India Indian Budget 2007-08
Compiled by:
Swiss Embassy in India
New Delhi, March 2007
Introduction The Indian Budget 2007-081 has come in the backdrop of a buoyant economy. The country’s average real GDP growth was 8.2 per cent during the last three fiscal years – 2003-04 to 2005-06, and during the first three quarters of the current fiscal year 2006-07, the growth momentum has not only continued, but has scaled up to 8.9 per cent. The vibrant growth of the industry (about 10 per cent) and services (about 11 per cent) have been the driving force behind the present buoyancy. The growth in the agriculture sector remains subdued (about 2 per cent), and, given the fact that more than 50 per cent of the Indian population depends upon this sector, it presently poses a great challenge for India. In spite of some ‘grey’ areas, e.g. relatively high fiscal deficit, the current run of the Indian economy in general and the rejuvenation in the industry sector in particular, has been consolidating India’s position in the global economy.
Some key budgetary proposals • • • • • • • • Reduce basic customs duty on non-agricultural products from 12.5 percent to 10 percent. Reduce Central Sales Tax from 4 percent to 3 percent, in an effort to finally phase out this tax by 2010. Reduce basic customs duty on specified food processing machinery to 5 percent. Reduce basic customs duty on specified chemical products to 7.5 percent. Reduce basic customs duty on specified medical equipment to 7.5 percent. Reduce basic customs duty on watch dials and movements to 5 percent. Expand Service Tax net by adding seven more services that are now liable to pay this tax. Increase Dividend Distribution Tax from 12.5 per cent to 15 per cent, and in the case of Money Market Mutual Funds and Liquid Mutual Funds from 12.5/20 per cent to 25 per cent.
1
The full text of the Indian Budget 2007-08 is available at: http://indiabudget.nic.in/ub2007-
08/ubmain.htm Download from: www.osec.ch
• •
Extend the Minimum Alternate Tax (MAT) to Export-Oriented Units, and units functioning in Software Technology Parks, Electronic Hardware Technology Parks and IT/ITES industry. Increase Education Cess on direct and indirect taxes from 2 per cent to 3 per cent.
Impact on some specific sectors Machinery: The process to reduce the customs duty has been continuing for the past many years, and it has certainly helped the foreign suppliers to have better access to the Indian market. This year, there is a major reduction of duty on food processing machinery and medical equipment, as well as on equipment meant for R&D activities in pharmaceutical and biotechnology fields. Furthermore, reduction in Central Sales Tax rate will result in marginally lowering the cost for the end users. Textile: The increased allocation of funds for Textile Integrated Parks and the Textile Technology Upgradation Fund Scheme (TUFS) will boost the setting up of additional capacities in the country, both for domestic and export markets. Furthermore, there is duty reduction on some raw materials, e.g. polyester yarn and fabric. These new measures will certainly have positive impact for this sector, including the textile machinery. Agriculture/Infrastructure: The budget has a major focus on agriculture as well as infrastructure. The increased funds available for irrigation, better quality seeds, crop protection, and rural infrastructure, as well as duty cut on irrigation fitting etc., will create better business opportunities in the rural India. In the infrastructure sector, power, roads, and ports segments will see better business opportunities due to segmentspecific new initiatives announced in the budget. Chemical and Pharmaceutical: The budget has raised the allocation of funds for the healthcare sector to INR 153 billion, which will have positive impact on demand for healthcare products. The 150 per cent weighted average tax deduction for R&D expenses has been extended for five more years, and this is a good development for research-based companies. The reduction in import duties on chemicals will result in better access to the Indian market. The removal of Service Tax on clinical trials will help India compete with other emerging clinical trial destinations.
Comments This year’s budget is in line with the Indian government’s focus on sustaining the current buoyancy in the economy and continuing fiscal consolidation. The changes being introduced with the budget are nominal and therefore the impact on various sectors is not drastic. As a matter of fact, due to prevailing sound economic fundamentals, the corporate India was expecting bold and transformational reforms, but it seems that such reforms would have to wait for some more time mainly due to “political compulsions”. With a 8-9 per cent GDP growth, India remains amongst the fastest growing economies in the world, and is gradually strengthening its role in the global economy. There are some good things happening – the saving and investment ratios are improving (reached 32.4 percent and 33.8 per cent of GDP respectively). There is a healthy foreign exchange reserve of US$ 180 billion. The foreign direct investments are growing rapidly (reached US$ 12.5 billion during April-January in this fiscal year, registering an increase of about 150 percent over the corresponding period of previous fiscal year).
Download from: www.osec.ch 2
The foreign trade is booming, with exports having gone up by 32 per cent during the period April-January in this fiscal year as compared to the same period of previous year, and the imports also increased by 37 per cent during the same period (non-oil imports are up by 23 per cent). The boom in the domestic consumption is continuing and remains the main push for the current vibrancy in the economy. The government is able to lower the fiscal deficit in accordance with the target set for the current year, of course due to rising revenue receipts consequent to healthy growth of corporate India. The proportion of direct taxes in the total taxes has been increasing over the past few years and it has now reached almost 50 per cent, which is a good sign of the maturing of the Indian economy with import duties and some other indirect taxes gradually going down. The government claims that the present growth in the economy is not on account of a “cyclical upturn” but a result of a “structural shift” induced by industry and service sectors expanding robustly. The growth in the services sector has been quite good over the past many years, but now it is the industrial sector which is rejuvenating and very much facing new challenges and opportunities of globalisation. However, there is currently one area that is of great concern to the government - the inflation rate in terms of wholesale price index has gone up to 6.5 per cent mainly due to supply side factors and higher consumption consequent to buoyant economic growth. The Finance Minister has focused on lowering it to at least 5-5.5 per cent in line with the target set by the Reserve Bank of India. Many experts feel that it will not be a difficult task to lower the current inflation, however, failure to do so could result in upsetting the economy’s growth momentum. In addition to control the inflation, there are many other tasks yet to be accomplished by the government, for example improve the prevailing infrastructural bottlenecks, implement some pending major reforms – labour reforms, agriculture reforms, financial sector reforms -, further open up the economy. India’s economic growth story remains intact at the present juncture, and such a vibrant growth is opening up greater business opportunities for both the domestic and foreign companies. Already, the relatively higher growth in the Indian economy has made a positive impact on Swiss export to India, which grew by 36 percent in the year 2006. The sectors, such as industrial machinery, precision instruments/equipment especially for research and development work, chemical and pharmaceutical, power, textile, processed foods and technology, construction, railways, and telecommunication will be offering better scope for increasing Swiss trade and investment with/in India.
Download from: www.osec.ch
3