The cabinet has approved a budget for the second half of the current fiscal year (2005-6), with considerable cuts in import duties on 125 items, thus bringing the average customs rate down to 8 per cent (from the existing 9.6) per cent. These changes raise fears of their negative impact on the domestic industry as well as on the collection of government revenue. But some government officials argue that the reductions would not affect the domestic products because the cuts relate to such manufactured items as two-wheelers, electronic goods, TV sets, musical equipment and power generating sets. Finance ministry estimates are reported to put the loss in revenue from the changes in import duties at Rs.1.7 billion, but it does not seem to have any strategy in place for offseting this shortfall.

However, minister of state for finance Dr Roop Jyoti says the revenue would indeed grow as, claims he, the reductions would encourage importers to use legal channels, thus cutting the volume of smuggling. The measure, according to Dr Jyoti, was necessary to discourage undervaluation of imported goods with its adverse effects on VAT collections. But even within the ministry there are dissenting murmurs as the tariff cuts, apart from their destablising effects on revenue, could also be incompatible with the proposal for the gradual reduction of customs duty under the SAFTA arrangement. Except for the tariff cuts and some changes in income tax, the ordinance leaves the annual estimates for revenue, recurrent and capital expenditures unchanged.

Dr Jyoti may also be docked on the ground that duty cuts include items such as motor-cycles and electronic goods his family is commercially connected with. He also failed to keep the tariff cuts confidential, which helped businessmen delay imports. Barring further changes, the present changes reflect the second amendment to the budget announced last July, reflecting the way the government is making free with the budget provisions, which is certainly not advisable, under cover of the ‘compulsion’ to bring out a budget through ordinance. There is another argument which conflicts with Dr Jyoti’s: the cuts in tariffs will boost rather than reduce smuggling. At a time when donor support as well as sources of revenue are shrinking with the low performance of the economy, how the government can successfully manage its finances is a huge question, all the more so in the light of the fact that non-productive expenses, particularly security budgets, continue to soar. Development is sure to suffer further.