Indu Arora & Khushboo Mehrotra
MBA IV semester (Finance) students
WISDOM, Banasthali Vidyapith

In this year of elections, continuing sluggishness in global recovery, a 9-month long military stand-off on our borders and the worst draught we have faced in three decades, it was a real testing time for Finance Minister Jaswant Singh to formulate a budget that would deliver the feel good factor to everybody. But has he really delivered it? We make an attempt to find out the same through 'The Budget Crystal' developed by Prof. Subhash Sharma (Southern Economist, Vol.39, No.22, March15, 2001, p32.). The crystal helps in analyzing budget from seven different angles viz.:

1.Common Man's Perspective 2. Corporate Perspective 3. Sectoral Perspective 4. Fiscal Perspective 5. Security Perspective 6. Development Perspective 7. Local Global Balancing.

In this paper, we have tried to understand the budget from these angles.

Common Man's Perspective

The Budget has brought a mixed package fort the common man. The smiles come from the removal of 5% surcharge levied last year, hike in standard deductions, more tax rebates, dividends being made tax free in the hands of investors, excise duty cuts on several household items etc.

But the gloomy side begins with reduction in small savings' interest rate by 1% and increase in service tax rates from 5% to 8%. A direct hit comes from the increase in prices of LPG, petrol and diesel. On the whole the budget appears to be 'middle class friendly' and it is the first time that salary earners do not feel frustrated. It's a super six for the common person but an increase in tax exemption limit would have sent him to World Cup (happiness) Final!
Corporate Perspective

Most demands of the corporate sector seem to have been met in this year's budget. There has been rationalization of tax structure with excise slabs cut to three - 8%, 16% and 24%, introduction of VAT, surcharge being halved etc. Abolition of expenditure tax for hotels, continuation of tax exemptions u/s 10(a), 10(b) for IT, completion of CENVAT chain and reduction of excise on cotton and yarn, enhanced FDI limits for the ever growing telecom - the 'T' sector seems the favourite this year (Textile, Telecom, Technology, Tourism)

Other major gainers being Pharma (DRL, Ranbaxy), Automobile (TELCO, M&M), Media (Saregama, Zee Telefilms), Steel & Cement (ACC, TISCO). However the Capital Goods sector (BHEL, ABB, L&T) could face stiff competition due to reduction in customs duty.

Overall, large sections of industry have benefited but one needs to keep the fingers crossed as neither the government nor the corporates are very clear about possible gains from VAT. For instance Grasim is considering to raise fabric prices, as the benefits of VAT are still not clear. 

Sectoral Perspective

The budget seeks to bring a second green revolution in agriculture sector.  Introduction of central sector scheme in Hi-tech horticulture and precision farming, development of price stabilization fund of Rs. 500 cr. For tea coffee and natural rubber growers, reduction in customs duty on veterinary drugs from 15 % to 10%, easy availability of credit and measures towards conservation of land and water resources would give a boost to the declining agricultural growth however the hike in prices of diesel, petrol and urea might give a little pinch.

In the service sector, tourism has been the major gainer.  Apart from exemption from luxury and service taxes, restoration of LTC facility to govt. employees and other development measures have served a great menu for the tourism industry.  However hike in service tax from 5% to 8% and increased coverage might break the absorption limits and make the customer feel the heat of it.  Also there is a lack of clarity about inclusion of many sectors (like IT enabled services) in this tax net.

And the corporate sector as expected has got its due share in the pie. Overall, it seems that the corporate sector has been the favorite this year (a departure from the past budget) .The government intends to give more and take less from it.

Fiscal perspective

Fiscal deficit has always played a spoilsport, with the numbers never coming up to the mark. The fiscal imbalance is up 13% as compared to the last year's budget estimate. In terms of GDP the 2002-03 target was 5.3% and this touched 5.9%. According to revised estimates next year's target is 5.6%.

While the total expenditure for the next fiscal has been projected at Rs.435795 cr., the revenue receipts are expected to be Rs.253935 cr. What is worse is the center's inability to effect any significant cuts in non-plan expenditure. This has shot up by almost 10% compared to revised estimates of the current fiscal, to Rs.317281 cr. in 2003-04.

Jaswant Singh's fiscal consolidation measures include a pilot project to initiate cash management in some major spending ministries, continuing with the policy of prepayment of external debt (using up surplus foreign exchange which stands comfortably at US $74 bn), a new scheme to buy back old domestic debt from banks and a Rs.100000 cr. debt swap package for the states.

Security Perspective

Government showing its commitment towards modernizing the armed forces and equipping them with best available, has allocated Rs.9300 cr. for defense. Declaring that there will be no shortage of funds for defense preparedness a 14% proposed hike for defense is a welcome move.

However one needs to consider that China and Pakistan spend 5.5% and 4.6% of GDP on defense every year, while we spend just 2.4% never the less, this was the third year in running that defense ministry had surrendered huge unspent fund with major armaments deals like the acquisition of French Scorpene Submarine and with increasing emphasis on private sector involvement, government can reduce the budgetary allocation. Overall well done FM.

Development Perspective

Realizing the importance of infrastructure development in the growth of the economy, the Finance Minister has taken several welcoming steps: 48 new projects with Rs.40000 cr, airport projects worth Rs.8000 cr., fiscal incentives for power projects, modernization of ports etc. This would create more jobs and give a push to all major sectors of the economy, especially steel and cement.

On the social front, the budget has come up with 9% interest guaranteed pension scheme for senior citizens, additional tax benefits for handicaps, and a special community based health insurance scheme for BPL families. Supporting the education frontier, a tax rebate of Rs.12000 per child has been proposed. To maintain the present momentum of growth in the housing sector, the interest deductible under IT up to Rs1.5 lakh continues and the benefits of this scheme are available irrespective of the year of completion.

This time the government has scored well on the SHE frontier (Shelter, Health, Education).

Local Global Balancing

In this arena too, a balanced approach can be seen. On the videshi front, the peak customs duty has been brought down from 30% to 25% and corporate taxes remain the same. Action can be seen in the banking sector in which the FDI limit has been raised from 49% to 74%.

While on the swadeshi front, government has increased overseas investment limit from 50% to 100% of Net Worth. Also the ceiling of US $ 100mn on prepayment of ECB has been removed.

The government remains impartial to both the fronts and seeks to bring procedural improvement by rationalizing and modernizing customs clearance. Also a self-assessment scheme for exporters and importers is proposed.


Although the budget seems good but it's all a number game. The development activities can be carried out only if the revenues are realized, as projected. But the past experiences show that there is a large gap between these two. Overall the budget is modest on economic reforms, strong on Tax procedural reforms, weak on tax policies and seriously lax on expenditure control and fiscal deficit.

The actual growth will be achieved if the proposed measures are actually put into action, in real time and with no more Rollbacks. Hoping the difference of 'Kathni and Karni' doesn't drag the budget, making it yet another report from the FM's chair.

1.Budget Speech, The Economic Times, Feb.28, 2003.
2.Economic Survey, The Economic Times, March 1, 2003.
3.Purohit H., "analysis of Budget 2002 Through Crystal Maze", Southern Economist, Vol.40, No.22, March15, 2002, p28.
4.Sharma S., "The Budget Crystal", Southern Economist, Vol.39, No.22, March15, 2001, p32.

Indu Arora & Khushboo Mehrotra
MBA IV semester (Finance) students
WISDOM, Banasthali Vidyapith

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