeyer Award has now
ceased to have effect it is proposed to maintain the share of the Provinces in the
income tax revenue at approximately the same level as now after making an adjustment
in respect of the Provinces and parts of Provinces now included in Pakistan. The
Centre will retain Rs. 3 crores out of the Provincial moiety as provided in the original
budget. On this basis, the divisible pool of income tax is estimated at Rs. 66 crores
and the Provincial share at Rs. 30 crores.
6
 13. Revenue from the Posts and Telegraphs Department is expected to amount
to Rs. 15.9 crores and the working expenses and interest to 13.9 crores leaving a net
surplus of Rs. 2 crores. The outright contribution of the department to general revenues
will be three-fourths of the realised surplus, the department retaining the balance. The
department will get a rebate of interest on its share of the accumulated profits in the
past which, after allowing for the portion of the department transferred to Pakistan, is
expected to amount to Rs. 71 crores. As regards the contribution from Railways we do
not expect anything in the current year. The House is already aware of the reasons for
this from the Railway Budget.
EXPENDITURE
14. The total expenditure for the year is estimated at Rs. 197.39 crores, of
which Rs. 92.74 crores is on account of the Defence Services, the balance representing
Civil expenditure. Following the customary procedure, I shall first deal with the Defence
Estimates which remain, as in the past, the largest single item of expenditure.
DEFENCE SERVICES
15. The reconstitution of the Armed Forces in India into two Dominion forces
was an inevitable consequence of the partition of the country. This decision came at
a time when the Armed Forces were in the process of rapid demobilisation. While a
substantial measure of demobilisation had already been achieved, the process was
arrested as a consequence of the decision to divide the remaining forces between the
two Dominions on a communal cum optional basis. The strength of the Army at the
time stood roughly at 410,000 troops. After the completion of the reconstitution of the
Army, India will have roughly 260,000 troops. An organisation under a Supreme
Commander, acting under the direction of the Joint Defence Council, was set up and
made responsible for carrying out the reconstitution, and for general administrative
control of the entire Armed Forces until the completion of reconstitution. From the
15th August 1947, however, the operational control of the troops in each Dominion
was transferred to the Dominion Government. It was originally expected that the
reconstitution would be completed by the 31st March 1948. But the Armed Forces
Headquarters of each of the Dominion have been able to take over administrative
responsibilities in a greater measure and earlier than was originally anticipated and
the reconstitution of the Forces has in consequence been accelerated. It is now expected
that this will be completed in the more important fields by the end of this month when
the Supreme Commander’s organisation will be disbanded.
16. The future size and composition of the Armed Forces have been engaging
the attention of Government, as it is obvious that they must be related to the altered
strategic needs of the country as well as to its reduced financial resources. Under the
pre-partition demobilisation plan the Army was to be reduced to about 230,000 men
for undivided India by the 1st April, 1949 against which we shall have about 260,000
men for our share alone after the reconstitution of the Armed Forces. Due to the
7
widespread communal disturbances in the Punjab and the sporadic outbursts of disorder
in other parts of the country, there has been an unprecedented call on the Armed
Forces in aid of the civil power. Government have accordingly come to the conclusion
that the existing Forces should be retained until the 31st March 1948 but the position
will be reviewed next month. The financial effect of this is that in spite of a reduction
of revenue resources the expenditure on Defence Services will be running higher than
it normally should during this year. In the present fluid conditions it is impossible to
forecast the position in 1948-49.
17. India had never an adequate Navy or Air Force and the effect of the
partition has been to reduce them still further, so far as the Dominion of India is
concerned. It is obvious that even without the disturbances there could be no question
of an overall demobilisation in these services. The future development plans of these
services are under consideration.
18. The complete nationalisation of India’s Armed Forces in the shortest time
possible is the accepted policy of Government. Due, however, to various reasons
which are now a matter of history, we have had a shortage of Indian officers for filling
some of the posts in the technical services and the senior appointments, This holds
good to a varying degree for all the three services. It was therefore decided to employ
a number of British officers who volunteered to stay, for one year in the first instance,
from the 15th August 1947. As these officers hold the King’s Commission they were
transferred to a special list of the British Army and the Supreme Commander assumed
control over them. When subsequent developments indicated that the Supreme
Commander’s office may not continue beyond the 31st December 1947 it was decided
to terminate the services of these British officers by the same date, leaving it to the
two Dominions to offer fresh terms to any British officers they may wish to employ.
The British officers have, therefore, been served with three months’ notice, as laid
down in their present terms of service, with effect from the 1st October 1947. The
number of British officers whom it is essential for India to retain and the terms of
service to be offered are now under the active consideration of Government. It may,
however, be stated that the number of British officers to be retained will be relatively
small and it is hoped that all operational Commands, at least in the Army and the Air
Force, will be filled by Indian officers.
19. As has already been announced, an agreement was reached with the United
Kingdom Government that the withdrawal of the British Forces from India should
commence immediately after the transfer of power and completed as early as possible.
The first detachment of British troops actually left India on the 17th August 1947. It
was hoped at one time that the withdrawals would be completed before the end of
1947 but due to shipping difficulties it now appears that this may take up to April
1948. The British troops remaining in the country have, however, no operational
functions. Except two R.A.F. Transport Squadrons the rest are merely awaiting
repatriation.
8
 20. The rapidly changing conditions this year have made it difficult to frame
a close estimate of Defence expenditure and the position is further complicated by the
fact that the proportion in which the joint expenditure incurred by the Supreme
Commander’s organisation should he allocated between the two Dominions is yet to
be decided. On the best estimate that can be made at this stage, the net expenditure on
Defence Services during the period 15th August 1947 to 31st March 1948 is estimated
at Rs. 92.74 crores. The following main factors have contributed to an increase in the
expenditure;
(1) The decision to suspend demobilisation and to withdraw troops from
overseas.
(2) The implementation of the Post-war Pay Committee’s recommendations
In respect of Defence Services personnel. No provision for this was
included in the original estimates.
(3) The movement of troops and stores in connection with the reconstitution
of the Armed Forces.
(4) The calling out of troops in aid of the civil power during the disturbances
in the Punjab and elsewhere.
The withdrawal of British troops from India earlier than was anticipated originally
has resulted in a saving but this has been to some extent counterbalanced by expenditure
in moving them to the United Kingdom and other destinations.
CIVIL ESTIMATES
21. Details of the estimates under individual heads are given in the Explanatory
Memorandum circulated with the Budget papers and I propose to draw the attention
of Hon’ble Members to only the more important items included In them. As I have
explained elsewhere, the initial liability in respect of the outstanding debt of the late
Central Government and the pensions chargeable to it has been placed on the Indian
Dominion subject to the levy of an equitable contribution from Pakistan. The
contribution still remains to be settled and, for the present, no credit has been taken in
these estimates for any recovery from Pakistan. The estimates also include Rs. 2221
crores on account of subsidies on imported foodgrains and a lump sum provision of
Rs. 22 crores for expenditure on the evacuation, relief and rehabilitation of refugees
from Western Pakistan. I have briefly referred elsewhere to the problems raised by the
widespread communal disturbances In the Punjab and the North West Frontier Province
and the mass migration of refugees between the two Dominions. There are two aspects
to this problem viz., the short term one of giving immediate relief to the refugees
pouring into this country from Pakistan, practically destitute, and the long term one of
resettling them in India. All the resources at the disposal of the Government of India
have been mobilised in arranging the evacuation and relief of these refugees and the
railways and the Armed Forces have been utilised to the maximum extent possible on
9
this work. It Is not possible to estimate the expenditure likely to fall on Central revenues
on account of these developments and I have provisionally included a sum of Rs. 22
crores on this account In the Revenue Budget. In addition, a sum of Rs. 5 crores is
being Included in the ways and means budget for advances to the East Punjab
Government. But I must mention that this does not give any idea of the magnitude of
the burden that may be placed on Central revenues by these developments. Indeed, the
basis on which the expenditure on relief and rehabilitation should be shared between
the Centre and the East Punjab, the province most vitally affected, still remains to be
decided and may take some time to decide. Whatever the final arrangement in this
behalf may be, I have no doubt that it is the desire of all sections of the House that
financial considerations should not stand in the way of affording relief to these
unfortunate people and in alleviating their sufferings in one of the most poignant
human tragedies that could take place outside a war.
22. Before I leave this subject I should like to give a brief analysis of the total
provision included for civil expenditure, so that a balanced view of the position may
be obtained. Of the total provision of Rs. 1041/2 crores, Rs. 441/2 crores are accounted
for by the expenditure on refugees and the subsidising of imported foodgrains, leaving
Rs. 60 crores for normal expenditure. This includes Rs. 5 crores for tax collection,
obligatory expenditure of Rs. 221 crores on payment of interest and pensions and
provision for debt redemption, Rs. 2 crores on planning and resettlement and Rs. 12
crores for expenditure on nation building activities such as education, medical, public
health, the running of scientific institutions and scientific surveys, aviation, broadcasting
etc. in which the Centre largely supplements the work of the Provincial Governments
by providing valuable assistance by way of specialised services and research, leaving
a balance of Rs. 181/2 crores for the ordinary expenditure on administration, civil
works etc. This expenditure only constitutes 18 per cent of the total civil expenditure
included in the budget. In addition to the expenditure of Rs. 12 crores on nation
building activities mentioned above, provision has been made in the Capital Budget
for a grant of Rs. 20.39 crores to Provincial Governments for development and Rs. 15
crores for loans.
WAYS AND MEANS
23. I shall now turn to give a brief account of the ways and means position.
The budget for the current year provided for a borrowing of Rs. 150 crores but this
target will not be reached. Owing to the communal disturbances In the country and the
uncertainties of the political situation, the securities market was very unsettled in the
opening months of the year and no loan was actually floated before the 15th August
1947. After the doubts about the political future had been cleared by the decision to
partition the country, there was some improvement in the position and although the
market has been fairly steady in recent weeks, there is not as yet any large sustained
demand for investment. Government issued early this month a fifteen year loan for
Rs. 40 crores carrying interest at two and three quarter per cent with facilities for
10
holders of the 31 per cent. Loan 1947-50, falling due for discharge on the 15th of that
month to convert their holdings. The loan was issued at the beginning of the busy
season and was not expected to be oversubscribed. But the public still seem to be
hesitant in taking up Government loans and if their holding off is due to any lingering
doubts about the responsibility for the repayment of the outstanding debt, I hope they
will be reassured by what I have stated elsewhere that the Indian Dominion remains
responsible to the bondholder. The need for money is now as urgent as ever if
Government are to finance their own development plans and assist the Provincial
Governments to implement their plans for development. There is also the short-term
aspect to this problem, viz. the urgent necessity to counter the inflationary forces
which are still present by withdrawing from the public as much surplus purchasing
power as possible through Government loans.
24. Hon’ble Members must have noticed that in recent months there has been
some criticism in certain quarters of the cheap money policy of the Government. At
the last Annual General Meeting of the shareholders of the Reserve Bank the Governor
of the Bank made some observations on this question. Under the influence of that
eminent economist the late Lord Keynes, cheap money has been the cardinal feature
of the monetary policy In many countries. It is no wonder that the Government of
India fell in line with this trend in monetary policy. The House will realise that there
is no absolute criterion by which to judge the propriety of rates at which Government
borrow in the market. In the long run it is mainly a question of keeping a balance
between the demands of Government on the market and the demands of Industry so
that the available funds in the country are used to the best advantage. In the United
Kingdom where the pursuit of this policy culminated in the issue of a 21 per cent
irredeemable loan last year, attempts are being made to consolidate the progress made
so far and not to proceed further in the same direction. I realise that if there is the need
for such a cautious policy in a country where the economy is mature and the money
and capital markets are highly developed, it is all the more necessary in the case of an
economically backward country like India. Our efforts will now be directed towards
consolidating and stabilising the position so far gained. There is no intention on the
part of the Government to reverse the policy and thereby jeopardize the interests of
those who have trusted the Government with their money. Our borrowing programme
will be such as will enable us to obtain the funds required by Government as cheaply
as possible without in any way affecting the flow of investment into industry. It is also
my intention to reorganise the small savings movement which was considerably
expanded during the war years, so that it might be retained as a peacetime organisation
with the primary purpose of encouraging savings among the middle classes. In co-
operation with the Provincial Governments, steps will be taken to place the movement
on a permanent footing. I take this opportunity of appealing to the chosen representatives
of the people in this House to co-operate with Government fully in their borrowing
programme. If the standard of living of our people is to be substantially raised by
undertaking large schemes of development, both the rich and the middle classes should
come forward to place their savings at the disposal of the Government.
11
STERLING BALANCES
25. The House will, I am sure, be interested to get some information on the
subject of the sterling balances, the recent agreement regarding which between ourselves
and His Majesty’s Government in the United Kingdom I placed on the table of the
House a few days ago. The peak figure which the sterling balances reached was Rs.
1,733 crores on the 5th April 1946. Thereafter, they have declined very rapidly. At the
end of March 1947 they stood at Rs. 1,612 crores showing a reduction of Rs. 121
crores in twelve months. In the middle of July 1947, from when our new agreement
became effective, they stood at about Rs. 1, 547 crores. We had thus drawn as much
as Rs. 65 crores in a little over six months. These large decreases were due largely to
heavy imports mainly of food grains and of consumer goods, of which the country had
been starved during the period of the war. They also reflected some movement of
capital from India, largely British.
26. This rapid depletion of the sterling balances caused some anxiety to the
Government of India. These balances represent the entire foreign exchange reserves
of this country and it is of the utmost importance that they should not be lightly
frittered away on the import of unessential and luxury articles or on luxury living in
foreign countries for they thereby reduce pro tanto the capacity of this country to
finance capital and developmental expenditure abroad. The view of the Government
of India is that these reserves should not be used to finance deficits in the balances of
payments on what may be called normal current account. Our aim should be to meet
our normal day-to-day requirements from abroad through the earnings of our current
exports and we should draw upon these accumulated reserves, broadly speaking, only
for the purpose of purchasing capital goods, the import of which is necessary for
developing the agricultural and industrial productivity of the country.
27. With this aim in view, the Government of India decided to follow a more
restrictive import policy from the second half of the calendar year 1947. Broadly
speaking, that policy consists of dividing imports into three categories: free, restricted
and prohibited. Imports of food, capital goods, the raw materials of industry and
certain essential consumer goods are free and no exchange restrictions are placed
upon their import. Consumer goods which are not absolutely essential are licensed on
a quota basis, while others which in the context of the economy of this country must
be regarded as totally unessential and luxury imports have been altogether prohibited.
Together with the restrictions on imports were introduced certain restrictions on
remittances abroad, in particular on the transference of Indian capital. These new
policies are now showing the effects which they were calculated to have and the
reduction in the sterling balances between the middle of July and the beginning of
November 1947 has only been Rs. 21 crores. I should like to point out, however, that
in one substantial respect the import policy now in force differs from that in force
previously, in that in the licences issued for the licensing period June to December
1947 no discrimination has been made between currencies and imports from the dollar
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area have been allowed on the same basis as imports from the sterling area. This
position, which the House will no doubt welcome, has been brought about by the
terms obtained by us in our interim negotiations on the sterling balances. The main
features of this agreement, which holds good to the 31st December 1947, are that the
Indian sterling balances have been divided into two accounts which may well be
likened to a deposit account and a current account. The current account has been
opened with a credit of £65 millions. All fresh earnings of foreign exchange are
credited to the current account and all balances in the current account are available for
expenditure in any part of the world including the United States of America. The
deposit account is not available for ordinary current transactions but can be drawn
upon only for certain limited purposes such as the repatriation of British capital from
India, the payments of pensions, provident funds and gratuities outside India and
certain other defined categories of payments.
28. Shortly after this agreement had been signed there arose the dollar crisis.
The strain on the dollar reserves of the United Kingdom Government was felt by them
to be so great that they were compelled to break their agreement with various countries
regarding the free convertibility of sterling into dollars. I am glad to be able to report
to the House that our agreement stands unaltered and intact and that as long as we
have any balance to our credit in the current account we shall be able to spend it
without question in any currency area. The United Kingdom Government have,
however, appealed to us for our co-operation in the matter of saving dollars and we
have promised them this co-operation. We are now engaged on a review of our import
policy and are investigating other means to save dollar expenditure and we may have,
I fear, to reintroduce in the next licensing period the discrimination in favour of imports
from the sterling area which we removed only so short a time ago. We trust, however,
that it will be possible so to arrange this discrimination as not to injure the vital needs
of the country’s economy.
EMPIRE DOLLAR POOL
29. The country has always displayed an interest in the arrangement commonly
known as the Empire Dollar Pool. As has been explained before, the arrangement is
that the countries of the sterling area hold all their foreign exchange reserve in sterling,
selling currencies which they do not need to the Bank of England and buying from the
Bank of England currencies of which they are in short supply. As a consequence, there
is always in the custody of the Bank of England a pool of foreign exchange from
which members of the sterling area can buy for sterling the currencies which they
need. A more correct name for this arrangement would be “the Sterling Area Pool of
Foreign Exchange”. It has come to be known as the Empire Dollar Pool only because
the most important of the foreign exchanges in the pool is the United States dollar.
30. Figures have been published by, Government from time to time of India’s
earnings of dollars and other hard currencies and of her expenditure of these currencies
and I shall now bring these figures up to date. From September 1939 up to the 31st
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March 1946 we earned Rs. 405 crores worth of United States dollars and spent Rs. 240
crores worth of United States dollars, leaving a surplus of Rs. 165 crores. On the other
hand, in the same period we spent net Rs. 51 crores worth of other hard currencies,
namely those of Canada, Switzerland, Sweden and Portugal so that our net surplus on
hard currency account was Rs. 114 crores. Daring the year 1946-47 we had a deficit
in the balance of payments with the United States of Rs. 15 crores, having earned Rs.
83crores and spent Rs. 98 crores, and a deficit in the balance of payments with other
hard currency countries of Rs. 7 crores. It may therefore be assumed that we contributed
net to the pool between September 1939 and March 1947 Rs. 92 crores worth of hard
currencies, which is the equivalent of 275 million dollars. During the quarter April to
June 1947 we have had a net deficit on hard currency account of Rs. 15 crores. It will
be observed, therefore, that since the financial year 1946-47 we have been consistently
drawing on the pool for our dollar requirements and that we are at the moment also in
heavy deficit with the United States and other hard currency countries. Generally
speaking, however, I would say that, thanks to our policy of foreign exchange restriction,
we hope to end the year in a fairly comfortable financial position externally. What
definite policy we will follow from the next year I am not now in a position to say
because our agreement terminates at the end of this year and we do not yet know what
kind of agreement will replace it. I fear, however, that in view of the dollar crisis
which has threatened not only the United Kingdom but the entire world, we may be in
somewhat greater difficulty in the matter of dollar exchange than we are now. We
hope to enter shortly into further discussions with the United Kingdom Government
on the subject of the sterling balances.
POSTWAR PLANNING AND DEVELOPMENT
31. The House will remember that In the budget for the current year provision
of Rs. 100 crores was made for development expenditure, Including a provision of Rs.
45 crores for grants to Provinces. The partition of the country has naturally affected
the scale of this expenditure as the Government of India are no longer concerned with
the expenditure on development in the Provinces and areas now included in Pakistan.
When the partition of the country was decided upon, Provincial Governments were
informed last July that so far as the period upto the 15th August 1947 was concerned,
the Government of India would make advance payments to cover expenditure on
approved schemes upto the maximum of the proportion of the budget grant for this
period. The Provinces were also advised not to enter into any major commitments that
were likely to embarrass either of the successor Governments. It has since been decided
that for the remainder of the year grants will be available to the Provinces now remaining
in the Indian Dominion on the same scale as was originally planned subject to a
proportionate adjustment on account of the division of the Punjab and Bengal and the
transfer of most of the Sylhet district to East Bengal. In the estimates now placed
before the House a provision of Rs. 20.39 crores has been included for grants to
Provinces and a sum of Rs. 15 crores for loans to them.
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 32. In the last budget speech my predecessor drew attention to the fact that
the resources available to the then Central Government for planning and development
were likely to be less than was originally estimated. What he said then for the then
Central Government is equally applicable to the present Government and in the light
of the reduced resources likely to be available it may be necessary to redraw the
development plans and rearrange their priorities. This does not however mean that
there has been any change In the Government’s policy of giving all the assistance in
their power to the Provincial Governments for implementing their development
schemes. It merely emphasises the need for the Provinces mobilising all the resources
for this purpose and I have no doubt that this is recognised by the Provinces themselves.
The House will appreciate that there is a large measure of uncertainty about the future
allocation of resources between the Centre and the Provinces and till this in decided
it will be difficult to make any forecast of Central resources or determine the extent to
which they will be available for development and I hope to take this question of re-
examining the development schemes with the Provincial Governments shortly.
Meanwhile, all the approved schemes of development will be continued and the
necessary funds will be made available for them. Having given this assurance on
behalf of the Central Government,, I would earnestly urge on the Provinces the need
for conserving all their resources and securing the most rigid economy in expenditure.
As I have stated, the whole basis on which post-war development plans were conceived
has now been upset. The substantial revenue surpluses which were anticipated in the
Central budget will now be turned into substantial deficits. In the context of this new
development, the need for utilizing all the available funds in the most effective manner
possible should be appreciated by the Provincial Governments.
33. In the Central field the progress on development schemes is being
maintained and we are going forward with all the sanctioned schemes particularly
those schemes of river development with long range benefits to the country. In this
connection, the House will be interested to know that an agreement has been reached
between the Central Government and the Provincial Governments concerned regarding
the setting up of the Damodar Valley Authority. Another scheme which is likely to be
taken up very shortly is the construction of the Hirakud Dam in Orissa at an estimated
cost of Rs. 48 crores, the benefits from which will include irrigation for over a million
acres, 350, 000 kilowatts of power and a considerable degree of protection from floods
to the coastal districts of Orissa. It is hoped shortly to reach an agreement on this
project with the Orissa Government and the Orissa States after which the actual work
of construction would begin early in 1948. It is also proposed to concentrate on the
construction of the Bhakra Dam in the East Punjab.
THE DEFICIT
34. I have carefully considered if any part of the deficit for this year should be
covered by additional taxation and I have come to the conclusion that it should be
left largely uncovered. If, for any reason, our ordinary expenditure threatens to
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outrun our revenue there will be a clear case for either reducing the expenditure to
within the available revenue or raising additional revenue to meet the expenditure.
But the circumstances during the period under review have been abnormal and the
deficit is entirely due to these abnormal factors. The expenditure estimates include
Rs. 22 crores for the evacuation and relief of refugees while subsidies for imported
food grains are expected to cost Rs. 221/2 crores. Defence expenditure is also
considerably inflated due to the slowing down of demobilisation following the
partition of the country and the necessity to maintain larger forces than would
normally be necessary. It must also be remembered that no credit has been taken in
the estimates for Pakistan’s share of the expenditure on pensions and interest. If
these factors are allowed for the budgeted deficit of Rs. 26.24 crores will be converted
into a surplus. Notwithstanding this I feel justified in tapping any available source
of income if it could be done without adding to the burden of the ordinary man.
After a careful consideration of all the available sources I have decided to replace
the existing export duty of three per cent on cotton cloth and yarn by a duty of four
annas per square yard on cotton cloth and six annas a pound on cotton yarn. In a full
year this will yield Rs. 8 crores but in the current year the net additional revenue
will amount to only Rs. 165 lakhs leaving a final deficit of Rs. 24.59 crores. A bill
to give effect to this proposal will be introduced at the end of my speech.
GENERAL FINANCIAL POSITION
35. This is the eighth consecutive deficit budget and the House may well ask
itself if our revenue position is sound. I have myself no hesitation in answering that
question with an emphatic ‘yes’. The years covered by these budgets have been
overshadowed by the greatest war in history and no country, whether neutral or
belligerent, has been able to escape its economic effects or its aftermath. The deficits
in the war years were wholly due to the high level of Defence expenditure and were
met as far as possible by raising additional taxation. The return to peace time conditions
has been slower than we anticipated and even this tardy progress has been retarded by
the recent partition of the country and the unhappy developments in the Punjab. I have
just mentioned the large burden thrown on this year’s budget by the unavoidable
expenditure on refugees and the payment of subsidies for foodgrains. In addition, the
expenditure on Defence is much higher than it would be in a normal year. If these
special factors are taken into account it will be seen that we have not been living
beyond our means or heading towards bankruptcy. I do not wish in any way to minimise
our present difficulties or to underrate the effort required to surmount them but I have
no doubt that once we reach fairly normal conditions and are able to reduce our
Defence expenditure to peacetime proportions and curtail our reliance upon import of
foodgrains we should be able to balance the budget. It will be too optimistic to expect
normal conditions for the next year but I feel that with a determined all round effort
we should be able to achieve this result in 1949-50.
36. And what about the general financial position of the country? Here again
while there is no room for complacency there is equally no reason to take a pessimistic
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view. There is no doubt that economically and strategically the partition of the country
has weakened both the Dominions created by it and It to a truism that an undivided
India would have been In every way a stronger State than either. But the Indian
Dominion with its acceding States would still cover the larger part of the country, with
immense resources in men, material and industrial potential. Our debt position is also
intrinsically sound and for a country of its size, India carries only a relatively small
burden of unproductive debt. Our external debt is negligible and we have considerable
external resources in the accumulated sterling balances. At the beginning of this year
the total public debt and interest bearing obligations of undivided India stood at roughly
Rs. 2,531 crores of which only Rs. 864 crores represented unproductive debt and Rs.
36 crores. external debt, while her external reserves amounted to over Rs. 1,600 crores.
The share of Pakistan in these has not yet been determined but it is unlikely to affect
the broad proportions of this picture.
37. The only disturbing features in the position are the persistence of
inflationary trends and the unsatisfactory food position to both of which I have drawn
attention elsewhere. The only real answer to inflation is to increase our internal
production and thereby close the gap between the available supplies and the purchasing
power in the hands of the community which in present circumstances imports cannot
bridge. Till this position is reached the community must conserve its purchasing power
by lending it to Government. As regards food, I am sure the House will agree that the
country cannot depend indefinitely on imports. For one thing this places us at the
mercy of foreign countries for our vital necessities and for another large scale Imports
of foodgrains seriously affect our foreign exchange position and threaten to consume
the bulk of the available resources which are badly required for the industrialisation
and development of the country. We must concentrate our energies on producing as
much food as possible within the country. I suggest that this to not an impossible task,
for after all the total Imports from abroad, which have never touched more than 21
million tons in any year so far, represent only a fraction of the total foodgrains
amounting to 45 million tons we produce, although they make a large hole in our
available foreign exchange.
38. I should like to make a few observations on the criticism made in certain
quarters that the level of taxation introduced in the last Budget has seriously affected
the incentive for Investment. In their last Annual Report the Central Board of Directors
of the Reserve Bank of India have observed “There seems little doubt now that the
severity of the last Budget is defeating its own purpose and is hindering the formation
of capital for productive purposes. Unless correctives are applied without delay, there
is a danger of the very foundations of society and economic life of the country being
undermined by deepening penury and despair”. A pronouncement of this kind coming
from such an authoritative source must receive serious notice. I have no doubt in my
mind that it was not the intention of the Government to so arrange its taxation policy
as to stifle the growth of Industry in the country. On the contrary, it is of the utmost
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importance that the country should be industrialised rapidly so as to secure increased
production and a widening range of employment for the people. There is no need for
any serious difference of opinion based on more ideological differences. Whatever
might be the ultimate pattern of our economic structure, I hold the belief that for many
years to come there is need and scope for private enterprise in industry. We cannot
afford to lose the benefit of the long years of experience which private enterprise has
gained in the building up of our industrial economy. I believe that the general pattern
of our economy must be a mixed economy in which there is scope both for private
enterprise and for State enterprise. Before I present the annual Budget to this House
next February. I shall make a careful examination of the consequences of our taxation
policy and endeavour to make any adjustments that may be necessary to instil
confidence in private enterprise. In the meantime, I may assure the House that it is not
the policy of the Government to hamper in any way the expansion of business enterprise
or the accumulation of savings likely to flow into investment.
CONCLUSION
39. I would conclude the Speech with an appeal to this House and through the
House to the country at large. For the first time in two centuries we have a Government
of our own answerable to the people for its actions. A to the duty and the privilege of
such a Government to render an account of its stewardship to the representatives of
the people, but it has also the right to ask for the co-operation of the entire community
in the carrying out of the accepted policies. Events of the last few weeks have
unmistakably shown that the political problems arising out of our status have not yet
been fully solved. While we have secured freedom from foreign yoke, mainly through
the operation of world vents and partly through a unique act of enlightened self
abnegation on behalf of the erstwhile rulers f the country, we have yet to consolidate
into one unified whole the many discordant elements in our national life. This can be
achieved only by the rigorous establishment of the rule of law which is the only
durable foundation on which the fabric of any democratic State can be raised. Respect
for law is essentially a matter of political training and tradition and transition from a
dependent to an independent status always makes it difficult In the initial stages to
secure that unflinching obedience to the rule of law which always acquires a new
meaning in a new political context. If the fabric of the State is not built on durable
foundations, it will be futile to try and fill it with the material and moral contents of
a good life. If India, just risen from bondage, is to realise her destiny as the leader of
Asia and take her place in the front rank of free nations, she would require all the
disciplined effort her sons can put forth in the years immediately ahead. The willing
help and co-operation of all sections of the community is required in maintaining
peace and order, in increasing production and in avoiding internecine quarrels whether
between communities or between capital and labour. I am sure my appeal for this help
and co-operation will not go in vain.
(November 26, 1947)

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