What is expected of this year's Union Budget ? A lot has already been written and much more would be forthcoming as the last day of February approaches. The most notable departure from other years is the replacement of month-long interactive meetings with a cross-section of experts and associations by a timely publication of a report on Direct and Indirect taxes by the Advisor to the Finance Minister. The report, as it happens with any other publication, has been hailed by many as pathbreaking and by many others as devoid of any serious analysis. No wonder the political implications of the implementation of some portions of its recommendations are not found palatable to the ruling party, particularly those relating to withdrawal of exemptions in Income tax. Does it mean that if the elections were not so near, the Kelkar recommendations (KR) would have occupied the maximum space in the Budget speech of the FM as well as in the Finance Bill ? It appears that the introductory observations in the report on transparency, trust and other fiscal virtues can still find place in the FM's speech. The simplification of the systems and procedures is a non-controversial item and KR in this regard has over-fulfilled the expectations. We may thus take a critical look at KR in the area of indirect taxes.

Almost at the same time the Annual Report by Director General, WTO on International Trading Environment has made significant observations on various features of global trade that are surfacing with alarming pace. One could easily perceive a lament for the lack of principles and guidelines propounded by WTO to shape the current pattern of international trade. This has no doubt generated lots of hope for the Doha Development Agenda. The expectations of developed and developing nations in the forthcoming ministerial meeting vary so much that the negotiations are bound to linger for a long time.

First, it has taken a leaf out of the analysis by the author of the uniform customs duty structure for Indian economy. A distinction has been made between nominal protection and effective protection and it has been proved by simple example that, if everything follows in that ideal manner, a low nominal protection to an indian manufacturer does virtually lead to a high effective protection in most of the cases and, therefore, there is a strong case for lowering of nominal protection in the form of customs duties. The basic premise in the analyst's perception is that foreign manufacturer is more efficient as exemplified in higher value addition in input-output norm and hence the inefficiencies of Indian producer gives him an undue protection much more than provided by the nominal customs duties. This is a golden regime where predatory pricing and other market-distorting practices by the foreign supplier are kept out of consideration while working on excellent tabular formulations to bring home the point. And who does not know that pricing behaviour which does not follow the most efficient value-addition norm-based costs can be and are indeed taken care of under the umbrella of an agency called WTO?

A sectorwise analysis either in terms of a input-output model or a flow chart that quantifies inflow and outflow of goods in the economy is outside the purview of our analysts. And hence the reliance on these make-believe table to formulate a comprehensive customs duty structure for the economy. The Consultation Paper has raised hopes but the perfunctory analysis in customs duty structure in the final KR is frustrating.

There is no attempt to define what is meant by raw materials, intermediates and final goods. It is taken for granted that high customs duties of 25/30 percent on steel has prevented the final goods of automobile, consumer goods from being cost-competitive in the global markets. One wishes to look at the past data as to what extent the prices of these products came down alongwith reduction of customs duties on steel. If the answer is negative and which is a reality, the question arises who gets benefitted by the reduction of duties? The rationale that steel as a raw material needs to have a low customs duty to bring down costs of these final products should also consider the details of import-intensity of these products. If with rise in prices of inputs, the prices of so-called finished goods goes up (recent hike in Maruti prices a/c rise in steel prices) then why the opposite never happens in our market? In most of the cases, the empirical data show that it is the cheapness of the products rather than the quality which is being sought while taking decisions in favour of imports of steel. It may also be true of many other items which have been clubbed under raw materials and intermediates in the final KR. The underlying assumption in KR that high customs tariff in steel has prevented the import-intensive export production of other finished items from becoming globally competitive presupposes a lot more things that are not substantiated in indian condition and are merely generalised from a preconceived academic bias.The report has acknowledged that one part of industry feels that prevalence of various internal and infrastructural bottlenecks need solution before the ASEAN duty levels are implemented in India. This has been completely ignored in the final KR, perhaps due to the familiar economist's logic that price-differentials in non-tradable goods ( power for instance) are best taken care of by exchange rate variation. One wishes the global steel trading takes place in PPP-determined( Purchasing Power Parity) price-indices.

Notwithstanding what is written in the above paragraphs, an across-the-board reduction of customs duty by at least 5 percent is very much on the cards. This implies that duty rates on Pig Iron and semi-finished steel would be 10 and 20 percent respectively. Duty on HR Coils is likely to be 20 percent, while those on other steel products would be 25 percent. As rupee is appreciating in terms of dollar, the duty reduction of 5 percent on HR Coils, for instance, may well translate into a landed price reduction of approx. 6.25 percent. At the current level of international price, it is equivalent to a fall of around Rs.992/- per tonne.If there is no further rise in global prices in the next two months, which is unlikely, it may result in a downward pressure on the domestic prices. Would that lead to a lowering of prices of the goods using HR Coils and thus become globally competitive? We may wait for an answer.

Keeping in view our commitment to WTO on reduction of tariff rates, the Kelkar paper has acknowledged the complexity of distinguishing steel between an input or a finished product. It has tried to carry forward the statement of the erstwhile Finance Minister that India needs to bring down its tariff rates to Asian level by 2004-05. It is not known if Asian level rates are exactly what our commitment to WTO stands. In that case the bound rates for steel tariff fixed at 40 per cent a few years ago would be renegotiated to bring them at par with those of some of the other complying members. To reach the Asian level is tantamount to a steep reduction in the tariff rates in the next two years. The following table summarises the extent of reduction in tariff rates that is implied in various broad product categories in the next two years.

The withdrawal of SAD of 4 percent has been demanded by many segments of the industry who are of the view that 4 percent on the top of a minimum 5 percent customs duty make the duty incidence quite steep. SAD compensates the domestic manufacturers of the various local taxes and levies including sales taxes. The withdrawal would not hamper the interests of domestic manufacturers, if these are not indigenously available, like Coking/ non-coking coal with ash content less than 12 percent. An across-the-board withdrawal may await the implementation of VAT in the country, as rightly mentioned in KR.

Imposition of CVED on all categories of import has found a place in KR. If implemented, this would meet a long-standing demand of domestic manufacturers. The facility of deemed export which also envisages nil payment of excise is restrictive as this can be availed only in special cases.

KR has outlined wide-ranging steps to revitalise the customs and clearance activities.This year's budget may well implement some of them. One wishes the aspect of regular diversion of duty-free steel under various export incentive schemes to domestic tariff areas, thereby negating the very premise that low duty-based steel imports benefit export trade, could have found a place in the final KR.

(These are the personal views of the author)