Budget and challenges before government
Ferdous Ara Begum | Saturday, 28 June 2008
THE proposed budget for fiscal 2008-09 has been able to draw the attention of many because of its high quality social safety-net programmes, policies for small and medium enterprises (SMEs), extension of tax holidays, reduction of corporate rate of taxes and so on. But the budget is to some extent slipshod so far as it is about giving specific direction to improve business confidence by enhancing investment, creating more employment, resolving problems of sick domestic industries, strengthening enabling environment to give business momentum, strengthening capital market, reducing inflation and addressing poverty situation. Budget discussion is still going on as usual. Those concerned have put forward their opinions. However, it is the prerogative of the policymakers to considered whether any of those post-budget opinions would find place in the final version of the budget.
A recent study by CPD mentioned that growth rates for both agriculture and industry have come down by 1.0 per cent and 1.5 per cent respectively. Growth of service sector did not show much change. Budget has fixed a conservative gross domestic product (GDP) growth of 6.5 per cent though in the Poverty Reduction Strategy Paper (PRSP) that was revised up to June 08, the target was set at 7.0 per cent. Low Annual Development Programme (ADP) has been justified due to its poor implementation in the past consecutive years. It could have negative impact on employment generation. Draft PRSP projects entry of 1.8 million people in the labour force every year during 2009-11. How this problems will be addressed is not mentioned in the budget. When the budget has taken several positive steps to create employment for rural poor, it did not give visible policy for young educated graduates, the number of which has been increasing to a significant rate each year.
Some very important issues remain to be addressed. The industrial sector is suffering since long. Those have to engage manpower hired from abroad at a very high cost which increases cost of doing business. Manpower beyond supervisory level is very difficult in Bangladesh to find even in the textile sector for which we are pioneer. We could have done much better if we could manage and create skilled labour in this sector. People having their education abroad may be encouraged to come back as it has happened in other countries.
We are lagging far behind in technology. The budget did not give any directive for adequate Research and Development (R&D) to scientists so that they might contribute more. So, whatever R&D fund has been allocated may not be utilised because of weak institutional arrangement. Like in the past, budget has allocated the highest amount for human resources development. From the Dhaka Chamber of Commerce and Industry (DCCI), there was a suggestion to allocate a separate budget for educational infrastructure and skill development.
On-the-job education like in Japan and other developing countries can be introduced. The government may announce a scheme so that after finishing the Secondary School Certificate (SSC) or Higher Secondary Certificate (HSC) courses, human resources can be engaged in different practical fields. Private business entrepreneurs can train them according to requirement.
Various fiscal measures have been announced for small and medium enterprises (SMEs) development which we consider is the number one requirement for the country. So far several steps, institutional arrangement and financing schemes have been announced for the SME development but progress is not satisfactory yet. New innovative sectors and bankable projects have not been on the table so that bankers are encouraged to fund them. SMEs need an enabling business environment for the new investors. Among the fiscal measures for SMEs, income tax relief, tax holiday, withdrawal of VAT from the production stage of handmade biscuits, fabrics produced from artificial fibres, and thread using handloom are encouraging steps.
A number of domestic industries are facing closure because of cheap imported finished products. Sometimes for supporting some export-oriented industries, the interests of local industries producing intermediate and semi-finished products are not protected. Locally produced dextrose, glucose, glucose syrup, particle board, carbon rod etc., are some of the examples of these types of domestic industries. Small industries in new innovative areas have to be encouraged so that diversification of exports is possible. Recent development of shipbuilding is an encouraging development for us. At the same time, the effort should be taken so that more value addition by establishing backward and forward linkage industries can be possible and a self-sustained sector is developed. In the industrial policy, for SMEs in particular, a large number of industrial sectors are included as the thrust and booster sector but very few entrepreneurs are encouraged to go for new investments in this sectors. Those who once started a venture are jittery about the complex procedures and the huge gap between the policy announced and its implementation.
It is also very common that finished products of a domestic industry are the raw materials for others. Especially in the case of protecting export-oriented sector, import has been made easier so that quality and standard of exportable commodities can be maintained. On the contrary, the domestic suppliers are claiming that they are competent enough to supply goods of similar quality and quantity. How is one to resolve this conflict of interests? An extensive survey has to be conducted to identify and revive already established industrial enterprises. There could be co-existence of export-oriented and import-substitute manufacturing sector. In the past, there was a pass-book system for industrial owners for importing raw materials, under which the industrial importers and the commercial importers were possible to be separated. These can be reintroduced so that an industrial entrepreneur can get easy access to imported raw materials at a required quantity and at a relatively cheaper rate than commercial importer.
We are aware about a large number of domestic small and medium industries in the light engineering units in medical equipment, electrical and electronic equipment, furniture, ceramics, leather, detergent, cosmetics, agro-processing, steel, cement etc., sectors where entrepreneurs started with a new vigour and enthusiasm could not continue for long. Under the proposed budget, the government has introduced specific duty on sugar. We do not know what will happen to the sugar industries established in the private sector. Because of this policy, imported sugar will be much cheaper than the domestic product. TV assembling, UPS, automobile assembling etc., are some other examples.
The budget has not given any positive directives for the automobile assembling industries in order to maintain differential tariffs for CKD and CBU motor and vehicle parts. Some protection has been given to the ceramic tiles, plastic industries, stainless steel kitchenware, paper industries etc. It did not tell anything about pharmaceuticals, or about reviving jute and others.
For technology we are hundred per cent import dependent. Even as Bangladeshis, we do not have faith on our own technology. Some agro-machinery products could not sustain in the face of cheap and easily imported technology. An indigenous technology development project can be taken to encourage local technology.
There is always a gap between policy announcement and policy implementation. Even in the recently formed Bangladesh Better Business Forum (BBBF), a large number of SME supportive steps have been taken, but it will see its impact on industrial growth if implementation is adequate. In response to the SME entrepreneurs' need, SME refinancing scheme has been extended from Taka 3.0 billion to Taka 5.0 billion and entrepreneurs equity fund (EEF) has been extended for information technology (IT) sector. In case of refinancing, it is seen that SMEs in the manufacturing sector are rather behind compared to SMEs in trading sector. Banks are also encouraged to finance trading sector to get quick return on their fund than industrial sector. Banks should also be encouraged to help develop entrepreneurship in the new and emerging modern manufacturing sector. Once we were famous for producing so many things like jute products, fabrics like muslin, conch products, comb, hosiery, decorative materials and so many others. In the fairs and expositions organised at home and abroad, Bangladesh presents a very dismal look and always had a poor show in representing the country's image. Our traditional products have been losing their identity day by day.
Industrial sector is suffering for so many reasons, such as gas and electricity, infrastructural problems, certification for quality and standards, complex taxation policies, procedural complexities and so on. Though SME development has become a buzz word nowadays, we cannot ignore large industries, which can support about 100 small industries. Once some large units in the jute, fabrics, steel, paper, machine tools and fertilisers sector were profit-oriented industries. Some assembling industries for electronic and electric goods have also lost their future.
VAT-free limit of exempted turn-over income of cottage sector has been enhanced from Tk. 2.0 million to Tk. 2.4 million. Exempted limit of value added tax (VAT)-free turn-over amount could be up to at least Tk. 10 million. We need to have tremendous growth of small industries throughout the country to employ millions of youths to mobilise indigenous sources of finance and to succeed in poverty alleviation. At the same time, government spending has to be reduced as much as possible. In order to give a boost to this sector and reduce unemployment, a complete waiver of VAT should be considered. On the other hand, some industries identified as sick could be rehabilitated at the earliest. A large number of industries established in the district level become sick due to paucity of gas and electricity causing a dispersion effect on the other would-be entrepreneurs. In sum, we have to develop and nurture entrepreneurship through Entrepreneurship Development Programmes (EDP).
High corporate tax was discouraging the investors since long. The budget has given some relief but also frustrated the entrepreneurs by proposing increase in corporate tax rate on dividend income. This means that on the dividend income companies will pay taxes instead of 15 per cent at the rate of 27.5 per cent for the public companies, 37.5 per cent for the private companies and 45 per cent for the financial companies. Proposal to increase taxes on the dividends of the companies will prohibit free flow of profits from companies to companies in a different manner. Whatever the reduction in the corporate tax, high tax on dividend has offset the benefits and may cause impact on capital market. It may be noted that after announcement of the budget, without any significant reason, the price hike of essentials continued with the capital market showing a slump.
Private sector business entrepreneurs are the main source of tax collection. They should be made capable of paying the taxes first, meaning business should be increased first. Population of our country is about 150 million, but the number of TIN holder is only 1.6 million, while the total number of taxpayers is about 0.7 million. This is not a good situation. By expanding tax net, the ultimate tax burden on each taxpayer can be reduced.
High revenue deficit of about Tk 300 billion is another feature of the budget. In a recent report announced by the Bangladesh Bank said, the Bank's control over the reserve money is on the wane mainly due to government borrowings. Private sector fears that it will shrink the credit availability. It means that the budget is seriously dependent on the national and international funding. How much acceptable is the situation? Government should strengthen its monitoring, reduce unnecessary spending, give attention to energy saving and maintain food security and keep inflation at a reasonable level.
The Finance Adviser has already mentioned that there will not be any credit deficit for the private sector and it will also not hamper economic activities. If the expenditure is made in the productive sector and quality of services of the administration improves, then it could have a positive impact. Business community is still apprehensive of the accountability and transparency of the government machinery.
It is true that business has not really got momentum. Terms of trade of Bangladesh has fallen. Per unit price of export product has come down. It all means exporters have to export more in terms of volume to keep the export figure and income on an even keel. A process has been started to fix a minimum value of products. Competition is huge. We need to concentrate more on the service sector. For export of skilled manpower, we need to get ready to train our manpower as the market of semi-skilled and unskilled manpower has been reducing. New generation young business entrepreneurs and a large number of computer graduates have started working on graphic designing, preparing advertising materials, catalogues for the foreign companies and so on. Bangladesh has now been identified as a new destination of outsourcing. Cost advantage is the basic criteria, man-hour has been becoming costly in the developed countries. Manpower cost is still cheaper in Bangladesh. We should not miss the train.
We need more and more investment in infrastructure. The budget also failed to address the issue. Energy sector is very vital for our economy. What will happen to gas exploration? Government is not telling us about mid- and long -term prospects of gas and energy. Then how will private sector get and generate power for their already established plants?
In the Bangladesh Export Processing Zones Authority (BEPZ) areas, the situation is very difficult. Only academic answer to these queries cannot resolve practical problems. BEPZA requested to stop self- power production and if they do not stop power generation they will have to pay 10 per cent service charge as per BEPZA rules. This could be a major obstacles to future attraction of investment.
About facilities for declaring undisclosed money with penalty, it was recommended from the business community that investment in the manufacturing sector should not be subject to any question. It is true that there is undisclosed money in the economy. As we require investment, undisclosed money in the manufacturing sector without penalty could attract some new investment. Otherwise undisclosed money may go out of country which, in turn, will bring no benefit for the economy.
Now about the issue of identification of agriculture as the priority sector. Increased financial allocation, extension of subsidy and financing for agriculture will definitely have positive impact. We want to see its implementation. Food security has become an important task for the government of developing countries now. So far, price hike of essentials has been impacting adversely the standard of living. This has aggravated poverty situation and reduced nutrition intake which may further aggravate in future. We do not know what will happen about overheated oil price. There is no indication of any fall in price. So, investment on agriculture has to be increased and diversified.
One hundred days employment programme for rural people is another good step. It should be extended to the Monga-prone areas. Reform in the administration is not much visible. We are lagging far behind in the field. The recent Transparency International, Bangladesh (TIB) report has mentioned corruption, which has deepened further.
In the CPD analysis, it is mentioned that incidence of poverty has deepened and additional 8.5 per cent people have fallen below poverty line in the recent times between 2005-2008, because of high inflation.
So, the biggest challenge for the government is to contain inflation. Like our neighbouring country, we can also say, 'contain inflation first, then growth'.
The writer is former Executive Director, Saarc Chamber of Commerce & Industry
A recent study by CPD mentioned that growth rates for both agriculture and industry have come down by 1.0 per cent and 1.5 per cent respectively. Growth of service sector did not show much change. Budget has fixed a conservative gross domestic product (GDP) growth of 6.5 per cent though in the Poverty Reduction Strategy Paper (PRSP) that was revised up to June 08, the target was set at 7.0 per cent. Low Annual Development Programme (ADP) has been justified due to its poor implementation in the past consecutive years. It could have negative impact on employment generation. Draft PRSP projects entry of 1.8 million people in the labour force every year during 2009-11. How this problems will be addressed is not mentioned in the budget. When the budget has taken several positive steps to create employment for rural poor, it did not give visible policy for young educated graduates, the number of which has been increasing to a significant rate each year.
Some very important issues remain to be addressed. The industrial sector is suffering since long. Those have to engage manpower hired from abroad at a very high cost which increases cost of doing business. Manpower beyond supervisory level is very difficult in Bangladesh to find even in the textile sector for which we are pioneer. We could have done much better if we could manage and create skilled labour in this sector. People having their education abroad may be encouraged to come back as it has happened in other countries.
We are lagging far behind in technology. The budget did not give any directive for adequate Research and Development (R&D) to scientists so that they might contribute more. So, whatever R&D fund has been allocated may not be utilised because of weak institutional arrangement. Like in the past, budget has allocated the highest amount for human resources development. From the Dhaka Chamber of Commerce and Industry (DCCI), there was a suggestion to allocate a separate budget for educational infrastructure and skill development.
On-the-job education like in Japan and other developing countries can be introduced. The government may announce a scheme so that after finishing the Secondary School Certificate (SSC) or Higher Secondary Certificate (HSC) courses, human resources can be engaged in different practical fields. Private business entrepreneurs can train them according to requirement.
Various fiscal measures have been announced for small and medium enterprises (SMEs) development which we consider is the number one requirement for the country. So far several steps, institutional arrangement and financing schemes have been announced for the SME development but progress is not satisfactory yet. New innovative sectors and bankable projects have not been on the table so that bankers are encouraged to fund them. SMEs need an enabling business environment for the new investors. Among the fiscal measures for SMEs, income tax relief, tax holiday, withdrawal of VAT from the production stage of handmade biscuits, fabrics produced from artificial fibres, and thread using handloom are encouraging steps.
A number of domestic industries are facing closure because of cheap imported finished products. Sometimes for supporting some export-oriented industries, the interests of local industries producing intermediate and semi-finished products are not protected. Locally produced dextrose, glucose, glucose syrup, particle board, carbon rod etc., are some of the examples of these types of domestic industries. Small industries in new innovative areas have to be encouraged so that diversification of exports is possible. Recent development of shipbuilding is an encouraging development for us. At the same time, the effort should be taken so that more value addition by establishing backward and forward linkage industries can be possible and a self-sustained sector is developed. In the industrial policy, for SMEs in particular, a large number of industrial sectors are included as the thrust and booster sector but very few entrepreneurs are encouraged to go for new investments in this sectors. Those who once started a venture are jittery about the complex procedures and the huge gap between the policy announced and its implementation.
It is also very common that finished products of a domestic industry are the raw materials for others. Especially in the case of protecting export-oriented sector, import has been made easier so that quality and standard of exportable commodities can be maintained. On the contrary, the domestic suppliers are claiming that they are competent enough to supply goods of similar quality and quantity. How is one to resolve this conflict of interests? An extensive survey has to be conducted to identify and revive already established industrial enterprises. There could be co-existence of export-oriented and import-substitute manufacturing sector. In the past, there was a pass-book system for industrial owners for importing raw materials, under which the industrial importers and the commercial importers were possible to be separated. These can be reintroduced so that an industrial entrepreneur can get easy access to imported raw materials at a required quantity and at a relatively cheaper rate than commercial importer.
We are aware about a large number of domestic small and medium industries in the light engineering units in medical equipment, electrical and electronic equipment, furniture, ceramics, leather, detergent, cosmetics, agro-processing, steel, cement etc., sectors where entrepreneurs started with a new vigour and enthusiasm could not continue for long. Under the proposed budget, the government has introduced specific duty on sugar. We do not know what will happen to the sugar industries established in the private sector. Because of this policy, imported sugar will be much cheaper than the domestic product. TV assembling, UPS, automobile assembling etc., are some other examples.
The budget has not given any positive directives for the automobile assembling industries in order to maintain differential tariffs for CKD and CBU motor and vehicle parts. Some protection has been given to the ceramic tiles, plastic industries, stainless steel kitchenware, paper industries etc. It did not tell anything about pharmaceuticals, or about reviving jute and others.
For technology we are hundred per cent import dependent. Even as Bangladeshis, we do not have faith on our own technology. Some agro-machinery products could not sustain in the face of cheap and easily imported technology. An indigenous technology development project can be taken to encourage local technology.
There is always a gap between policy announcement and policy implementation. Even in the recently formed Bangladesh Better Business Forum (BBBF), a large number of SME supportive steps have been taken, but it will see its impact on industrial growth if implementation is adequate. In response to the SME entrepreneurs' need, SME refinancing scheme has been extended from Taka 3.0 billion to Taka 5.0 billion and entrepreneurs equity fund (EEF) has been extended for information technology (IT) sector. In case of refinancing, it is seen that SMEs in the manufacturing sector are rather behind compared to SMEs in trading sector. Banks are also encouraged to finance trading sector to get quick return on their fund than industrial sector. Banks should also be encouraged to help develop entrepreneurship in the new and emerging modern manufacturing sector. Once we were famous for producing so many things like jute products, fabrics like muslin, conch products, comb, hosiery, decorative materials and so many others. In the fairs and expositions organised at home and abroad, Bangladesh presents a very dismal look and always had a poor show in representing the country's image. Our traditional products have been losing their identity day by day.
Industrial sector is suffering for so many reasons, such as gas and electricity, infrastructural problems, certification for quality and standards, complex taxation policies, procedural complexities and so on. Though SME development has become a buzz word nowadays, we cannot ignore large industries, which can support about 100 small industries. Once some large units in the jute, fabrics, steel, paper, machine tools and fertilisers sector were profit-oriented industries. Some assembling industries for electronic and electric goods have also lost their future.
VAT-free limit of exempted turn-over income of cottage sector has been enhanced from Tk. 2.0 million to Tk. 2.4 million. Exempted limit of value added tax (VAT)-free turn-over amount could be up to at least Tk. 10 million. We need to have tremendous growth of small industries throughout the country to employ millions of youths to mobilise indigenous sources of finance and to succeed in poverty alleviation. At the same time, government spending has to be reduced as much as possible. In order to give a boost to this sector and reduce unemployment, a complete waiver of VAT should be considered. On the other hand, some industries identified as sick could be rehabilitated at the earliest. A large number of industries established in the district level become sick due to paucity of gas and electricity causing a dispersion effect on the other would-be entrepreneurs. In sum, we have to develop and nurture entrepreneurship through Entrepreneurship Development Programmes (EDP).
High corporate tax was discouraging the investors since long. The budget has given some relief but also frustrated the entrepreneurs by proposing increase in corporate tax rate on dividend income. This means that on the dividend income companies will pay taxes instead of 15 per cent at the rate of 27.5 per cent for the public companies, 37.5 per cent for the private companies and 45 per cent for the financial companies. Proposal to increase taxes on the dividends of the companies will prohibit free flow of profits from companies to companies in a different manner. Whatever the reduction in the corporate tax, high tax on dividend has offset the benefits and may cause impact on capital market. It may be noted that after announcement of the budget, without any significant reason, the price hike of essentials continued with the capital market showing a slump.
Private sector business entrepreneurs are the main source of tax collection. They should be made capable of paying the taxes first, meaning business should be increased first. Population of our country is about 150 million, but the number of TIN holder is only 1.6 million, while the total number of taxpayers is about 0.7 million. This is not a good situation. By expanding tax net, the ultimate tax burden on each taxpayer can be reduced.
High revenue deficit of about Tk 300 billion is another feature of the budget. In a recent report announced by the Bangladesh Bank said, the Bank's control over the reserve money is on the wane mainly due to government borrowings. Private sector fears that it will shrink the credit availability. It means that the budget is seriously dependent on the national and international funding. How much acceptable is the situation? Government should strengthen its monitoring, reduce unnecessary spending, give attention to energy saving and maintain food security and keep inflation at a reasonable level.
The Finance Adviser has already mentioned that there will not be any credit deficit for the private sector and it will also not hamper economic activities. If the expenditure is made in the productive sector and quality of services of the administration improves, then it could have a positive impact. Business community is still apprehensive of the accountability and transparency of the government machinery.
It is true that business has not really got momentum. Terms of trade of Bangladesh has fallen. Per unit price of export product has come down. It all means exporters have to export more in terms of volume to keep the export figure and income on an even keel. A process has been started to fix a minimum value of products. Competition is huge. We need to concentrate more on the service sector. For export of skilled manpower, we need to get ready to train our manpower as the market of semi-skilled and unskilled manpower has been reducing. New generation young business entrepreneurs and a large number of computer graduates have started working on graphic designing, preparing advertising materials, catalogues for the foreign companies and so on. Bangladesh has now been identified as a new destination of outsourcing. Cost advantage is the basic criteria, man-hour has been becoming costly in the developed countries. Manpower cost is still cheaper in Bangladesh. We should not miss the train.
We need more and more investment in infrastructure. The budget also failed to address the issue. Energy sector is very vital for our economy. What will happen to gas exploration? Government is not telling us about mid- and long -term prospects of gas and energy. Then how will private sector get and generate power for their already established plants?
In the Bangladesh Export Processing Zones Authority (BEPZ) areas, the situation is very difficult. Only academic answer to these queries cannot resolve practical problems. BEPZA requested to stop self- power production and if they do not stop power generation they will have to pay 10 per cent service charge as per BEPZA rules. This could be a major obstacles to future attraction of investment.
About facilities for declaring undisclosed money with penalty, it was recommended from the business community that investment in the manufacturing sector should not be subject to any question. It is true that there is undisclosed money in the economy. As we require investment, undisclosed money in the manufacturing sector without penalty could attract some new investment. Otherwise undisclosed money may go out of country which, in turn, will bring no benefit for the economy.
Now about the issue of identification of agriculture as the priority sector. Increased financial allocation, extension of subsidy and financing for agriculture will definitely have positive impact. We want to see its implementation. Food security has become an important task for the government of developing countries now. So far, price hike of essentials has been impacting adversely the standard of living. This has aggravated poverty situation and reduced nutrition intake which may further aggravate in future. We do not know what will happen about overheated oil price. There is no indication of any fall in price. So, investment on agriculture has to be increased and diversified.
One hundred days employment programme for rural people is another good step. It should be extended to the Monga-prone areas. Reform in the administration is not much visible. We are lagging far behind in the field. The recent Transparency International, Bangladesh (TIB) report has mentioned corruption, which has deepened further.
In the CPD analysis, it is mentioned that incidence of poverty has deepened and additional 8.5 per cent people have fallen below poverty line in the recent times between 2005-2008, because of high inflation.
So, the biggest challenge for the government is to contain inflation. Like our neighbouring country, we can also say, 'contain inflation first, then growth'.
The writer is former Executive Director, Saarc Chamber of Commerce & Industry